As filed with the Securities and Exchange Commission on March 2, 1998.
Registration Nos. 033-54642 and 811-07342
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 50
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 51
J.P. MORGAN INSTITUTIONAL FUNDS
(formerly The JPM Institutional Funds)
(Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(617) 557-0700
Christopher Kelley, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: Stephen K. West, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
It is proposed that this filing will become effective (check appropriate box):
[X] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
i:\dsfndlgl\institut\0198fix.pea\wrapper.wpf
<PAGE>
The Short Term Bond Portfolio, The U.S. Fixed Income Portfolio, The Non- U.S.
Fixed Income Portfolio, The Tax Exempt Bond Portfolio, The New York Total Return
Bond Portfolio and Series Portfolio II have also executed this registration
statement.
i:\dsfndlgl\institut\0198fix.pea\wrapper.wpf
<PAGE>
J.P. MORGAN INSTITUTIONAL FUNDS
(SHORT TERM BOND, BOND, BOND-ULTRA, GLOBAL STRATEGIC INCOME, TAX EXEMPT BOND,
INTERNATIONAL BOND AND NEW YORK TOTAL RETURN BOND FUNDS)
CROSS-REFERENCE SHEET
(As Required by Rule 495)
PART A ITEM NUMBER: Prospectus Headings.
1. COVER PAGE: Cover Page.
2. SYNOPSIS: Introduction; Investor Expenses.
3. CONDENSED FINANCIAL INFORMATION: Financial Highlights.
4. GENERAL DESCRIPTION OF REGISTRANT: Fixed Income Investment Process; Goal;
Investment Approach; Potential Risks and Rewards; Master/Feeder Structure; Risk
and Reward Elements; Securities.
5. MANAGEMENT OF THE FUND: Cover Page; J.P. Morgan; Portfolio Management;
Management and Administration.
5A. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE: Performance.
6. CAPITAL STOCK AND OTHER SECURITIES: Investing Directly; Account and
Transaction Policies; Dividends and Distributions; Tax Considerations;
Master/Feeder Structure.
7. PURCHASE OF SECURITIES BEING OFFERED: Introduction; Investing Directly;
Opening your Account; Adding to your Account; Account and Transaction Policies.
8. REDEMPTION OR REPURCHASE: Selling Shares; Account and Transaction Policies.
9. PENDING LEGAL PROCEEDINGS: Not Applicable.
PART B ITEM NUMBER: Statement of Additional Information Headings.
10. COVER PAGE: Cover Page.
11. TABLE OF CONTENTS: Table of Contents.
12. GENERAL INFORMATION AND HISTORY: General.
13. INVESTMENT OBJECTIVE AND POLICIES: Investment Objective and Policies;
Additional Investments; Investment Restrictions; Quality and Diversification
Requirements; Appendix A.
i:\dsfndlgl\institut\0198fix.pea\wrapper.wpf
<PAGE>
14. MANAGEMENT OF THE FUND: Trustees and Officers.
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES: Description of Shares.
16. INVESTMENT ADVISORY AND OTHER SERVICES: Investment Advisor; Distributor;
Co-Administrator; Services Agent; Custodian and Transfer Agent; Shareholder
Servicing; Eligible Institutions; Independent Accountants; Expenses.
17. BROKERAGE ALLOCATION AND OTHER PRACTICES: Portfolio Transactions.
18. CAPITAL STOCK AND OTHER SECURITIES: Massachusetts Trust; Description of
Shares.
19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED: Net Asset
Value; Purchase of Shares; Redemption of Shares; Exchange of Shares; Dividends
and Distributions.
20. TAX STATUS: Taxes.
21. UNDERWRITERS: Distributor.
22. CALCULATION OF PERFORMANCE DATA: Performance Data.
23. FINANCIAL STATEMENTS: Financial Statements.
PART C. Information required to be included in Part C is set forth under the
appropriate items, so numbered, in Part C of this Registration Statement.
i:\dsfndlgl\institut\0198fix.pea\wrapper.wpf
<PAGE>
EXPLANATORY NOTE
This post-effective amendment No. 50 to the Registrant's registration
statement on Form N-1A (File No. 033-54642) (the "Registration Statement") is
being filed to update the Registrant's disclosure in the Prospectus and
Statements of Additional Information relating to the Registrant's Short Term
Bond, Bond, Bond-Ultra, International Bond, Global Strategic Income, Tax Exempt
Bond and New York Total Return Bond Funds, separate series of shares of the
Registrant, for the purpose of "simplifying" each Fund's prospectus.
Additionally the filing is being made to update the Registrant's disclosure in
the Prospectuses and Statements of Additional Information for the Short Term
Bond, Bond and Global Strategic Income Funds with audited financial information
for the fiscal year ended October 31, 1997, and with respect to the New York
Total Return Bond Fund, to include unaudited financial information for the six
months ended September 30, 1997. As a result, the Amendment does not affect any
of the Registrant's currently effective prospectuses for each other series of
shares of the Registrant.
i:\dsfndlgl\institut\0198fix.pea\wrapper.wpf
<PAGE>
- --------------------------------------------------------------------------------
|
MARCH 2, 1998 | PROSPECTUS
|
================================================================================
J.P. MORGAN INSTITUTIONAL
SHORT TERM BOND FUND
========================================
Seeking high total return
by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate.
It is a criminal offense to state or suggest otherwise.
Distributed by Funds Distributor, Inc.
<PAGE>
<TABLE>
CONTENTS
====================================================================================================================================
<S> <C> <C>
2 | FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process ....................................................2
4 | J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
Fund description ...................................................................4
The fund's goal, investment approach,
risks, expenses, performance, and Investor expenses ..................................................................4
financial highlights
Performance ........................................................................5
Financial highlights ...............................................................5
6 | YOUR INVESTMENT
Investing through a financial professional .........................................6
Investing in the J.P. Morgan Institutional
Short Term Bond Fund Investing through an employer-sponsored retirement plan ............................6
Investing through an IRA or rollover IRA ...........................................6
Investing directly .................................................................6
Opening your account ...............................................................6
Adding to your account .............................................................6
Selling shares .....................................................................7
Account and transaction policies ...................................................7
Dividends and distributions ........................................................8
Tax considerations .................................................................8
9 | FUND DETAILS
Master/feeder structure ............................................................9
More about risk and the fund's
business operations Management and administration ......................................................9
Risk and reward elements ..........................................................10
Securities ........................................................................12
FOR MORE INFORMATION ......................................................back cover
</TABLE>
<PAGE>
INTRODUCTION
================================================================================
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
This fund invests primarily in bonds and other fixed income securities through a
master portfolio (another fund with the same goal). The fund seeks high total
return consistent with moderate risk.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
The fund is not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $250 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
======================================
Before you invest
Investors considering the fund should
understand that:
o The value of the fund's shares
will fluctuate over time. You could
lose money if you sell when the
fund's share price is lower than
when you invested.
o There is no assurance that the fund
will meet its investment goal.
o Future returns will not necessarily
resemble past performance.
o The fund invests a portion of assets
in non-investment-grade bonds
("junk bonds"), which offer higher
potential yields but have a higher
risk of default and are more
sensitive to market risk than
investment-grade bonds.
- --------------------------------------
|
| 1
|
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
================================================================================
The J.P. Morgan Institutional Short Term
Bond Fund invests primarily in bonds
and other fixed income securities.
The fund's investment philosophy,
developed by its advisor, emphasizes the
potential for consistently enhancing
performance while managing risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an
information advantage through the depth
of its global fixed-income research and
the sophistication of its analytical
systems. Using a team-oriented approach,
J.P. Morgan seeks to gain insights in a
broad range of distinct areas and takes
positions in many different ones,
helping the fund to limit exposure to
concentrated sources of risk.
In managing the fund, J.P. Morgan
employs a three-step process that
combines sector allocation, fundamental
research for identifying portfolio
securities, and duration management.
[GRAPHIC] Sector allocation The sector allocation
team meets monthly, analyzing the
The fund invests across a range fundamentals of a very broad range of
of different types of securities sectors. The team seeks to enhance
performance and manage risk by
underweighting or overweighting sectors.
[GRAPHIC] Security selection Relying on the
insights of different specialists,
The fund makes its portfolio including credit analysts, quantitative
decisions as described later researchers, and dedicated fixed income
in this prospectus traders, the portfolio managers make buy
and sell decisions according to the
fund's goal and strategy.
[GRAPHIC] Duration management Forecasting teams
use fundamental economic factors to
J.P. Morgan uses a disciplined develop strategic forecasts of the
process to control the fund's direction of interest rates. Based on
sensitivity to interest rates these forecasts, strategists establish
the fund's exposure to interest rate
risk (a goal of duration management),
typically remaining relatively close to
the duration of the market as a whole,
as represented by the fund's benchmark.
The strategists closely monitor the fund
and make tactical adjustments as
necessary.
|
2 | FIXED INCOME MANAGEMENT APPROACH
|
<PAGE>
================================================================================
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
|
| 3
|
<PAGE>
J.P. MORGAN INSTITUTIONAL
SHORT TERM BOND FUND | TICKER SYMBOL: JMSBX
================================================================================
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL SHORT TERM BOND
FUND)
[GRAPHIC] GOAL
The fund seeks to provide high total return while attempting to limit the
likelihood of negative quarterly returns.
[GRAPHIC] INVESTMENT APPROACH
The fund invests primarily in fixed income securities, including U.S.
government and agency securities, domestic and foreign corporate bonds, private
placements, asset-backed and mortgage-backed securities, money market
instruments, and others. These securities may be of any maturity, but under
normal market conditions the fund's duration will range between one and three
years, similar to that of the Merrill Lynch 1-3 Year Treasury Index.
Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. At least
90% of assets must be invested in securities that, at the time of purchase, are
rated investment-grade (BBB/Baa or better) or are the unrated equivalent,
including at least 75% A or better. No more than 10% of assets may be invested
in securities as low as B.
[GRAPHIC] POTENTIAL RISKS AND REWARDS
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
duration fixed income funds will depend on the success of the investment
process, which is described on page 2.
Although any rise in interest rates is likely to cause a fall in the price of
bonds, the fund's comparatively short duration is designed to help keep its
share price within a relatively narrow range. Because it seeks to minimize risk,
the fund will generally offer less income, and during periods of declining
interest rates, may offer lower total returns than bond funds with longer
durations. However, the fund may offer higher total returns than longer duration
funds during periods of rising interest rates. Additionally, because the fund
may invest up to 25% of assets in foreign securities, it takes on additional
risks.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on pages 10-13.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $250
billion, including more than $2 billion using the same strategy as this fund.
The portfolio management team is led by Connie J. Plaehn, managing director, who
has been on the team since the fund's inception and has been at J.P. Morgan
since 1984, and by William G. Tennille, vice president, who joined the team in
January of 1994 and has been at J.P. Morgan since 1992.
================================================================================
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund are
shown at right. The fund has no sales, redemption, exchange, or account fees,
although some institutions may charge you a fee for shares you buy through them.
The annual fund expenses shown are deducted from fund assets prior to
performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
================================================================================
Annual fund operating expenses(1) (%)
================================================================================
<S> <C>
Management fees (actual) 0.25
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.00
================================================================================
Total operating expenses(2)
(after reimbursement) 0.25
- --------------------------------------------------------------------------------
</TABLE>
================================================================================
Expense example
================================================================================
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
Your cost($) 3 8 14 32
- --------------------------------------------------------------------------------
</TABLE>
|
4 |
|
<PAGE>
<TABLE>
====================================================================================================================================
<S> <C>
PERFORMANCE (unaudited)
================================
Average annual total return Shows performance over time, for periods ended December 31, 1997
================================-------------------------------------------------------------------------------------------
<CAPTION>
1 yr. 3 yrs. Since inception(3)
<S> <C> <C> <C>
J.P. Morgan Institutional Short Term Bond Fund (after expenses) 6.40 7.41 5.37
- ---------------------------------------------------------------------------------------------------------------------------
Merrill Lynch 1-3 Year Treasury Index(4) (no expenses) 6.66 7.52 5.60
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
================================
Year-by-year total return (%) Shows changes in returns by calendar year
================================-------------------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<CAPTION>
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
J.P. Morgan Institutional Short Term Bond Fund 0.36 10.80 5.10 6.40
Merrill Lynch 1-3 Year Treasury Index(4) 0.57 11.00 4.98 6.66
</TABLE>
<TABLE>
====================================================================================================================================
FINANCIAL HIGHLIGHTS
================================
Per-share data For fiscal periods ended October 31
================================-------------------------------------------------------------------------------------------
<CAPTION>
1993(3) 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 9.99 9.60 9.83 9.85
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.11 0.47 0.58 0.55 0.61
Net realized and unrealized gain (loss)
on investment ($) (0.01) (0.39) 0.24 0.02 (0.01)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.10 0.08 0.82 0.57 0.60
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.11) (0.47) (0.59) (0.55) (0.61)
Net asset value, end of period ($) 9.99 9.60 9.83 9.85 9.84
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 1.01(5) 0.87 8.81 6.01 6.27
- ---------------------------------------------------------------------------------------------------------------------------
================================
Ratios and supplemental data
================================-------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 27,605 47,679 18,916 17,810 27,375
- ---------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.46(6) 0.45 0.45 0.37 0.25
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 3.92(6) 4.96 6.09 5.69 6.19
- ---------------------------------------------------------------------------------------------------------------------------
Decrease reflected in expense ratio due
to expense reimbursement (%) 0.84(6) 0.33 0.22 1.00 0.71
- ---------------------------------------------------------------------------------------------------------------------------
The Financial Highlights above have been audited by Price Waterhouse LLP, the fund's independent accountants.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund has a master/feeder structure as described on page 9. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal year, expressed as a percentage of the fund's average net
assets and reflecting reimbursement for ordinary expenses over 0.25%.
(2) Without reimbursement other expenses and total operating expenses would
have been 0.71% and 0.96%, respectively. There is no guarantee that
reimbursement will continue beyond 2/28/99.
3 The fund commenced operations on 7/8/93. Except in the Financial
Highlights, returns reflect performance of the fund from 7/31/93.
(4) The Merrill Lynch 1-3 Year Treasury Index, consisting of U.S. Treasury
notes and bonds with maturities of 1-3 years, is an unmanaged index that
measures short-term bond performance.
(5) Not annualized.
(6) Annualized.
|
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND | 5
|
<PAGE>
YOUR INVESTMENT
================================================================================
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Determine the amount you are investing. The minimum amount for initial
investments is $5,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on
minimum investments, call 1-800-766-7722.
o Complete the application, indicating how much of your investment you want
to allocate to which fund(s). Please apply now for any account privileges
you may want to use in the future, in order to avoid the delays associated
with adding them later on.
o Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING YOUR ACCOUNT
By wire
o Mail your completed application to the Shareholder Services Agent.
o Call the Shareholder Services Agent to obtain an account number and to
place a purchase order. Funds that are wired without a purchase order will
be returned uninvested.
o After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York
Routing number: 021-000-238
Credit: J.P. Morgan Institutional Funds
Account number: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with your completed application to the Shareholder Services
Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ADDING TO YOUR ACCOUNT
By wire
o Call the Shareholder Services Agent to place a purchase order. Funds that
are wired without a purchase order will be returned uninvested.
o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with a completed investment slip to the Shareholder Services
Agent. If you do not have an investment slip, attach a note indicating your
account number and how much you wish to invest in which fund(s).
By exchange
o Call the Shareholder Services Agent for an exchange.
|
6 | YOUR INVESTMENT
|
<PAGE>
================================================================================
SELLING SHARES
By phone -- wire payment
o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can
help you add it.
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your
fund account.
By phone -- check payment
o Call the Shareholder Services Agent and place your request. Once your
request has been verified, a check for the net amount, payable to the
registered owner(s), will be mailed to the address of record. For checks
payable to any other party or mailed to any other address, please make your
request in writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the
fund name; the amount you want to sell; and the recipient's name and
address or wire information, if different from those of the account
registration.
o Indicate whether you want the proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
o Mail the letter to the Shareholder Services Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in this fund for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
Business hours and NAV calculations The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time).
Timing of orders Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
================================================================================
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available 8:00 a.m. to 5:00 p.m. eastern
time on fund business days.
|
YOUR INVESTMENT | 7
|
<PAGE>
================================================================================
Timing of settlements When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
Statements and reports The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically declares income dividends daily and pays them monthly. If an
investor's shares are redeemed during the month, accrued but unpaid dividends
are paid with the redemption proceeds. Shares of the fund earn dividends on the
business day the purchase is effective, but not on the business day the
redemption is effective. The fund distributes capital gains, if any, once a
year. However, the fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities:
<TABLE>
<CAPTION>
================================================================================
Transaction Tax status
- --------------------------------------------------------------------------------
<S> <C>
Income dividends Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------
</TABLE>
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
|
8 | YOUR INVESTMENT
|
<PAGE>
FUND DETAILS
================================================================================
MASTER/FEEDER STRUCTURE
As noted earlier, the fund is a "feeder" fund that invests in a master
portfolio. (Except where indicated, this prospectus uses the term "the fund" to
mean the feeder fund and its master portfolio taken together.)
The master portfolio accepts investments from other feeder funds, and the
feeders bear the master portfolio's expenses in proportion to their assets.
However, each feeder can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder could offer access to
the same master portfolio on more attractive terms, or could experience better
performance, than another feeder. Information about other feeders is available
by calling 1-800-766-7722. Generally, when the master portfolio seeks a vote,
the funds will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
The fund and its master portfolio expect to maintain consistent goals, but if
they do not, the fund will withdraw from the master portfolio, receiving its
assets either in cash or securities. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
MANAGEMENT AND ADMINISTRATION
The fund and its master portfolio are governed by the same trustees. The
trustees are responsible for overseeing all business activities. The trustees
are assisted by Pierpont Group, Inc., which they own and operate on a cost
basis; costs are shared by all funds governed by these trustees. Funds
Distributor, Inc., as co-administrator, along with J.P. Morgan, provides fund
officers. J.P. Morgan, as co-administrator, oversees the fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Advisory services 0.25% of the master portfolio's
average net assets
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion in J.P. Morgan-
advised portfolios, plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.075% of the fund's average
net assets
- --------------------------------------------------------------------------------
</TABLE>
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
|
FUND DETAILS | 9
|
<PAGE>
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 4). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk.
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market conditions
o The fund's share price, o Bonds have generally o Under normal circumstances the fund plans to
yield, and total return outperformed money market remain fully invested in bonds and other
will fluctuate in investments over the long fixed income securities as noted in the table
response to bond market term, with less risk than on pages 12-13
movements stocks
o The fund seeks to limit risk and enhance
o The value of most bonds o Most bonds will rise in yields through careful management, sector
will fall when interest value when interest rates allocation, individual securities selection,
rates rise; the longer a fall and duration management
bond's maturity and the
lower its credit quality, o Mortgage-backed and o During severe market downturns, the fund has
the more its value asset-backed securities the option of investing up to 100% of assets
typically falls can offer attractive in investment-grade short-term securities
returns
o Mortgage-backed and o J.P. Morgan monitors interest rate trends, as
asset-backed securities well as geographic and demographic
(securities representing information related to mortgage-backed
an interest in, or securities and mortgage prepayments
secured by, a pool of
mortgages or other assets
such as receivables)
could generate capital
losses or periods of low
yields if they are paid
off substantially earlier
or later than anticipated
- ------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could o The fund could outperform o J.P. Morgan focuses its active management on
underperform its its benchmark due to those areas where it believes its commitment
benchmark due to its these same choices to research can most enhance returns and
sector, securities, or manage risks in a consistent way
duration choices
- ------------------------------------------------------------------------------------------------------------------------------------
Credit quality
o The default of an issuer o Investment-grade bonds o The fund maintains its own policies for
would leave the fund with have a lower risk of balancing credit quality against potential
unpaid interest or default yields and gains in light of its investment
principal goals
o Junk bonds offer higher
o Junk bonds (those rated yields and higher o J.P. Morgan develops its own ratings of
BB/Ba or lower) have a potential gains unrated securities and makes a credit quality
higher risk of default determination for unrated securities
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign investments
o The fund could lose money o Foreign bonds, which o Foreign bonds are a secondary investment for
because of foreign represent a major portion the fund
government actions, of the world's fixed
political instability, or income securities, offer o To the extent that the fund invests in
lack of adequate and attractive potential foreign bonds, it may manage the currency
accurate information performance and exposure of its foreign investments relative
opportunities for to its benchmark, and may hedge back into the
o Currency exchange rate diversification U.S. dollar from time to time (see also
movements could reduce "Derivatives")
gains or create losses o Favorable exchange rate
movements could generate
gains or reduce losses
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
|
10 | FUND DETAILS
|
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivatives
o Derivatives such as o Hedges that correlate o The fund uses derivatives for hedging (i.e.,
futures, options, and well with underlying to adjust duration or to establish or adjust
foreign currency forward positions can reduce or exposure to particular securities, markets, or
contracts that are used eliminate losses at low currencies)
for hedging the portfolio cost
or specific securities o The fund only establishes hedges that it
may not fully offset the o The fund could make money expects will be highly correlated with
underlying positions(1) and protect against underlying positions
losses if management's
o Derivatives that involve analysis proves correct o While the fund may use derivatives that
leverage could magnify incidentally involve leverage, it does not
losses o Derivatives that involve use them for the specific purpose of
leverage could generate leveraging the portfolio
substantial gains at low
cost
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o The fund could have o These holdings may offer o The fund may not invest more than 15% of net
difficulty valuing these more attractive yields or assets in illiquid holdings
holdings precisely potential growth than
comparable widely traded o To maintain adequate liquidity to meet
o The fund could be unable securities redemptions, the fund may hold
to sell these holdings at investment-grade short-term securities
the time or price desired (including repurchase agreements) and, for
temporary or extraordinary purposes, may
borrow from banks up to 30% of the value
of its assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed delivery
securities
o When the fund buys o The fund can take o The fund uses segregated accounts to offset
securities before issue advantage of attractive leverage risk
or for delayed delivery, transaction opportunities
it could be exposed to
leverage risk if it does
not use segregated
accounts
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would o The fund could realize o The fund anticipates a portfolio turnover
raise the fund's gains in a short period rate of approximately 300%
transaction costs of time
o The fund generally avoids short-term trading,
o Increased short-term o The fund could protect except to take advantage of attractive or
capital gains against losses if a bond unexpected opportunities or to meet demands
distributions would raise is overvalued and its generated by shareholder activity
shareholders' income tax value later falls
liability
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on the value of a securities index. An option is the right to
buy or sell securities that is granted in exchange for an agreed-upon sum.
A foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
|
FUND DETAILS | 11
|
<PAGE>
================================================================================
================================================================================
Securities
================================================================================
This table discusses the customary types of securities which can be held by the
fund. In each case the principal types of risk are listed on the following page
(see below for definitions). This table reads across two pages.
- --------------------------------------------------------------------------------
Asset-backed securities Bonds or notes backed by unsecured debt, such as credit
card receivables; these securities are often guaranteed or over-collateralized
to enhance their credit quality.
- --------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
- --------------------------------------------------------------------------------
Convertible securities Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
Corporate bonds Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
Mortgages (directly held) Debt instrument which gives the lender a lien on
property as security for the loan repayment.
- --------------------------------------------------------------------------------
Mortgage dollar rolls The sale of mortgage-backed securities with the commitment
to buy back similar securities at a future date and at an agreed upon price.
Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Mortgage-backed securities Securities backed by pools of mortgages (such as
Ginnie Maes, Fannie Maes and Freddie Macs), including pass through certificates,
and other senior classes of collateralized mortgage obligations (CMOs) or
stripped mortgage-backed securities.
- --------------------------------------------------------------------------------
Participation interests Securities representing an interest in another security
or in bank loans.
- --------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITs and other real-estate related instruments Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
Repurchase agreements Agreements between a seller and a buyer whereby the seller
agrees to repurchase the securities at an agreed upon price and at a stated
time.
- --------------------------------------------------------------------------------
Sovereign debt, Brady bonds, and debt of supranational organizations Dollar- and
non-dollar-denominated securities issued to refinance foreign government bank
loans and other debt.
- --------------------------------------------------------------------------------
Swaps Contractual agreement whereby a party agrees to exchange periodic payments
with a counterparty. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Synthetic variable rate instruments Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
Tax exempt municipal securities Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- --------------------------------------------------------------------------------
U.S. government securities Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- --------------------------------------------------------------------------------
Zero coupon, pay-in-kind, and deferred payment securities Securities offering
non-cash or delayed-cash payment. Their prices are typically more volatile than
those of some other debt instruments and involve certain special tax
considerations.
- --------------------------------------------------------------------------------
Risk related to certain securities held by J.P. Morgan Institutional Short
Term Bond Fund:
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk The risk the costs associated with a liability are less than the
value of the underlying instrument.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
|
12 | FUND DETAILS
|
<PAGE>
================================================================================
================================================================================
* Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
o Permitted, but not typically used
- -- Not permitted
Types of Risk
<TABLE>
<CAPTION>
Short Term
Bond
- ------------------------------------------------------------------------------------------------
<S> <C>
credit, interest rate, market, prepayment *
- ------------------------------------------------------------------------------------------------
credit, currency, liquidity, political *
- ------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political *
- ------------------------------------------------------------------------------------------------
credit, currency, liquidity, political * 25% Foreign
- ------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political, valuation * 25% Foreign
- ------------------------------------------------------------------------------------------------
credit, extension, interest rate, market, natural event, prepayment --
- ------------------------------------------------------------------------------------------------
extension, interest rate, leverage, liquidity, prepayment * 30%
- ------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage, market, political, *
prepayment
- ------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, liquidity, political, prepayment *
- ------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation *
- ------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, valuation *
- ------------------------------------------------------------------------------------------------
credit, liquidity *
- ------------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political *
- ------------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political o
- ------------------------------------------------------------------------------------------------
credit, leverage, market --
- ------------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political o
- ------------------------------------------------------------------------------------------------
interest rate *
- ------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political *
- ------------------------------------------------------------------------------------------------
</TABLE>
Market risk The risk that the market value of a security may move up or down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
bonds and the mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
|
FUND DETAILS | 13
|
<PAGE>
================================================================================
FOR MORE INFORMATION
================================================================================
For investors who want more information on the fund, the following documents are
available free upon request:
Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. Morgan Institutional Short Term Bond Fund
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
Telephone: 1-800-766-7722
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available from the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. (1-800-SEC-0330) and may be viewed on-screen or downloaded from the SEC's
Internet site at http://www.sec.gov. The fund's investment company and 1933 Act
registration numbers are 811-07342 and 033-54642.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Institutional Funds combine a heritage of integrity and
financial leadership with comprehensive, sophisticated analysis and management
techniques. Drawing on J.P. Morgan's extensive experience and depth as an
investment manager, the J.P. Morgan Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.
================================================================================
J.P. Morgan Institutional Funds
Advisor Distributor
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
PROS378-983
<PAGE>
- --------------------------------------------------------------------------------
|
MARCH 2, 1998 | PROSPECTUS
|
================================================================================
J.P. MORGAN INSTITUTIONAL BOND FUND
========================================
Seeking high total return
by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense to state or suggest otherwise.
[LOGO] JPMorgan
Distributed by Funds Distributor, Inc.
<PAGE>
CONTENTS
<TABLE>
====================================================================================================================================
<S> <C>
2 | FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process ..........................................................2
4 | J.P. MORGAN INSTITUTIONAL BOND FUND
The fund's goal, investment approach, Fund description .........................................................................4
risks, expenses, performance, and
financial highlights Investor expenses ........................................................................4
Performance ..............................................................................5
Financial highlights .....................................................................5
6 | YOUR INVESTMENT
Investing in the J.P. Morgan Investing through a financial professional ...............................................6
Institutional Bond Fund
Investing through an employer-sponsored retirement plan ..................................6
Investing through an IRA or rollover IRA .................................................6
Investing directly .......................................................................6
Opening your account .....................................................................6
Adding to your account ...................................................................6
Selling shares ...........................................................................7
Account and transaction policies .........................................................7
Dividends and distributions ..............................................................8
Tax considerations .......................................................................8
9 | FUND DETAILS
More about risk and the fund's Master/feeder structure ..................................................................9
business operations
Management and administration ............................................................9
Risk and reward elements ................................................................10
Securities ..............................................................................12
FOR MORE INFORMATION ............................................................back cover
</TABLE>
<PAGE>
INTRODUCTION
================================================================================
J.P. MORGAN INSTITUTIONAL BOND FUND
This fund invests primarily in bonds and other fixed income securities through a
master portfolio (another fund with the same goal). The fund seeks high total
return consistent with moderate risk.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
The fund is not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $250 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
=======================================
Before you invest
Investors considering the fund should
understand that:
o The value of the fund's shares
will fluctuate over time. You could
lose money if you sell when the
fund's share price is lower than
when you invested.
o There is no assurance that the fund
will meet its investment goal.
o Future returns will not necessarily
resemble past performance.
o The fund invests a portion of assets
in non-investment-grade bonds
("junk bonds"), which offer higher
potential yields but have a higher
risk of default and are more
sensitive to market risk than
investment-grade bonds.
- ---------------------------------------
|
| 1
|
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
================================================================================
The J.P. Morgan Institutional Bond Fund
invests primarily in bonds and other
fixed income securities.
The fund's investment philosophy,
developed by its advisor, emphasizes the
potential for consistently enhancing
performance while managing risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an
information advantage through the depth
of its global fixed-income research and
the sophistication of its analytical
systems. Using a team-oriented approach,
J.P. Morgan seeks to gain insights in a
broad range of distinct areas and takes
positions in many different ones,
helping the fund to limit exposure to
concentrated sources of risk.
In managing the fund, J.P. Morgan
employs a three-step process that
combines sector allocation, fundamental
research for identifying portfolio
securities, and duration management.
[GRAPHIC] Sector allocation The sector allocation
team meets monthly, analyzing the
The fund invests across a range fundamentals of a very broad range of
of different types of securities sectors. The team seeks to enhance
performance and manage risk by
underweighting or overweighting sectors.
[GRAPHIC] Security selection Relying on the
insights of different specialists,
The fund makes its portfolio including credit analysts, quantitative
decisions as described later in researchers, and dedicated fixed income
this prospectus traders, the portfolio managers make buy
and sell decisions according to the
fund's goal and strategy.
[GRAPHIC] Duration management Forecasting teams
use fundamental economic factors to
J.P. Morgan uses a disciplined develop strategic forecasts of the
process to control the fund's direction of interest rates. Based on
sensitivity to interest rates these forecasts, strategists establish
the fund's exposure to interest rate
risk (a goal of duration management),
typically remaining relatively close to
the duration of the market as a whole,
as represented by the fund's benchmark.
The strategists closely monitor the fund
and make tactical adjustments as
necessary.
|
2 | FIXED INCOME MANAGEMENT APPROACH
|
<PAGE>
================================================================================
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
|
| 3
|
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND | TICKER SYMBOL: JMIBX
================================================================================
REGISTRANT: J.P. MORGAN
INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL BOND FUND)
[GRAPHIC] GOAL
The fund seeks to provide high total return consistent with moderate risk of
capital and maintenance of liquidity.
[GRAPHIC] INVESTMENT APPROACH
The fund invests primarily in fixed income securities, including U.S.
government and agency securities, corporate bonds, private placements,
asset-backed and mortgage-backed securities, and others. These securities may be
of any maturity, but under normal market conditions the management team will
keep the fund's duration within one year of that of the Salomon Brothers Broad
Investment Grade Bond Index (currently about five years).
Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. At least
75% of total assets must be invested in securities that, at the time of
purchase, are rated investment-grade (BBB/Baa or better) or are the unrated
equivalent, including at least 65% A or better. No more than 25% of assets may
be invested in securities as low as B.
[GRAPHIC] POTENTIAL RISKS AND REWARDS
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 2.
To the extent that the fund seeks higher returns by investing in
non-investment-grade bonds, it takes on additional risks, because these bonds
are more sensitive to economic news and their issuers are in less secure
financial condition. Additionally, because the fund may invest up to 25% of
assets in foreign securities, it takes on additional risks.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on pages 10-13.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $250
billion, including more than $31 billion using the same strategy as this fund.
The portfolio management team is led by William G. Tennille, vice president, who
has been at J.P. Morgan since 1992, and by Connie J. Plaehn, managing director,
who has been at J.P. Morgan since 1984. Both have been on the team since January
of 1994.
================================================================================
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund are
shown at right. The fund has no sales, redemption, exchange, or account fees,
although some institutions may charge you a fee for shares you buy through them.
The annual fund expenses shown are deducted from fund assets prior to
performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
================================================================================
Annual fund operating expenses(1) (%)
================================================================================
<S> <C>
Management fees (actual) 0.30
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.20
- --------------------------------------------------------------------------------
Total operating expenses(2)
(after reimbursement) 0.50
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Expense example
================================================================================
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
Your cost($) 5 16 28 63
- --------------------------------------------------------------------------------
</TABLE>
|
4 | J.P. MORGAN INSTITUTIONAL BOND FUND
|
<PAGE>
<TABLE>
====================================================================================================================================
PERFORMANCE (unaudited)
===================================
Average annual total return (%) Shows performance over time, for periods ended December 31, 1997
===================================-------------------------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. Since inception(3)
<S> <C> <C> <C> <C>
J.P. Morgan Institutional Bond Fund (after expenses) 9.29 10.16 7.41 8.16
- ------------------------------------------------------------------------------------------------------------------------------------
Bond Index4 (no expenses) 9.62 10.43 7.53 8.91x
- ------------------------------------------------------------------------------------------------------------------------------------
===================================
Year-by-year total return (%) Shows changes in returns by calendar year
===================================-------------------------------------------------------------------------------------------------
</TABLE>
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
J.P. Morgan Institutional Bond Fund 10.23 10.09 13.45 6.53 9.88 (2.68) 18.42 3.30 9.29
Bond Index(4) 14.24 8.28 15.78 7.59 9.89 (2.85) 18.55 3.62 9.62
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
FINANCIAL HIGHLIGHTS
==================================
Per-share data For fiscal periods ended October 31
==================================--------------------------------------------------------------------------------------------------
1993(3) 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 10.14 9.23 9.98 9.84
- --------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.15 0.55 0.63 0.61 0.65
Net realized and unrealized gain (loss)
on investment ($) 0.14 (0.88) 0.75 (0.11) 0.18
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.29 (0.33) 1.38 0.50 0.83
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.15) (0.55) (0.63) (0.61) (0.64)
Net realized gain ($) -- (0.03) -- (0.03) (0.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ($) (0.15) (0.58) (0.63) (0.64) (0.66)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.14 9.23 9.98 9.84 10.01
Total return (%) 2.90(5) (3.33) 15.50 5.21 8.78
===================================
Ratios and supplemental data
==================================--------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 43,711 253,174 438,610 836,066 912,054
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.50(6) 0.50 0.47 0.50 0.50
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.83(6) 6.00 6.62 6.28 6.59
Decrease reflected in expense ratio due to
expense reimbursement (%) 0.39(6) 0.19 0.05 0.03 0.00(7)
- ------------------------------------------------------------------------------------------------------------------------------------
The Financial Highlights above have been audited by Price Waterhouse LLP, the fund's independent accountants.
</TABLE>
1 The fund has a master/feeder structure as described on page 9. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year, expressed as a percentage of the fund's average net assets
and reflecting reimbursement for ordinary expenses over 0.50%.
2 There is no guarantee that reimbursement will continue beyond 2/28/99.
3 The fund commenced operations on 7/12/93. Except in the Financial Highlights,
returns reflect performance of the fund from 7/31/93. Returns for the period
3/31/88 through 7/31/93 reflect performance of The Pierpont Bond Fund, the
predecessor of the fund.
4 The Bond Index is composed of the Lehman Brothers Government/Corporate
Intermediate Bond Index, consisting of all investment-grade bonds with
maturities between 1 and 9.99 years, from February 1988 through 9/30/91, and
the Salomon Brothers Broad Investment Grade Bond Index, consisting of U.S.
Treasury and agency securities and investment grade mortgage and corporate
bonds, from 10/1/91 forward. Both are unmanaged indices that measure bond
market performance.
5 Not annualized.
6 Annualized.
7 Less than 0.01%.
|
J.P. MORGAN INSTITUTIONAL BOND FUND | 5
|
<PAGE>
YOUR INVESTMENT
================================================================================
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Determine the amount you are investing. The minimum amount for initial
investments is $5,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on minimum
investments, call 1-800-766-7722.
o Complete the application, indicating how much of your investment you want to
allocate to which fund(s). Please apply now for any account privileges you may
want to use in the future, in order to avoid the delays associated with adding
them later on.
o Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING YOUR ACCOUNT
By wire
o Mail your completed application to the Shareholder Services Agent.
o Call the Shareholder Services Agent to obtain an account number and to place a
purchase order. Funds that are wired without a purchase order will be returned
uninvested.
o After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York
Routing number: 021-000-238
Credit: J.P. Morgan Institutional Funds
Account number: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
By check
o Make out a check for the investment amount payable
to J.P. Morgan Institutional Funds.
o Mail the check with your completed application to the Shareholder Services
Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ADDING TO YOUR ACCOUNT
By wire
o Call the Shareholder Services Agent to place a purchase order. Funds that are
wired without a purchase order will be returned uninvested.
o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with a completed investment slip to the Shareholder Services
Agent. If you do not have an investment slip, attach a note indicating your
account number and how much you wish to invest in which fund(s).
By exchange
o Call the Shareholder Services Agent for an exchange.
|
6 | YOUR INVESTMENT
|
<PAGE>
================================================================================
SELLING SHARES
By phone -- wire payment
O Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can help
you add it.
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your fund
account.
By phone -- check payment
o Call the Shareholder Services Agent and place your request. Once your request
has been verified, a check for the net amount, payable to the registered
owner(s), will be mailed to the address of record. For checks payable to any
other party or mailed to any other address, please make your request in
writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the fund
name; the amount you want to sell; and the recipient's name and address or
wire information, if different from those of the account registration.
o Indicate whether you want the proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
o Mail the letter to the Shareholder Services Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in this fund for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
Business hours and NAV calculations The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time).
Timing of orders Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
================================================================================
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available 8:00 a.m. to 5:00 p.m. eastern
time on fund business days.
|
YOUR INVESTMENT | 7
|
<PAGE>
================================================================================
Timing of settlements When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
Statements and reports The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically declares income dividends daily and pays them monthly. If an
investor's shares are redeemed during the month, accrued but unpaid dividends
are paid with the redemption proceeds. Shares of the fund earn dividends on the
business day the purchase is effective, but not on the business day the
redemption is effective. The fund distributes capital gains, if any, once a
year. However, the fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities:
<TABLE>
<CAPTION>
================================================================================
Transaction Tax status
- --------------------------------------------------------------------------------
<S> <C>
Income dividends Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------
</TABLE>
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
|
8 | YOUR INVESTMENT
|
<PAGE>
FUND DETAILS
================================================================================
MASTER/FEEDER STRUCTURE
As noted earlier, the fund is a "feeder" fund that invests in a master
portfolio. (Except where indicated, this prospectus uses the term "the fund" to
mean the feeder fund and its master portfolio taken together.)
The master portfolio accepts investments from other feeder funds, and the
feeders bear the master portfolio's expenses in proportion to their assets.
However, each feeder can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder could offer access to
the same master portfolio on more attractive terms, or could experience better
performance, than another feeder. Information about other feeders is available
by calling 1-800-766-7722. Generally, when the master portfolio seeks a vote,
the funds will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
The fund and its master portfolio expect to maintain consistent goals, but if
they do not, the fund will withdraw from the master portfolio, receiving its
assets either in cash or securities. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
MANAGEMENT AND ADMINISTRATION
The fund and its master portfolio are governed by the same trustees. The
trustees are responsible for overseeing all business activities. The trustees
are assisted by Pierpont Group, Inc., which they own and operate on a cost
basis; costs are shared by all funds governed by these trustees. Funds
Distributor, Inc., as co-administrator, along with J.P. Morgan, provides fund
officers. J.P. Morgan, as co-administrator, oversees the fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Advisory services 0.30% of the master portfolio's
average net assets
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion in J.P. Morgan-
advised portfolios, plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.075% of the fund's average
net assets
- --------------------------------------------------------------------------------
</TABLE>
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
|
FUND DETAILS | 9
|
<PAGE>
================================================================================
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 4). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk.
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market conditions
o The fund's share price, o Bonds have generally o Under normal circumstances the fund plans to
yield, and total return outperformed money market remain fully invested in bonds and other
will fluctuate in investments over the long fixed income securities as noted in the table
response to bond market term, with less risk than on pages 12-13
movements stocks
o The fund seeks to limit risk and enhance
o The value of most bonds o Most bonds will rise in yields through careful management, sector
will fall when interest value when interest rates allocation, individual securities selection,
rates rise; the longer a fall and duration management
bond's maturity and the
lower its credit quality, o Mortgage-backed and o During severe market downturns, the fund has
the more its value asset-backed securities the option of investing up to 100% of assets
typically falls can offer attractive in investment-grade short-term securities
returns
o Mortgage-backed and o J.P. Morgan monitors interest rate trends, as
asset-backed securities well as geographic and demographic
(securities representing information related to mortgage-backed
an interest in, or securities and mortgage prepayments
secured by, a pool of
mortgages or other assets
such as receivables)
could generate capital
losses or periods of low
yields if they are paid
off substantially earlier
or later than anticipated
- ------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could o The fund could outperform o J.P. Morgan focuses its active management on
underperform its its benchmark due to those areas where it believes its commitment
benchmark due to its these same choices to research can most enhance returns and
sector, securities, or manage risks in a consistent way
duration choices
- ------------------------------------------------------------------------------------------------------------------------------------
Credit quality
o The default of an issuer o Investment-grade bonds o The fund maintains its own policies for
would leave the fund with have a lower risk of balancing credit quality against potential
unpaid interest or default yields and gains in light of its investment
principal goals
o Junk bonds offer higher
o Junk bonds (those rated yields and higher o J.P. Morgan develops its own ratings of
BB/Ba or lower) have a potential gains unrated securities and makes a credit quality
higher risk of default determination for unrated securities
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign investments
o The fund could lose money o Foreign bonds, which o Foreign bonds are a secondary investment for
because of foreign represent a major portion the fund
government actions, of the world's fixed
political instability, or income securities, offer o To the extent that the fund invests in
lack of adequate and attractive potential foreign bonds, it may manage the currency
accurate information performance and exposure of its foreign investments relative
opportunities for to its benchmark, and may hedge back into the
o Currency exchange rate diversification U.S. dollar from time to time (see also
movements could reduce "Derivatives")
gains or create losses o Favorable exchange rate
movements could generate
gains or reduce losses
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
|
10 | FUND DETAILS
|
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivatives
o Derivatives such as o Hedges that correlate o The fund uses derivatives for hedging (i.e.,
futures, options, and well with underlying to adjust duration orto establish or adjust
foreign currency forward positions can reduce or exposure to particular securities, markets, or
contracts that are used eliminate losses at low currencies)
for hedging the portfolio cost
or specific securities o The fund only establishes hedges that it
may not fully offset the o The fund could make money expects will be highly correlated with
underlying positions(1) and protect against underlying positions
losses if management's
o Derivatives that involve analysis proves correct o While the fund may use derivatives that
leverage could magnify incidentally involve leverage, it does not
losses o Derivatives that involve use them for the specific purpose of
leverage could generate leveraging the portfolio
substantial gains at low
cost
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o The fund could have o These holdings may offer o The fund may not invest more than 15% of net
difficulty valuing these more attractive yields or assets in illiquid holdings
holdings precisely potential growth than
comparable widely traded o To maintain adequate liquidity to meet
o The fund could be unable securities redemptions, the fund may hold
to sell these holdings at investment-grade short-term securities
the time or price desired (including repurchase agreements) and, for
temporary or extraordinary purposes, may
borrow from banks up to 30% of the value
of its assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed delivery
securities
o When the fund buys o The fund can take o The fund uses segregated accounts to offset
securities before issue advantage of attractive leverage risk
or for delayed delivery, transaction opportunities
it could be exposed to
leverage risk if it does
not use segregated
accounts
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would o The fund could realize o The fund anticipates a portfolio turnover
raise the fund's gains in a short period rate of approximately 300%
transaction costs of time
o The fund generally avoids short-term trading,
o Increased short-term o The fund could protect except to take advantage of attractive or
capital gains against losses if a bond unexpected opportunities or to meet demands
distributions would raise is overvalued and its generated by shareholder activity
shareholders' income tax value later falls
liability
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on the value of a securities index. An option is the right to
buy or sell securities that is granted in exchange for an agreed-upon sum.
A foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
|
FUND DETAILS | 11
|
<PAGE>
================================================================================
================================================================================
Securities
================================================================================
This table discusses the customary types of securities which can be held by the
fund. In each case the principal types of risk are listed on the following page
(see below for definitions). This table reads across two pages.
- --------------------------------------------------------------------------------
Asset-backed securities Bonds or notes backed by unsecured debt, such as credit
card receivables; these securities are often guaranteed or over-collateralized
to enhance their credit quality.
- --------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
- --------------------------------------------------------------------------------
Convertible securities Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
Corporate bonds Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
Mortgages (directly held) Debt instrument which gives the lender a lien on
property as security for the loan repayment.
- --------------------------------------------------------------------------------
Mortgage dollar rolls The sale of mortgage-backed securities with the commitment
to buy back similar securities at a future date and at an agreed upon price.
Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Mortgage-backed securities Securities backed by pools of mortgages (such as
Ginnie Maes, Fannie Maes and Freddie Macs), including pass through certificates,
and other senior classes of collateralized mortgage obligations (CMOs) or
stripped mortgage-backed securities.
- --------------------------------------------------------------------------------
Participation interests Securities representing an interest in another security
or in bank loans.
- --------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITs and other real-estate related instruments Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
Repurchase agreements Agreements between a seller and a buyer whereby the seller
agrees to repurchase the securities at an agreed upon price and at a stated
time.
- --------------------------------------------------------------------------------
Sovereign debt, Brady bonds, and debt of supranational organizations Dollar- and
non-dollar-denominated securities issued to refinance foreign government bank
loans and other debt.
- --------------------------------------------------------------------------------
Swaps Contractual agreement whereby a party agrees to exchange periodic payments
with a counterparty. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Synthetic variable rate instruments Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
Tax exempt municipal securities Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- --------------------------------------------------------------------------------
U.S. government securities Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- --------------------------------------------------------------------------------
Zero coupon, pay-in-kind, and deferred payment securities Securities offering
non-cash or delayed-cash payment. Their prices are typically more volatile than
those of some other debt instruments and involve certain special tax
considerations.
- --------------------------------------------------------------------------------
Risk related to certain securities held by J.P. Morgan Institutional Bond Fund:
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk The risk the costs associated with a liability are less than the
value of the underlying instrument.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
|
12 | FUND DETAILS
|
<PAGE>
================================================================================
================================================================================
* Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
o Permitted, but not typically used
- -- Not permitted
Types of Risk
<TABLE>
<CAPTION>
Bond
- -------------------------------------------------------------------------------------------
<S> <C>
credit, interest rate, market, prepayment *
- -------------------------------------------------------------------------------------------
credit, currency, liquidity, political *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political o
- -------------------------------------------------------------------------------------------
credit, currency, liquidity, political * 25%
Foreign
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political, valuation * 25%
Foreign
- -------------------------------------------------------------------------------------------
credit, extension, interest rate, market, natural event, prepayment --
- -------------------------------------------------------------------------------------------
extension, interest rate, leverage, liquidity, prepayment * 30%
- -------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage, market, political, *
prepayment
- -------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, liquidity, political, prepayment, *
- -------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation *
- -------------------------------------------------------------------------------------------
credit, interest rate, liquidity, valuation *
- -------------------------------------------------------------------------------------------
credit, liquidity *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political o
- -------------------------------------------------------------------------------------------
credit, leverage, market --
- -------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political o
- -------------------------------------------------------------------------------------------
interest rate *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political *
- -------------------------------------------------------------------------------------------
</TABLE>
Market risk The risk that the market value of a security may move up or down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
bonds and the mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
FUND DETAILS | 13
<PAGE>
================================================================================
FOR MORE INFORMATION
================================================================================
For investors who want more information on the fund, the following documents are
available free upon request:
Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. Morgan Institutional Bond Fund
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
Telephone: 1-800-766-7722
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available from the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. (1-800-SEC-0330) and may be viewed on-screen or downloaded from the SEC's
Internet site at http://www.sec.gov. The fund's investment company and 1933 Act
registration numbers are 811-07342 and 033-54642.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Institutional Funds combine a heritage of integrity and
financial leadership with comprehensive, sophisticated analysis and management
techniques. Drawing on J.P. Morgan's extensive experience and depth as an
investment manager, the J.P. Morgan Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.
JPMorgan
================================================================================
J.P. Morgan Institutional Funds
Advisor Distributor
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
PROS391-983
<PAGE>
- --------------------------------------------------------------------------------
|
MARCH 2, 1998 | PROSPECTUS
|
================================================================================
J.P. MORGAN INSTITUTIONAL
GLOBAL STRATEGIC INCOME FUND
=============================================
Seeking high total return
by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense to state or suggest otherwise.
[LOGO] JP Morgan
Distributed by Funds Distributor, Inc.
<PAGE>
<TABLE>
CONTENTS
====================================================================================================================================
<S> <C> <C>
2 | FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process .....................................................2
4 | J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
Fund description ....................................................................4
The fund's goal, investment approach, risks,
expenses, performance, and Investor expenses ...................................................................4
financial highlights
Performance .........................................................................5
Financial highlights ................................................................5
6 | YOUR INVESTMENT
Investing through a financial professional ..........................................6
Investing in the J.P. Morgan Institutional
Global Strategic Income Fund Investing through an employer-sponsored retirement plan .............................6
Investing through an IRA or rollover IRA ............................................6
Investing directly ..................................................................6
Opening your account ................................................................6
Adding to your account ..............................................................6
Selling shares ......................................................................7
Account and transaction policies ....................................................7
Dividends and distributions .........................................................8
Tax considerations ..................................................................8
9 | FUND DETAILS
Master/feeder structure .............................................................9
More about risk and the fund's
business operations Management and administration .......................................................9
Risk and reward elements ...........................................................10
Securities .........................................................................12
FOR MORE INFORMATION .......................................................back cover
</TABLE>
<PAGE>
INTRODUCTION
================================================================================
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
This fund invests primarily in bonds and other fixed income securities through a
master portfolio (another fund with the same goal). The fund seeks high total
return.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
The fund is not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
o are not prepared to accept a higher degree of risk than most traditional
bond funds
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $250 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
======================================
Before you invest
Investors considering the fund should
understand that:
o The value of the fund's shares
will fluctuate over time. You could
lose money if you sell when the
fund's share price is lower than
when you invested.
o There is no assurance that the fund
will meet its investment goal.
o Future returns will not necessarily
resemble past performance.
o The fund invests a portion of assets
in non-investment-grade bonds
("junk bonds") and emerging
markets debt, which offer higher
potential yields but have a higher
risk of default and are more
sensitive to market risk than
investment-grade bonds.
- --------------------------------------
|
| 1
|
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
================================================================================
The J.P. Morgan Institutional Global
Strategic Income Fund invests primarily
in bonds and other fixed income
securities.
The fund's investment philosophy,
developed by its advisor, emphasizes the
potential for consistently enhancing
performance while managing risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an
information advantage through the depth
of its global fixed-income research and
the sophistication of its analytical
systems. Using a team-oriented approach,
J.P. Morgan seeks to gain insights in a
broad range of distinct areas and takes
positions in many different ones,
helping the fund to limit exposure to
concentrated sources of risk.
In managing the fund, J.P. Morgan
employs a three-step process that
combines sector allocation, fundamental
research for identifying portfolio
securities, and duration management.
[GRAPHIC] Sector allocation The sector allocation
team meets monthly, analyzing the
The fund invests across a range fundamentals of a very broad range of
of different types of securities sectors. The team seeks to enhance
performance and manage risk by
underweighting or overweighting sectors.
[GRAPHIC] Security selection Relying on the
insights of different specialists,
The fund makes its portfolio including credit analysts, quantitative
decisions as described later researchers, and dedicated fixed income
in this prospectus traders, the portfolio managers make buy
and sell decisions according to the
fund's goal and strategy.
[GRAPHIC] Duration management Forecasting teams
use fundamental economic factors to
J.P. Morgan uses a disciplined develop strategic forecasts of the
process to control the fund's direction of interest rates. Based on
sensitivity to interest rates these forecasts, strategists establish
the fund's exposure to interest rate
risk (a goal of duration management),
typically remaining relatively close to
the duration of the market as a whole,
as represented by the fund's benchmark.
The strategists closely monitor the fund
and make tactical adjustments as
necessary.
|
2 | FIXED INCOME MANAGEMENT APPROACH
|
<PAGE>
================================================================================
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
|
| 3
|
<PAGE>
J.P. MORGAN INSTITUTIONAL
GLOBAL STRATEGIC INCOME FUND | TICKER SYMBOL: JPGSX
================================================================================
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC
INCOME FUND)
[GRAPHIC] GOAL
The fund seeks to provide high total return from a portfolio of fixed
income securities of foreign and domestic issuers.
[GRAPHIC] INVESTMENT APPROACH
The fund invests in a wide range of debt securities from the U.S. and other
markets, both developed and emerging. Issuers may include governments,
corporations, financial institutions, and supranational organizations (such as
the World Bank). The fund may invest directly in mortgages and in
mortgage-backed securities. The fund's securities may be of any maturity, but
under normal market conditions the fund's duration will generally be similar to
that of the Lehman Brothers Aggregate Bond Index (currently about four and a
half years). At least 40% of assets must be invested in securities that, at the
time of purchase, are rated investment-grade (BBB/Baa or better) or are the
unrated equivalent. The balance of assets may be invested in securities as low
as B.
The management team uses the process described on page 2, and also makes country
allocations, based primarily on macro-economic factors. With regard to sector
allocation, the team uses the model allocation shown at right as a basis,
although the actual allocations are adjusted periodically within the ranges
indicated. Within each sector, a dedicated team handles securities selection.
The fund typically hedges its non-dollar denominated investments back to the
U.S. dollar.
[GRAPHIC] POTENTIAL RISKS AND REWARDS
The fund's share price and total return will vary in response to changes in
global bond markets, interest rates, and currency exchange rates. How well the
fund's performance compares to that of similar fixed income funds will depend on
the success of the investment process. Because of credit and foreign and
emerging markets investment risks, the fund's performance is likely to be more
volatile than that of most fixed income funds. The fund's mortgage-backed
investments involve the risk of losses due to default or to prepayments that
occur earlier or later than expected. Some investments, including directly owned
mortgages, may be illiquid. The fund has the potential for long-term total
returns that exceed those of more traditional bond funds, but investors should
also be prepared for risks that exceed those of more traditional bond funds.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on pages 10-13.
MODEL SECTOR ALLOCATION
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
15% public/private corporates (range 5-25%)
23% high yield corporates (range 13-33%)
15% emerging markets (range 5-25%)
12% international non-dollar (range 0-25%)
35% public/private mortgages (range 20-45%)
</TABLE>
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $250
billion, including more than $3 billion using the same strategy as this fund.
The portfolio management team is led by Gerard W. Lillis, managing director, who
has been at J.P. Morgan since 1978, and by Mark E. Smith, managing director, who
joined J.P. Morgan in 1994 from Allied Signal, Inc. where he managed fixed
income portfolios and oversaw asset allocation activities across asset classes.
Both have been on the team since the fund's inception.
================================================================================
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund are
shown at right. The fund has no sales, redemption, exchange, or account fees,
although some institutions may charge you a fee for shares you buy through them.
The annual fund expenses shown are deducted from fund assets prior to
performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
================================================================================
Annual fund operating expenses(1) (%)
================================================================================
<S> <C>
Management fees (actual) 0.45
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.20
- --------------------------------------------------------------------------------
Total operating expenses(2)
(after reimbursement) 0.65
================================================================================
</TABLE>
================================================================================
Expense example
================================================================================
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
Your cost($) 7 21 36 81
- --------------------------------------------------------------------------------
</TABLE>
|
4 | J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
|
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
<S> <C> <C>
PERFORMANCE (unaudited)
===================================
Average annual total return (%) Shows performance over time, for period ended December 31, 1997
===================================-----------------------------------------------------------------------------------------
Since inception(3)
J.P. Morgan Institutional Global Strategic Income Fund (after expenses) 9.76
- ----------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index(4) (no expenses) 10.30
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
===================================
Total return (%) Shows changes in returns by calendar year
===================================-----------------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
1997(3)
-------
<S> <C>
J.P. Morgan Institutional Global Strategic Income Fund 9.76
Lehman Brothers Aggregate Bond Index(4) 10.30
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
FINANCIAL HIGHLIGHTS
===================================
Per-share data For fiscal period ended October 31
===================================-----------------------------------------------------------------------------------------------
1997(3)
<S> <C> <C>
Net asset value, beginning of period ($) 10.00
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.46
Net realized and unrealized gain
on investment and foreign currency ($) 0.15
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.61
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.45)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.16
- ----------------------------------------------------------------------------------------------------------------------------------
Total return (%) 6.15(5)
- ----------------------------------------------------------------------------------------------------------------------------------
===================================
Ratios and supplemental data
===================================-----------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 105,051
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.65(6)
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 7.12(6)
- ----------------------------------------------------------------------------------------------------------------------------------
Decrease reflected in expense ratio due to
expense reimbursement (%) 0.53(6)
- ----------------------------------------------------------------------------------------------------------------------------------
The Financial Highlights above have been audited by Price Waterhouse LLP, the fund's independent accountants
</TABLE>
(1) The fund has a master/feeder structure as described on page 9. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal year, expressed as a percentage of the fund's average net
assets and reflecting reimbursement for ordinary expenses over 0.65%.
(2) Without reimbursement other expenses and total operating expenses would
have been 0.73% and 1.18%, respectively, on an annualized basis. There is
no guarantee that reimbursement will continue beyond 2/28/99.
(3) The fund commenced operations on 3/17/97. Except in the Financial
Highlights, returns reflect performance of the fund from 3/31/97.
(4) The Lehman Brothers Aggregate Bond Index, consisting of U.S. Treasury,
agency, corporate and mortgage-backed securities, is an unmanaged index
that measures overall bond market performance.
(5) Not annualized.
(6) Annualized.
|
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND | 5
|
<PAGE>
YOUR INVESTMENT
================================================================================
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Determine the amount you are investing. The minimum amount for initial
investments is $1,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on
minimum investments, call 1-800-766-7722.
o Complete the application, indicating how much of your investment you want
to allocate to which fund(s). Please apply now for any account privileges
you may want to use in the future, in order to avoid the delays associated
with adding them later on.
o Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING YOUR ACCOUNT
By wire
o Mail your completed application to the Shareholder Services Agent.
o Call the Shareholder Services Agent to obtain an account number and to
place a purchase order. Funds that are wired without a purchase order will
be returned uninvested.
o After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York
Routing number: 021-000-238
Credit: J.P. Morgan Institutional Funds
Account number: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with your completed application to the Shareholder Services
Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ADDING TO YOUR ACCOUNT
By wire
o Call the Shareholder Services Agent to place a purchase order. Funds that
are wired without a purchase order will be returned uninvested.
o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with a completed investment slip to the Shareholder Services
Agent. If you do not have an investment slip, attach a note indicating your
account number and how much you wish to invest in which fund(s).
By exchange
o Call the Shareholder Services Agent for an exchange.
|
6 | YOUR INVESTMENT
|
<PAGE>
================================================================================
SELLING SHARES
By phone -- wire payment
o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can
help you add it.
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your
fund account.
By phone -- check payment
o Call the Shareholder Services Agent and place your request. Once your
request has been verified, a check for the net amount, payable to the
registered owner(s), will be mailed to the address of record. For checks
payable to any other party or mailed to any other address, please make your
request in writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the
fund name; the amount you want to sell; and the recipient's name and
address or wire information, if different from those of the account
registration.
o Indicate whether you want the proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
o Mail the letter to the Shareholder Services Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in this fund for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
Business hours and NAV calculations The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time).
Timing of orders Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
================================================================================
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available 8:00 a.m. to
5:00 p.m. eastern time on fund business days.
|
YOUR INVESTMENT | 7
|
<PAGE>
================================================================================
Timing of settlements When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
Statements and reports The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically declares income dividends daily and pays them monthly. If an
investor's shares are redeemed during the month, accrued but unpaid dividends
are paid with the redemption proceeds. Shares of the fund earn dividends on the
business day the purchase is effective, but not on the business day the
redemption is effective. The fund distributes capital gains, if any, once a
year. However, the fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities:
<TABLE>
<CAPTION>
================================================================================
Transaction Tax status
- --------------------------------------------------------------------------------
<S> <C>
Income dividends Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------
</TABLE>
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
|
8 | YOUR INVESTMENT
|
<PAGE>
FUND DETAILS
================================================================================
MASTER/FEEDER STRUCTURE
As noted earlier, the fund is a "feeder" fund that invests in a master
portfolio. (Except where indicated, this prospectus uses the term "the fund" to
mean the feeder fund and its master portfolio taken together.)
The master portfolio accepts investments from other feeder funds, and the
feeders bear the master portfolio's expenses in proportion to their assets.
However, each feeder can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder could offer access to
the same master portfolio on more attractive terms, or could experience better
performance, than another feeder. Information about other feeders is available
by calling 1-800-766-7722. Generally, when the master portfolio seeks a vote,
the funds will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
The fund and its master portfolio expect to maintain consistent goals, but if
they do not, the fund will withdraw from the master portfolio, receiving its
assets either in cash or securities. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
MANAGEMENT AND ADMINISTRATION
The fund and its master portfolio are governed by the same trustees. The
trustees are responsible for overseeing all business activities. The trustees
are assisted by Pierpont Group, Inc., which they own and operate on a cost
basis; costs are shared by all funds governed by these trustees. Funds
Distributor, Inc., as co-administrator, along with J.P. Morgan, provides fund
officers. J.P. Morgan, as co-administrator, oversees the fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Advisory services 0.45% of the master portfolio's
average net assets
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion in J.P. Morgan-
advised portfolios, plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.10% of the fund's average
net assets
- --------------------------------------------------------------------------------
</TABLE>
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
|
FUND DETAILS | 9
|
<PAGE>
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 4). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk.
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market conditions
o The fund's share price, o Bonds have generally o Under normal circumstances the fund plans to
yield, and total return outperformed money market remain fully invested in bonds and other
will fluctuate in investments over the long fixed income securities as noted in the table
response to bond market term, with less risk than on pages 12-13
movements stocks
o The fund seeks to limit risk and enhance
o The value of most bonds o Most bonds will rise in yields through careful management, sector
will fall when interest value when interest rates allocation, individual securities selection,
rates rise; the longer a fall and duration management
bond's maturity and the
lower its credit quality, o Mortgage-backed and o During severe market downturns, the fund has
the more its value asset-backed securities the option of investing up to 100% of assets
typically falls can offer attractive in investment-grade short-term securities
returns
o Mortgage-backed and o J.P. Morgan monitors interest rate trends, as
asset-backed securities well as geographic and demographic
(securities representing information related to mortgage-backed
an interest in, or securities and mortgage prepayments
secured by, a pool of
mortgages or other assets
such as receivables)
could generate capital
losses or periods of low
yields if they are paid
off substantially earlier
or later than anticipated
- ------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could o The fund could outperform o J.P. Morgan focuses its active management on
underperform its its benchmark due to those areas where it believes its commitment
benchmark due to its these same choices to research can most enhance returns and
sector, securities, or manage risks in a consistent way
duration choices
- ------------------------------------------------------------------------------------------------------------------------------------
Credit quality
o The default of an issuer o Investment-grade bonds o The fund maintains its own policies for
would leave the fund with have a lower risk of balancing credit quality against potential
unpaid interest or default yields and gains in light of its investment
principal goals
o Junk bonds offer higher
o Junk bonds (those rated yields and higher o J.P. Morgan develops its own ratings of
BB/Ba or lower) have a potential gains unrated securities and makes a credit quality
higher risk of default determination for unrated securities
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign investments
o The fund could lose money o Foreign bonds, which o Foreign bonds are a secondary investment for
because of foreign represent a major portion the fund
government actions, of the world's fixed
political instability, or income securities, offer o To the extent that the fund invests in
lack of adequate and attractive potential foreign bonds, it may manage the currency
accurate information performance and exposure of its foreign investments relative
opportunities for to its benchmark, and may hedge back into the
o Currency exchange rate diversification U.S. dollar from time to time (see also
movements could reduce "Derivatives")
gains or create losses o Favorable exchange rate
movements could generate
o Currency and investment gains or reduce losses
risks tend to be higher
in emerging markets o Emerging markets can
offer higher returns
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
|
10 | FUND DETAILS
|
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivatives
o Derivatives such as o Hedges that correlate o The fund uses derivatives for hedging and for
futures, options, and well with underlying risk management (i.e., to adjust duration or
foreign currency forward positions can reduce or to establish or adjust exposure to particular
contracts that are used eliminate losses at low securities, markets, or currencies); risk
for hedging the portfolio cost management may include management of the
or specific securities fund's exposure relative to its benchmark
may not fully offset the o The fund could make money
underlying positions(1) and protect against o The fund only establishes hedges that it
losses if management's expects will be highly correlated with
o Derivatives used for risk analysis proves correct underlying positions
management may not have
the intended effects and o Derivatives that involve o While the fund may use derivatives that
may result in losses or leverage could generate incidentally involve leverage, it does not
missed opportunities substantial gains at low use them for the specific purpose of
cost leveraging the portfolio
o Derivatives that involve
leverage could magnify
losses
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o The fund could have o These holdings may offer o The fund may not invest more than 15% of net
difficulty valuing these more attractive yields or assets in illiquid holdings
holdings precisely potential growth than
comparable widely traded o To maintain adequate liquidity to meet
o The fund could be unable securities redemptions, the fund may hold
to sell these holdings at investment-grade short-term securities
the time or price desired (including repurchase agreements) and, for
temporary or extraordinary purposes, may
borrow from banks up to 33 1/3% of the value
of its assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed delivery
securities
o When the fund buys o The fund can take o The fund uses segregated accounts to offset
securities before issue advantage of attractive leverage risk
or for delayed delivery, transaction opportunities
it could be exposed to
leverage risk if it does
not use segregated
accounts
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would o The fund could realize o The fund anticipates a portfolio turnover
raise the fund's gains in a short period rate of approximately 300%
transaction costs of time
o The fund generally avoids short-term trading,
o Increased short-term o The fund could protect except to take advantage of attractive or
capital gains against losses if a bond unexpected opportunities or to meet demands
distributions would raise is overvalued and its generated by shareholder activity
shareholders' income tax value later falls
liability
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on the value of a securities index. An option is the right to
buy or sell securities that is granted in exchange for an agreed-upon sum.
A foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
|
FUND DETAILS | 11
|
<PAGE>
================================================================================
================================================================================
Securities
================================================================================
This table discusses the customary types of securities which can be held by the
fund. In each case the principal types of risk are listed on the following page
(see below for definitions).This
table reads across two pages.
- --------------------------------------------------------------------------------
Asset-backed securities Bonds or notes backed by unsecured debt, such as credit
card receivables; these securities are often guaranteed or over-collateralized
to enhance their credit quality.
- --------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
- --------------------------------------------------------------------------------
Convertible securities Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
Corporate bonds Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
Mortgages (directly held) Debt instrument which gives the lender a lien on
property as security for the loan repayment.
- --------------------------------------------------------------------------------
Mortgage dollar rolls The sale of mortgage-backed securities with the commitment
to buy back similar securities at a future date and at an agreed upon price.
Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Mortgage-backed securities Securities backed by pools of mortgages (such as
Ginnie Maes, Fannie Maes and Freddie Macs), including pass through certificates,
and other senior classes of collateralized mortgage obligations (CMOs) or
stripped mortgage-backed securities.
- --------------------------------------------------------------------------------
Participation interests Securities representing an interest in another security
or in bank loans.
- --------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITs and other real-estate related instruments Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
Repurchase agreements Agreements between a seller and a buyer whereby the seller
agrees to repurchase the securities at an agreed upon price and at a stated
time.
- --------------------------------------------------------------------------------
Sovereign debt, Brady bonds, and debt of supranational organizations Dollar- and
non-dollar-denominated securities issued to refinance foreign government bank
loans and other debt.
- --------------------------------------------------------------------------------
Swaps Contractual agreement whereby a party agrees to exchange periodic payments
with a counterparty. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Synthetic variable rate instruments Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
Tax exempt municipal securities Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- --------------------------------------------------------------------------------
U.S. government securities Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- --------------------------------------------------------------------------------
Zero coupon, pay-in-kind, and deferred payment securities Securities offering
non-cash or delayed-cash payment. Their prices are typically more volatile than
those of some other debt instruments and involve certain special tax
considerations.
- --------------------------------------------------------------------------------
Risk related to certain securities held by J.P. Morgan Institutional Global
Strategic Income Fund:
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk The risk the costs associated with a liability are less than the
value of the underlying instrument.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
|
12 | FUND DETAILS
|
<PAGE>
================================================================================
================================================================================
* Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
o Permitted, but not typically used
- -- Not permitted
Types of Risk
<TABLE>
<CAPTION>
Global Strategic
Income
- -------------------------------------------------------------------------------------------
<S> <C>
credit, interest rate, market, prepayment *
- -------------------------------------------------------------------------------------------
credit, currency, liquidity, political *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political o
- -------------------------------------------------------------------------------------------
credit, currency, liquidity, political o
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political, valuation *
- -------------------------------------------------------------------------------------------
credit, extension, interest rate, market, natural event, prepayment *
- -------------------------------------------------------------------------------------------
extension, interest rate, leverage, liquidity, prepayment * 33 1/3%
- -------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage, market, political, *
prepayment
- -------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, liquidity, political prepayment, *
- -------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation *
- -------------------------------------------------------------------------------------------
credit, interest rate, liquidity, valuation *
- -------------------------------------------------------------------------------------------
credit, liquidity o
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political *
- -------------------------------------------------------------------------------------------
credit, leverage, market --
- -------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political --
- -------------------------------------------------------------------------------------------
interest rate *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political *
- -------------------------------------------------------------------------------------------
</TABLE>
Market risk The risk that the market value of a security may move up or down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
bonds and the mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
|
FUND DETAILS | 13
|
<PAGE>
================================================================================
FOR MORE INFORMATION
================================================================================
For investors who want more information on the fund, the following documents are
available free upon request:
Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. Morgan Institutional Global Strategic Income Fund
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
Telephone: 1-800-766-7722
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available from the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. (1-800-SEC-0330) and may be viewed on-screen or downloaded from the SEC's
Internet site at http://www.sec.gov. The fund's investment company and 1933 Act
registration numbers are 811-07342 and 033-54642.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Institutional Funds combine a heritage of integrity and
financial leadership with comprehensive, sophisticated analysis and management
techniques. Drawing on J.P. Morgan's extensive experience and depth as an
investment manager, the J.P. Morgan Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.
JPMorgan
================================================================================
J.P. Morgan Institutional Funds
Advisor Distributor
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
PROS308-983
<PAGE>
J.P. MORGAN INSTITUTIONAL FUNDS
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
J.P. MORGAN INSTITUTIONAL BOND FUND
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 2, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 2, 1998 FOR THE FUND OR 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.
i:\dsfndlgl\institut\0198fix.pea\bondsai.doc
<PAGE>
Table of Contents
PAGE
General.................................
Investment Objectives and Policies......
Investment Restrictions.................
Trustees and Officers...................
Investment Advisor......................
Distributor.............................
Co-Administrator........................
Services Agent..........................
Custodian and Transfer Agent............
Shareholder Servicing...................
Financial Professionals.................
Independent Accountants.................
Expenses................................
Purchase of Shares......................
Redemption of Shares....................
Exchange of Shares......................
Dividends and Distributions.............
Net Asset Value.........................
Performance Data........................
Portfolio Transactions..................
Massachusetts Trust.....................
Description of Shares...................
Special Information regarding
Investment Structure....................
Taxes...................................
Additional Information..................
Financial Statements....................
Appendix A - Description of Securities
Ratings................................
i:\dsfndlgl\institut\0198fix.pea\bondsai.doc
<PAGE>
GENERAL
This Statement of Additional Information relates only to J.P. Morgan
Institutional Short Term Bond Fund, J.P. Morgan Institutional Bond Fund and J.P.
Morgan Institutional Global Strategic Income Fund (collectively, the "Funds").
Each of the Funds is a series of shares of beneficial interest of 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"). Capitalized terms not
otherwise defined herein have the meanings accorded to them in the Prospectus.
The Funds' executive offices are located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
INVESTMENT OBJECTIVES AND POLICIES
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND (the "Short Term Bond
Fund") is designed for investors who place a strong emphasis on conservation of
capital but who also want a return greater than that of a money market fund or
other very low risk investment vehicles. The Fund is appropriate for investors
who do not require the stable net asset value typical of a money market fund but
who want less price fluctuation than is typical of a longer-term bond fund. The
Short Term Bond Fund's investment objective is to provide a high total return
while attempting to limit the likelihood of negative quarterly returns. The
Short Term Bond Fund seeks to achieve this high total return to the extent
consistent with modest risk of capital and the maintenance of liquidity. The
Short Term Bond Fund attempts to achieve its investment objective by investing
all of its investable assets in The Short Term Bond Portfolio (the "Portfolio"),
a diversified open-end management investment company having the same investment
objective as the Short Term Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in the corporate and government debt obligations and related
securities of domestic and foreign issuers described in this Statement of
Additional Information.
J.P. MORGAN INSTITUTIONAL BOND FUND (the "Bond Fund") is designed to be
an economical and convenient means of making substantial investments in a broad
range of corporate and government debt obligations and related investments of
domestic and foreign issuers, subject to certain quality and other restrictions.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
1
<PAGE>
See "Quality and Diversification Requirements." The Bond Fund's investment
objective is to provide a high total return consistent with moderate risk of
capital and maintenance of liquidity. Although the net asset value of the Bond
Fund will fluctuate, the Bond Fund attempts to conserve the value of its
investments to the extent consistent with its objective. The Bond Fund attempts
to achieve its objective by investing all of its investable assets in The U.S.
Fixed Income Portfolio (the "Portfolio"), a diversified open-end management
investment company having the same investment objective as the Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in high grade and investment grade corporate and government debt
obligations and related securities of domestic and foreign issuers described in
the Prospectus and this Statement of Additional Information.
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND (the "Global
Strategic Income Fund") is designed for the aggressive investor seeking to
diversify an investment portfolio by investing in fixed-income securities of
foreign and domestic issuers. The Global Strategic Income Fund's investment
objective is high total return from a portfolio of fixed-income securities of
foreign and domestic issuers. The Global Strategic Income Fund seeks to achieve
its objective by investing all of its investable assets in the Global Strategic
Income Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the Global Strategic Income
Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in mortgage-backed securities and direct mortgage obligations; below
investment grade debt obligations of U.S. and non-U.S. issuers; investment grade
U.S. dollar-denominated debt obligations of U.S. and non-U.S. issuers;
investment grade non-dollar denominated debt obligations of non-U.S. issuers;
and obligations of emerging market issuers.
The following discussion supplements the information regarding the
investment objective of each of the Funds and the policies to be employed to
achieve this objective by their corresponding Portfolios as set forth above and
in the Prospectus. The investment objective of each Fund and its corresponding
Portfolio is identical. Accordingly, references below to a Fund also include the
Fund's corresponding Portfolio; similarly, references to a Portfolio also
include the corresponding Fund that invests in the Portfolio unless the context
requires otherwise.
CORPORATE BONDS AND OTHER DEBT SECURITIES
Each Fund may invest in bonds and other debt securities of domestic and
foreign issuers to the extent consistent with its investment objective and
policies. A description of these investments appears below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."
MORTGAGE-BACKED SECURITIES. Each Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists
of mortgage loans evidenced by promissory notes secured by first mortgages or
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
2
<PAGE>
first deeds of trust or other similar security instruments creating a first lien
on owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value.
Unlike mortgage-backed securities, which generally represent an
interest in a pool of mortgages, direct investments in mortgages involve
prepayment and credit risks of an individual issuer and real property.
Consequently, these investments require different investment and credit analysis
by the Advisor.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support to these federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
There are several types of guaranteed mortgage-backed securities
currently available, including guaranteed mortgage pass-through certificates and
multiple class securities, which include guaranteed real estate mortgage
investment conduit certificates ("REMIC Certificates"), other collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
3
<PAGE>
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class mortgage-backed securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Funds do not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae and Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class
of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets underlying
the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or
REMIC Certificates to be retired substantially earlier than their final
scheduled distribution dates. Generally, interest is paid or accrues on all
classes of CMOs or REMIC Certificates on a monthly basis.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities ("SMBS") are derivative multiclass mortgage securities, issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers. Although the market for such securities is increasingly liquid,
privately issued SMBS may not be readily marketable and will be considered
illiquid for purposes of the Fund's limitation on investments in illiquid
securities. The Advisor may determine that SMBS which are U.S. Government
securities are liquid for purposes of each Fund's limitation on investments in
illiquid securities in accordance with procedures adopted by the Board of
Trustees. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
The directly placed mortgages in which the Global Strategic Income Fund
invests may include residential mortgages, multifamily mortgages, mortgages on
cooperative apartment buildings, commercial mortgages, and sale-leasebacks.
These investments are backed by assets such as office buildings, shopping
centers, retail stores, warehouses, apartment buildings and single-family
dwellings. In the event that the Fund forecloses on any non-performing mortgage,
and acquires a direct interest in the real property, the Fund will be subject to
the risks generally associated with the ownership of real property. There may be
fluctuations in the market value of the foreclosed property and its occupancy
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
4
<PAGE>
rates, rent schedules and operating expenses. There may also be adverse changes
in local, regional or general economic conditions, deterioration of the real
estate market and the financial circumstances of tenants and sellers,
unfavorable changes in zoning, building environmental and other laws, increased
real property taxes, rising interest rates, reduced availability and increased
cost of mortgage borrowings, the need for unanticipated renovations, unexpected
increases in the cost of energy, environmental factors, acts of God and other
factors which are beyond the control of the Fund or the Advisor. Hazardous or
toxic substances may be present on, at or under the mortgaged property and
adversely affect the value of the property. In addition, the owners of property
containing such substances may be held responsible, under various laws, for
containing, monitoring, removing or cleaning up such substances. The presence of
such substances may also provide a basis for other claims by third parties.
Costs of clean-up or of liabilities to third parties may exceed the value of the
property. In addition, these risks may be uninsurable. In light of these and
similar risks, it may be impossible to dispose profitably of properties in
foreclosure.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Portfolio accrues income with respect to zero
coupon and pay-in-kind securities prior to the receipt of cash payments.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals. While interest
payments are not made on such securities, holders of such securities are deemed
to have received "phantom income." Because a Fund will distribute "phantom
income" to shareholders, to the extent that shareholders elect to receive
dividends in cash rather than reinvesting such dividends in additional shares,
the applicable Fund will have fewer assets with which to purchase income
producing securities. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which a Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
5
<PAGE>
off certain amounts on credit card debt thereby reducing the balance due.
Additionally, if the letter of credit is exhausted, holders of asset-backed
securities may also experience delays in payments or losses if the full amounts
due on underlying sales contracts are not realized. Because asset-backed
securities are relatively new, the market experience in these securities is
limited and the market's ability to sustain liquidity through all phases of the
market cycle has not been tested.
CORPORATE FIXED INCOME SECURITIES. Each Fund may invest in publicly and
privately issued debt obligations of U.S. and non-U.S. corporations, including
obligations of industrial, utility, banking and other financial issuers. These
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligation and may also be subject to price
volatility due to such factors as market interest rates, market perception of
the creditworthiness of the issuer and general market liquidity.
The Fund may purchase privately issued corporate fixed income
securities pursuant to Rule 144A of the Securities Act of 1933 ("Rule 144A") or
pursuant to a directly negotiated agreement between the investors, including the
Fund, and the corporate issuer. At times, the Fund may be the only investor in a
privately issued fixed income security, or one of only a few institutional
investors. In this circumstance, there may be restrictions on the Fund's ability
to resell the privately issued fixed income security that result from
contractual limitations in the offering agreement and a limited trading market.
The Advisor will monitor the liquidity of privately issued fixed income
securities in accordance with guidelines established by the Advisor and
monitored by the Trustees. See Illiquid Investments; Privately Placed and Other
Unregistered Securities.
MONEY MARKET INSTRUMENTS
Each Fund may invest in money market instruments to the extent
consistent with its investment objective and policies. A description of the
various types of money market instruments that may be purchased by the Funds
appears below.
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
6
<PAGE>
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
FOREIGN GOVERNMENT OBLIGATIONS. 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 (the "Asset Limitation") and are organized under the laws of the
United States or any state, (ii) foreign branches of these banks or of foreign
banks of equivalent size (Euros) and (iii) U.S. branches of foreign banks of
equivalent size (Yankees). The Asset Limitation is not applicable to the Global
Strategic Income Fund. See "Foreign Investments." The Funds will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank. Each of the Funds may also invest in
obligations of international banking institutions designated or supported by
national governments to promote economic reconstruction, development or trade
between nations (e.g., the European Investment Bank, the Inter-American
Development Bank, or the World Bank).
COMMERCIAL PAPER. 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
7
<PAGE>
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.
TAX EXEMPT OBLIGATIONS
In certain circumstances the Bond and Short Term Bond Funds may invest in
tax exempt obligations to the extent consistent with each Fund's investment
objective and policies. A description of the various types of tax exempt
obligations which may be purchased by the Funds appears below. See "Quality and
Diversification Requirements."
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
8
<PAGE>
MUNICIPAL BONDS. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
MUNICIPAL NOTES. Municipal notes are subdivided into three categories of
short-term obligations: municipal notes, municipal commercial paper and
municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Funds may invest are payable, or are
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
9
<PAGE>
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of each Fund to receive the par value of the
obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, excluded from gross income for federal
income tax purposes. For a description of the attributes of master demand
obligations, see "Money Market Instruments" above. Although there is no
secondary market for master demand obligations, such obligations are considered
by the Funds to be liquid because they are payable upon demand. The Funds have
no specific percentage limitations on investments in master demand obligations.
FOREIGN INVESTMENTS
The Global Strategic Income Fund makes substantial investments in
foreign countries. The Bond and Short Term Bond Funds may invest in certain
foreign securities. The Short Term Bond and Bond Funds may invest up to 20% of
total assets in fixed income securities of foreign issuers denominated in
foreign currencies. Neither the Bond or Short Term Bond Funds expect to invest
more than 25% of their respective total assets at the time of purchase in
securities of foreign issuers. In the case of the Bond and Short Term Bond
Funds, any foreign commercial paper must not be subject to foreign withholding
tax at the time of purchase.
Foreign investments may be made directly in securities of foreign
issuers or in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or in 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. An
unsponsored depositary may not provide the same shareholder information that a
sponsored is required to provide under its contractual arrangements with the
issuer of the underlying foreign security. Generally, ADRs, in registered form,
are designed for use in the U.S. securities markets, and EDRs, in bearer form,
are designed for use in European securities markets.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
10
<PAGE>
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.
Investment in securities of foreign issuers and in obligations of
foreign branches of domestic banks involves somewhat different investment risks
from those affecting securities of U.S. domestic issuers. There may be limited
publicly available information with respect to foreign issuers, and foreign
issuers are not 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 a Fund by domestic companies.
Investors should realize that the value of a Fund's 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 administration 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 Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgement against a foreign
issuer. Any foreign investment made by a Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
In addition, while the volume of transactions effected on foreign
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, a Fund'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 addition, there is generally
less government supervision and regulation of securities exchanges, brokers and
issuers located in foreign countries than in the United States.
Since investments in foreign securities may involve foreign currencies,
the value of the 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. Each Fund 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 Fund's
currency exposure. See "Foreign Currency Exchange Transactions" below.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
11
<PAGE>
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because each Portfolio may buy
and sell securities and receive interest in currencies other than the U.S.
dollar, a Portfolio may enter from time to time into foreign currency exchange
transactions. The Portfolio either enters into these transactions on a spot
(i.e. cash) basis at the spot rate prevailing in the foreign currency exchange
market or uses forward contracts to purchase or sell foreign currencies. The
cost of the Portfolio's spot currency exchange transactions is generally the
difference between the bid and offer spot rate of the currency being purchased
or sold.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are derivative instruments, as their value derives from the spot exchange rates
of the currencies underlying the contract. These contracts are entered into in
the interbank market directly between currency traders (usually large commercial
banks) and their customers. A forward foreign currency exchange contract
generally has no deposit requirement and is traded at a net price without
commission. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of the Portfolio's securities or
in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
A Portfolio may enter into foreign currency exchange transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or
anticipated securities transactions. A Portfolio may also enter into forward
contracts to hedge against a change in foreign currency exchange rates that
would cause a decline in the value of existing investments denominated or
principally traded in a foreign currency. To do this, the Portfolio would enter
into a forward contract to sell the foreign currency in which the investment is
denominated or principally traded in exchange for U.S. dollars or in exchange
for another foreign currency. A Portfolio will only enter into forward contracts
to sell a foreign currency for another foreign currency if the Advisor expects
the foreign currency purchased to appreciate against the U.S. dollar.
Although these transactions are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
limit any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause the Portfolio to assume the
risk of fluctuations in the value of the currency purchased against the hedged
currency and the U.S. dollar. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market movements in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
12
<PAGE>
SOVEREIGN FIXED INCOME SECURITIES. Each of the Funds may invest in
fixed income securities issued or guaranteed by a foreign sovereign government
or its agencies, authorities or political subdivisions. Investment in sovereign
fixed income securities involves special risks not present in corporate fixed
income securities. The issuer of the sovereign debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal or interest when due, and a Fund may have limited recourse in
the event of a default. During periods of economic uncertainty, the market
prices of sovereign debt, and a Fund's net asset value, may be more volatile
than prices of U.S. debt obligations. In the past, certain foreign countries
have encountered difficulties in servicing their debt obligations, withheld
payments of principal and interest and declared moratoria on the payment of
principal and interest on their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward international lenders and local political
constraints. Sovereign debtors may also be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities to reduce
principal and interest arrearages on their debt. The failure of a sovereign
debtor to implement economic reforms, achieve specified levels of economic
performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
BRADY BONDS. The Global Strategic Income Fund may invest in Brady
bonds, which are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructurings. Brady bonds have been issued since
1989 and do not have a long payment history. In light of the history of defaults
of countries issuing Brady bonds on their commercial bank loans, investments in
Brady bonds may be viewed as speculative. Brady bonds may be fully or partially
collateralized or uncollateralized, are issued in various currencies (but
primarily the dollar) and are actively traded in over-the-counter secondary
markets. Incomplete collateralization of interest or principal payment
obligations results in increased credit risk. Dollar-denominated collateralized
Brady bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized by U.S. Treasury zero coupon bonds having the same maturity as
the Brady bonds.
OBLIGATIONS OF SUPRANATIONAL ENTITIES. The Global Strategic Income Fund
may invest in obligations of supranational entities designated or supported by
governmental entities to promote economic reconstruction or development and of
international banking institutions and related government agencies. Examples
include the International Bank for Reconstruction and Development (the "World
Bank"), the European Coal and Steel Community, the Asian Development Bank and
the Inter-American Development Bank. Each supranational entity's lending
activities
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
13
<PAGE>
are limited to a percentage of its total capital (including "callable capital"
contributed by its governmental members at the entity's call), reserves and net
income. There is no assurance that participating governments will be able or
willing to honor their commitments to make capital contributions to a
supranational entity.
INVESTING IN EMERGING MARKETS
The Global Strategic Income Fund 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 Fund's investments in those
countries and the availability to the 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 a Fund's 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.
Transaction costs in emerging markets may be higher than in the United
States and other developed securities markets. As legal systems in emerging
markets develop, foreign investors may be adversely affected by new or amended
laws and regulations or may not be able to obtain swift and equitable
enforcement of existing law.
Some countries in emerging markets also may have managed currencies,
which are not free floating against the U.S. dollar. In addition, emerging
markets are subject to the risk of restrictions upon the free conversion of
their currencies into other currencies. Any devaluations relative to the U.S.
dollar in the currencies in which a Fund's securities are quoted would reduce
the Fund's net asset value.
RESTRICTIONS ON INVESTMENT AND REPATRIATION. Certain emerging markets
limit, or require governmental approval prior to, investments by foreign
persons. Repatriation of investment income and capital from certain emerging
markets is subject to certain governmental consents. Even where there is no
outright restriction on repatriation of capital, the mechanics of repatriation
may affect the operation of the Portfolio.
ADDITIONAL INVESTMENTS
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
14
<PAGE>
CONVERTIBLE SECURITIES. Each of the Funds may invest in convertible
securities of domestic and, subject to the Fund's investment restrictions,
foreign issuers. The convertible securities in which a Fund 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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Funds 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 Fund until settlement takes
place. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, each Fund 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 Fund will meet its obligations from maturities or sales of
the securities held in the segregated account and/or from cash flow. If a Fund
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. Also, a Fund may be
disadvantaged if the other party to the transaction defaults. It is the current
policy of the Bond and Short Term Bond Funds not to enter into when-issued
commitments exceeding in the aggregate 15% of the market value of the Fund's
total assets, less liabilities other than the obligations created by when-issued
commitments. The Global Strategic Income Fund may also enter into other forward
commitments to purchase or sell securities.
DERIVATIVE INSTRUMENTS. The Global Strategic Income Fund may purchase
derivative securities to enhance return and enter into derivative contracts to
hedge against fluctuations in securities prices or currency exchange rates, to
change the duration of the Portfolio's fixed income holdings or as a substitute
for the purchase or sale of securities or currency.
All of the Fund's transactions in derivative instruments involve a risk
of loss or depreciation due to unanticipated adverse changes in interest rates,
securities prices or currency exchange rates. The loss on derivative contracts
(other than purchased options) may substantially exceed the Fund's initial
investment in these contracts. The Fund may lose the entire premium paid for
purchased options that expire before they can be profitably exercised by the
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
15
<PAGE>
Fund. In addition, the Fund incurs transaction costs in opening and closing
positions in derivative contracts.
STRUCTURED SECURITIES. The Global Strategic Income Fund may invest in
structured securities, including currency linked securities. The interest rate
or, in some cases, the principal payable at the maturity of a structured
security may change positively or inversely in relation to one or more interest
rates, financial indices, currency rates or other financial indicators
(reference prices). A structured security may be leveraged to the extent that
the magnitude of any change in the interest rate or principal payable on a
structured security is a multiple of the change in the reference price. Thus,
structured securities may decline in value due to adverse market changes in
currency exchange rates and other reference prices.
RISKS ASSOCIATED WITH DERIVATIVE SECURITIES AND CONTRACTS. The risks
associated with a Fund's transactions in derivative securities and contracts may
include some or all of the following: market risk, leverage and volatility risk,
correlation risk, credit risk, and liquidity and valuation risk.
MARKET RISK. Investments in structured securities are subject to the
market risks described above. Entering into a derivative contract involves a
risk that the applicable market will move against the Fund's position and that
the Fund will incur a loss. For derivative contracts other than purchased
options, this loss may substantially exceed the amount of the initial investment
made or the premium received by the Fund.
LEVERAGE AND VOLATILITY RISK. Derivative instruments may sometimes
increase or leverage a Fund's exposure to a particular market risk. Leverage
enhances the price volatility of derivative instruments held by a Fund. If a
Fund enters into futures contracts, writes options or engages in certain foreign
currency exchange transactions, it is required to maintain a segregated account
consisting of cash or liquid assets, hold offsetting portfolio securities or
cover written options which may partially offset the leverage inherent in these
transactions. Segregation of a large percentage of assets could impede portfolio
management or an investor's ability to meet redemption requests.
CORRELATION RISK. A Fund's success in using derivative contracts to
hedge portfolio assets depends on the degree of price correlation between the
derivative contract and the hedged asset. Imperfect correlation may be caused by
several factors, including temporary price disparities among the trading markets
for the derivative contract, the assets underlying the derivative contract and
the Fund's assets.
CREDIT RISK. Derivative securities and over-the-counter derivative
contracts involve a risk that the issuer or counterparty will fail to perform
its contractual obligations.
LIQUIDITY AND VALUATION RISK. Some derivative securities are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, a commodity exchange may suspend or
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
16
<PAGE>
limit trading in an exchange-traded derivative contract, which may make the
contract temporarily illiquid and difficult to price. A Fund's ability to
terminate over-the-counter derivative contracts may depend on the cooperation of
the counterparties to such contracts. For thinly traded derivative securities
and contracts, the only source of price quotations may be the selling dealer or
counterparty.
INTEREST RATE SWAPS. In connection with interest rate swaps, the Global
Strategic Income Fund will segregate cash or liquid securities to cover any
amounts it could owe under swaps that exceed the amounts it is entitled to
receive, and it will adjust that amount daily, as needed. During the term of a
swap, changes in the value of the swap are recognized as unrealized gains or
losses by marking to market to reflect the market value of the swap. When the
swap is terminated, the Fund will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and the Fund's basis in the contract. The Fund is exposed to credit
loss in the event of nonperformance by the other party to the swap.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by each of the Funds and their corresponding Portfolios to the
extent permitted under the 1940 Act. These limits require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of a
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group, and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by a Fund, provided however, that a Fund may invest all of
its investable assets in an open-end investment company that has the same
investment objective as the Fund (its corresponding Portfolio). As a shareholder
of another investment company, a Fund or Portfolio would bear, along with other
shareholders, its PRO RATA portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses that a Fund or Portfolio bears directly in connection with its
own operations.
REVERSE REPURCHASE AGREEMENTS. Each of the Funds may enter into reverse
repurchase agreements. In a reverse repurchase agreement, a Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act a reverse repurchase agreement is also
considered as the borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for a Fund to be magnified. The
Funds will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, a Fund will enter into a reverse repurchase agreement
only when the interest income to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. A Fund will not invest
the proceeds of a reverse repurchase agreement for a period which exceeds the
duration of the reverse repurchase agreement. Each Fund 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
17
<PAGE>
reverse repurchase agreements. See "Investment Restrictions" for each Fund's
limitations on reverse repurchase agreements and bank borrowings.
MORTGAGE DOLLAR ROLL TRANSACTIONS. The Funds may engage in mortgage
dollar roll transactions with respect to mortgage securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. In a mortgage dollar
roll transaction, the Fund sells a mortgage backed security and simultaneously
agrees to repurchase a similar security on a specified future date at an agreed
upon price. During the roll period, the Fund will not be entitled to receive any
interest or principal paid on the securities sold. The Fund is compensated for
the lost interest on the securities sold by the difference between the sales
price and the lower price for the future repurchase as well as by the interest
earned on the reinvestment of the sales proceeds. The Fund may also be
compensated by receipt of a commitment fee. When the Fund enters into a mortgage
dollar roll transaction, liquid assets in an amount sufficient to pay for the
future repurchase are segregated with the Custodian. Mortgage dollar roll
transactions are considered reverse repurchase agreements for purposes of the
Fund's investment restrictions.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, each Fund is permitted to lend securities in an amount up to 33
1/3% of the value of its net assets. Each of the Funds 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 Fund 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 Fund any income accruing
thereon. Loans will be subject to termination by a Fund 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 Fund and its respective investors. The
Funds may pay reasonable finders' and custodial fees in connection with a loan.
In addition, a Fund will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and no Fund will make
any loans in excess of one year. The Funds will not lend their securities to any
officer, Trustee, Director, employee or other affiliate of the Funds, the
Advisor or the Distributor, unless otherwise permitted by applicable law.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of the Portfolio's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Portfolio
may acquire investments that are illiquid or have limited liquidity, such as
private placements or investments that are not registered under the Securities
Act of 1933, as amended (the "1933 Act"), and cannot be offered for public sale
in the United States without first being registered under the 1933 Act. An
illiquid investment is any investment that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which it is
valued by the Portfolio. The price the Portfolio pays for illiquid securities or
receives upon resale may be lower than the price paid or received for similar
securities
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
18
<PAGE>
with a more liquid market. Accordingly the valuation of these securities will
reflect any limitations on their liquidity.
The Portfolio may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor and approved by the Trustees. The Trustees will
monitor the Advisor's implementation of these guidelines on a periodic basis.
As to illiquid investments, a Fund is subject to a risk that should the
Fund decide to sell them when a ready buyer is not available at a price the Fund
deems representative of their value, the value of the Fund's net assets could be
adversely affected. Where an illiquid security must be registered under the 1933
Act, before it may be sold, a Fund 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 Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Each Fund intends to meet the diversification requirements of the 1940
Act. To meet these requirements, 75% of the assets of the Funds 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 a Fund should an issuer, or a state or its related entities,
be unable to make interest or principal payments or should the market value of
such securities decline.
Each Fund will comply with the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
a regulated investment company. See "Taxes".
SHORT TERM BOND AND BOND FUNDS. If the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision and the obligation is
backed only by the assets and revenues of the subdivision, such subdivision is
regarded as the sole issuer. Similarly, in the case of an industrial development
revenue bond or pollution control revenue bond, if the bond is backed only by
the assets and revenues of the nongovernmental user, the nongovernmental user is
regarded as the sole issuer. If in either case the creating government or
another entity guarantees an obligation, the guaranty is regarded as a separate
security and treated as an issue of such guarantor. Since securities issued or
guaranteed by states or municipalities are not voting securities, there is no
limitation on the
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
19
<PAGE>
percentage of a single issuer's securities which the Fund may own so long as it
does not invest more than 5% of its total assets that are subject to the
diversification limitation in the securities of such issuer, except obligations
issued or guaranteed by the U.S. Government. Consequently, the Fund may invest
in a greater percentage of the outstanding securities of a single issuer than
would an investment company which invests in voting securities. See "Investment
Restrictions.
The Bond and Short Term Bond Funds invest in a diversified portfolio of
securities that are considered "high grade," "investment grade" and "below
investment grade" as described in Appendix A. In addition, at the time the Funds
invest in any commercial paper, bank obligation or repurchase agreement, the
issuer must have outstanding debt rated A or higher by Moody's or Standard &
Poor's, the issuer's parent corporation, if any, must have outstanding
commercial paper rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no
such ratings are available, the investment must be of comparable quality in the
Advisor's opinion. See below.
BELOW INVESTMENT GRADE DEBT. Certain lower rated securities purchased
by the Fund, such as those rated Ba or B by Moody's or BB or B by Standard &
Poor's (commonly known as junk bonds), may be subject to certain risks with
respect to the issuing entity's ability to make scheduled payments of principal
and interest and to greater market fluctuations. While generally providing
greater income than investments in higher quality securities, lower quality
fixed income securities involve greater risk of loss of principal and income,
including the possibility of default or bankruptcy of the issuers of such
securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Fund invests in such lower quality securities, the achievement of its
investment objective may be more dependent on the Advisor's own credit analysis.
THE GLOBAL STRATEGIC INCOME FUND. The higher total return sought by the
Global Strategic Income Fund is generally obtainable from high yield high risk
securities in the lower rating categories of the established rating services.
These securities are rated below Baa by Moody's or below BBB by Standard &
Poor's. The Global Strategic Income Fund may invest in securities rated as low
as B by Moody's or Standard & Poor's, which may indicate that the obligations
are speculative to a high degree and in default. Lower rated securities are
generally referred to as junk bonds. See the Appendix attached to this Statement
of Additional Information for a description of the characteristics of the
various ratings categories. The Global Strategic Income Fund is not obligated to
dispose of securities whose issuers subsequently are in default or which are
downgraded below the minimum ratings noted above. The credit ratings of Moody's
and Standard & Poor's (the "Rating Agencies"), such as those ratings described
in this Statement of Additional Information, may not be changed by the Rating
Agencies in a timely fashion to reflect subsequent economic events. The credit
ratings of securities do not evaluate market risk. The Global Strategic Income
Fund may also invest in unrated securities which, in the opinion of the Advisor,
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
20
<PAGE>
offer comparable yields and risks to the rated securities in which the Fund may
invest.
Debt securities that are rated in the lower rating categories, or which
are unrated, involve greater volatility of price and risk of loss of principal
and income, including the possibility of default or bankruptcy of the issuer of
such securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. Although the
Advisor seeks to minimize these risks through diversification, investment
analysis and attention to current developments in interest rates and economic
conditions, there can be no assurance that the Advisor will be successful in
limiting the Global Strategic Income Fund's exposure to the risks associated
with lower rated securities. Because the Global Strategic Income Fund invests in
securities in the lower rated categories, the achievement of the Fund's
investment objective is more dependent on the Advisor's ability than would be
the case if the Fund were investing in securities in the higher rated
categories.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to determine accurately the Portfolio's net
asset value.
Reduced volume and liquidity in the high yield bond market or the
reduced availability of market quotations may make it more difficult to dispose
of the Global Strategic Income Fund's investments in high yield securities and
to value accurately these assets. The reduced availability of reliable,
objective data may increase the Global Strategic Income Fund's reliance on
management's judgment in valuing high yield bonds. In addition, the Global
Strategic Income Fund's investments in high yield securities may be susceptible
to adverse publicity and investor perceptions whether or not justified by
fundamental factors.
OPTIONS AND FUTURES TRANSACTIONS
The Funds may (a) purchase exchange traded and over-the-counter (OTC)
put and call options on fixed income securities and indexes of fixed income
securities, (b) purchase and sell futures contracts on fixed income securities
and indexes of fixed income securities, and (C) purchase put and call options on
futures contracts on fixed income securities and indexes of fixed income
securities. Each of these instruments is a derivative instrument as its value
derives from the underlying asset or index.
Each of the Funds may use futures contracts and options for hedging
purposes. The Funds may not use futures contracts and options for speculation.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
21
<PAGE>
Each of the Funds may utilize options and futures contracts to manage
its exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge a Fund's investments against price fluctuations. Other strategies,
including buying futures contracts and buying calls, tend to increase market
exposure. Options and futures contracts may be combined with each other or with
forward contracts in order to adjust the risk and return characteristics of a
Fund's overall strategy in a manner deemed appropriate to the Advisor and
consistent with the Fund's objective and policies. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase a Fund's return. While the use of these instruments by a
Fund may reduce certain risks associated with owning its portfolio securities,
these techniques themselves entail certain other risks. If the Advisor applies a
strategy at an inappropriate time or judges market conditions or trends
incorrectly, options and futures strategies may lower a Fund's return. Certain
strategies limit the Fund's possibilities to realize gains as well as its
exposure to losses. A Fund could also experience losses if the prices of its
options and futures positions were poorly correlated with its other investments,
or if it could not close out its positions because of an illiquid secondary
market. In addition, the Fund will incur transaction costs, including trading
commissions and option premiums, in connection with its futures and options
transactions and these transactions could significantly increase the Fund's
turnover rate.
A Fund may purchase put and call options on securities, indexes of
securities and futures contracts, or purchase and sell futures contracts, only
if such options are written by other persons and if (i) the aggregate premiums
paid on all such options which are held at any time do not exceed 20% of the
Fund's net assets, and (ii) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the Fund's total
assets.
OPTIONS
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a Fund
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. A Fund may
terminate its position in a put option it has purchased by allowing it to expire
or by exercising the option. A Fund may also close out a put option position by
entering into an offsetting transaction, if a liquid market exits. If the option
is allowed to expire, the Fund will lose the entire premium it paid. If a Fund
exercises a put option on a security, it will sell the instrument underlying the
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
22
<PAGE>
option at the strike price. If a Fund exercises an option on an index,
settlement is in cash and does not involve the actual sale of securities. If an
option is American style, it may be exercised on any day up to its expiration
date. A European style option may be exercised only on its expiration date.
The buyer of a typical put option can expect to realize a gain if the
underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
OPTIONS ON INDEXES. Each of the Funds may purchase put and call options
on any securities index based on securities in which the Fund may invest.
Options on securities indexes are similar to options on securities, except that
the exercise of securities index options is settled by cash payment and does not
involve the actual purchase or sale of securities. In addition, these options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security. A
Fund, in purchasing or selling index options, is subject to the risk that the
value of its portfolio securities may not change as much as an index because the
Fund's investments generally will not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus a Fund
may not be able to close out an option position that it has previously entered
into. When a Fund purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and the Fund may incur additional
losses if the counterparty is unable to perform.
EXCHANGE TRADED AND OTC OPTIONS. All options purchased by a Portfolio
will be traded on a securities exchange or will be purchased by securities
dealers (OTC options) that meet creditworthiness standards approved by the
Portfolio's Board of Trustees. While exchange-traded options are obligations of
the Options Clearing Corporation, in the case of OTC options, the Portfolio
relies on the dealer from which it purchased the option to perform if the option
is exercised. Thus, when 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.
FUTURES CONTRACTS
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
23
<PAGE>
When a Fund purchases a futures contract, it agrees to purchase a
specified quantity of an underlying instrument at a specified future date or to
make a cash payment based on the value of a securities index. When a Fund sells
a futures contract, it agrees to sell a specified quantity of the underlying
instrument at a specified future date or to receive a cash payment based on the
value of a securities index. The price at which the purchase and sale will take
place is fixed when the Fund enters into the contract. Futures can be held until
their delivery dates or the position can be (and normally is) closed out before
then. There is no assurance, however, that a liquid market will exist when the
Fund wishes to close out a particular position.
When a Fund purchases a futures contract, the value of the futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Fund's exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying instrument
directly. When a Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the value of the
underlying instrument. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the underlying
instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when a Fund buys or sells a futures contract it will
be required to deposit "initial margin" with its Custodian in a segregated
account in the name of its futures broker, known as a futures commission
merchant (FCM). Initial margin deposits are typically equal to a small
percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments equal to the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. A Fund may be
obligated to make payments of variation margin at a time when it is
disadvantageous to do so. Furthermore, it may not always be possible for a Fund
to close out its futures positions. Until it closes out a futures position, the
Fund will be obligated to continue to pay variation margin. Initial and
variation margin payments do not constitute purchasing on margin for purposes of
a Fund's investment restrictions. In the event of the bankruptcy of an FCM that
holds margin on behalf of a Fund, the Fund may be entitled to return of margin
owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Fund.
Each Fund will segregate liquid assets in connection with its use of
options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
24
<PAGE>
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds may
purchase or sell (write) futures contracts and purchase put and call options,
including put and call options on futures contracts. In addition, the Global
Strategic Income Fund 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.
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 a Fund are paid by the Fund 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 Global Strategic Income Fund is permitted to purchase
and write options in combination with each other, or in combination with futures
or forward contracts, to adjust the risk and return characteristics of the
overall position. For example, the Fund 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 Fund's
current or anticipated investments exactly. A Fund 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 Fund's other investments.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
25
<PAGE>
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Fund'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 Fund may purchase or sell futures
contracts or purchase put and call options, including put and call options on
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in a Fund'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 Fund
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 Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund'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 Fund 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 Funds intend to
comply with Section 4.5 of the regulations under the Commodity Exchange Act,
which limits the extent to which a Fund can commit assets to initial margin
deposits and option premiums. In addition, the Funds will comply with guidelines
established by the SEC with respect to coverage of options and futures contracts
by mutual funds, and if the guidelines so require, will set aside appropriate
liquid assets in a segregated custodial account in the amount prescribed.
Securities held in a segregated account cannot be sold while the futures
contract or option is outstanding, unless they are replaced with other suitable
assets. As a result, there is a possibility that segregation of a large
percentage of a
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
26
<PAGE>
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
RISK MANAGEMENT
The Global Strategic Income Fund may employ non-hedging risk management
techniques. Examples of risk management strategies include synthetically
altering the duration of a portfolio or the mix of securities in a portfolio.
For example, if the Advisor wishes to extend maturities in a fixed income
portfolio in order to take advantage of an anticipated decline in interest
rates, but does not wish to purchase the underlying long term securities, it
might cause the Fund to purchase futures contracts on long term debt securities.
Similarly, if the Advisor wishes to decrease fixed income securities or purchase
equities, it could cause the Fund to sell futures contracts on debt securities
and purchase futures contracts on a stock index. Such non-hedging risk
management techniques are not speculative, but because they involve leverage
include, as do all leveraged transactions, the possibility of losses as well as
gains that are greater than if these techniques involved the purchase and sale
of the securities themselves rather than their synthetic derivatives.
PORTFOLIO TURNOVER
The 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 SHORT TERM BOND PORTFOLIO (SHORT TERM BOND FUND) -- For the fiscal year
ended October 31, 1996: 191%. For the fiscal year ended October 31, 1997: 219%.
THE U.S. FIXED INCOME PORTFOLIO (BOND FUND) -- For the fiscal year ended
October 31, 1996: 186%. For the fiscal year ended October 31, 1997: 93%.
THE GLOBAL STRATEGIC INCOME PORTFOLIO (GLOBAL STRATEGIC INCOME FUND) -- For the
period March 17, 1997 (commencement of operations) through October 31, 1997:
212%.
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
27
<PAGE>
1940 Act, may not be changed without the vote of a majority of the outstanding
voting securities of the Fund or Portfolio, as the case may be. A "majority of
the outstanding voting securities" is defined in the 1940 Act as the lesser of
(a) 67% or more of the voting securities present at a meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities. Whenever a Fund is requested to vote on a change in the
fundamental investment restrictions of its corresponding Portfolio, the Trust
will hold a meeting of Fund shareholders and will cast its votes as instructed
by the Fund's shareholders.
The SHORT TERM BOND FUND and its corresponding PORTFOLIO may not:
1. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Fund's total assets; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management investment
company with the same investment objective and restrictions as the Fund's. For
purposes of industry concentration, there is no percentage limitation with
respect to investments in U.S. Government securities;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in securities or other obligations of any one such
issuer; provided, however, that the Fund may invest all or part of its
investable assets in an open-end management investment company with the same
investment objective and restrictions as the Fund's. This limitation shall not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or to permitted investments of up to 25% of the Fund's total
assets;
3. Purchase the securities of an issuer if, immediately after such purchase, the
Fund owns more than 10% of the outstanding voting securities of such issuer;
provided, however, that the Fund may invest all or part of its investable assets
in an open-end management investment company with the same investment objective
and restrictions as the Fund's. This limitation shall not apply to permitted
investments of up to 25% of the Fund's total assets;
4. Borrow money (not including reverse repurchase agreements), except from banks
for temporary or extraordinary or emergency purposes and then only in amounts up
to 30% of the value of the Fund's or the Portfolio's total assets, taken at cost
at the time of such borrowing (and provided that such borrowings and reverse
repurchase agreements do not exceed in the aggregate one-third of the market
value of the Fund's and the Portfolio's total assets less liabilities other than
the obligations represented by the bank borrowings and reverse repurchase
agreements). The Fund will not mortgage, pledge, or hypothecate any assets
except in connection with any such borrowing and in amounts not to exceed 30% of
the value of the Fund's or the Portfolio's net assets at the time of such
borrowing. The Fund or the Portfolio will not purchase securities while
borrowings exceed 5% of the Fund's total assets; provided, however, that the
Fund
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
28
<PAGE>
may increase its interest in an open-end management investment company with the
same investment objective and restrictions as the Fund's while such borrowings
are outstanding. Collateral arrangements for premium and margin payments in
connection with the Fund's hedging activities are not deemed to be a pledge of
assets;
5. Issue any senior security, except as appropriate to evidence indebtedness
which constitutes a senior security and which the Fund is permitted to incur
pursuant to Investment Restriction No. 4 and except that the Fund may enter into
reverse repurchase agreements, provided that the aggregate of senior securities,
including reverse repurchase agreements, shall not exceed one-third of the
market value of the Fund's total assets, less liabilities other than obligations
created by reverse repurchase agreements. The Fund's arrangements in connection
with its hedging activities as described in "Investment Objectives and Policies"
shall not be considered senior securities for purposes hereof;
6. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Fund's
investment objective and policies;
7. Purchase or sell puts, calls, straddles, spreads, or any combination thereof,
real estate, commodities, or commodity contracts, except for the Fund's
interests in hedging activities as described under "Investment Objectives and
Policies"; or interests in oil, gas, or mineral exploration or development
programs. However, the Fund may purchase securities or commercial paper issued
by companies which invest in real estate or interests therein, including real
estate investment trusts, and purchase instruments secured by real estate or
interests therein;
8. Purchase securities on margin, make short sales of securities, or maintain a
short position in securities, except to obtain such short-term credit as
necessary for the clearance of purchases and sales of securities; provided that
this restriction shall not be deemed to be applicable to the purchase or sale of
when-issued securities or delayed delivery securities;
9. Acquire securities of other investment companies, except as permitted by the
1940 Act or in connection with a merger, consolidation, reorganization,
acquisition of assets or an offer of exchange; provided, however, that nothing
in this investment restriction shall prevent the Trust from investing all or
part of the Fund's assets in an open-end management investment company with the
same investment objective and restrictions as the Fund; or
10. Act as an underwriter of securities.
The BOND FUND and its corresponding PORTFOLIO may not:
1. Borrow money, except from banks for extraordinary or emergency purposes and
then only in amounts up to 30% of the value of the Fund's total assets, taken at
cost at the time of such borrowing and except in connection with reverse
repurchase agreements permitted by Investment Restriction No. 8. Mortgage,
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
29
<PAGE>
pledge, or hypothecate any assets except in connection with any such borrowing
in amounts up to 30% of the value of the Fund's net assets at the time of such
borrowing. The Fund will not purchase securities while borrowings (including
reverse repurchase agreements) exceed 5% of the Fund's total assets; provided,
however, that the Fund may increase its interest in an open-end management
investment company with the same investment objective and restrictions as the
Fund's while such borrowings are outstanding. This borrowing provision
facilitates the orderly sale of portfolio securities, for example, in the event
of abnormally heavy redemption requests. This provision is not for investment
purposes. Collateral arrangements for premium and margin payments in connection
with the Fund's hedging activities are not deemed to be a pledge of assets;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in securities or other obligations of any one such
issuer; provided, however, that the Fund may invest all or part of its
investable assets in an open-end management investment company with the same
investment objective and restrictions as the Fund's. This limitation shall not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or to permitted investments of up to 25% of the Fund's total
assets;
3. Purchase the securities of an issuer if, immediately after such purchase, the
Fund owns more than 10% of the outstanding voting securities of such issuer;
provided, however, that the Fund may invest all or part of its investable assets
in an open-end management investment company with the same investment objective
and restrictions as the Fund's. This limitation shall not apply to permitted
investments of up to 25% of the Fund's total assets;
4. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Fund's total assets; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management investment
company with the same investment objective and restrictions as the Fund's. For
purposes of industry concentration, there is no percentage limitation with
respect to investments in U.S. Government securities;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Fund's
investment objective and policies;
6. Purchase or sell puts, calls, straddles, spreads, or any combination thereof,
real estate, commodities, commodity contracts, except for the Fund's interest in
hedging activities as described under "Investment Objectives and Policies"; or
interests in oil, gas, or mineral exploration or development programs. However,
the Fund may purchase debt obligations secured by interests in real estate or
issued by companies which invest in real estate or interests therein including
real estate investment trusts;
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
30
<PAGE>
7. Purchase securities on margin, make short sales of securities, or maintain a
short position in securities, except in the course of the Fund's hedging
activities, unless at all times when a short position is open the Fund owns an
equal amount of such securities, provided that this restriction shall not be
deemed to be applicable to the purchase or sale of when-issued securities or
delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence indebtedness
which constitutes a senior security and which the Fund is permitted to incur
pursuant to Investment Restriction No. 1 and except that the Fund may enter into
reverse repurchase agreements, provided that the aggregate of senior securities,
including reverse repurchase agreements, shall not exceed one-third of the
market value of the Fund's total assets, less liabilities other than obligations
created by reverse repurchase agreements. The Fund's arrangements in connection
with its hedging activities as described in "Investment Objectives and Policies"
shall not be considered senior securities for purposes hereof;
9. Acquire securities of other investment companies, except as permitted by the
1940 Act; or
10. Act as an underwriter of securities.
Unless Section 8(b)(1), and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof, are amended or modified, the GLOBAL STRATEGIC
INCOME 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. Issue senior securities. For purposes of this restriction, borrowing money in
accordance with paragraph 3 below, making loans in accordance with non-
fundamental restriction no. (v), 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) less liabilities (other than
borrowings)(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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
31
<PAGE>
sale of other portfolio securities or assets and (iv) pursuant to reverse
repurchase agreement entered into by the Fund.1
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) make direct investments in mortgages,
(v) purchase and sell mortgage-related securities and (vi) hold and sell real
estate acquired by the Fund as a result of the ownership of securities including
mortgages.
6. Purchase or sell commodities or commodity contracts, unless acquired as a
result of the ownership of securities or instruments, 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. 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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - BOND FUND, SHORT TERM BOND
FUND. The investment restriction described below is not a fundamental policy of
these Funds or their corresponding Portfolios and may be changed by their
respective Trustees. This non-fundamental investment policy requires that each
such Fund may not:
(i) acquire any illiquid securities, such as repurchase agreements with more
than seven days to maturity or fixed time deposits with a duration of over seven
calendar days, if as a result thereof, more than 15% of the market value of the
Fund's net assets would be in investments that are illiquid.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - GLOBAL STRATEGIC INCOME FUND.
The investment restrictions described below are not fundamental policies of the
- --------
1Although the Portfolio is permitted to fulfill plans to purchase
additional securities pending the anticipated sale of other portfolio securities
or assets, the Portfolio has no current intention of engaging in this form of
leverage.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
32
<PAGE>
Funds and their corresponding Portfolios and may be changed by the Trustees.
These non-fundamental investment policies require that each 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; or
(v) Make loans, except that the Fund (1) may lend portfolio securities with a
value not exceeding one third of the Fund's total assets, (2) enter into
repurchase agreements, and (3) purchase all or a portion of an issue of debt
obligations (including privately issued debt obligations and direct investments
in mortgages), bank loan participation and subparticipation 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.
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 AND OFFICERS
TRUSTEES
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
33
<PAGE>
The Trustees of the Trust, who are also the Trustees of each of the
Portfolios, 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 HEALEY2--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., 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. In accordance with applicable state requirements, a majority of the
disinterested Trustees have adopted written procedures reasonably appropriate to
deal with potential conflicts of interest arising from the fact that the same
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), 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.
-------- 2Mr. Healey is an "interested person" of the Trust, the Advisor
and each Portfolio as that term is defined in the 1940 Act.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
34
<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 THE MASTER
AGGREGATE TRUSTEE PORTFOLIOS(*), J.P. MORGAN
COMPENSATION PAID FUNDS, J.P. MORGAN SERIES
BY THE TRUST TRUST AND
NAME OF TRUSTEE DURING 1997 THE TRUST DURING 1997(**)
--------------- ----------- -------------------------
- -------------------------------------------------- --------------------------------- ------------------------------------------
<S> <C> <C>
Frederick S. Addy, $11,772.77 $72,500
Trustee
- -------------------------------------------------- --------------------------------- ------------------------------------------
William G. Burns, Trustee $11,786.38 $72,500
- -------------------------------------------------- --------------------------------- ------------------------------------------
Arthur C. Eschenlauer, $11,786.38 $72,500
Trustee
- -------------------------------------------------- --------------------------------- ------------------------------------------
Matthew Healey, $11,786.38 $72,500
Trustee(***),
Chairman and Chief
Executive Officer
- -------------------------------------------------- --------------------------------- ------------------------------------------
Michael P. Mallardi, $11,786.38 $72,500
Trustee
- -------------------------------------------------- --------------------------------- ------------------------------------------
</TABLE>
(*) Includes the Portfolios and 19 Portfolios (collectively the "Master
Portfolios").
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 18 investment companies (15 investment
companies comprising the Master Portfolios, the Trust, J.P. Morgan Funds 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
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
35
<PAGE>
Group, Inc. a fee in an amount representing its reasonable costs in performing
these services to the Trust, the Portfolios and certain other registered
investment companies subject to similar agreements with Pierpont Group, Inc.
These costs are periodically reviewed by the Trustees.
The aggregate fees paid to Pierpont Group, Inc. by each Fund and its
corresponding Portfolio during the indicated fiscal years are set forth below:
SHORT TERM BOND FUND -- For the fiscal year ended October 31, 1995: $4,748.
For the fiscal year ended October 31, 1996: $568. For the fiscal year ended
October 31, 1997: $900.
THE SHORT TERM BOND PORTFOLIO -- For the fiscal year ended October 31,
1995: $5,573. For the fiscal year ended October 31, 1996: $1,005. For the fiscal
year ended October 31, 1997: $1,343.
BOND FUND -- For the fiscal year ended October 31, 1995: $29,276. For the
fiscal year ended October 31, 1996: $30,044. For the fiscal year ended October
31, 1997: $29,814.
THE U.S. FIXED INCOME PORTFOLIO --For the fiscal year ended October 31,
1995: $40,729. For the fiscal year ended October 31, 1996: $36,922. For the
fiscal year ended October 31, 1997: $35,577.
GLOBAL STRATEGIC INCOME FUND -- For the period March 17, 1997
(commencement of operations) through October 31, 1997: 1,573.
GLOBAL STRATEGIC INCOME PORTFOLIO -- For the period March 17, 1997
(commencement of operations) through October 31, 1997: $1,574.
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
and each Portfolio. The business address of each of the officers unless
otherwise noted is Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts
02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, FL 33436. His date of birth is August 23, 1937.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
36
<PAGE>
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI and
Premier Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and
an officer of certain investment companies advised or administered by the
Dreyfus Corporation ("Dreyfus") or its affiliates. From December 1991 to July
1994, she was President and Chief Compliance Officer of FDI. Her date of birth
is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Manager of Treasury Services and Administration of FDI and an
officer of certain investment companies advised or administered by Dreyfus or
its affiliates. Prior to April 1997, Mr. Conroy was Supervisor of Treasury
Services and Administration of FDI. From April 1993 to January 1995, Mr. Conroy
was a Senior Fund Accountant for Investors Bank & Trust Company. Prior to March
1993, Mr. Conroy was employed as a fund accountant at The Boston Company, Inc.
His date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Portfolios only (excluding the Global Strategic Income Portfolio). 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
37
<PAGE>
Putnam Investments in legal and compliance capacities. His date of birth is
December 24, 1964.
LENORE J. MCCABE; Assistant Secretary and Assistant Treasurer of the
Portfolios only (excluding the Global Strategic Income Portfolio). 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.
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.
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.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
38
<PAGE>
INVESTMENT ADVISOR
The Advisor, a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan"), is 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 Advisor's fixed income investment process is based on analysis of real
rates, sector diversification and quantitative and credit analysis.
The investment advisory services the Advisor provides to the Portfolios
are not exclusive under the terms of the Advisory Agreements. The Advisor is
free to and does render similar investment advisory services to others. The
Advisor serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolios. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolios. See
"Portfolio Transactions."
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 benchmarks for the Portfolios in which the Funds invest are
currently: The Short Term Bond Portfolio--Merrill Lynch 1-3 Year Treasury
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
39
<PAGE>
Index; The U.S. Fixed Income Portfolio--Salomon Brothers Broad Investment Grade
Bond Index; The Global Strategic Income Portfolio--The Lehman Brothers Aggregate
Bond Index.
J.P. Morgan Investment Management Inc., also a wholly owned subsidiary
of J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The 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 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.
SHORT TERM BOND: 0.25%
U.S. FIXED INCOME: 0.30%
GLOBAL STRATEGIC INCOME: 0.45%
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 "Expenses" in the Prospectus and below for applicable expense limitations.
THE SHORT TERM BOND PORTFOLIO (Short Term Bond Fund) -- For the fiscal year
ended October 31, 1995: $146,335. For the fiscal year ended October 31, 1996:
$50,319. For the fiscal year ended October 31, 1997: $92,126.
THE U.S. FIXED INCOME PORTFOLIO (Bond Fund) -- For the fiscal year ended
October 31, 1995: $1,339,147. For the fiscal year ended October 31, 1996:
$2,402,660. For the fiscal year ended October 31, 1997: $2,908,384.
THE GLOBAL STRATEGIC INCOME PORTFOLIO (Global Strategic Income Fund) -- For the
period March 17, 1997 (commencement of operations) through October 31, 1997:
$212,934.
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
40
<PAGE>
"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 and administrative 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.
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
41
<PAGE>
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.
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, J.P. Morgan Funds, the Master Portfolios
and other investment companies subject to similar agreements with FDI.
The table below sets forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to FDI for the fiscal periods indicated.
See "Expenses" in the Prospectus and below for applicable expense limitations.
SHORT TERM BOND FUND -- For the period August 1, 1996 through October 31, 1996:
$137. For the fiscal year ended October 31, 1997: $764.
THE SHORT TERM BOND PORTFOLIO -- For the period August 1, 1996 through October
31, 1996: $156. For the fiscal year ended October 31, 1997: $886.
BOND FUND -- For the period August 1, 1996 through October 31, 1996:
$7,415. For the fiscal year ended October 31, 1997: $25,518.
THE U.S. FIXED INCOME PORTFOLIO -- For the period August 1, 1996 through October
31, 1996: $6,419. For the fiscal year ended October 31, 1997: $23,296.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
42
<PAGE>
GLOBAL STRATEGIC INCOME FUND -- For the period March 17, 1997 (commencement of
operations) through October 31, 1997: $1,378.
THE GLOBAL STRATEGIC INCOME PORTFOLIO -- For the period March 17, 1997
(commencement of operations) through October 31, 1997: $889.
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. See "Expenses" below for applicable
expense limitations.
SHORT TERM BOND FUND -- For the fiscal year ended October 31, 1995:
$13,185. For the period November 1, 1995 through July 31, 1996: $1,332.
THE SHORT TERM BOND PORTFOLIO -- For the fiscal year ended October 31, 1995:
$4,485. For the period November 1, 1995 through July 31, 1996: $1,547.
BOND FUND -- For the fiscal year ended October 31, 1995: $85,904. For the
period November 1, 1995 through July 31, 1996: $67,809.
THE U.S. FIXED INCOME PORTFOLIO -- For the fiscal year ended October 31, 1995:
$27,436. For the period November 1, 1995 through July 31, 1996: $65,610.
SERVICES AGENT
The Trust, on behalf of each Fund, and the Portfolios have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan
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, each of the Funds and its corresponding
Portfolio has agreed to pay Morgan fees equal to its allocable share of an
annual complex-wide charge. This charge is calculated daily based on the
aggregate net assets of the Master Portfolios and 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 their net assets bear to the total net assets of the
Trust, J.P. Morgan Funds, the Master Portfolios, the other investors in the
Master Portfolios for which Morgan provides similar services and J.P. Morgan
Series Trust.
Under prior 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
43
<PAGE>
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 listed and its corresponding
Portfolio the fees paid to Morgan, net of fee waivers and reimbursements, as
Services Agent. See "Expenses" in the Prospectus and below for applicable
expense limitations.
SHORT TERM BOND FUND -- For the fiscal year ended October 31, 1995: $(91,382)*.
For the fiscal year ended October 31, 1996: $(83,872).* For the fiscal year
ended October 31, 1997: $(91,821).
THE SHORT TERM BOND PORTFOLIO -- For the fiscal year ended October 31, 1995:
$(21,070)*. For the fiscal year ended October 31, 1996: $(42,274).* For the
fiscal year ended October 31, 1997: $(99,895).
BOND FUND -- For the fiscal year ended October 31, 1995: $(146,399).* For the
fiscal year ended October 31, 1996: $(18,383).* For the fiscal year ended
October 31, 1997: $234,599.
THE U.S. FIXED INCOME PORTFOLIO --For the fiscal year ended October 31, 1995:
$167,081. For the fiscal year ended October 31, 1996: $191,348. For the fiscal
year ended October 31, 1997: $265,098.
GLOBAL STRATEGIC INCOME FUND -- For the period March 17, 1997 (commencement of
operations) through October 31, 1997: $(165,680).*
THE GLOBAL STRATEGIC INCOME PORTFOLIO -- For the period March 17, 1997
(commencement of operations) through October 31, 1997: $(54,641).*
- ----------------------
(*) 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's transfer and
dividend disbursing agent. Pursuant to the Custodian Contracts, State Street is
responsible for maintaining the books of account and records of portfolio trans
actions and holding portfolio securities and cash. In the case of foreign assets
held outside the United States, the Custodian employs various subcustodians who
were approved by the Trustees of the Portfolios in accordance with the
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
44
<PAGE>
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
includes but is not limited to, answering inquiries regarding account status and
history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to a Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Funds' transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; and providing other related services.
Under the Shareholder Servicing Agreement, each Fund has agreed to pay
Morgan for these services a fee at the following annual rates (expressed as a
percentage of the average daily net asset values of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent): Short
Term Bond and Bond Funds, 0.075; Global Strategic Income Fund, 0.10%. 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. See "Expenses" in the
Prospectus and below for applicable expense limitations.
SHORT TERM BOND FUND -- For the fiscal year ended October 31, 1995:
$24,729. For the fiscal year ended October 31, 1996: $7,885. For the fiscal year
ended October 31, 1997: $18,131.
BOND FUND -- For the fiscal year ended October 31, 1995: $161,357. For the
fiscal year ended October 31, 1996: $472,758. For the fiscal year ended October
31, 1997: $608,161.
GLOBAL STRATEGIC INCOME FUND -- For the period March 17, 1997 (commencement of
operations) through October 31, 1997: $47,162.
As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
45
<PAGE>
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 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.
Each Fund 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 Fund. See
"Financial Professionals" below. Organizations that provide record keeping or
other services to certain employee benefit or retirement plans that include the
Fund 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 the 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 the Fund's behalf.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
46
<PAGE>
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
of the Fund's and the Portfolio's federal and state income tax returns and
consults with the Funds and the Portfolios as to matters of accounting and
federal and state income taxation.
EXPENSES
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 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.
PURCHASE OF SHARES
Investors may open Fund accounts and purchase shares as described in
the Prospectus. 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
47
<PAGE>
corresponding Portfolio); and (iii) be liquid securities which are not
restricted as to transfer either by law or liquidity of market. 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 charge the investor a
fee for this service and other services it provides to its customers.
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus.
If the Trust on behalf of a Fund and its corresponding Portfolio
determine that it would be detrimental to the best interest of the remaining
shareholders of a Fund to make payment wholly or partly in cash, payment of the
redemption price may be made in whole or in part by a distribution in kind of
securities from the Portfolio, in lieu of cash, in conformity with the
applicable rule of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur transaction costs in converting the assets into cash.
The method of valuing portfolio securities is described under "Net Asset Value,"
and such valuation will be made as of the same time the redemption price is
determined. The Trust, on behalf of all of the Funds and their corresponding
Portfolios (except the Global Strategic Income Portfolio), have elected to be
governed by Rule 18f-1 under the 1940 Act pursuant to which the Funds and the
corresponding Portfolios are obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90 day period for any one shareholder. The Trust will redeem Fund shares in kind
only if it has received a redemption in kind from the corresponding Portfolio
and therefore shareholders of the Fund that receive redemptions in kind will
receive securities of the Portfolio. The Portfolios have advised the Trust that
the Portfolios will not redeem in kind except in circumstances in which a Fund
is permitted to redeem in kind.
FURTHER REDEMPTION INFORMATION. The Trust, on behalf of a Fund, and the
Portfolios reserve the right to suspend the right of redemption and to postpone
the date of payment upon redemption as follows: (i) for up to seven days, (ii)
during periods when the New York Stock Exchange is closed for other than
weekends and holidays or when trading on such Exchange is restricted as
determined by the SEC by rule or regulation, (iii) during periods in which an
emergency, as determined by the SEC, exists that causes disposal by the
Portfolio of, or evaluation of the net asset value of, its portfolio securities
to be unreasonable or impracticable, or (iv) for such other periods as the SEC
may permit.
EXCHANGE OF SHARES
An investor may exchange shares from any J.P. Morgan Institutional Fund
into any other J.P. Morgan Institutional Fund, J.P. Morgan Fund or J.P. Morgan
Series Trust, as described in the Prospectus. For complete information, the
Prospectus as it relates to the Fund into which a transfer is being made should
be read prior to the transfer. Requests for exchange are made in the same manner
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
48
<PAGE>
as requests for redemptions. See "Redemption of Shares." Shares of the Fund to
be acquired are purchased for settlement when the proceeds from redemption
become available. In the case of investors in certain states, state securities
laws may restrict the availability of the exchange privilege. The Trust reserves
the right to discontinue, alter or limit the exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays dividends and distributions as described in
the Prospectus.
Determination of the net income for the Funds is made at the times
described in the Prospectus; in addition, net investment income for days other
than business days is determined at the time net asset value is determined on
the prior business day.
NET ASSET VALUE
Each of the Funds computes its net asset value once daily on Monday
through Friday as described 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
49
<PAGE>
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 yield,
actual distributions, total return or capital appreciation in reports, sales
literature and advertisements published by the Trust. Current performance
information for the Funds may be obtained by calling the number provided on the
cover page of this Statement of Additional Information. See also the Prospectus.
YIELD QUOTATIONS. As required by regulations of the SEC, the annualized
yield for the Funds is computed by dividing each Fund's net investment income
per share earned during a 30-day period by the net asset value on the last day
of the period. The average daily number of shares outstanding during the period
that are eligible to receive dividends is used in determining the net investment
income per share. Income is computed by totaling the interest earned on all debt
obligations during the period and subtracting from that amount the total of all
recurring expenses incurred during the period. The 30-day yield is then
annualized on a bond-equivalent basis assuming semi-annual reinvestment and
compounding of net investment income.
Below is set forth historical yield information for the Funds for the
periods indicated:
SHORT TERM BOND FUND (12/31/97): 30-day yield: %.
BOND FUND (12/31/97): 30-day yield: %.
GLOBAL STRATEGIC INCOME FUND (12/31/97): 30-day yield: %.
TOTAL RETURN QUOTATIONS. As required by regulations of the SEC, the
annualized 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
50
<PAGE>
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 for periods prior to the establishment of the
Short Term Bond and Bond Funds will be that of their 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 each Fund or its
related series of J.P. Morgan Funds for the periods indicated:
SHORT TERM BOND FUND (12/31/97): Average annual total return, 1 year: 6.40%;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations(*) to period end: 5.29%; aggregate total return, 1
year: 6.40%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations(*) to period end: 26.05%.
BOND FUND (12/31/97): Average annual total return, 1 year: 9.29%; average annual
total return, 5 years: 7.41%; average annual total return, commencement of
operations(*) to period end: 8.12%; aggregate total return, 1 year: 9.29%;
aggregate total return, 5 years: 42.95%; aggregate total return, commencement of
operations(*) to period end: 115.04%.
GLOBAL STRATEGIC INCOME 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 (March 14, 1997) to period end: 8.58%; aggregate
total return, 1 year:N/A; aggregate total return, 5 years: N/A; aggregate total
return, commencement of operations (March 14, 1997) to period end: 8.58%.
GENERAL. A Fund's performance will vary from time to time depending
upon market conditions, the composition of its corresponding Portfolio, and its
operating expenses. Consequently, any given performance quotation should not be
considered representative of a Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in a Fund with certain bank deposits or
other investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising the Funds' shares, including appropriate market indices including
the benchmarks indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
51
<PAGE>
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 the Portfolios. See "Investment Objectives and Policies."
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolios corresponding to the Funds
will be undertaken principally to accomplish a Portfolio's objective in relation
to expected movements in the general level of interest rates. The Portfolios
corresponding to the Funds may engage in short-term trading consistent with
their objectives. See "Investment Objectives and Policies -- Portfolio
Turnover."
In connection with portfolio transactions for the Portfolios, the
Advisor intends to seek best execution on a competitive basis for both purchases
and sales of securities.
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
52
<PAGE>
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" and each Fund's
name changed accordingly.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
53
<PAGE>
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 or of any other
series of the Trust 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. How ever, 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 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
54
<PAGE>
paid and nonassessable. The rights of redemption and exchange are described in
the Prospectus and elsewhere in this Statement of Additional Information.
The shareholders of the Trust are entitled to a full vote for each full
share held and to a fractional vote for each fractional share. Subject to the
1940 Act, the Trustees themselves have the power to alter the number and the
terms of office of the Trustees, to lengthen their own terms, or to make their
terms of unlimited duration subject to certain removal procedures, and appoint
their own successors, PROVIDED, HOWEVER, that immediately after such appointment
the requisite majority of the Trustees have been elected by the shareholders of
the Trust. The voting rights of shareholders are not cumulative so that holders
of more than 50% of the shares voting can, if they choose, elect all Trustees
being selected while the shareholders of the remaining shares would be unable to
elect any Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for action
by shareholder vote as may be required by either the 1940 Act or the Trust's
Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of more than two-thirds of its outstanding shares, to remove a
Trustee. The Trustees will call a meeting of shareholders to vote on removal of
a Trustee upon the written request of the record holders of 10% of the Trust's
shares. In addition, whenever ten or more shareholders of record who have been
such for at least six months preceding the date of application, and who hold in
the aggregate either shares having a net asset value of at least $25,000 or at
least 1% of the Trust's outstanding shares, whichever is less, shall apply to
the Trustees in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting for the
purpose of voting upon the question of removal of any Trustee or Trustees and
accompanied by a form of communication and request which they wish to transmit,
the Trustees shall within five business days after receipt of such application
either: (1) afford to such 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
55
<PAGE>
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 the
Prospectus.
As of January 30, 1998, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of:
SHORT TERM BOND FUND -- Morgan as Agent for WITCO Corp. & Medical & Ltd
Trust (17.36%); Cooper Industries Foundation (15.51%); Morgan as Agent
for Warner Lambert Benefits Trust (13.28%); The Fluor Foundation
(8.94%); Morgan as Agent for The Lemelson Medical Education & Research
Foundation (8.76%); Morgan as Agent for Florida Atlantic University
Foundation - Non Endowed Foundation (5.15%); and
BOND FUND -- Morgan as Agent for Ameritech Union (5.51%).
GLOBAL STRATEGIC INCOME FUND -- Morgan as Agent for R. Lauder (21.27%);
Morgan as Agent for Kenan Charitable Trust (12.53%); Morgan as Agent for
The Dyson Foundation (10.04%); Charles Schwab & Co. Inc. Special Custody
Account for Benefit of Customers (8.63%); Morgan as Agent for Diversifed
Growth Fund (5.28%).
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.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
56
<PAGE>
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. Generally, when a Master
Portfolio seeks a vote to change its investment objective, its feeder fund(s)
will hold a shareholder meeting and cast its vote proportionately, as instructed
by its shareholders. Fund shareholders are entitled to one vote per fund share.
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) 766-7722.
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 with respect to the Portfolio described above and in each Fund's
prospectus.
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
57
<PAGE>
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
affect 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; (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.
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
58
<PAGE>
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.
Distributions to corporate shareholders of the Funds are not eligible for the
dividends received deduction. The Global Strategic Income Fund pays a monthly
dividend. If dividend payments exceed income earned by the Fund, the
overdistribution would be considered a return of capital rather than a dividend
payment. The Fund intends 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 tax
rate of 28% in respect of a capital asset held directly by such individual for
more than one year but no more than eighteen months, and the maximum tax rate is
reduced to 20% in respect of a capital asset held for more than 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
the 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 such
shareholders have held their shares in the Fund. See the Prospectus for a
discussion of the federal income tax treatment of any gain or loss realized on
the redemption or exchange of a Fund's shares. Additionally, any loss realized
on a redemption or exchange of shares of a Fund will be disallowed to the extent
the shares disposed of are replaced within a period of 61 days beginning 30 days
before such disposition, such as pursuant to reinvestment of a dividend in
shares of the Fund.
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
59
<PAGE>
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.
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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
60
<PAGE>
who, as to the United States, is a nonresident alien individual, fiduciary of a
foreign trust or estate, foreign corporation or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding tax at the rate of 30% (or
lower treaty rate) unless the dividends are effectively connected with a U.S.
trade or business of the shareholder, in which case the dividends will be
subject to tax on a net income basis at the graduated rates applicable to U.S.
individuals or domestic corporations. Distributions treated as long term capital
gains to foreign shareholders will not be subject to U.S. tax unless the
distributions are effectively connected with the shareholder's trade or business
in the United States or, in the case of a shareholder who is a nonresident alien
individual, the shareholder was present in the United States for more than 182
days during the taxable year and certain other conditions are met.
In the case of a foreign shareholder who is a nonresident alien
individual or foreign entity, 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 Global Strategic Income Fund may
be subject to foreign withholding taxes or other foreign taxes with respect to
income (possibly including, in some cases, capital gains) received from sources
within foreign countries. So long as more than 50% in value of the total assets
of the Fund (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. If the Fund makes the election, each shareholder will be required
to include in his income (in addition to the dividends and distributions he
receives) his proportionate share of the amount of foreign income taxes deemed
paid by the Fund and will be entitled to claim either a credit (subject to the
limitations discussed below) or, if he itemizes deductions, a deduction for his
share of the foreign income taxes in computing federal income tax liability. (No
deduction will be permitted in computing an individual's alternative minimum tax
liability.) A shareholder who is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from
the election described in this paragraph, but may not be able to claim a credit
or deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. A tax-exempt shareholder will not ordinarily benefit
from this election. Shareholders who choose to utilize a credit (rather than a
deduction) for foreign taxes will be subject to the limitation that the credit
may not exceed the shareholder's U.S. tax (determined without regard to the
availability of the credit) attributable to his or her total foreign source
taxable income. For this purpose, the portion of dividends and distributions
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
61
<PAGE>
paid by the Global Strategic Income 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 Global Strategic Income Fund.
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 Financial Professionals 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
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
62
<PAGE>
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.
FINANCIAL STATEMENTS
The following financial statements and the report thereon of Price
Waterhouse LLP of each Fund 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 J.P. Morgan Funds Services
at (800) 766-7722. Each Fund's financial statements include the financial
statements of the Fund's corresponding Portfolio.
<TABLE>
<CAPTION>
Date of Annual Report; Date Annual
Name of Fund Report Filed; and Accession Number
- -------------------------------------------------------------- -----------------------------------------------------
<S> <C>
10/31/98;
J.P. Morgan Institutional Short Term 01/08/98;
Bond Fund 0001047469-98-000421
- -------------------------------------------------------------- -----------------------------------------------------
J.P. Morgan Institutional Bond Fund 10/31/98;
01/08/98;
0001047469-98-000474
- -------------------------------------------------------------- -----------------------------------------------------
J.P. Morgan Institutional Global 10/31/98
Strategic Income Fund 01/08/98;
0001047469-98-000414
- -------------------------------------------------------------- -----------------------------------------------------
</TABLE>
i:\dsfndlgl\pierpont\0198fix.pea\bondsai.wpf
63
<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.
i:\dsfndlgl\institut\0198fix.pea\bondsai.doc
Appendix-1
<PAGE>
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
i:\dsfndlgl\institut\0198fix.pea\bondsai.doc
Appendix-2
<PAGE>
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.
i:\dsfndlgl\institut\0198fix.pea\bondsai.doc
Appendix-3
<PAGE>
MARCH 2, 1998 PROSPECTUS
J.P. MORGAN INSTITUTIONAL
TAX EXEMPT BOND FUND
------------------------------
Seeking high current income
by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense to state or suggest otherwise.
Distributed by Funds Distributor, Inc. JPMORGAN
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
- --------------------------------------------------------------------------------
<S> <C>
2
- ----
FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process. . . . . . . . . . . . . . . . . . . . . . . 2
4
- ----
The fund's goal, investment approach, risks, expenses, performance, and
financial highlights
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
- ----
Investing in the J.P. Morgan Institutional Tax Exempt Bond Fund
YOUR INVESTMENT
Investing through a financial professional . . . . . . . . . . . . . . . . . 6
Investing directly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Opening your account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Adding to your account . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Selling shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Account and transaction policies . . . . . . . . . . . . . . . . . . . . . . 7
Dividends and distributions. . . . . . . . . . . . . . . . . . . . . . . . . 8
Tax considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
9
- ----
More about risk and the fund's business operations
FUND DETAILS
Master/feeder structure. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management and administration. . . . . . . . . . . . . . . . . . . . . . . . 9
Risk and reward elements . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . back cover
</TABLE>
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
This fund invests primarily in bonds and other fixed income securities through a
master portfolio (another fund with the same goal). The fund seeks high current
income consistent with moderate risk.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
- - want to add an income investment to further diversify a portfolio
- - want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
- - want an investment that pays monthly dividends
- - are seeking income that is exempt from federal personal income tax
The fund is NOT designed for investors who:
- - are investing for aggressive long-term growth
- - require stability of principal
- - are investing through a tax-deferred account such as an IRA
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $250 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
BEFORE YOU INVEST
Investors considering the fund should understand that:
- - The value of the fund's shares will fluctuate over time. You could lose money
if you sell when the fund's share price is lower than when you invested.
- - There is no assurance that the fund will meet its investment goal.
- - Future returns will not necessarily resemble past performance.
- - The fund invests a portion of assets in non-investment-grade bonds ("junk
bonds"), which offer higher potential yields but have a higher risk of default
and are more sensitive to market risk than investment-grade bonds.
1
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
The J.P. Morgan Institutional Tax Exempt Bond Fund invests primarily in bonds
and other fixed income securities.
The fund's investment philosophy, developed by its advisor, emphasizes the
potential for consistently enhancing performance while managing risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the depth of its
global fixed-income research and the sophistication of its analytical systems.
Using a team-oriented approach, J.P. Morgan seeks to gain insights in a broad
range of distinct areas and takes positions in many different ones, helping the
fund to limit exposure to concentrated sources of risk.
In managing the fund, J.P. Morgan employs a three-step process that combines
sector allocation, fundamental research for identifying portfolio securities,
and duration management.
[GRAPHIC]
The fund invests across a range of different types of securities
SECTOR ALLOCATION The sector allocation team meets monthly, analyzing the
fundamentals of a very broad range of sectors. The team seeks to enhance
performance and manage risk by underweighting or overweighting sectors.
[GRAPHIC]
The fund makes its portfolio decisions as described later in this prospectus
SECURITY SELECTION Relying on the insights of different specialists, including
credit analysts, quantitative researchers, and dedicated fixed income traders,
the portfolio managers make buy and sell decisions according to the fund's goal
and strategy.
[GRAPHIC]
J.P. Morgan uses a disciplined process to control the fund's sensitivity to
interest rates
DURATION MANAGEMENT Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish the fund's exposure to interest rate risk (a
goal of duration managment), typically remaining relatively close to the
duration of the market as a whole, as represented by the fund's benchmark. The
strategists closely monitor the fund and make tactical adjustments as necessary.
2 FIXED INCOME MANAGEMENT APPROACH
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
3
<PAGE>
J.P. MORGAN INSTITUTIONAL
TAX EXEMPT BOND FUND TICKER SYMBOL: JITBX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND)
[GRAPHIC]
GOAL
The fund seeks to provide high current income that is exempt from federal income
tax, consistent with moderate risk of capital and maintenance of liquidity.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests primarily in high quality municipal securities whose income is
free from federal personal income tax. While the fund's goal is high tax-exempt
income, the fund may invest to a limited extent in taxable securities, including
U.S. government, government agency, corporate, or taxable municipal securities.
The fund's securities may be of any maturity, but under normal market conditions
the fund's duration will generally range between four and seven years, similar
to that of the Lehman Brothers 1-16 Year Municipal Bond Index. At least 90% of
assets must be invested in securities that, at the time of purchase, are rated
investment-grade (BBB/Baa or better) or are the unrated equivalent. No more than
10% of assets may be invested in securities as low as B.
[GRAPHIC]
POTENTIAL RISKS AND REWARDS
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
tax-exempt funds will depend on the success of the investment process, which is
described on page 2.
Investors should expect the potential for returns that exceed those of a
comparable tax-exempt fund of shorter duration, and should be prepared for
higher share price volatility than such a fund. The fund's performance could
also be affected by market reaction to proposed tax legislation. To the extent
that the fund seeks increased performance by investing in non-investment-grade
bonds, it takes on additional risks, since these bonds are more sensitive to
economic news and their issuers have a less secure financial condition. A
portion of the fund's returns may be subject to federal, state, or local tax, or
the alternative minimum tax.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on pages 10-13.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $250
billion, including more than $8 billion using the same strategy as this fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
joined the team in May of 1997 and has been at J.P. Morgan since 1987, and by
Elaine B. Young, vice president, who joined the team in January of 1996 and has
been at J.P. Morgan since August of 1994. Prior to joining J.P. Morgan, Ms.
Young was a municipal bond trader and fixed income portfolio manager at Scudder,
Stevens, & Clark, Inc.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund are
shown at right. The fund has no sales, redemption, exchange, or account fees,
although some institutions may charge you a fee for shares you buy through them.
The annual fund expenses shown are deducted from fund assets prior to
performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(1) (%)
<S> <C>
Management fees (actual) 0.30
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.20
- ------------------------------------------------------
TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 0.50
- ------------------------------------------------------
</TABLE>
EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
YOUR COST($) 5 16 28 63
- ------------------------------------------------------------------------
</TABLE>
4 J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for periods ended December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.(3)
<S> <C> <C> <C> <C>
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND (after expenses) 7.58 8.19 6.23 7.19
- ----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BOND INDEX(4) (no expenses) 7.80 8.55 6.61 7.57
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR-BY-YEAR TOTAL RETURN (%) Shows changes in returns by calendar year
- ----------------------------------------------------------------------------------------------------------------------------------
[GRAPH]
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
J.P. MORGAN INSTITUTIONAL TAX
EXEMPT BOND FUND 7.38 8.25 6.87 10.92 7.47 9.58 (2.53) 13.50 3.71 7.58
- ----------------------------------------------------------------------------------------------------------------------------------
Municipal Bond Index(4) 5.80 9.62 7.48 11.66 8.25 10.71 (2.74) 13.80 4.27 7.80
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA For fiscal periods ended August 31
- ----------------------------------------------------------------------------------------------------------------------------------
1993(3) 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ($) 10.00 10.07 9.75 10.01 9.92
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.06 0.48 0.49 0.48 0.48
Net realized and unrealized gain (loss) on investment ($) 0.07 (0.32) 0.26 (0.07) 0.20
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS ($) 0.13 0.16 0.75 0.41 0.68
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.06) (0.48) (0.49) (0.48) (0.48)
Net realized gain ($) -- -- -- (0.02) (0.00)(5)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS ($) (0.06) (0.48) (0.49) (0.50) (0.48)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ($) 10.07 9.75 10.01 9.92 10.12
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 1.39(6) 1.61 8.00 4.13 7.06
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($ thousands) --(8) 16,415 59,867 121,131 201,614
- ----------------------------------------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
EXPENSES (%) -- 0.50 0.50 0.50 0.50
- ----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (%) 3.56(7) 4.70 5.09 4.82 4.83
- ----------------------------------------------------------------------------------------------------------------------------------
DECREASE REFLECTED IN EXPENSE RATIO DUE TO
EXPENSE REIMBURSEMENT (%) 2.50(7) 1.48 0.21 0.10 0.06
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Financial Highlights above have been audited by Price Waterhouse LLP, the
fund's independent accountants.
(1) The fund has a master/feeder structure as described on page 9. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal year, expressed as a percentage of the fund's average net
assets and reflecting reimbursement for ordinary expenses over 0.50%.
(2) Without reimbursement, other expenses and total operating expenses would
have been 0.26%, and 0.56%, respectively. There is no guarantee that
reimbursement will continue beyond 12/31/98.
(3) The fund commenced operations on 7/12/93. Except in the Financial
Highlights, returns reflect performance of the fund from 7/31/93. Returns
for the period 12/31/87 through 7/31/93 reflect performance of The Pierpont
Tax Exempt Bond Fund, the predecessor of the fund.
(4) The Municipal Bond Index is composed of the Lehman Brothers Quality
Intermediate Municipal Bond Index, consisting of general obligation and
revenue bonds rated A or better with maturities of 2-12 years, from
12/31/87 through 4/30/97, and the Lehman Brothers 1-16 Year Municipal Bond
Index, consisting of general obligation and revenue bonds with maturities
of 1-16 years, from 5/1/97 forward. Both are unmanaged indices that measure
municipal bond market performance.
(5) Less than $0.01 per share.
(6) Not annualized.
(7) Annualized.
(8) Net assets at 8/31/93 were $202.
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
- - Determine the amount you are investing. The minimum amount for initial
investments is $5,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on
minimum investments, call 1-800-766-7722.
- - Complete the application, indicating how much of your investment you want
to allocate to which fund(s). Please apply now for any account privileges
you may want to use in the future, in order to avoid the delays associated
with adding them later on.
- - Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING YOUR ACCOUNT
BY WIRE
- - Mail your completed application to the Shareholder Services Agent.
- - Call the Shareholder Services Agent to obtain an account number and to
place a purchase order. FUNDS THAT ARE WIRED WITHOUT A PURCHASE ORDER WILL
BE RETURNED UNINVESTED.
- - After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York
ROUTING NUMBER: 021-000-238
CREDIT: J.P. Morgan Institutional Funds
ACCOUNT NUMBER: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
BY CHECK
- - Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
- - Mail the check with your completed application to the Shareholder Services
Agent.
BY EXCHANGE
- - Call the Shareholder Services Agent for an exchange.
ADDING TO YOUR ACCOUNT
BY WIRE
- - Call the Shareholder Services Agent to place a purchase order. FUNDS THAT
ARE WIRED WITHOUT A PURCHASE ORDER WILL BE RETURNED UNINVESTED.
- - Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
BY CHECK
- - Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
- - Mail the check with a completed investment slip to the Shareholder Services
Agent. If you do not have an investment slip, attach a note indicating your
account number and how much you wish to invest in which fund(s).
BY EXCHANGE
- - Call the Shareholder Services Agent for an exchange.
6 YOUR INVESTMENT
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHARES
BY PHONE -- WIRE PAYMENT
- - Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can
help you add it.
- - Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your
fund account.
BY PHONE -- CHECK PAYMENT
- - Call the Shareholder Services Agent and place your request. Once your
request has been verified, a check for the net amount, payable to the
registered owner(s), will be mailed to the address of record. For checks
payable to any other party or mailed to any other address, please make your
request in writing (see below).
IN WRITING
- - Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the
fund name; the amount you want to sell; and the recipient's name and
address or wire information, if different from those of the account
registration.
- - Indicate whether you want the proceeds sent by check or by wire.
- - Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
- - Mail the letter to the Shareholder Services Agent.
BY EXCHANGE
- - Call the Shareholder Services Agent for an exchange.
ACCOUNT AND TRANSACTION POLICIES
TELEPHONE ORDERS The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
EXCHANGES You may exchange shares in this fund for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time).
TIMING OF ORDERS Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES AGENT
J.P. MORGAN FUNDS SERVICES
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available
8:00 a.m. to 5:00 p.m. eastern
time on fund business days.
YOUR INVESTMENT 7
<PAGE>
- --------------------------------------------------------------------------------
TIMING OF SETTLEMENTS When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
STATEMENTS AND REPORTS The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
ACCOUNTS WITH BELOW-MINIMUM BALANCES If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically declares income dividends daily and pays them monthly. If an
investor's shares are redeemed during the month, accrued but unpaid dividends
are paid with the redemption proceeds. Shares of the fund earn dividends on the
business day the purchase is effective, but not on the business day the
redemption is effective. The fund distributes capital gains, if any, once a
year. However, the fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities:
TRANSACTION TAX STATUS
- --------------------------------------------------------------------------------
Income dividends Exempt from federal personal income taxes
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary income;
shares owned for one year losses are subject to special rules
or less
- --------------------------------------------------------------------------------
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
8 YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
MASTER/FEEDER STRUCTURE
As noted earlier, the fund is a "feeder" fund that invests in a master
portfolio. (Except where indicated, this prospectus uses the term "the fund" to
mean the feeder fund and its master portfolio taken together.)
The master portfolio accepts investments from other feeder funds, and the
feeders bear the master portfolio's expenses in proportion to their assets.
However, each feeder can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder could offer access to
the same master portfolio on more attractive terms, or could experience better
performance, than another feeder. Information about other feeders is available
by calling 1-800-766-7722. Generally, when the master portfolio seeks a vote,
the funds will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
The fund and its master portfolio expect to maintain consistent goals, but if
they do not, the fund will withdraw from the master portfolio, receiving its
assets either in cash or securities. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
MANAGEMENT AND ADMINISTRATION
The fund and its master portfolio are governed by the same trustees. The
trustees are responsible for overseeing all business activities. The trustees
are assisted by Pierpont Group, Inc., which they own and operate on a cost
basis; costs are shared by all funds governed by these trustees. Funds
Distributor, Inc., as co-administrator, along with J.P. Morgan, provides fund
officers. J.P. Morgan, as co-administrator, oversees the fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
- --------------------------------------------------------------------------------
ADVISORY SERVICES 0.30% of the master portfolio's
average net assets
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion in J.P. Morgan-
advised portfolios, plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.075% of the fund's average net assets
- --------------------------------------------------------------------------------
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
FUND DETAILS 9
<PAGE>
- -------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 4). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET CONDITIONS
- - The fund's share price, - Bonds have generally outper- - Under normal circumstances the fund plans to remain
yield, and total return formed money market fully invested in bonds and other fixed income
will fluctuate in response investments over the long securities as noted in the table on pages 12-13
to bond market movements term, with less risk than
stocks - The fund seeks to limit risk and enhance yields
through careful management, sector allocation,
- - The value of most bonds will - Most bonds will rise in individual securities selection, and duration
fall when interest rates value when interest rates management
rise; the longer a bond's fall
maturity and the lower its - During severe market downturns, the fund has the
credit quality, the more its - Mortgage-backed and asset- option of investing up to 100% of assets in
value typically falls backed securities can offer investment-grade short-term securities
attractive returns
- - Mortgage-backed and asset- - J.P. Morgan monitors interest rate trends, as well
backed securities (securities as geographic and demographic information related
representing an interest in, to mortgage-backed securities and mortgage prepayments
or secured by, a pool of
mortgages or other assets
such as receivables) could
generate capital losses or
periods of low yields if they
are paid off substantially
earlier or later than
anticipated
- -----------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
- - The fund could underperform - The fund could outperform its - J.P. Morgan focuses its active management on those
its benchmark due to its benchmark due to these same areas where it believes its commitment to research
sector, securities, or choices can most enhance returns and manage risks in a
duration choices consistent way
- -----------------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY
- - The default of an issuer - Investment-grade bonds have - The fund maintains its own policies for balancing
would leave the fund with a lower risk of default credit quality against potential yields and gains in
unpaid interest or light of its investment goals
principal - Junk bonds offer higher yields
and higher potential gains - J.P. Morgan develops its own ratings of unrated
- - Junk bonds (those rated securities and makes a credit quality determination for
BB/Ba or lower) have a unrated securities
higher risk of default
</TABLE>
10 FUND DETAILS
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
DERIVATIVES
- - Derivatives such as futures - Hedges that correlate well - The fund uses derivatives for hedging (i.e., to adjust
and options that are used for with underlying positions duration or to establish or adjust exposure to particular
hedging the portfolio or can reduce or eliminate securities, markets, or currencies)
specific securities may not losses at low cost
fully offset the underlying - The fund only establishes hedges that it expects will
positions(1) - The fund could make money be highly correlated with underlying positions
and protect against losses
- - Derivatives that involve if management's analysis - While the fund may use derivatives that incidentally
leverage could magnify proves correct involve leverage, it does not use them for the
losses specific purpose of leveraging the portfolio
- Derivatives that involve
leverage could generate
substantial gains at low cost
- -----------------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have - These holdings may offer more - The fund may not invest more than 15% of net assets
difficulty valuing these attractive yields or potential in illiquid holdings
holdings precisely growth than comparable widely
traded securities - To maintain adequate liquidity to meet redemptions,
- - The fund could be unable to the fund may hold investment-grade short-term
sell these holdings at the securities (including repurchase agreements) and, for
time or price desired temporary or extraordinary purposes, may borrow from
banks up to 10% of the value of its assets
- -----------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys - The fund can take advantage of - The fund uses segregated accounts to offset leverage
securities before issue or attractive transaction risk
for delayed delivery, it opportunities
could be exposed to leverage
risk if it does not use
segregated accounts
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
- - Increased trading would - The fund could realize gains - The fund anticipates a portfolio turnover rate of
raise the fund's transaction in a short period of time approximately 50%
costs
- The fund could protect - The fund generally avoids short-term trading, except
- - Increased short-term capital against losses if a bond is to take advantage of attractive or unexpected
gains distributions would overvalued and its value opportunities or to meet demands generated by
raise shareholders' income later falls shareholder activity
tax liability
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash payment
based on the value of a securities index. An option is the right to buy or
sell securities that is granted in exchange for an agreed-upon sum.
FUND DETAILS 11
<PAGE>
SECURITIES
- --------------------------------------------------------------------------------
This table discusses the customary types of securities which can be held by the
fund. In each case the principal types of risk are listed on the following page
(see below for definitions). This table reads across two pages.
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES Bonds or notes backed by unsecured debt, such as credit
card receivables; these securities are often guaranteed or over-collateralized
to enhance their credit quality.
- --------------------------------------------------------------------------------
BANK OBLIGATIONS Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
COMMERCIAL PAPER Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
CORPORATE BONDS Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
MORTGAGES (DIRECTLY HELD) Debt instrument which gives the lender a lien on
property as security for the loan repayment.
- --------------------------------------------------------------------------------
MORTGAGE DOLLAR ROLLS The sale of mortgage-backed securities with the
commitment to buy back similar securities at a future date and at an agreed upon
price. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES Securities backed by pools of mortgages (such as
Ginnie Maes, Fannie Maes and Freddie Macs), including pass through certificates,
and other senior classes of collateralized mortgage obligations (CMOs) or
stripped mortgage-backed securities.
- --------------------------------------------------------------------------------
PARTICIPATION INTERESTS Securities representing an interest in another security
or in bank loans.
- --------------------------------------------------------------------------------
PRIVATE PLACEMENTS Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITS AND OTHER REAL-ESTATE RELATED INSTRUMENTS Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS Agreements between a seller and a buyer whereby the
seller agrees to repurchase the securities at an agreed upon price and at a
stated time.
- --------------------------------------------------------------------------------
SOVEREIGN DEBT, BRADY BONDS, AND DEBT OF SUPRANATIONAL ORGANIZATIONS Dollar-
and non-dollar-denominated securities issued to refinance foreign government
bank loans and other debt.
- --------------------------------------------------------------------------------
SWAPS Contractual agreement whereby a party agrees to exchange periodic
payments with a counterparty. Segregated accounts are used to offset leverage
risk.
- --------------------------------------------------------------------------------
SYNTHETIC VARIABLE RATE INSTRUMENTS Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
TAX EXEMPT MUNICIPAL SECURITIES Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- --------------------------------------------------------------------------------
ZERO COUPON, PAY-IN-KIND, AND DEFERRED PAYMENT SECURITIES Securities offering
non-cash or delayed-cash payment. Their prices are typically more volatile than
those of some other debt instruments and involve certain special tax
considerations.
- --------------------------------------------------------------------------------
RISK RELATED TO CERTAIN SECURITIES HELD BY J.P. MORGAN INSTITUTIONAL TAX EXEMPT
BOND FUND:
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
CURRENCY RISK The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
EXTENSION RISK The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
INTEREST RATE RISK The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK The risk the costs associated with a liability are less than the
value of the underlying instrument.
LIQUIDITY RISK The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
12 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
X Permitted (and if applicable, percentage limitation)
percentage of total assets - BOLD
percentage of net assets - ITALIC
+ Permitted, but not typically used
-- Not permitted
<TABLE>
<CAPTION>
TAX EXEMPT
TYPES OF RISK BOND
- --------------------------------------------------------------------------------
<S> <C>
credit, interest rate, market, prepayment --
- --------------------------------------------------------------------------------
credit, currency, liquidity, political + Domestic
Only
- --------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, Tax
political X Exempt
Only
- --------------------------------------------------------------------------------
credit, currency, liquidity, political --
- --------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, --
political, valuation
- --------------------------------------------------------------------------------
credit, extension, interest rate, market, natural event, --
prepayment
- --------------------------------------------------------------------------------
extension, interest rate, leverage, liquidity, prepayment --
- --------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage, --
market, political, prepayment
- --------------------------------------------------------------------------------
credit, currency, extension, interest rate, liquidity, --
political, prepayment
- --------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation X
- --------------------------------------------------------------------------------
credit, interest rate, liquidity, valuation --
- --------------------------------------------------------------------------------
credit, liquidity +
- --------------------------------------------------------------------------------
credit, currency, interest rate, market, political --
- --------------------------------------------------------------------------------
credit, currency, interest rate, market, political --
- --------------------------------------------------------------------------------
credit, leverage, market X
- --------------------------------------------------------------------------------
credit, interest rate, market, natural event, political X(1)
- --------------------------------------------------------------------------------
interest rate X
- --------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, X
political
- --------------------------------------------------------------------------------
</TABLE>
MARKET RISK The risk that the market value of a security may move up or down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
bonds and the mutual funds that invest in them.
NATURAL EVENT RISK The risk of losses attributable to natural disasters, crop
failures and similar events.
POLITICAL RISK The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
PREPAYMENT RISK The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
VALUATION RISK The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
(1) At least 65% of assets must be in tax exempt securities.
FUND DETAILS 13
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
For investors who want more information on the fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
TELEPHONE: 1-800-766-7722
HEARING IMPAIRED: 1-888-468-4015
EMAIL: [email protected]
Text-only versions of these documents and this prospectus are available from
the Public Reference Room of the Securities and Exchange Commission in
Washington, D.C. (1-800-SEC-0330) and may be viewed on-screen or downloaded from
the SEC's Internet site at http://www.sec.gov. The fund's investment company and
1933 Act registration numbers are 811-07342 and 033-54642.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Institutional Funds combine a heritage of integrity and
financial leadership with comprehensive, sophisticated analysis and management
techniques. Drawing on J.P. Morgan's extensive experience and depth as an
investment manager, the J.P. Morgan Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.
JPMORGAN
- --------------------------------------------------------------------------------
J. P. MORGAN INSTITUTIIONAL FUNDS
ADVISOR DISTRIBUTOR
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
<PAGE>
================================================================================
|
MARCH 2, 1998 | PROSPECTUS
|
================================================================================
J.P. MORGAN INSTITUTIONAL
INTERNATIONAL BOND FUND
================================================
Seeking high total return
by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense to state or suggest otherwise.
Distributed by Funds Distributor, Inc.
<PAGE>
CONTENTS
<TABLE>
====================================================================================================================================
<S> <C> <C> <C>
2 | FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process ....................................................2
4 | J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
The fund's goal, investment approach, Fund description ...................................................................4
risks, expenses, performance, and
financial highlights Investor expenses ..................................................................4
Performance ........................................................................5
Financial highlights ...............................................................5
6 | YOUR INVESTMENT
Investing in the J.P. Morgan Institutional Investing through a financial professional .........................................6
International Bond Fund
Investing through an employer-sponsored retirement plan ............................6
Investing through an IRA or rollover IRA ...........................................6
Investing directly .................................................................6
Opening your account ...............................................................6
Adding to your account .............................................................6
Selling shares .....................................................................7
Account and transaction policies ...................................................7
Dividends and distributions ........................................................8
Tax considerations .................................................................8
9 | FUND DETAILS
More about risk and the fund's Master/feeder structure ............................................................9
business operations
Management and administration ......................................................9
Risk and reward elements ..........................................................10
Securities ........................................................................12
FOR MORE INFORMATION ......................................................back cover
</TABLE>
<PAGE>
INTRODUCTION
================================================================================
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
This fund invests primarily in bonds and other fixed income securities through a
master portfolio (another fund with the same goal). The fund seeks high total
return consistent with moderate risk.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
The fund is not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $250 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
========================================
Before you invest
Investors considering the
fund should understand that:
o The value of the fund's shares will
fluctuate over time. You could lose money
if you sell when the fund's share price
is lower than when you invested.
o There is no assurance that the fund will
meet its investment goal.
o Future returns will not necessarily
resemble past performance.
- ----------------------------------------
|
| 1
|
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
================================================================================
The J.P. Morgan Institutional
International Bond Fund invests
primarily in bonds and other fixed
income securities.
The fund's investment philosophy,
developed by its advisor,
emphasizes the potential for
consistently enhancing performance
while managing risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an
information advantage through the
depth of its global fixed-income
research and the sophistication of
its analytical systems. Using a
team-oriented approach, J.P. Morgan
seeks to gain insights in a broad
range of distinct areas and takes
positions in many different ones,
helping the fund to limit exposure
to concentrated sources of risk.
In managing the fund, J.P. Morgan
employs a three-step process that
combines sector allocation,
fundamental research for
identifying portfolio securities,
and duration management.
[GRAPHIC] Sector allocation The sector
allocation team meets monthly,
The fund invests across a range analyzing the fundamentals of a
of different types of securities very broad range of sectors. The
team seeks to enhance performance
and manage risk by underweighting
or overweighting sectors.
[GRAPHIC] Security selection Relying on the
insights of different specialists,
The fund makes its portfolio decisions as including credit analysts,
described later in this prospectus quantitative researchers, and
dedicated fixed income traders, the
portfolio managers make buy and
sell decisions according to the
fund's goal and strategy.
[GRAPHIC] Duration management Forecasting
teams use fundamental economic
J.P. Morgan uses a disciplined process factors to develop strategic
to control the fund's sensitivity forecasts of the direction of
to interest rates interest rates. Based on these
forecasts, strategists establish
the fund's exposure to interest
rate risk (a goal of duration
management), typically remaining
relatively close to the duration of
the market as a whole, as
represented by the fund's
benchmark. The strategists closely
monitor the fund and make tactical
adjustments as necessary.
|
2 | FIXED INCOME MANAGEMENT APPROACH
|
<PAGE>
================================================================================
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
|
| 3
|
<PAGE>
J.P. MORGAN INSTITUTIONAL
INTERNATIONAL BOND FUND |
================================================================================
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL INTERNATIONAL
BOND FUND)
[GRAPHIC] GOAL
The fund seeks to provide high total return, consistent with moderate risk of
capital, by investing in a portfolio of international fixed income securities.
[GRAPHIC] INVESTMENT APPROACH
The fund invests primarily in fixed income securities from developed countries
outside the U.S., including those issued by foreign governments, corporations,
financial institutions, and supranational organizations (such as the World
Bank). These securities may be of any maturity, but under normal market
conditions the management team will keep the fund's duration within one year of
that of the Salomon Brothers Non-U.S. World Government Bond Index (currency
hedged) (currently about five years). All of the fund's assets must be invested
in securities that, at the time of purchase, are rated investment-grade (BBB/Baa
or better) or are the unrated equivalent, including at least 65% A or better.
In addition to the investment process described on page 2, the management team
makes country allocation decisions, based primarily on financial and economic
forecasts and other macro-economic factors. The fund generally seeks to reduce
currency risk by hedging its investments back to the U.S. dollar.
[GRAPHIC] POTENTIAL RISKS AND REWARDS
The fund's share price and total return will vary in response to changes in
international bond markets and interest rates. How well the fund's performance
compares to that of similar fixed income funds will depend on the success of the
investment process.
Because the fund may invest more than 5% of total assets in a single issuer and
its primary securities are foreign securities, it takes on additional risks. Its
performance may vary more widely than that of comparable funds. The fund has the
potential to produce high total return over time, but investors should be
prepared to ride out periods of negative total return.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on pages 10-13.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $250
billion, including more than $1.5 billion using the same strategy as this fund.
The portfolio management team is led by Dominic J. Pegler, vice president, who
has been on the team since joining J.P. Morgan from the Bank of England in April
of 1996, where he was an economist and later managed UK foreign exchange
reserves, and by Maria Ryan, associate, who joined the team in January of 1997
and has been at J.P. Morgan since 1990.
================================================================================
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund are
shown at right. The fund has no sales, redemption, exchange, or account fees,
although some institutions may charge you a fee for shares you buy through them.
The annual fund expenses shown are deducted from fund assets prior to
performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
================================================================================
Annual fund operating expenses(1) (%)
================================================================================
<S> <C>
Management fees (actual) 0.35
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.30
- --------------------------------------------------------------------------------
Total operating expenses(2)
(after reimbursement) 0.65
- --------------------------------------------------------------------------------
</TABLE>
================================================================================
Expense example
================================================================================
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
Your cost($) 7 21 36 81
- --------------------------------------------------------------------------------
</TABLE>
|
4 | J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
|
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
<S> <C>
PERFORMANCE (unaudited)
==============================
Average annual total return (%) Shows performance over time, for periods ended December 31, 1997
==============================------------------------------------------------------------------------------------------------
1 yr. 3 yrs. Since inception(3)
<S> <C> <C> <C>
J.P. Morgan Institutional International Bond Fund (after expenses) 10.78 13.07 12.85
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Non-U.S. World Government Bond Index(4) (currency hedged) (no expenses)11.07 13.57 13.17
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
==============================
Year-by-year total return (%) Shows changes in returns by calendar year
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
1995 1996 1997(3)
------ ------ -------
<S> <C> <C> <C>
J.P. Morgan Institutional International Bond Fund 17.40 11.15 10.78
Salomon Brothers Non-U.S. World Government Bond Index(4) 17.94 11.82 11.07
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
FINANCIAL HIGHLIGHTS
====================
<S> <C>
Per-share data For fiscal periods ended September 30
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1995(3) 1996 1997
------ ------ -------
<S> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 11.12 11.30
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.49 0.31 2.21
Net realized and unrealized gain
on investment and foreign currency
(loss) allocated from portfolio ($) 0.78 0.95 (1.11)
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 1.27 1.26 1.10
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.15) -- (2.78)
Net realized gain ($) -- (1.08) (0.97)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions ($) (0.15) (1.08) (3.75)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 11.12 11.30 8.65
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 12.835 12.09 12.52
- ---------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 4,233 13,310 7,126
- ---------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.606 0.65 0.50
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 5.82(6) 5.28 4.88
- ---------------------------------------------------------------------------------------------------------------------------
Decrease reflected in expense ratio due
to expense reimbursement (%) 1.90(6,7) 1.02 1.91
- ---------------------------------------------------------------------------------------------------------------------------
The Financial Highlights above have been audited by Price Waterhouse LLP, the fund's independent accountants.
</TABLE>
1 The fund has a master/feeder structure as described on page 9. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year, expressed as a percentage of the fund's average net assets
and reflecting reimbursement for ordinary expenses over 0.65%.
2 Without reimbursement, other expenses and total operating expenses would have
been 2.06%, and 2.41%, respectively. There is no guarantee that reimbursement
will continue beyond 1/31/99.
3 The fund commenced operations on 12/1/94. Except in the Financial Highlights,
returns reflect performance of the fund from 12/1/94.
4 The Salomon Brothers Non-U.S. World Government Bond Index (currency hedged),
consisting of government bonds of developed countries, is an unmanaged index
that measures foreign bond market performance.
5 Not annualized.
6 Annualized.
7 After consideration of certain state limitations.
|
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND | 5
|
<PAGE>
YOUR INVESTMENT
================================================================================
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Determine the amount you are investing. The minimum amount for initial
investments is $1,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on minimum
investments, call 1-800-766-7722.
o Complete the application, indicating how much of your investment you want to
allocate to which fund(s). Please apply now for any account privileges you may
want to use in the future, in order to avoid the delays associated with adding
them later on.
o Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING YOUR ACCOUNT
By wire
o Mail your completed application to the Shareholder Services Agent.
o Call the Shareholder Services Agent to obtain an account number and to place a
purchase order. Funds that are wired without a purchase order will be returned
uninvested.
o After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York
Routing number: 021-000-238
Credit: J.P. Morgan Institutional Funds
Account number: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
By check
o Make out a check for the investment amount payable
to J.P. Morgan Institutional Funds.
o Mail the check with your completed application to the Shareholder Services
Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ADDING TO YOUR ACCOUNT
By wire
o Call the Shareholder Services Agent to place a purchase order. Funds that are
wired without a purchase order will be returned uninvested.
o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with a completed investment slip to the Shareholder Services
Agent. If you do not have an investment slip, attach a note indicating your
account number and how much you wish to invest in which fund(s).
By exchange
o Call the Shareholder Services Agent for an exchange.
|
6 | YOUR INVESTMENT
|
<PAGE>
SELLING SHARES
By phone -- wire payment
o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can help
you add it.
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your fund
account.
By phone -- check payment
o Call the Shareholder Services Agent and place your request. Once your request
has been verified, a check for the net amount, payable to the registered
owner(s), will be mailed to the address of record. For checks payable to any
other party or mailed to any other address, please make your request in
writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the fund
name; the amount you want to sell; and the recipient's name and address or
wire information, if different from those of the account registration.
o Indicate whether you want the proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party.
The Shareholder Services Agent may require additional information, such as a
signature guarantee.
o Mail the letter to the Shareholder Services Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in this fund for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
Business hours and NAV calculations The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time).
Timing of orders Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available 8:00 a.m. to 5:00 p.m. eastern
time on fund business days.
|
YOUR INVESTMENT | 7
|
<PAGE>
Timing of settlements When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
Statements and reports The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically declares income dividends daily and pays them monthly. If an
investor's shares are redeemed during the month, accrued but unpaid dividends
are paid with the redemption proceeds. Shares of the fund earn dividends on the
business day the purchase is effective, but not on the business day the
redemption is effective. The fund distributes capital gains, if any, once a
year. However, the fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities:
<TABLE>
<CAPTION>
================================================================================
Transaction Tax status
- --------------------------------------------------------------------------------
<S> <C>
Income dividends Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------
</TABLE>
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
|
8 | YOUR INVESTMENT
|
<PAGE>
FUND DETAILS
================================================================================
MASTER/FEEDER STRUCTURE
As noted earlier, the fund is a "feeder" fund that invests in a master
portfolio. (Except where indicated, this prospectus uses the term "the fund" to
mean the feeder fund and its master portfolio taken together.)
The master portfolio accepts investments from other feeder funds, and the
feeders bear the master portfolio's expenses in proportion to their assets.
However, each feeder can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder could offer access to
the same master portfolio on more attractive terms, or could experience better
performance, than another feeder. Information about other feeders is available
by calling 1-800-766-7722. Generally, when the master portfolio seeks a vote,
the funds will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
The fund and its master portfolio expect to maintain consistent goals, but if
they do not, the fund will withdraw from the master portfolio, receiving its
assets either in cash or securities. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
MANAGEMENT AND ADMINISTRATION
The fund and its master portfolio are governed by the same trustees. The
trustees are responsible for overseeing all business activities. The trustees
are assisted by Pierpont Group, Inc., which they own and operate on a cost
basis; costs are shared by all funds governed by these trustees. Funds
Distributor, Inc., as co-administrator, along with J.P. Morgan, provides fund
officers. J.P. Morgan, as co-administrator, oversees the fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Advisory services 0.35% of the master portfolio's
average net assets
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion in J.P. Morgan-
advised portfolios, plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.10% of the fund's average
net assets
- --------------------------------------------------------------------------------
</TABLE>
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
|
FUND DETAILS | 9
|
<PAGE>
================================================================================
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 4). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk.
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market conditions
o The fund's share price, o Bonds have generally o Under normal circumstances the fund plans to
yield, and total return outperformed money market remain fully invested in bonds and other
will fluctuate in investments over the long fixed income securities as noted in the table
response to bond market term, with less risk than on pages 12-13
movements stocks
o The fund seeks to limit risk and enhance
o The value of most bonds o Most bonds will rise in yields through careful management, sector
will fall when interest value when interest rates allocation, individual securities selection,
rates rise; the longer a fall and duration management
bond's maturity and the
lower its credit quality, o Mortgage-backed and o During severe market downturns, the fund has
the more its value asset-backed securities the option of investing up to 100% of assets
typically falls can offer attractive in investment-grade short-term securities
returns
o Mortgage-backed and o J.P. Morgan monitors interest rate trends, as
asset-backed securities well as geographic and demographic
(securities representing information related to mortgage-backed
an interest in, or securities and mortgage prepayments
secured by, a pool of
mortgages or other assets
such as receivables)
could generate capital
losses or periods of low
yields if they are paid
off substantially earlier
or later than anticipated
- ------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could o The fund could outperform o J.P. Morgan focuses its active management on
underperform its its benchmark due to those areas where it believes its commitment
benchmark due to its these same choices to research can most enhance returns and
sector, securities, or manage risks in a consistent way
duration choices
- ------------------------------------------------------------------------------------------------------------------------------------
Credit quality
o The default of an issuer o Investment-grade bonds o The fund maintains its own policies for
would leave the fund with have a lower risk of balancing credit quality against potential
unpaid interest or default yields and gains in light of its investment
principal goals
o Junk bonds offer higher
o Junk bonds (those rated yields and higher o J.P. Morgan develops its own ratings of
BB/Ba or lower) have a potential gains unrated securities and makes a credit quality
higher risk of default determination for unrated securities
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign investments
o The fund could lose money o Foreign bonds, which o Foreign bonds are a secondary investment for
because of foreign represent a major portion the fund
government actions, of the world's fixed
political instability, or income securities, offer o To the extent that the fund invests in
lack of adequate and attractive potential foreign bonds, it may manage the currency
accurate information performance and exposure of its foreign investments relative
opportunities for to its benchmark, and may hedge back into the
o Currency exchange rate diversification U.S. dollar from time to time (see also
movements could reduce "Derivatives")
gains or create losses o Favorable exchange rate
movements could generate
o Currency and investment gains or reduce losses
risks tend to be higher
in emerging markets o Emerging markets can
offer higher returns
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
|
10 | FUND DETAILS
|
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivatives
o Derivatives such as o Hedges that correlate o The fund uses derivatives for hedging and for
futures, options, and well with underlying risk management (i.e., to adjust duration or
foreign currency forward positions can reduce or to establish or adjust exposure to particular
contracts that are used eliminate losses at low securities, markets, or currencies); risk
for hedging the portfolio cost management may include management of the
or specific securities fund's exposure relative to its benchmark
may not fully offset the o The fund could make money
underlying positions(1) and protect against o The fund only establishes hedges that it
losses if management's expects will be highly correlated with
o Derivatives used for risk analysis proves correct underlying positions
management may not have
the intended effects and o Derivatives that involve o While the fund may use derivatives that
may result in losses or leverage could generate incidentally involve leverage, it does not
missed opportunities substantial gains at low use them for the specific purpose of
cost leveraging the portfolio
o Derivatives that involve
leverage could magnify
losses
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o The fund could have o These holdings may offer o The fund may not invest more than 15% of net
difficulty valuing these more attractive yields or assets in illiquid holdings
holdings precisely potential growth than
comparable widely traded o To maintain adequate liquidity to meet
o The fund could be unable securities redemptions, the fund may hold
to sell these holdings at investment-grade short-term securities
the time or price desired (including repurchase agreements) and, for
temporary or extraordinary purposes, may
borrow from banks up to 33 1/3% of the value
of its assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed delivery
securities
o When the fund buys o The fund can take o The fund uses segregated accounts to offset
securities before issue advantage of attractive leverage risk
or for delayed delivery, transaction opportunities
it could be exposed to
leverage risk if it does
not use segregated
accounts
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would o The fund could realize o The fund anticipates a portfolio turnover
raise the fund's gains in a short period rate of approximately 350%
transaction costs of time
o The fund generally avoids short-term trading,
o Increased short-term o The fund could protect except to take advantage of attractive or
capital gains against losses if a bond unexpected opportunities or to meet demands
distributions would raise is overvalued and its generated by shareholder activity
shareholders' income tax value later falls
liability
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on the value of a securities index. An option is the right to
buy or sell securities that is granted in exchange for an agreed-upon sum.
A foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
|
FUND DETAILS | 11
|
<PAGE>
================================================================================
================================================================================
Securities
================================================================================
This table discusses the customary types of securities which can be held by the
fund. In each case the principal types of risk are listed on the following page
(see below for definitions). This table reads across two pages.
- --------------------------------------------------------------------------------
Asset-backed securities Bonds or notes backed by unsecured debt, such as credit
card receivables; these securities are often guaranteed or over-collateralized
to enhance their credit quality.
- --------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
- --------------------------------------------------------------------------------
Convertible securities Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
Corporate bonds Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
Mortgages (directly held) Debt instrument which gives the lender a lien on
property as security for the loan repayment.
- --------------------------------------------------------------------------------
Mortgage dollar rolls The sale of mortgage-backed securities with the commitment
to buy back similar securities at a future date and at an agreed upon price.
Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Mortgage-backed securities Securities backed by pools of mortgages (such as
Ginnie Maes, Fannie Maes and Freddie Macs), including pass through certificates,
and other senior classes of collateralized mortgage obligations (CMOs) or
stripped mortgage-backed securities.
- --------------------------------------------------------------------------------
Participation interests Securities representing an interest in another security
or in bank loans.
- --------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITs and other real-estate related instruments Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
Repurchase agreements Agreements between a seller and a buyer whereby the seller
agrees to repurchase the securities at an agreed upon price and at a stated
time.
- --------------------------------------------------------------------------------
Sovereign debt, Brady bonds, and debt of supranational organizations Dollar- and
non-dollar-denominated securities issued to refinance foreign government bank
loans and other debt.
- --------------------------------------------------------------------------------
Swaps Contractual agreement whereby a party agrees to exchange periodic payments
with a counterparty. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Synthetic variable rate instruments Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
Tax exempt municipal securities Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- --------------------------------------------------------------------------------
U.S. government securities Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- --------------------------------------------------------------------------------
Zero coupon, pay-in-kind, and deferred payment securities Securities offering
non-cash or delayed-cash payment. Their prices are typically more volatile than
those of some other debt instruments and involve certain special tax
considerations.
- --------------------------------------------------------------------------------
Risk related to certain securities held by J.P. Morgan Institutional
International Bond Fund:
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Interest rate risk The risk of market losses attributable to changes in interest
rates. With fixed-rate securities, a rise in interest rates typically causes a
fall in values, while a fall in rates typically causes a rise in values.
Leverage risk The risk the costs associated with a liability are less than the
value of the underlying instrument.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
|
12 | FUND DETAILS
|
<PAGE>
================================================================================
================================================================================
* Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
o Permitted, but not typically used
- -- Not permitted
Types of Risk
<TABLE>
<CAPTION>
International
Bond
- -------------------------------------------------------------------------------------------
<S> <C>
credit, interest rate, market, prepayment *
- -------------------------------------------------------------------------------------------
credit, currency, liquidity, political *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political *
- -------------------------------------------------------------------------------------------
credit, currency, liquidity, political *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political, valuation *
- -------------------------------------------------------------------------------------------
credit, extension, interest rate, market, natural event, prepayment --
- -------------------------------------------------------------------------------------------
extension, interest rate, leverage, liquidity, prepayment --
- -------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage, market, political, o
prepayment
- -------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, liquidity, political, prepayment *
- -------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation o
- -------------------------------------------------------------------------------------------
credit, interest rate, liquidity, valuation --
- -------------------------------------------------------------------------------------------
credit, liquidity o
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political o
- -------------------------------------------------------------------------------------------
credit, leverage, market --
- -------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political --
- -------------------------------------------------------------------------------------------
interest rate *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political *
- -------------------------------------------------------------------------------------------
</TABLE>
Market risk The risk that the market value of a security may move up or down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
bonds and the mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
|
FUND DETAILS | 13
|
<PAGE>
================================================================================
FOR MORE INFORMATION
================================================================================
For investors who want more information on the fund, the following documents are
available free upon request:
Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. Morgan Institutional International Bond Fund
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
Telephone: 1-800-766-7722
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available from the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. (1-800-SEC-0330) and may be viewed on-screen or downloaded from the SEC's
Internet site at http://www.sec.gov. The fund's investment company and 1933 Act
registration numbers are 811-07342 and 033-54642.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Institutional Funds combine a heritage of integrity and
financial leadership with comprehensive, sophisticated analysis and management
techniques. Drawing on J.P. Morgan's extensive experience and depth as an
investment manager, the J.P. Morgan Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.
JPMorgan
================================================================================
J.P. Morgan Institutional Funds
Advisor Distributor
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
PROS383-983
<PAGE>
J.P. MORGAN INSTITUTIONAL FUNDS
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 2, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 2, 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.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
<PAGE>
Table of Contents
PAGE
General . . . . . . . . . . . . . . . . . . 2
Investment Objectives and Policies . . . . . . 2
Investment Restrictions . . . . . . . . . . . 16
Trustees and Officers . . . . . . . . . . . . 19
Investment Advisor . . . . . . . . . . . . . . 23
Distributor . . . . . . . . . . . . . . . . 25
Co-Administrator . . . . . . . . . . . . . . 26
Services Agent . . . . . . . . . . . . . . . 27
Custodian and Transfer Agent . . . . . . . . . 28
Shareholder Servicing . . . . . . . . . . . . 28
Independent Accountants . . . . . . . . . . . 29
Expenses . . . . . . . . . . . . . . . . . . 29
Purchase of Shares . . . . . . . . . . . . . 30
Redemption of Shares . . . . . . . . . . . . . 32
Exchange of Shares . . . . . . . . . . . . . . 32
Dividends and Distributions . . . . . . . . . 31
Net Asset Value . . . . . . . . . . . . . . 31
Performance Data . . . . . . . . . . . . . . . 33
Portfolio Transactions . . . . . . . . . . . . 34
Massachusetts Trust . . . . . . . . . . . . . 36
Description of Shares . . . . . . . . . . . . 37
Taxes . . . . . . . . . . . . . . . . . . . 38
Additional Information . . . . . . . . . . . 43
Financial Statements . . . . . . . . . . . . . 44
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . A-45
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
<PAGE>
GENERAL
This Statement of Additional Information relates only to the J.P.
Morgan Institutional Tax Exempt Bond Fund and the J.P. Morgan Institutional
International Bond Fund (collectively, the "Funds"). Each of the Funds is 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 and provides additional information with respect to the Funds and
should be read in conjunction with the relevant Fund's current Prospectus (the
"Prospectus"). Capitalized terms not otherwise defined herein have the meanings
accorded to them in 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, each Fund seeks to achieve its investment objective by
investing all of its investable assets in a corresponding Master Portfolio (the
"Portfolio"), a corresponding open-end management investment company having the
same investment objective as the Fund. Each Fund invests in a Portfolio through
a two-tier master-feeder investment fund structure. See "Special Information
Concerning Investment Structure."
Each Portfolio is advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
Investments in a Fund are not deposits or obligations of, or guaranteed
or endorsed by, Morgan or any other bank. Shares of a Fund 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 OBJECTIVES AND POLICIES
The following discussion supplements the information regarding the
investment objective of each of the Funds and the policies to be employed to
achieve this objective by their corresponding Portfolios as set forth above and
in the Prospectus. The investment objective of each Fund and its corresponding
Portfolio is identical. Accordingly, references below to a Fund also include the
Fund's corresponding Portfolio; similarly, references to a Portfolio also
include the corresponding Fund that invests in the Portfolio unless the context
requires otherwise.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
1
<PAGE>
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND (the "Tax Exempt Bond
Fund") is designed for investors who seek tax exempt yields greater than those
generally available from a portfolio of short term tax exempt obligations and
who are willing to incur the greater price fluctuation of longer-term
instruments. Additionally, the Tax Exempt Bond Fund is designed is designed to
be an economical and convenient means of making substantial investments in debt
obligations that are exempt from federal income tax. The Tax Exempt Bond Fund's
investment objective is to provide high current income that is exempt from
federal income tax, consistent with moderate risk of capital and maintenance of
liquidity. See "Taxes." The Fund attempts to achieve its investment objective by
investing all of its investable assets in The Tax Exempt Bond Portfolio (the
"Portfolio"), a diversified open-end management investment company having the
same investment objective as the Tax Exempt Bond Fund.
The Tax Exempt Bond Fund attempts to achieve its investment objective
by investing primarily in securities of states, territories and possessions of
the United States and their political subdivisions, agencies and
instrumentalities, the interest of which is exempt from federal income tax in
the opinion of bond counsel for the issuer, but it may invest up to 20% of its
total assets in taxable obligations. During normal market conditions, the Tax
Exempt Bond Fund will invest at least 80% of its net assets in tax exempt
obligations. Interest on these securities may be subject to state and local
taxes. For more detailed information regarding tax matters, including the
applicability of the alternative minimum tax, see "Taxes". The Tax Exempt Bond
Fund attempts to invest its assets in tax exempt municipal securities; however,
under certain circumstances the Tax Exempt Bond Fund is permitted to invest up
to 20% of the value of its total assets in securities, the interest income on
which may be subject to federal, state and local income taxes. The Tax Exempt
Bond Fund may make taxable investments pending investment of proceeds from sales
of its interests or portfolio securities, pending settlement of purchases of
portfolio securities, to maintain liquidity or when it is advisable in Morgan's
opinion because of adverse market conditions. The Tax Exempt Bond Fund will
invest in taxable securities only if there are no tax exempt securities
available for purchase or if the expected return from an investment in taxable
securities exceeds the expected return on available tax exempt securities. In
abnormal market conditions, if, in the judgment of Morgan, tax exempt securities
satisfying the Fund's investment objective may not be purchased, the Tax Exempt
Bond Fund may, for defensive purposes only, temporarily invest more than 20% of
its net assets in debt securities the interest on which is subject to federal,
state and local income taxes. The taxable investments permitted for the Tax
Exempt Bond Fund include obligations of the U.S. Government and its agencies and
instrumentalities, bank obligations, commercial paper and repurchase agreements
and other debt securities which meet the Fund's quality requirements. See
"Taxes". The Tax Exempt Bond Fund seeks to maintain a current yield that is
greater than that obtainable from a portfolio of short term tax exempt
obligations, subject to certain quality restrictions. See "Quality and
Diversification Requirements."
Morgan believes that based upon current market conditions, the Tax
Exempt Bond Fund will consist of a portfolio of securities with a duration of
four to
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
2
<PAGE>
seven years. In view of the duration of the Tax Exempt Bond Fund, under normal
market conditions, the Tax Exempt Bond Fund's yield can be expected to be higher
and its net asset value less stable than those of a money market fund. Duration
is a measure of the weighted average maturity of the bonds held in the Tax
Exempt Bond Fund and can be used as a measure of the sensitivity of the Tax
Exempt Bond Fund's market value to changes in interest rates. The maturities of
the individual securities in the Tax Exempt Bond Fund may vary widely, however,
as Morgan adjusts the Tax Exempt Bond Fund's holdings of long-term and
short-term debt securities to reflect its assessment of prospective changes in
interest rates, which may adversely affect current income.
The value of the Tax Exempt Bond Fund's investments will generally
fluctuate inversely with changes in prevailing interest rates. The value of the
Tax Exempt Bond Fund's investments will also be affected by changes in the
creditworthiness of issuers and other market factors. The quality criteria
applied in the selection of portfolio securities are intended to minimize
adverse price changes due to credit considerations. The value of the Tax Exempt
Bond Fund's municipal securities can also be affected by market reaction to
legislative consideration of various tax reform proposals. Although the net
asset value of the Fund fluctuates, the Tax Exempt Bond Fund attempts to
preserve the value of its investments to the extent consistent with its
objective.
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND (the "International Bond
Fund") is designed to be an economical and convenient means of making
substantial investments in a broad range of international fixed income
securities. The International Bond Fund's investment objective is to provide a
high total return, consistent with moderate risk of capital, by investing in a
portfolio of international fixed income securities. The International Bond Fund
attempts to achieve its objective by investing all of its investable assets in
The Non-U.S. Fixed Income Portfolio (the "Portfolio"), a non-diversified
open-end management investment company having the same investment objective as
the International Bond Fund. The expected total return of a portfolio of fixed
income securities may not be as high as that of a portfolio of equity
securities.
The Fund attempts to achieve its investment objective by investing
primarily in high grade, non-dollar-denominated corporate and government debt
obligations of foreign issuers described in this Statement of Additional
Information. The International Bond Fund is designed for investors who seek
exposure to the international bond markets in their investment portfolios.
INVESTMENT PROCESS FOR THE NON-U.S. FIXED INCOME PORTFOLIO
Morgan actively manages the Non-U.S. Fixed Income Portfolio's
allocation across countries, its duration and the selection of specific
securities within countries. Based on fundamental economic and capital markets
research, quantitative valuation techniques and experienced judgment, Morgan
allocates The Non-U.S. Fixed Income Portfolio's assets primarily among the
developed countries of the world outside the United States. Morgan adjusts The
Non-U.S. Fixed Income Portfolio's duration in light of market conditions and the
Advisor's interest rate outlook for the countries in which it invests. The
Advisor selects
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
3
<PAGE>
securities among the broad sectors of the fixed income market including, but not
limited to, debt obligations of governments and their agencies, supranational
organizations, corporations and banks, taking into consideration such factors as
their relative value, the likelihood of a change in credit rating, and the
liquidity of the issue. Under normal circumstances, the Advisor intends to keep
The Non-U.S. Fixed Income Portfolio essentially fully invested with at least 65%
of The Non-U.S. Fixed Income Portfolio's assets invested in bonds of foreign
issuers. These investments will be made in at least three foreign countries.
Country allocation: Morgan allocates the Portfolio's assets primarily
among the developed countries of the world outside the United States. Country
allocations are determined through an optimization procedure that ranks markets
according to the risks and returns inherent in their "optimal" durations.
Country weightings also reflect liquidity and credit quality considerations. To
help contain risk, Morgan typically limits the country-weighted duration of the
Portfolio to a range between one year shorter and one year longer than that of
the benchmark.
Sector/security selection: Holdings primarily consist of government and
government-guaranteed bonds, but also include publicly and privately traded
corporates, debt obligations of banks and bank holding companies and of
supranational organizations, and convertible securities. Sectors are over- or
under-weighted when Morgan perceives significant valuation distortions in their
yield spreads. Securities are selected by the portfolio manager, with
substantial input from fixed income analysts and traders as well as from
Morgan's extended network of equity analysts. Credit analysts monitor the
quality of current and prospective holdings and, in conjunction with the credit
committee, recommend purchases and sales.
Duration management: Duration is a measure of the weighted average
maturity of the bonds held in The Non-U.S. Fixed Income Portfolio and can be
used as a measure of the sensitivity of the Non-U.S. Fixed Income Portfolio's
market value to changes in interest rates. Typically, The Non-U.S. Fixed Income
Portfolio's duration will range between one year shorter and one year longer
than the duration of the non-U.S. fixed income universe, as represented by
Salomon Brothers Non-U.S. World Government Bond Index (currency hedged), The
Non-U.S. Fixed Income Portfolio's benchmark. Currently the benchmark's duration
is approximately five years. The maturities of the individual bonds in The
Non-U.S. Fixed Income Portfolio may vary widely, however. The duration decision
is central to Morgan's investment process and begins with an analysis of
economic conditions and real yields in the countries that make up the
Portfolio's universe. Based on this analysis, fixed income portfolio managers
forecast three potential paths (optimistic, pessimistic, and most likely) that
interest rates in each market could follow over the next three and twelve
months. These forecasts are converted into return curves that enable Morgan to
estimate the risk-return profile of different portfolio durations. In each
market, duration is set at its "optimal" level-that is, at the level that Morgan
believes will generate the highest excess return per unit of excess risk, as
measured against the Salomon Brothers Non-U.S. World Government Bond Index
(currency hedged).
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
4
<PAGE>
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in the Prospectus, the International Bond Fund may invest
in bonds and other debt securities of domestic and foreign issuers to the extent
consistent with its investment objective and policies. A description of these
investments appears in the Prospectus and below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."
ASSET-BACKED SECURITIES. The International Bond Fund may invest in
asset- backed securities, which directly or indirectly represent a participation
interest in, or are secured by and payable from, a stream of payments generated
by particular assets such as motor vehicle or credit card receivables or other
asset-backed securities collateralized by such assets. Asset-backed securities
provide periodic payments that generally consist of both interest and principal
payments. Consequently, the life of an asset-backed security varies with the
prepayment experience of the underlying obligations. Payments of principal and
interest may be guaranteed up to certain amounts and for a certain time period
by a letter of credit issued by a financial institution unaffiliated with the
entities issuing the securities. The asset-backed securities in which the
International Bond Fund may invest are subject to the International Bond Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
TAX EXEMPT OBLIGATIONS
The Tax Exempt Bond Fund may invest in bonds issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies, authorities and
instrumentalities. These obligations may be general obligation bonds secured by
the issuer's pledge of its full faith credit and taxing power for the payment of
principal and interest, or they may be revenue bonds payable from specific
revenue sources, but not generally backed by the issuer's taxing power. These
include industrial development bonds where payment is the responsibility of the
private industrial user of the facility financed by the bonds. The Tax Exempt
Bond Fund may invest more than 25% of its assets in industrial development
bonds, but may not invest more than 25% of its assets in industrial development
bonds in projects of similar type or in the same state.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
5
<PAGE>
The Tax Exempt Bond Fund may invest in tax exempt obligations to the extent
consistent with its investment objective and policies. A description of the
various types of tax exempt obligations which may be purchased by the Tax Exempt
Bond Fund appears below. See "Quality and Diversification Requirements."
The Tax Exempt Bond Fund will invest in tax exempt obligations. A
description of the various types of tax exempt obligations which may be
purchased by the Tax Exempt Bond Fund appears below. See "Quality and
Diversification Requirements."
MUNICIPAL BONDS. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
MUNICIPAL NOTES. Municipal notes are subdivided into three categories of
short-term obligations: municipal notes, municipal commercial paper and
municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
6
<PAGE>
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Tax Exempt Bond Fund may invest are
payable, or are subject to purchase, on demand usually on notice of seven
calendar days or less. The terms of the notes provide that interest rates are
adjustable at intervals ranging from daily to six months, and the adjustments
are based upon the prime rate of a bank or other appropriate interest rate index
specified in the respective notes. Variable rate demand notes are valued at
amortized cost; no value is assigned to the right of each Fund to receive the
par value of the obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, excluded from gross income for federal
income tax purposes. For a description of the attributes of master demand
obligations, see "Money Market Instruments" above. Although there is no
secondary market for master demand obligations, such obligations are considered
by the Tax Exempt Bond Fund to be liquid because they are payable upon demand.
The Tax Exempt Bond Fund has no specific percentage limitations on investments
in master demand obligations.
PUTS. The Tax Exempt Bond Fund may purchase without limit, municipal
bonds or notes together with the right to resell the bonds or notes to the
seller at an agreed price or yield within a specified period prior to the
maturity date of the bonds or notes. Such a right to resell is commonly known as
a "put." The aggregate price for bonds or notes with puts may be higher than the
price for bonds or notes without puts. Consistent with the Tax Exempt Bond
Fund's investment objective and subject to the supervision of the Trustees, the
purpose of this practice is to permit the Tax Exempt Bond Fund to be fully
invested in tax exempt securities while preserving the necessary liquidity to
purchase securities on a when-issued basis, to meet unusually large redemptions,
and to purchase at a later date securities other than those subject to the put.
The principal risk of puts is that the writer of the put may default on its
obligation to repurchase. The Advisor will monitor each writer's ability to meet
its obligations under puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet
obligations or when the funds available are otherwise allocated for investment.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
7
<PAGE>
In addition, puts may be exercised prior to the expiration date in order to take
advantage of alternative investment opportunities or in the event the Advisor
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration date
and in selecting which puts to exercise, the Advisor considers the amount of
cash available to the Tax Exempt Bond Fund, the expiration dates of the
available puts, any future commitments for securities purchases, alternative
investment opportunities, the desirability of retaining the underlying
securities in the Tax Exempt Bond Fund's portfolio and the yield, quality and
maturity dates of the underlying securities.
The Tax Exempt Bond Fund values any municipal bonds and notes subject
to puts with remaining maturities of less than 60 days by the amortized cost
method. If the Tax Exempt Bond Fund were to invest in municipal bonds and notes
with maturities of 60 days or more that are subject to puts separate from the
underlying securities, the puts and the underlying securities would be valued at
fair value as determined in accordance with procedures established by the Board
of Trustees. The Board of Trustees would, in connection with the determination
of the value of a put, consider, among other factors, the creditworthiness of
the writer of the put, the duration of the put, the dates on which or the
periods during which the put may be exercised and the applicable rules and
regulations of the SEC. Prior to investing in such securities, the Tax Exempt
Bond Fund, if deemed necessary based upon the advice of counsel, will apply to
the SEC for an exemptive order, which may not be granted, relating to the
valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Tax Exempt Bond Fund's
policy is to enter into put transactions only with municipal securities dealers
who are approved by the Advisor. Each dealer will be approved on its own merits,
and it is the Tax Exempt Bond Fund's general policy to enter into put
transactions only with those dealers which are determined to present minimal
credit risks. In connection with such determination, the Trustees will review
regularly the Advisor's list of approved dealers, taking into consideration,
among other things, the ratings, if available, of their equity and debt
securities, their reputation in the municipal securities markets, their net
worth, their efficiency in consummating transactions and any collateral
arrangements, such as letters of credit, securing the puts written by them.
Commercial bank dealers normally will be members of the Federal Reserve System,
and other dealers will be members of the National Association of Securities
Dealers, Inc. or members of a national securities exchange. In the case of the
Tax Exempt Bond Fund, other put writers will have outstanding debt rated Aa or
better by Moody's Investors Service, Inc. ("Moody's") or AA or better by
Standard & Poor's Ratings Group ("Standard & Poor's"), or will be of comparable
quality in the Advisor's opinion or such put writers' obligations will be
collateralized and of comparable quality in the Advisor's opinion. The Trustees
have directed the Advisor not to enter into put transactions with any dealer
which in the judgment of the Advisor becomes more than a minimal credit risk. In
the event that a dealer should default on its obligation to repurchase an
underlying security, the Funds are unable to predict
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
8
<PAGE>
whether all or any portion of any loss sustained could subsequently be recovered
from such dealer.
The Trust has been advised by counsel that the Tax Exempt Bond Fund
will be considered the owner of the securities subject to the puts so that the
interest on the securities is tax exempt income to the Tax Exempt Bond Fund.
Such advice of counsel is based on certain assumptions concerning the terms of
the puts and the attendant circumstances.
FOREIGN INVESTMENTS
The International Bond Fund makes substantial investments in foreign
securities. The International Bond Fund may invest in securities of foreign
corporations included in Salomon Brothers Non-U.S. World Government Bond Index
(currency hedged). The International Bond Fund may invest in securities
denominated in foreign currencies, the U.S. dollar or multinational currency
units such as the ECU. The Advisor will generally attempt to hedge the
International Bond Fund's foreign currency exposure into the U.S. dollar.
However, the Advisor may from time to time decide to keep foreign currency
positions unhedge or engaged in foreign currency transactions if, based on
fundamental research, technical factors and the judgment of experienced currency
managers, it believes the foreign currency exposure will benefit the
International Bond Fund.
Since investments in foreign securities may involve foreign currencies,
the value of the International Bond Fund's assets as measured in U.S. dollars
may be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, including currency blockage. The International
Bond Fund 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 its currency exposure.
FOREIGN INVESTMENT INFORMATION. The International Bond Fund invests
primarily in foreign securities. Investment in securities of foreign issuers and
in obligations of foreign branches of domestic banks involves somewhat different
investment risks from those affecting securities of U.S. domestic issuers. There
may be limited publicly available information with respect to foreign issuers,
and foreign issuers are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to
domestic companies. 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 interest paid to the Portfolio by domestic companies.
Investors should realize that the value of the International Bond
Fund's 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
9
<PAGE>
depreciation of portfolio securities and could favorably or unfavorably affect
the International Bond Fund's operations. Furthermore, the economies of
individual foreign nations may differ from the U.S. economy, whether favorably
or unfavorably, in areas such as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. Any foreign investments made by the
International Bond Fund must be made in compliance with U.S. and foreign
currency restrictions and tax laws restricting the amounts and types of foreign
investments.
In addition, while the volume of transactions effected in foreign bond
markets has increased in recent years, in most cases it remains appreciably
below that of domestic markets. Accordingly, the International Bond Fund's
foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities of U.S. issuers. Moreover, the
settlement periods for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity. In addition, there
is generally less government supervision and regulation of brokers, financial
institutions and issuers located in foreign countries than in the United States.
Although the International Bond Fund invests primarily in securities of
established issuers based in developed foreign countries, it may also invest in
securities of issuers in emerging markets countries. Investments in securities
of issuers in emerging markets countries may involve a high degree of risk and
many may be considered speculative. These investments carry all of the risks of
investing in securities of foreign issuers outlined in this section to a
heightened degree. These heightened risks include (i) greater risks of
expropriation, confiscatory taxation, nationalization, and less social,
political and economic stability; (ii) the small current size of the markets for
securities of emerging markets issuers and the currently low or nonexistent
volume of trading, resulting in lack of liquidity and in price volatility; (iii)
certain national policies which may restrict the International Bond Fund's
investment opportunities including restrictions on investing in issuers or
industries deemed sensitive to relevant national interests; and (iv) the absence
of developed legal structures governing private or foreign investment and
private property.
Since the International Bond Fund's investments in foreign securities
involve foreign currencies, the value of its assets as measured in U.S. dollars
may be affected favorably or unfavorably by changes in currency rates and in
exchange contraol regulations, including currency blockage. See "Foreign
Currency Exchange Transactions".
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the International Bond
Fund buys and sells securities and receives interest in currencies other than
the U.S. dollar, the International Bond Fund enters into foreign currency
exchange transactions. The International Bond Fund either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward contracts to purchase or sell
foreign currencies. The cost of the International Bond Fund's spot currency
exchange transactions is
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
10
<PAGE>
generally the difference between the bid and offer spot rate of the currency
being purchased or sold.
A forward foreign currency exchange contract is an obligation by the
International Bond Fund to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are derivative instruments, as their value derives
from the spot exchange rates of the currencies underlying the contract. These
contracts are entered into in the interbank market directly between currency
traders (usually large commercial banks) and their customers. A forward foreign
currency exchange contract generally has no deposit requirement and is traded at
a net price without commission. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices of the
International Bond Fund's securities or in foreign exchange rates, or prevent
loss if the prices of these securities should decline.
The International Bond Fund may enter into foreign currency exchange
transactions in an attempt to protect against changes in foreign currency
exchange rates between the trade and settlement dates of specific securities
transactions or anticipated securities transactions. The International Bond Fund
may also enter into forward contracts to hedge against a change in foreign
currency exchange rates that would cause a decline in the value of existing
investments denominated or principally traded in a foreign currency. To do this,
the International Bond Fund would enter into a forward contract to sell the
foreign currency in which the investment is denominated or principally traded in
exchange for U.S. dollars or in exchange for another foreign currency. The
International Bond Fund will only enter into forward contracts to sell a foreign
currency in exchange for another foreign currency if the Advisor expects the
foreign currency purchased to appreciate against the U.S. dollar.
Although these transactions are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
limit any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause the International Bond Fund to
assume the risk of fluctuations in the value of the currency purchased against
the hedged currency and the U.S. dollar. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
MONEY MARKET INSTRUMENTS
Each Fund may invest in money market instruments to the extent
consistent with its investment objective and policies. The Tax Exempt Bond Fund
may invest in municipal notes of various types, including notes issued in
anticipation of
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
11
<PAGE>
receipt of taxes, the proceeds of the sale of bonds, other revenues or grant
proceeds, as well as municipal commercial paper and municipal demand obligations
such as variable rate demand notes and master demand obligations. The interest
rate on variable rate demand notes is adjustable at periodic intervals as
specified in the notes. Master demand obligations permit the investment of
fluctuating amounts at periodically adjusted interest rates. They are governed
by agreements between the municipal issuer and Morgan acting as agent, for no
additional fee, in its capacity as Advisor to The Tax Exempt Bond Portfolio and
as fiduciary for other clients. Although master demand obligations are not
marketable to third parties, the Portfolio considers them to be liquid because
they are payable on demand.
The Tax Exempt Bond Fund will invest in money market instruments that
meet the quality requirements described below except that short-term municipal
obligations of New York State issuers may be rated MIG-2 by Moody's or SP-2 by
Standard & Poor's. Under normal circumstances, the Tax Exempt Bond Fund will
purchase these securities to invest temporary cash balances or to maintain
liquidity to meet withdrawals. However, the Tax Exempt Bond Fund may also invest
in money market instruments as a temporary defensive measure taken during, or in
anticipation of, adverse market conditions.
The International Bond Fund may invest in money market instruments of
foreign or domestic issuers denominated in U.S. dollars and other currencies.
Under normal circumstances, the International Bond Fund will purchase these
securities as a part of its management of the International Bond Fund's
duration, to invest temporary cash balances or to maintain liquidity to meet
redemptions. However, the International Bond Fund may also invest in money
market instruments without limitation as a temporary defensive measure taken in
the Advisor's judgment during, or in anticipation of, 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
12
<PAGE>
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
FOREIGN GOVERNMENT OBLIGATIONS. The International Bond Fund, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."
BANK OBLIGATIONS. Each of the funds, unless otherwise noted in the
Prospectus or below, may invest in negotiable certificates of deposit, time
deposits and bankers' acceptances of (i) banks, savings and loan associations
and savings banks which have more than $2 billion in total assets and are
organized under the laws of the United States or any state, (ii) foreign
branches of these banks or of foreign banks of equivalent size (Euros) and (iii)
U.S. branches of foreign banks of equivalent size (Yankees). See "Foreign
Investments." The Tax Exempt Bond Fund may not invest in obligations of foreign
branches of foreign banks. The Funds will not invest in obligations for which
the Advisor, or any of its affiliated persons, is the ultimate obligor or
accepting bank. The International Bond Fund may also invest in obligations of
international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade between
nations (e.g., the European Investment Bank, the Inter-American Development
Bank, or the World Bank).
COMMERCIAL PAPER. 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
13
<PAGE>
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, unless otherwise noted below,
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 bonds. The International Bond Fund may also make
investments without limitation or foreign bonds and asset-backed securities and
other obligations described in this Statement of Additional Information.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Funds 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
14
<PAGE>
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 Fund until settlement takes place. At
the time a Fund makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction, reflect the value each
day of such securities in determining its net asset value and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, each Fund 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 Fund
will meet its obligations from maturities or sales of the securities held in the
segregated account and/or from cash flow. If a Fund 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 fund obligation, incur a gain or loss due to
market fluctuation. It is the current policy of each Fund not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Fund'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, provided
however, that a Fund may invest all of its investable assets in an open-end
investment company that has the same investment objective as the Fund (its
corresponding Portfolio). As a shareholder of another investment company, a Fund
or Portfolio would bear, along with other shareholders, its pro rata portion of
the other investment company's expenses, including advisory fees. These expenses
would be in addition to the advisory and other expenses that a Fund or Portfolio
bears directly in connection with its own operations.
REVERSE REPURCHASE AGREEMENTS. Each of the Funds, unless otherwise
noted in the Prospectus or below, may enter into reverse repurchase agreements.
In a reverse repurchase agreement, a Fund sells a security and agrees to
repurchase the same security at a mutually agreed upon date and price. For
purposes of the 1940 Act a reverse repurchase agreement is also considered as
the borrowing of money by the Fund and, therefore, a form of leverage. The Funds
will invest the proceeds of borrowings under reverse repurchase agreements. In
addition, a Fund will enter into a reverse repurchase agreement only when the
interest income to be earned from the investment of the proceeds is greater than
the interest expense of the transaction. A Fund will not invest the proceeds of
a reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. Each Fund will establish and maintain with the
Custodian
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
15
<PAGE>
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 Fund's limitations on reverse repurchase
agreements and bank borrowings.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, each Fund is permitted to lend its securities in an amount up to
331/3% of the Fund's net assets. Each of the Funds 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 Fund 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 Fund any income accruing
thereon. Loans will be subject to termination by the Funds 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 Fund and its respective
investors. The Funds may pay reasonable finders' and custodial fees in
connection with a loan. In addition, a Fund will consider all facts and
circumstances including the creditworthiness of the borrowing financial
institution, and the Funds will not make any loans in excess of one year. The
Funds will not lend their securities to any officer, Trustee, Director, employee
or other affiliate of the Funds, the Advisor or the Distributor, unless
otherwise permitted by applicable law.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Funds may not acquire any illiquid securities if, as a result
thereof, more than 15% of the Fund's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, each Fund may
acquire investments that are illiquid or have limited liquidity, such as private
placements or investments that are not registered under the Securities Act of
1933, as amended (the "1933 Act"), and cannot be offered for public sale in the
United States without first being registered under the 1933 Act. An illiquid
investment is any investment that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which it is valued by
the Fund. The price a Fund pays for illiquid securities or receives upon resale
may be lower than the price paid or received for similar securities with a more
liquid market. Accordingly the valuation of these securities will reflect any
limitations on their liquidity.
Each Fund 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 Fund is subject to a risk that should the
Fund decide to sell them when a ready buyer is not available at a price the Fund
deems representative of their value, the value of the Fund's net assets could be
adversely affected. Where an illiquid security must be registered under the
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
16
<PAGE>
1933 Act, before it may be sold, a Fund 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 Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Fund might obtain a less favorable
price than prevailed when it decided to sell.
SYNTHETIC INSTRUMENTS. The Tax Exempt Bond Fund may invest in certain
synthetic variable rate instruments. The Tax Exempt Bond Fund my invest in
certain synthetic variable rate instruments. Such instruments generally involve
the deposit of a long-term tax exempt bond in a custody or trust arrangement and
the creation of a mechanism to adjust the long-term interest rate on the bond to
a variable short-term rate and a right (subject to certain conditions) on the
part of the purchaser to tender it periodically to a third party at par. Morgan
will review the structure of synthetic variable rate instruments to identify
credit and liquidity risks (including the conditions under which the right to
tender the instrument would no longer be available) and will monitor those
risks. In the event that the right to tender the instrument is no longer
available, the risk to the Tax Exempt Bond Fund will be that of holding the
long-term bond. In the case of some types of instruments credit enhancement is
not provided, and if certain events, which may include (a) default in the
payment of principal or interest on the underlying bond, (b) downgrading of the
bond below investment grade or (c) a loss of the bond's tax exempt status,
occur, then (i) the put will terminate and (ii) the risk to a Fund will be that
of holding a long-term bond.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Tax Exempt Bond Fund intends to meet the diversification
requirements of the 1940 Act. To meet these requirements, 75% of the assets of
the Fund are subject to the following fundamental limitations: (1) the Tax
Exempt Bond 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 Tax Exempt Bond 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 Tax Exempt Bond 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.
TAX EXEMPT BOND FUND. With respect to the Tax Exempt Bond Fund, for
purposes of diversification and concentration under the 1940 Act, identification
of the issuer of municipal bonds or notes depends on the terms and conditions of
the obligation. If the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of the
government creating the subdivision and the obligation is backed only by the
assets and revenues of the subdivision, such subdivision is regarded as the sole
issuer. Similarly, in the case of an industrial development revenue bond or
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
17
<PAGE>
pollution control revenue bond, if the bond is backed only by the assets and
revenues of the nongovernmental user, the nongovernmental user is regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guaranty is regarded as a separate security and
treated as an issue of such guarantor. Since securities issued or guaranteed by
states or municipalities are not voting securities, there is no limitation on
the percentage of a single issuer's securities which the Tax Exempt Bond Fund
may own so long as it does not invest more than 5% of its total assets that are
subject to the diversification limitation in the securities of such issuer,
except obligations issued or guaranteed by the U.S. Government. Consequently,
the Tax Exempt Bond Fund may invest in a greater percentage of the outstanding
securities of a single issuer than would an investment company which invests in
voting securities. See "Investment Restrictions."
The Tax Exempt Bond Fund invests principally in a diversified portfolio
of "investment grade" tax exempt securities. On the date of investment, with
respect to at least 90% of its total assets, (i) municipal bonds must be rated
within the four highest ratings of Moody's, currently Aaa, Aa, A and Baa, or of
Standard & Poor's, currently AAA, AA, A and BBB, (ii) municipal notes must be
rated MIG-1 by Moody's or SP-1 by Standard & Poor's (or, in the case of New York
State municipal notes, MIG-1 or MIG-2 by Moody's or SP-1 or SP-2 by Standard &
Poor's) and (iii) municipal commercial paper must be rated Prime-1 by Moody's or
A-1 by Standard & Poor's or, if not rated by either Moody's or Standard &
Poor's, issued by an issuer either (a) having an outstanding debt issue rated A
or higher by Moody's or Standard & Poor's or (b) having comparable quality in
the opinion of the Advisor and, with respect to the remaining 10% of its assets,
must be rated B or better by Moody's or Standard & Poor's, or of comparable
quality. The Tax Exempt Bond Fund may invest in other tax exempt securities
which are not rated if, in the opinion of the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Tax Exempt Bond 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.
INTERNATIONAL BOND FUND. The International Bond Fund is registered as a
non-diversified investment company which means that the International Bond Fund
is not limited by the 1940 Act in the proportion of its assets that may be
invested in the obligations of a single issuer. Thus, the International Bond
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, may be subject to greater risk with
respect to its portfolio securities. The International Bond Fund, however, will
comply with the diversification requirements imposed by the Internal Revenue
Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company. See "Taxes".
The International Bond Fund may also purchase securities on a
when-issued or delayed delivery basis, enter into repurchase and reverse
repurchase
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
18
<PAGE>
agreements, loan its portfolio securities, purchase certain privately placed
securities and enter into forward foreign currency exchange contracts. In
addition, the International Bond Fund may use options on securities and indexes
of securities, futures contracts and options on futures contracts for hedging
and risk management purposes. Forward foreign currency exchange contracts,
options and futures contracts are derivative instruments. For a discussion of
these investments and investment techniques, see "Additional Investment
Information and Risk Factors".
Under normal circumstances at least 65% of the International Bond
Fund's total assets will consist of securities that at the time of purchase are
rated at least A by Moody's or Standard & Poor's or that are unrated, and in the
Advisor's opinion are of comparable quality. In the case of the remaining 35% of
the International Bond Fund's investments, the International Bond Fund may
purchase securities that are rated Baa or better by Moody's or BBB or better by
Standard & Poor's, or are unrated and in the Advisor's opinion are of comparable
quality. Securities rated Baa by Moody's or BBB by Standard & Poor's are
considered investment grade, but have some speculative characteristics. These
standards must be satisfied at the time an investment is made. If the quality of
the investment later declines, the International Bond Fund may continue to hold
the investment. See Appendix A for more detailed information on these ratings.
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
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a Fund
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, a Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. A Fund may
terminate its position in a put option it has purchased by allowing it to expire
or by exercising the option. A Fund may also close out a put option position by
entering into an offsetting transaction, if a liquid market exits. If the option
is allowed to expire, a Fund will lose the entire premium it paid. If a Fund
exercises a put option on a security, it will sell the instrument underlying the
option at the strike price. If a Fund exercises an option on an index,
settlement is in cash and does not involve the actual sale of securities. If an
option is American style, it may be exercised on any day up to its expiration
date. A European style option may be exercised only on its expiration date.
The buyer of a typical put option can expect to realize a gain if the
underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
19
<PAGE>
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When a Fund writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, a Fund assumes the obligation
to pay the strike price for the instrument underlying the option if the party to
the option chooses to exercise it. A Fund may seek to terminate its position in
a put option it writes before exercise by purchasing an offsetting option in the
market at its current price. If the market is not liquid for a put option a Fund
has written, however, the Fund must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes, and must
continue to post margin as discussed below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates a Fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
OPTIONS ON INDEXES. A Fund may purchase put and call options on any
securities index based on securities in which the Fund may invest. Options on
securities indexes are similar to options on securities, except that the
exercise
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
20
<PAGE>
of securities index options is settled by cash payment and does not involve the
actual purchase or sale of securities. In addition, these options are designed
to reflect price fluctuations in a group of securities or segment of the
securities market rather than price fluctuations in a single security. A Fund,
in purchasing or selling index options, is subject to the risk that the value of
its portfolio securities may not change as much as an index because the Fund's
investments generally will not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus a Fund
may not be able to close out an option position that it has previously entered
into. When a Fund purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and a Fund may incur additional losses
if the counterparty is unable to perform.
FUTURES CONTRACTS
When a Fund purchases a futures contract, it agrees to purchase a
specified quantity of an underlying instrument at a specified future date or to
make a cash payment based on the value of a securities index. When a Fund sells
a futures contract, it agrees to sell a specified quantity of the underlying
instrument at a specified future date or to receive a cash payment based on the
value of a securities index. The price at which the purchase and sale will take
place is fixed when a Fund enters into the contract. Futures can be held until
their delivery dates or the position can be (and normally is) closed out before
then. There is no assurance, however, that a liquid market will exist when a
Fund wishes to close out a particular position.
When a Fund purchases a futures contract, the value of the futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Fund's exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying instrument
directly. When the Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the value of the
underlying instrument. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the underlying
instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when a Fund buys or sells a futures contract it will
be required to deposit "initial margin" with its Custodian in a segregated
account in the name of its futures broker, known as a futures commission
merchant (FCM). Initial margin deposits are typically equal to a small
percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments equal to the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. The Fund may be
obligated to make payments of variation margin at a time when it is
disadvantageous to do so. Furthermore, it may not always be possible for the
Fund to close out its futures
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
21
<PAGE>
positions. Until it closes out a futures position, the Fund will be obligated to
continue to pay variation margin. Initial and variation margin payments do not
constitute purchasing on margin for purposes of the Fund's investment
restrictions. In the event of the bankruptcy of an FCM that holds margin on
behalf of the Portfolio, the Fund's may be entitled to return of margin owed to
it only in proportion to the amount received by the FCM's other customers,
potentially resulting in losses to the Funds.
A Fund will segregate liquid assets in connection with its use of
options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of a Fund's assets could impede portfolio
management or a Fund's ability to meet redemption requests or other current
obligations.
EXCHANGE TRADED AND OTC OPTIONS. All options purchased or sold by the
Funds 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 Fund's Board of Trustees. While exchange-traded options are obligations
of the Options Clearing Corporation, in the case of OTC options, a Fund relies
on the dealer from which it purchased the option to perform if the option is
exercised. Thus, when a Fund 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 Fund as well as loss of the expected benefit of the
transaction.
Provided that a Fund has arrangements with certain qualified dealers
who agree that the Fund may repurchase any option it writes for a maximum price
to be calculated by a predetermined formula, a Fund 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 Funds permitted
to enter into futures and options transactions may purchase or sell (write)
futures contracts and purchase put and call options, including put and call
options on futures contracts. In addition, the International Bond Fund 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.
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
22
<PAGE>
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 a Fund are paid by the Fund 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 Funds may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, a Fund 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 Fund's
current or anticipated investments exactly. A Fund 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 Fund'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
Fund'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 Fund 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
23
<PAGE>
successful in all cases. If price changes in a Fund'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 Fund
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 Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund'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 Fund 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 Funds
intend to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which a Fund can commit assets to
initial margin deposits and option premiums. In addition, the funds will comply
with guidelines established by the SEC with respect to coverage of options and
futures contracts by mutual funds, and if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures contract or option is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a large
percentage of a Fund's assets could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
RISK MANAGEMENT
The International Bond Fund may employ non-hedging risk management
techniques. Examples of risk management strategies include synthetically
altering the duration of a portfolio or the mix of securities in a portfolio.
For example, if the Advisor wishes to extend maturities in a fixed income
portfolio in order to take advantage of an anticipated decline in interest
rates, but does not wish to purchase the underlying long term securities, it
might cause the International Bond Fund to purchase futures contracts on long
term debt securities. Similarly, if the Advisor wishes to decrease fixed income
securities
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
24
<PAGE>
or purchase equities, it could cause the International Bond Fund to sell futures
contracts on debt securities and purchase futures contracts on a stock index.
Such non-hedging risk management techniques are not speculative, but because
they involve leverage include, as do all leveraged transactions, the possibility
of losses as well as gains that are greater than if these techniques involved
the purchase and sale of the securities themselves rather than their synthetic
derivatives.
PORTFOLIO TURNOVER
The 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 TAX EXEMPT BOND PORTFOLIO (Tax Exempt Bond Fund) -- For the fiscal years
August 31, 1996 and 1997: 25% and 25%, respectively.
THE NON-U.S. FIXED INCOME PORTFOLIO (International Bond Fund) -- For the fiscal
years ended September 30, 1996 and 1997: 330% and 346%, respectively.
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 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.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
25
<PAGE>
The TAX EXEMPT BOND FUND and its corresponding PORTFOLIO may not:
1. Borrow money, except from banks for extraordinary or emergency purposes and
then only in amounts up to 10% of the value of the Tax Exempt Bond Fund's total
assets, taken at cost at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets except in connection with any such borrowing in amounts
up to 10% of the value of the Tax Exempt Bond Fund's net assets at the time of
such borrowing. The Tax Exempt Bond Fund will not purchase securities while
borrowings exceed 5% of the Tax Exempt Bond Fund's total assets; provided,
however, that the Tax Exempt Bond Fund may increase its interest in an open-end
management investment company with the same investment objective and
restrictions as the Tax Exempt Bond Fund's while such borrowings are
outstanding. This borrowing provision facilitates the orderly sale of portfolio
securities, for example, in the event of abnormally heavy redemption requests.
This provision is not for investment purposes. Collateral arrangements for
premium and margin payments in connection with the Tax Exempt Bond Fund's
hedging activities are not deemed to be a pledge of assets;
2. Purchase securities or other obligations of any one issuer if, immediately
after such purchase, more than 5% of the value of the Tax Exempt Bond Fund's
total assets would be invested in securities or other obligations of any one
such issuer; provided, however, that the Tax Exempt Bond 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 Tax Exempt Bond Fund's.
Each state and each political subdivision, agency or instrumentality of such
state and each multi-state agency of which such state is a member will be a
separate issuer if the security is backed only by the assets and revenue of that
issuer. If the security is guaranteed by another entity, the guarantor will be
deemed to be the issuer.1 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 Tax Exempt Bond Fund's total assets;
3. Invest more than 25% of its total assets in securities of governmental units
located in any one state, territory, or possession of the United States. The Tax
Exempt Bond Fund may invest more than 25% of its total assets in industrial
developments and pollution control obligations whether or not the users of
facilities financed by such obligations are in that same industry;2
- --------
1For purposes of interpretation of Investment Restriction No. 2,
"guaranteed by another entity" includes credit substitutions, such as letters of
credit or insurance, unless the Advisor determines that the security meets the
Tax Exempt Bond Fund's credit standards without regard to the credit
substitution.
2 Pursuant to an interpretation of the staff of the SEC, the Tax Exempt
Bond Fund may not invest more than 25% of its assets in industrial development
bonds in projects of similar type or in the same state. The Tax Exempt Bond Fund
shall comply with this interpretation until such time as it may be modified by
the staff of the SEC.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
26
<PAGE>
4. Purchase industrial revenue bonds if, as a result of such purchase, more than
5% of total Tax Exempt Bond Fund assets would be invested in industrial revenue
bonds where payment of principal and interest are the responsibility of
companies with fewer than three years of operating history (including
predecessors);
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities) or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Tax Exempt
Bond Fund's investment objective and policies (see "Investment Objectives and
Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination thereof
except to the extent that securities subject to a demand obligation, stand-by
commitments and puts may be purchased (see "Investment Objectives and
Policies"); real estate; commodities; commodity contracts, except for the Tax
Exempt Bond Fund's interests in hedging activities as described under
"Investment Objectives and Policies"; or interests in oil, gas, or mineral
exploration or development programs. However, the Tax Exempt Bond Fund may
purchase municipal bonds, notes or commercial paper secured by interests in real
estate;
7. Purchase securities on margin, make short sales of securities, or maintain a
short position, except in the course of the Tax Exempt Bond Fund's hedging
activities, unless at all times when a short position is open the Tax Exempt
Bond Fund owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount to, the
securities sold short; provided that this restriction shall not be deemed to be
applicable to the purchase or sale of when-issued or delayed delivery
securities;
8. Issue any senior security, except as appropriate to evidence indebtedness
which the Tax Exempt Bond Fund is permitted to incur pursuant to Investment
Restriction No. 1. The Tax Exempt Bond Fund's arrangements in connection with
its hedging activities as described in "Investment Objectives and Policies"
shall not be considered senior securities for purposes hereof;
9. Acquire securities of other investment companies, except as permitted by the
1940 Act; or
10. Act as an underwriter of securities.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof are amended or modified, each of the INTERNATIONAL
BOND FUND and its corresponding PORTFOLIO may not:
1. Purchase any security if, as a result, more than 25% of the value of the
International Bond Fund's total assets would be invested in securities of
issuers having their principal business activities in the same industry. This
limitation
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
27
<PAGE>
shall not apply to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. In addition, and while subject to changing
interpretations, so long as a single foreign government or supranational
organization is considered to be an "industry" for the purposes of this 25%
limitation, The Non-U.S. Fixed Income Portfolio will comply therewith. The staff
of the SEC considers all supranational organizations (as a group) to be a single
industry for concentration purposes;
2. Borrow money, except that the International Bond 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 International Bond
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 International Bond Fund's total assets, the International Bond Fund will
reduce its borrowings within three business days to the extent necessary to
comply with the 33 1/3% limitation;
3. Make loans to other persons, except through the purchase of debt obligations,
loans of portfolio securities, and participation in repurchase agreements;
4. Purchase or sell physical commodities or contracts thereon, unless acquired
as a result of the ownership of securities or instruments, but the International
Bond Fund may purchase or sell futures contracts or options (including options
on futures contracts, but excluding options or futures contracts on physical
commodities) and may enter into foreign currency forward contracts;
5. Purchase or sell real estate, but the International Bond Fund may purchase or
sell securities that are secured by real estate or issued by companies
(including real estate investment trusts) that invest or deal in real estate;
6. Underwrite securities of other issuers, except to the extent the
International Bond Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act;
7. Issue senior securities, except as permitted under the 1940 Act or any rule,
order or interpretation thereunder; and
8. Notwithstanding any other investment restriction of the International Bond
Fund, the International Bond Fund may invest all of its investable assets in an
open-end management investment company having substantially the same investment
objective and restrictions as the International Bond Fund.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - TAX EXEMPT BOND FUND. The
investment restriction described below is not a fundamental policy of the Tax
Exempt Bond Fund or the corresponding Portfolio and may be changed by the
respective Trustees. This non-fundamental investment policy requires that the
Tax Exempt Bond Fund may not:
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
28
<PAGE>
(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 Tax Exempt Bond
Fund's net assets would be in investments that are illiquid.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - INTERNATIONAL BOND FUND. The
investment restrictions described below are not fundamental policies of the
International Bond Fund or the corresponding Portfolio and may be changed by
their respective Trustees. These non-fundamental investment policies require
that the International Bond 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 if as a result thereof, more than 15% of
the market value of the International Bond 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
Securities and Exchange Commission 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.
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, the Advisor 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 the Advisor 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, the
Advisor 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.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
29
<PAGE>
TRUSTEES AND OFFICERS
TRUSTEES
The Trustees of the Trust, who are also the Trustees of each of the
Portfolios, 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., 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.
- ----------------------
(*) Mr. Healey is an "interested person" of the Trust, the Advisor and each
Portfolio, as that term is defined in the 1940 Act.
The Trustees of the Trust are the same as the Trustees of each of the
Portfolios. In accordance with applicable state requirements, a majority of the
disinterested Trustees have adopted written procedures reasonably appropriate to
deal with potential conflicts of interest arising from the fact that the same
individuals are Trustees of the Trust, each of the Portfolios and the 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.
Trustee compensation expenses paid by the Trust for the calendar year
ended December 31, 1997 are set forth below.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
30
<PAGE>
<TABLE>
<CAPTION>
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
AGGREGATE TRUSTEE PORTFOLIOS(*), J.P. MORGAN
COMPENSATION FUNDS, J.P. MORGAN SERIES
PAID BY THE TRUST AND THE TRUST DURING
NAME OF TRUSTEE TRUST DURING 1997 1997(**)
- --------------- ----------------- --------
- -------------------------------------------------- -------------------------------- --------------------------------------------
<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 Portfolios, and 20 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, the 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 have entered into a Fund Services Agreement
with Pierpont Group, Inc. to assist the Trustees in exercising their overall
supervisory responsibilities over the affairs of the Portfolios and the Trust.
Pierpont Group, Inc. was organized in July 1989 to provide services for The
Pierpont Family of Funds, and the Trustees are the equal and sole shareholders
of Pierpont Group, Inc. The Trust and the Portfolios have agreed to pay Pierpont
Group, Inc. a fee in an amount representing its reasonable costs in performing
these services to the Trust, the Portfolios and certain other registered
investment companies subject to similar agreements with Pierpont Group, Inc.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
31
<PAGE>
These costs are periodically reviewed by the Trustees. The principal offices of
Pierpont Group, Inc. are located at 461 Fifth Avenue, New York, NY 10017.
The aggregate fees paid to Pierpont Group, Inc. by each Fund and its
corresponding Portfolio during the indicated fiscal years are set forth below:
TAX EXEMPT BOND FUND -- For the fiscal years ended August 31, 1995, 1996 and
1997: $3,602, $4,527 and $5,670, respectively.
THE TAX EXEMPT BOND PORTFOLIO -- For the fiscal years ended August 31, 1995,
1996 and 1997: $38,804, $24,602 and $18,912, respectively.
INTERNATIONAL BOND FUND -- For the period December 1, 1994 (commencement of
operations) through September 30, 1995 and for the fiscal years ended September
30, 1996 and 1997: $232, $304 and $214, respectively.
THE NON-U.S. FIXED INCOME PORTFOLIO -- For the period October 11, 1994
(commencement of operations) through September 30, 1995 and for the fiscal years
ended September 30, 1996 and 1997: $20,446, $11,488 and $6,587, respectively.
OFFICERS
The Trust's and Portfolios' executive officers (listed below), other
than the Chief Executive Officer, are provided and compensated by Funds
Distributor, Inc. ("FDI"), a wholly owned indirect subsidiary of Boston
Institutional Group, Inc. The officers conduct and supervise the business
operations of the Trust and the 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
and each Portfolio. The business address of each of the officers unless
otherwise noted is Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts
02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
32
<PAGE>
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. His date of
birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Non-U.S. Fixed Income 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, BWI. Her
date of birth is March 24, 1942.
RICHARD W. INGRAM; President and Treasurer. Executive Vice President
and Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director -Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant Vice
President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity Funds,
Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a senior paralegal at The Boston Company Advisors, Inc.
("TBCA"). Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse Investors Cash Management Fund, Inc. and certain investment
companies advised or administered by Harris or its affiliates. From April 1994
to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From
1992 to 1994, Mr. Kelley was employed by Putnam Investments in legal and
compliance capacities. His date of birth is December 24, 1964.
LENORE J. MCCABE; Assistant Secretary and Assistant Treasurer of the Non-
U.S. Fixed Income 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, BWI. Her date of birth is May 31, 1961.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
33
<PAGE>
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors
Cash Management Fund, Inc. and certain investment companies advised or
administered by Dreyfus or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.
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 Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
INVESTMENT ADVISOR
The Advisor, a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan"), is 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.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
34
<PAGE>
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 advisor, 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. In
addition, the investment management divisions employ approximately 300 capital
market researchers, portfolio managers and traders. The Advisor's fixed income
investment process is based on analysis of real rates, sector diversification,
and quantitative and credit analysis.
The investment advisory services the Advisor provides to the 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 benchmarks for the Portfolios in which the Funds
invest are currently: The Tax Exempt Bond Portfolio--Lehman Brothers 1-16 Year
Municipal Bond Index; The Non-U.S. Fixed Income Portfolio--Salomon Brothers
Non-U.S. World Government Bond Index (currency hedged).
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
35
<PAGE>
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.
TAX EXEMPT BOND: 0.30%
NON-U.S. FIXED INCOME: 0.35%
The table below sets forth for each Fund listed the advisory fees paid
by its corresponding Portfolio to the Advisor for the fiscal periods indicated.
See the Prospectus and below for applicable expense limitations.
THE TAX EXEMPT BOND PORTFOLIO (Tax Exempt Bond Fund) -- For the fiscal years
ended August 31, 1995, 1996 and 1997: $1,178,720, $1,354,145 and $1,620,498,
respectively.
THE NON-U.S. FIXED INCOME PORTFOLIO (International Bond Fund) -- For the period
April 11, 1994 (commencement of operations) through September 30, 1995 and for
the fiscal years ended September 30, 1996 and 1997: $782,748, $737,543 and
$650,545, respectively.
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
36
<PAGE>
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 and administrative 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.
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
37
<PAGE>
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.
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 certain other
investment companies subject to similar agreements with FDI.
The table below sets forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to FDI for the fiscal periods indicated.
See the Prospectus and below for applicable expense limitations.
TAX EXEMPT BOND FUND -- For the period August 1, 1996 through August 31, 1996:
$370. For the fiscal year ended August 31, 1997: $5,376.
THE TAX EXEMPT BOND PORTFOLIO -- For the period August 1, 1996 through
August 31, 1996: $920. For the fiscal year ended August 31, 1997: $10,663.
INTERNATIONAL BOND FUND -- For the period August 1, 1996 through September 30,
1996: $80. For the fiscal year ended September 30, 1997: $177.
THE NON-U.S. FIXED INCOME PORTFOLIO -- For the period August 1, 1996 through
September 30, 1996: $738. For the fiscal year ended September 30, 1997: $4,505.
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. See the Prospectus and below for
applicable expense limitations.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
38
<PAGE>
TAX EXEMPT BOND FUND -- For the fiscal year ended August 31, 1995 and for the
period September 1, 1995 through July 31, 1996: $10,309 and $12,887,
respectively.
THE TAX EXEMPT BOND PORTFOLIO -- For the fiscal year ended August 31, 1995 and
for the period September 1, 1995 through July 31, 1996: $28,290 and $43,154,
respectively.
INTERNATIONAL BOND FUND -- For the period December 1, 1994 (commencement of
operations) through September 30, 1995: $460. For the period October 1, 1995
through July 31, 1996: $689.
THE NON-U.S. FIXED INCOME PORTFOLIO -- For the period October 11, 1994
(commencement of operations) through September 30, 1995: $13,862. For the
period October 1, 1995 through July 31, 1996: $18,964.
SERVICES AGENT
The Trust, on behalf of each Fund, and the Portfolios have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan,
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, each of the Funds and the Portfolios has
agreed to pay Morgan fees equal to its allocable share of an annual complex-wide
charge. This charge is calculated daily based on the aggregate net assets of the
Master Portfolios and 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 aggregate 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 prior administrative services agreements in effect from December
29, 1995 through July 31, 1996, with Morgan, the Funds and their corresponding
Portfolios 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' aggregate average daily net assets
in excess of $7 billion. Prior to December 29, 1995, the Trust and the
Portfolios 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.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
39
<PAGE>
The table below sets forth for each Fund listed and its corresponding
Portfolio the fees paid to Morgan, net of fee waivers and reimbursements, as
Services Agent. See the Prospectus and below for applicable expense limitations.
TAX EXEMPT BOND FUND -- For the fiscal years ended August 31, 1995, 1996 and
1997: $(61,012)*, $16,596 and $51,270, respectively.
THE TAX EXEMPT BOND PORTFOLIO -- For the fiscal years ended August 31, 1995,
1996 and 1997: $189,892, $80,281 and $169,209, respectively.
THE INTERNATIONAL BOND FUND -- For the period December 1, 1994 (commencement of
operations) through September 30, 1995 and for the fiscal years ended September
30, 1996 and 1997: $(46,217)*, $1,729 and $1,669, respectively.
THE NON-U.S. FIXED INCOME PORTFOLIO -- For the period October 11, 1994
(commencement of operations) through September 30, 1995 and for the fiscal years
ended September 30, 1996 and 1997: $156,367, $37,344 and $57,815, respectively.
(*) 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's transfer and
dividend disbursing agent. Pursuant to the Custodian Contracts, State Street is
responsible for maintaining the books of account and records of portfolio trans
actions and holding portfolio securities and cash. In addition, the Custodian
has entered into a subcustodian agreement on behalf of The Tax Exempt Bond
Portfolio 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
40
<PAGE>
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; monitoring the activities of the Fund's transfer agent; and providing
other related services.
Under the Shareholder Servicing Agreement, each Fund has agreed to pay
Morgan for these services a fee at the following annual rates (expressed as a
percentage of the average daily net asset values of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent): Tax
Exempt Bond Fund, 0.075%; International Bond Fund, 0.10% 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. See the Prospectus and below
for applicable expense limitations.
TAX EXEMPT BOND FUND -- For the fiscal years ended August 31, 1995, 1996 and
1997: $19,310, $59,743 and $122,850, respectively.
INTERNATIONAL BOND FUND -- For the period December 1, 1994 (commencement of
operations) through September 30, 1995 and for the fiscal years ended September
30, 1996 and 1997: $1,412, $6,684 and $5,328, respectively.
As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing administrative services to the 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 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.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
41
<PAGE>
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 a Fund or
Morgan.
The Funds have authorized one or more brokers to accept purchase and
redemption orders on their behalf. Such brokers are authorized to designate
other intermediaries to accept purchase and redemption orders on a Fund's
behalf. Each 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 a 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
of the Fund's and the Portfolio's federal and state income tax returns and
consults with the Funds and the Portfolios as to matters of accounting and
federal and state income taxation.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
42
<PAGE>
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 expenses, insurance costs,
the compensation and expenses of the Trustees, costs associated with the
registration 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 Portfolios and the usual and customary expenses described above
(excluding organization and extraordinary expenses, custodian fees and brokerage
expenses).
PURCHASE OF SHARES
Investors may open Fund accounts and purchase shares as described in
the Prospectus. 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 charge the investor a
fee for this service and other services it provides to its customers.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
43
<PAGE>
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus.
Accordingly, a redemption request might result in payment of a dollar amount
which differs from the number of shares redeemed. See "Net Asset Value" below.
If the Trust, on behalf of a Fund, and its corresponding Portfolio
determine that it would be detrimental to the best interest of the remaining
shareholders of a Fund to make payment wholly or partly in cash, payment of the
redemption price may be made in whole or in part by a distribution in kind of
securities from the Portfolio, in lieu of cash, in conformity with the
applicable rule of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur transaction costs in converting the assets into cash.
The method of valuing portfolio securities is described under "Net Asset Value,"
and such valuation will be made as of the same time the redemption price is
determined. The Trust, on behalf of 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 the corresponding Portfolios are obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
asset value of the Fund during any 90 day period for any one shareholder. The
Trust will redeem Fund shares in kind only if it has received a redemption in
kind from the corresponding Portfolio and therefore shareholders of the Fund
that receive redemptions in kind will receive securities of the Portfolio. The
Portfolios have advised the Trust that the Portfolios will not redeem in kind
except in circumstances in which a Fund is permitted to redeem in kind.
FURTHER REDEMPTION INFORMATION. The Trust, on behalf of a Fund, and the
Portfolios reserve the right to suspend the right of redemption and to postpone
the date of payment upon redemption as follows: (i) for up to seven days, (ii)
during periods when the New York Stock Exchange is closed for other than
weekends and holidays or when trading on such Exchange is restricted as
determined by the SEC by rule or regulation, (iii) during periods in which an
emergency, as determined by the SEC, exists that causes disposal by the
Portfolio of, or evaluation of the net asset value of, its portfolio securities
to be unreasonable or impracticable, or (iv) for such other periods as the SEC
may permit.
EXCHANGE OF SHARES
An investor may exchange shares from any Fund into any other J.P.
Morgan Institutional Fund, J.P. Morgan Fund, or shares of J.P. Morgan Series
Trust as described in the Prospectus. For complete information, the Prospectus
as it relates to the Fund into which a transfer is being made should be read
prior to the transfer. Requests for exchange are made in the same manner as
requests for redemptions. See "Redemption of Shares." Shares of the Fund to be
acquired are purchased for settlement when the proceeds from redemption become
available. In the case of investors in certain states, state securities laws may
restrict the availability of the exchange privilege. The Trust reserves the
right to discontinue, alter or limit the exchange privilege at any time.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
44
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays dividends and distributions as described in
the Prospectus.
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 as described 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, Columbus Day, Veterans 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 sales 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
45
<PAGE>
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 4:00pm) 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 the exchange on which they are traded closes and the time when a
Portfolio's net asset value is calculated, such securities will be valued at
fair value in accordance with procedures established by and under the general
supervision of the Trustees.
PERFORMANCE DATA
From time to time, the Funds may quote performance in terms of yield,
actual distributions, total return or capital appreciation in reports, sales
literature and advertisements published by the Trust. Current performance
information for the Funds may be obtained by calling the number provided on the
cover page of this Statement of Additional Information.
As required by regulations of the SEC, the annualized yield for the
Funds is computed by dividing each Fund's net investment income per share earned
during a 30-day period by the net asset value on the last day of the period. The
average daily number of shares outstanding during the period that are eligible
to receive dividends is used in determining the net investment income per share.
Income is computed by totaling the interest earned on all debt obligations
during the period and subtracting from that amount the total of all recurring
expenses incurred during the period. The 30-day yield is then annualized on a
bond-equivalent basis assuming semi-annual reinvestment and compounding of net
investment income, as described under "Additional Information" in the
Prospectus.
Below is set forth historical yield information for the periods
indicated:
TAX EXEMPT BOND FUND (12/31/97): 30-day yield: %; 30-day tax equivalent yield
at 39.6% tax rate: %.
INTERNATIONAL BOND FUND (12/31/97): 30-day yield: %.
TOTAL RETURN QUOTATIONS. As required by regulations of the SEC, the
annualized total return of a Fund for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Fund over the period are reinvested. It is
then assumed that at the end of the period, the entire amount is redeemed. The
annualized total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
46
<PAGE>
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Historical performance information for the period or portion thereof
prior to the establishment of the Tax Exempt Bond Fund will be that of its
corresponding predecessor J.P. Morgan Fund, as permitted by applicable SEC staff
interpretations, since the J.P. Morgan Fund commenced operations before the
corresponding J.P. Morgan Institutional Fund.
Below is set forth historical return information for the Funds for the
periods indicated:
TAX EXEMPT BOND FUND (12/31/97): Average annual total return, 1 year: %;
average annual total return, 5 years: %; average annual total return, 10 years:
%; aggregate total return, 1 year: %; aggregate total return, 5 years: %;
aggregate total return, 10 years: %.
INTERNATIONAL BOND FUND (12/31/97): Average annual total return, 1 year: %;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations (December 1, 1994) to period end: %; aggregate total
return, 1 year: %; aggregate total return, 5 years: N/A; aggregate total return
commencement of operations (December 1, 1994) to period end: %.
GENERAL. A Fund's performance will vary from time to time depending
upon market conditions, the composition of its corresponding Portfolio, and its
operating expenses. Consequently, any given performance quotation should not be
considered representative of a Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in a Fund with certain bank deposits or
other investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising the Funds' shares, including appropriate market indices including
the benchmarks indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
47
<PAGE>
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 the 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 the Portfolios. See "Investment Objectives and Policies."
Fixed income, debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions will be undertaken principally to accomplish a
Portfolio's objective in relation to expected movements in the general level of
interest rates. The Portfolios may engage in short-term trading consistent with
their objectives. See "Investment Objectives and Policies -- Portfolio
Turnover".
In connection with portfolio transactions for the Portfolios, the
Advisor intends to seek the best price and execution on a competitive basis for
both of purchase and sales of securities.
Subject to the overriding objective of obtaining the best possible
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
48
<PAGE>
"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", and the Funds'
names changed accordingly.
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
49
<PAGE>
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 a Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of a 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 have been authorized and 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
50
<PAGE>
rights and are fully paid and nonassessable. The rights of redemption and
exchange are described in the Prospectus and elsewhere in this Statement of
Additional Information.
The shareholders of the Trust are entitled to a full vote for each full
share held and to a fractional vote for each fractional share. Subject to the
1940 Act, the Trustees themselves have the power to alter the number and the
terms of office of the Trustees, to lengthen their own terms, or to make their
terms of unlimited duration subject to certain removal procedures, and appoint
their own successors, PROVIDED, HOWEVER, that immediately after such appointment
the requisite majority of the Trustees have been elected by the shareholders of
the Trust. The voting rights of shareholders are not cumulative so that holders
of more than 50% of the shares voting can, if they choose, elect all Trustees
being selected while the shareholders of the remaining shares would be unable to
elect any Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for action
by shareholder vote as may be required by either the 1940 Act or the Trust's
Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of more than two-thirds of its outstanding shares, to remove a
Trustee. The Trustees will call a meeting of shareholders to vote on removal of
a Trustee upon the written request of the record holders of 10% of the Trust's
shares. In addition, whenever ten or more shareholders of record who have been
such for at least six months preceding the date of application, and who hold in
the aggregate either shares having a net asset value of at least $25,000 or at
least 1% of the Trust's outstanding shares, whichever is less, shall apply to
the Trustees in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting for the
purpose of voting upon the question of removal of any Trustee or Trustees and
accompanied by a form of communication and request which they wish to transmit,
the Trustees shall within five business days after receipt of such application
either: (1) afford to such 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.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
51
<PAGE>
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.
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 the Funds:
Tax Exempt Bond Fund--
International Bond Fund--
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 of the Funds is a separate 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. Generally,
when a Master Portfolio seeks a vote to change its investment objective, its
feeder fund(s) will hold a shareholder meeting and cast its vote
proportionately,
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
52
<PAGE>
as instructed by its shareholders. Fund shareholders are entitled to one vote
per fund share.
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 a 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 a Portfolio is available from Morgan at (800) 766-7722.
The Trust may withdraw the investment of the Fund from the Portfolio at
any time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same
investment objective and restrictions in accordance with the investment policies
with respect to the Portfolio described above and in the Fund's Prospectus.
Certain changes in the Portfolio's investment objective, policies or
restrictions, or a failure by the Fund's shareholders to approve a change in the
portfolio's investment objective or restrictions, may require withdrawal of the
Fund's interest in the Portfolio. Any such withdrawal could result in a
distribution in kind of portfolio securities (as opposed to a cash distribution)
from the Portfolio which may or may not be readily marketable. The distribution
in kind may result in the Fund having a less diversified portfolio of
investments or adversely affect the Fund's liquidity, and the Fund could incur
brokerage, tax or other charges in converting the securities to cash.
Notwithstanding the above, there are other means for meeting shareholder
redemption requests, such as borrowing.
Smaller funds investing in the Portfolio may be materially affected by
the actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may subsequently
experience higher pro rata operating expenses, thereby producing lower returns.
Additionally, because the Portfolio would become smaller, it may become
less diversified, resulting in potentially increased portfolio risk (however,
these possibilities also exist for traditionally structured funds which have
large or institutional investors who may withdraw from a fund). Also funds with
a greater pro rata wnership 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
53
<PAGE>
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
affect 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; (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.
The Tax Exempt Bond Fund intends to qualify to pay exempt-interest
dividends to its shareholders by having, at the close of each quarter of its
taxable years, at least 50% of the value of their respective total assets
consist of tax exempt securities. An exempt-interest dividend is that part of
dividend distributions made by the Fund which is properly designated as
consisting of interest received by the Fund on tax exempt securities.
Shareholders will not incur any federal income tax on the amount of
exempt-interest dividends received by them from the Fund, other than the
alternative minimum tax under certain
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
54
<PAGE>
circumstances. In view of the Tax Exempt Bond Fund's investment policies, it is
expected that a substantial portion of all dividends will be exempt-interest
dividends, although the Fund may from time to time realize and distribute net
short-term capital gains and may invest limited amounts in taxable securities
under certain circumstances. See "Investment Objective(s) and Policies" in the
Prospectus.
Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital loss
(other than exempt interest dividends) are generally taxable to shareholders of
the Funds as ordinary income whether such distributions are taken in cash or
reinvested in additional shares. Distributions to corporate shareholders of the
Funds are not eligible for a dividends received deduction. The International
Bond Fund pays a monthly dividend. If dividend payments exceed income earned by
the Fund, the excess distribution would be considered a return of capital rather
than a dividend payment. The Fund intends 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 the 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 such shareholders have held their shares in the Fund. See the Prospectus
for a discussion of the federal income tax treatment of any gain or loss
realized on the redemption or exchange of a Fund's shares. Additionally, any
loss realized on a redemption or exchange of shares of a Fund will be disallowed
to the extent the shares disposed of are replaced within a period of 61 days
beginning 30 days before such disposition, such as pursuant to reinvestment of a
dividend in shares of the Fund.
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
55
<PAGE>
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
56
<PAGE>
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.
FOREIGN SHAREHOLDERS. Dividends of net investment income and
distributions of realized net short-term gain in excess of net long-term loss to
a shareholder who, as to the United States, is a nonresident alien individual,
fiduciary of a foreign trust or estate, foreign corporation or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax at
the rate of 30% (or lower treaty rate) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions treated
as long term capital gains to foreign shareholders will not be subject to U.S.
tax unless the distributions are effectively connected with the shareholder's
trade or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder was present in the United States
for more than 182 days during the taxable year and certain other conditions are
met.
In the case of a foreign shareholder who is a nonresident alien
individual or foreign entity, 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 included 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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
57
<PAGE>
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.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
58
<PAGE>
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 Eligible Institutions as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's Registration Statement
filed with the SEC under the 1933 Act and the Trust's and the Portfolios'
Registration Statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The Registration
Statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the 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\0198fix.pea\tebibsai.doc
59
<PAGE>
FINANCIAL STATEMENTS
The following financial statements and the report thereon of Price
Waterhouse LLP of each Fund 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. The following financial reports are
available without charge upon request by calling J.P. Morgan Funds Services at
(800) 766-7722. Each Fund's financial statements include the financial
statements of its corresponding Portfolio.
<TABLE>
<CAPTION>
Date of Annual Report;
Date Annual Report Filed;
and Accession Number
Name of Fund
- -------------------------------------------------------------------------- ------------------------------------------
<S> <C>
J.P. Morgan Institutional Tax Exempt Bond Fund 08/31/97;
11/03/97;
0001047469-97-002373
J.P. Morgan Institutional International Bond
Fund 09/30/97;
12/09/97;
000104769-97-007194
- -------------------------------------------------------------------------- ------------------------------------------
</TABLE>
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
60
<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 exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
Appendix-1
<PAGE>
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
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
Appendix-2
<PAGE>
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.
i:\dsfndlgl\institut\0198fix.pea\tebibsai.doc
Appendix-3
<PAGE>
MARCH 2, 1998 PROSPECTUS
J.P. MORGAN INSTITUTIONAL NEW YORK
TOTAL RETURN BOND FUND
---------------------------
Seeking high total return
by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense to state or suggest otherwise.
Distributed by Funds Distributor, Inc. JPMORGAN
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
2
- ---
FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process. . . . . . . . . . . . . . . . . . . . . 2
4
- ---
The fund's goal, investment approach, risks, expenses, performance, and
financial highlights
J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
- ---
Investing in the J.P. Morgan Institutional New York Total Return Bond Fund
YOUR INVESTMENT
Investing through a financial professional . . . . . . . . . . . . . . . 6
Investing directly . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Opening your account . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Adding to your account . . . . . . . . . . . . . . . . . . . . . . . . . 6
Selling shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Account and transaction policies . . . . . . . . . . . . . . . . . . . . 7
Dividends and distributions. . . . . . . . . . . . . . . . . . . . . . . 8
Tax considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
9
- ---
More about risk and the fund's business operations
FUND DETAILS
Master/feeder structure. . . . . . . . . . . . . . . . . . . . . . . . . 9
Management and administration. . . . . . . . . . . . . . . . . . . . . . 9
Risk and reward elements . . . . . . . . . . . . . . . . . . . . . . . . 10
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . back cover
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
This fund invests primarily in bonds and other fixed income securities through a
master portfolio (another fund with the same goal). The fund seeks high total
return consistent with moderate risk.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
- - want to add an income investment to further diversify a portfolio
- - want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
- - want an investment that pays monthly dividends
- - are seeking income that is exempt from federal, state and local personal
income taxes in New York
The fund is NOT designed for investors who:
- - are investing for aggressive long-term growth
- - require stability of principal
- - are investing through a tax-deferred account such as an IRA
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $250 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
BEFORE YOU INVEST
Investors considering the fund should understand that:
- - The value of the fund's shares will fluctuate over time. You could lose
money if you sell when the fund's share price is lower than when you
invested.
- - There is no assurance that the fund will meet its investment goal.
- - Future returns will not necessarily resemble past performance.
- - The fund invests a portion of assets in non-investment-grade bonds ("junk
bonds"), which offer higher potential yields but have a higher risk of
default and are more sensitive to market risk than investment-grade bonds.
1
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
The J.P. Morgan Institutional New York Total Return Bond Fund invests primarily
in bonds and other fixed income securities.
The fund's investment philosophy, developed by its advisor, emphasizes the
potential for consistently enhancing performance while managing risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the depth of its
global fixed-income research and the sophistication of its analytical systems.
Using a team-oriented approach, J.P. Morgan seeks to gain insights in a broad
range of distinct areas and takes positions in many different ones, helping the
fund to limit exposure to concentrated sources of risk.
In managing the fund, J.P. Morgan employs a three-step process that combines
sector allocation, fundamental research for identifying portfolio securities,
and duration management.
SECTOR ALLOCATION The sector allocation team meets monthly, analyzing the
fundamentals of a very broad range of sectors. The team seeks to enhance
performance and manage risk by underweighting or overweighting sectors.
[GRAPHIC]
The fund invests across a range of different types of securities
SECURITY SELECTION Relying on the insights of different specialists, including
credit analysts, quantitative researchers, and dedicated fixed income traders,
the portfolio managers make buy and sell decisions according to the fund's goal
and strategy.
[GRAPHIC]
The fund makes its portfolio decisions as described later in this prospectus
DURATION MANAGEMENT Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish the fund's exposure to interest rate risk (a
goal of duration management), typically remaining relatively close to the
duration of the market as a whole, as represented by the fund's benchmark. The
strategists closely monitor the fund and make tactical adjustments as necessary.
[GRAPHIC]
J.P. Morgan uses a disciplined process to control the fund's sensitivity to
interest rates
2 FIXED INCOME MANAGEMENT APPROACH
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
3
<PAGE>
J.P. MORGAN INSTITUTIONAL NEW YORK
TOTAL RETURN BOND FUND TICKER SYMBOL: JPNTX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND)
[GRAPHIC]
GOAL
The fund seeks to provide high after-tax total return for New York residents
consistent with moderate risk of capital.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests primarily in New York municipal securities whose income is free
from federal, state, and New York City personal income taxes for New York
residents. Because the fund's goal is high after-tax total return rather than
high tax-exempt income, the fund may invest to a limited extent in securities of
other states or territories. To the extent that the fund invests in municipal
securities of other states, the income from such securities would be free from
federal personal income taxes for New York residents but would be subject to New
York state and New York City personal income taxes. For non-New York residents,
the income from New York municipal securities is free from federal personal
income taxes only. The fund may also invest in taxable securities. The fund's
securities may be of any maturity, but under normal market conditions the fund's
duration will generally range between three and seven years, similar to that of
the Lehman Brothers 1-16 Year Municipal Bond Index. At least 90% of assets must
be invested in securities that, at the time of purchase, are rated investment-
grade (BBB/Baa or better) or are the unrated equivalent. No more than 10% of
assets may be invested in securities as low as B.
[GRAPHIC]
POTENTIAL RISKS AND REWARDS
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 2. Because most of the fund's investments will typically be
from issuers in the State of New York, its performance will be affected by the
fiscal and economic health of that state and its municipalities. The fund may
invest more than 5% of assets in a single issuer, which could further
concentrate its risks. To the extent that the fund seeks higher returns by
investing in non-investment-grade bonds, it takes on additional risks, since
these bonds are more sensitive to economic news and their issuers have a less
secure financial condition. A portion of the fund's returns may be subject to
federal, state, or local tax, or the alternative minimum tax.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on pages 10-13.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $250
billion, including more than $8 billion using the same strategy as this fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
has been at J.P. Morgan since 1987, and by Elaine B. Young, vice president, who
joined J.P. Morgan from Scudder, Stevens & Clark, Inc. in 1994 where she was a
municipal bond trader and fixed income portfolio manager. Both have been on the
team since June of 1997.
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund are
shown at right. The fund has no sales, redemption, exchange, or account fees,
although some institutions may charge you a fee for shares you buy through them.
The annual fund expenses shown are deducted from fund assets prior to
performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES(1) (%)
<S> <C>
Management fees (actual) 0.30
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.20
- ------------------------------------------------------
TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 0.50
- ------------------------------------------------------
</TABLE>
EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
YOUR COST($) 5 16 28 63
- ---------------------------------------------------------------------
</TABLE>
4 J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for periods ended December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
1 yr. 3 yrs. Since inception(3)
<S> <C> <C> <C>
J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
(after expenses) 7.68 8.32 6.90
- -------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BOND INDEX(4) (no expenses) 8.16 9.19 7.55
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR-BY-YEAR TOTAL RETURN (%) Shows changes in returns by calendar year
- -------------------------------------------------------------------------------------------------------------------------
[GRAPH]
1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND 13.28 4.21 7.68
- -------------------------------------------------------------------------------------------------------------------------
Municipal Bond Index(4) 14.69 4.93 8.16
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA For fiscal periods ended
- -------------------------------------------------------------------------------------------------------------------------
3/31/95(3) 3/31/96 3/31/97 9/30/97(5)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ($) 10.00 10.11 10.34 10.31
- -------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.42 0.49 0.48 0.24
Net realized and unrealized gain (loss) on investment ($) 0.11 0.25 (0.02) 0.33
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS ($) 0.53 0.74 0.46 0.57
- -------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.42) (0.49) (0.48) (0.24)
Net realized gain ($) -- (0.02) (0.01) --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS ($) (0.42) (0.51) (0.49) (0.24)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ($) 10.11 10.34 10.31 10.64
- -------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 5.49(6) 7.40 4.54 5.62(6)
- -------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($ thousands) 20,621 47,926 90,792 101,693
- -------------------------------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
- -------------------------------------------------------------------------------------------------------------------------
EXPENSES (%) 0.50(7) 0.50 0.50 0.50(7)
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (%) 4.65(7) 4.67 4.70 4.64(7)
- -------------------------------------------------------------------------------------------------------------------------
DECREASE REFLECTED IN EXPENSE RATIO DUE TO
EXPENSE REIMBURSEMENT (%) 0.55(7) 0.17 0.14 0.07(7)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Financial Highlights above, except for the six months ended 9/30/97, have
been audited by Price Waterhouse LLP, the fund's independent accountants.
(1) The fund has a master/feeder structure as described on page 9. This table
shows the fund's expenses and its share of master portfolio expenses for
the fiscal year ended 3/31/97, expressed as a percentage of the fund's
average net assets and reflecting reimbursement for ordinary expenses over
0.50%.
(2) Without reimbursement, other expenses and total operating expenses for the
fiscal year ended 3/31/97 would have been 0.34% and 0.64%, respectively.
There is no guarantee that reimbursement will continue beyond 7/31/98.
(3) The fund commenced operations on 4/11/94. Except in the Financial
Highlights, returns reflect performance of the fund from 4/30/94.
(4) The Municipal Bond Index is composed of the Lehman Brothers New York 1-15
Year Municipal Bond Index, consisting of New York general obligation and
revenue bonds with maturities of 1-15 years, from 4/11/94 through 4/30/97,
and the Lehman Brothers 1-16 Year Municipal Bond Index, consisting of
general obligation and revenue bonds with maturities of 1-16 years, from
5/1/97 forward. Both are unmanaged indices that measure municipal bond
market performance.
(5) The Financial Highlights for the six months ended 9/30/97 are unaudited.
(6) Not annualized.
(7) Annualized.
J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
- - Determine the amount you are investing. The minimum amount for initial
investments is $5,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on
minimum investments, call 1-800-766-7722.
- - Complete the application, indicating how much of your investment you want
to allocate to which fund(s). Please apply now for any account privileges
you may want to use in the future, in order to avoid the delays associated
with adding them later on.
- - Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING YOUR ACCOUNT
BY WIRE
- - Mail your completed application to the Shareholder Services Agent.
- - Call the Shareholder Services Agent to obtain an account number and to
place a purchase order. FUNDS THAT ARE WIRED WITHOUT A PURCHASE ORDER WILL
BE RETURNED UNINVESTED.
- - After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York
ROUTING NUMBER: 021-000-238
CREDIT: J.P. Morgan Institutional Funds
ACCOUNT NUMBER: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
BY CHECK
- - Make out a check for the investment amount payable
to J.P. Morgan Institutional Funds.
- - Mail the check with your completed application to
the Shareholder Services Agent.
BY EXCHANGE
- - Call the Shareholder Services Agent for an exchange.
ADDING TO YOUR ACCOUNT
BY WIRE
- - Call the Shareholder Services Agent to place a purchase order. FUNDS THAT
ARE WIRED WITHOUT A PURCHASE ORDER WILL BE RETURNED UNINVESTED.
- - Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
BY CHECK
- - Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
- - Mail the check with a completed investment slip to the Shareholder Services
Agent. If you do not have an investment slip, attach a note indicating your
account number and how much you wish to invest in which fund(s).
BY EXCHANGE
- - Call the Shareholder Services Agent for an exchange.
6 YOUR INVESTMENT
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHARES
BY PHONE -- WIRE PAYMENT
- - Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can
help you add it.
- - Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your
fund account.
BY PHONE -- CHECK PAYMENT
- - Call the Shareholder Services Agent and place your request. Once your
request has been verified, a check for the net amount, payable to the
registered owner(s), will be mailed to the address of record. For checks
payable to any other party or mailed to any other address, please make your
request in writing (see below).
IN WRITING
- - Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the
fund name; the amount you want to sell; and the recipient's name and
address or wire information, if different from those of the account
registration.
- - Indicate whether you want the proceeds sent by check or by wire.
- - Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
- - Mail the letter to the Shareholder Services Agent.
BY EXCHANGE
- - Call the Shareholder Services Agent for an exchange.
ACCOUNT AND TRANSACTION POLICIES
TELEPHONE ORDERS The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
EXCHANGES You may exchange shares in this fund for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time).
TIMING OF ORDERS Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES AGENT
J.P. MORGAN FUNDS SERVICES
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available 8:00 a.m.
to 5:00 p.m. eastern time on fund
business days.
YOUR INVESTMENT 7
<PAGE>
TIMING OF SETTLEMENTS When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
STATEMENTS AND REPORTS The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
ACCOUNTS WITH BELOW-MINIMUM BALANCES If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically declares income dividends daily and pays them monthly. If an
investor's shares are redeemed during the month, accrued but unpaid dividends
are paid with the redemption proceeds. Shares of the fund earn dividends on the
business day the purchase is effective, but not on the business day the
redemption is effective. The fund distributes capital gains, if any, once a
year. However, the fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities:
- --------------------------------------------------------------------------------
TRANSACTION TAX STATUS
- --------------------------------------------------------------------------------
Income dividends Exempt from federal, state, and New York
City personal income taxes for New York
residents only
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
8 YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
MASTER/FEEDER STRUCTURE
As noted earlier, the fund is a "feeder" fund that invests in a master
portfolio. (Except where indicated, this prospectus uses the term "the fund" to
mean the feeder fund and its master portfolio taken together.)
The master portfolio accepts investments from other feeder funds, and the
feeders bear the master portfolio's expenses in proportion to their assets.
However, each feeder can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder could offer access to
the same master portfolio on more attractive terms, or could experience better
performance, than another feeder. Information about other feeders is available
by calling 1-800-766-7722. Generally, when the master portfolio seeks a vote,
the funds will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
The fund and its master portfolio expect to maintain consistent goals, but if
they do not, the fund will withdraw from the master portfolio, receiving its
assets either in cash or securities. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
MANAGEMENT AND ADMINISTRATION
The fund and its master portfolio are governed by the same trustees. The
trustees are responsible for overseeing all business activities. The trustees
are assisted by Pierpont Group, Inc., which they own and operate on a cost
basis; costs are shared by all funds governed by these trustees. Funds
Distributor, Inc., as co-administrator, along with J.P. Morgan, provides fund
officers. J.P. Morgan, as co-administrator, oversees the fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
- --------------------------------------------------------------------------------
ADVISORY SERVICES 0.30% of the master portfolio's
average net assets
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion in J.P. Morgan-
advised portfolios, plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.075% of the fund's average net assets
- --------------------------------------------------------------------------------
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
FUND DETAILS 9
<PAGE>
- --------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 4). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MARKET CONDITIONS
- - The fund's share price, - Bonds have generally - Under normal circumstances the fund
yield, and total return outperformed money market plans to remain fully invested in bonds
will fluctuate in response investments over the and other fixed income securities as
to bond market movements long term, with less risk noted in the table on pages 12-13
than stocks
- - The value of most bonds will - The fund seeks to limit risk and enhance
fall when interest rates rise; - Most bonds will rise in value yields through careful management, sector
the longer a bond's maturity when interest rates fall allocation, individual securities
and the lower its credit selection, and duration management
quality, the more its value - Mortgage-backed and
typically falls asset-backed securities can - During severe market downturns, the fund
offer attractive returns has the option of investing up to 100%
- - Mortgage-backed and of assets in investment-grade short-term
asset-backed securities securities
(securities representing
an interest in, or secured - J.P. Morgan monitors interest rate trends,
by, a pool of mortgages or as well as geographic and demographic
other assets such as information related to mortgage-backed
receivables) could generate securities and mortgage prepayments
capital losses or periods of
low yields if they are paid
off substantially earlier or
later than anticipated
- ------------------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
- - The fund could underperform - The fund could outperform its - J.P. Morgan focuses its active management
its benchmark due to its benchmark due to these same on those areas where it believes its
sector, securities, or choices commitment to research can most enhance
duration choices returns and manage risks in a consistent
way
- ------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY
- - The default of an issuer - Investment-grade bonds have - The fund maintains its own policies for
would leave the fund with a lower risk of default balancing credit quality against potential
unpaid interest or principal yields and gains in light of its investment
- Junk bonds offer higher yields goals
- - Junk bonds (those rated and higher potential gains
BB/Ba or lower) have a - J.P. Morgan develops its own ratings of
higher risk of default unrated securities and makes a credit
quality determination for unrated securities.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
10 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DERIVATIVES
- - Derivatives such as futures - Hedges that correlate well with - The fund uses derivatives for hedging
and options that are used underlying positions can reduce and for risk management (i.e., to
for hedging the portfolio or eliminate losses at low cost adjust duration or to establish or
or specific securities may adjust exposure to particular securities,
not fully offset the - The fund could make money and markets, or currencies); risk management
underlying positions(1) protect against losses if may include management of the fund's
management's analysis proves exposure relative to its benchmark
- - Derivatives used for risk correct
management may not have the - The fund only establishes hedges that
intended effects and may - Derivatives that involve it expects will be highly correlated
result in losses or missed leverage could generate with underlying positions
opportunities substantial gains at low cost
- While the fund may use derivatives
- - Derivatives that involve that incidentally involve leverage,
leverage could magnify losses it does not use them for the specific
purpose of leveraging the portfolio
- ------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have - These holdings may offer more - The fund may not invest more than 15%
difficulty valuing these attractive yields or potential of net assets in illiquid holdings
holdings precisely growth than comparable widely
traded securities - To maintain adequate liquidity to meet
- - The fund could be unable to redemptions, the fund may hold
sell these holdings at the investment-grade short-term securities
time or price desired (including repurchase agreements) and,
for temporary or extraordinary purposes,
may borrow from banks up to 33 1/3% of
the value of its total assets
- ------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys securities - The fund can take advantage - The fund uses segregated accounts
before issue or for delayed of attractive transaction to offset leverage risk
delivery, it could be exposed opportunities
to leverage risk if it does
not use segregated accounts
- ------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
- - Increased trading would raise - The fund could realize gains - The fund anticipates a portfolio
the fund's transaction costs in a short period of time turnover rate of approximately 75%
- - Increased short-term capital - The fund could protect against - The fund generally avoids short-term
gains distributions would losses if a bond is overvalued trading, except to take advantage of
raise shareholders' income and its value later falls attractive or unexpected opportunities
tax liability or to meet demands generated by
shareholder activity
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on the value of a securities index. An option is the right to
buy or sell securities that is granted in exchange for an agreed-upon sum.
FUND DETAILS 11
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES
- --------------------------------------------------------------------------------
This table discusses the customary types of securities which can be held by the
fund. In each case the principal types of risk are listed on the following page
(see below for definitions). This table reads across two pages.
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES Bonds or notes backed by unsecured debt, such as credit
card receivables; these securities are often guaranteed or over-collateralized
to enhance their credit quality.
- --------------------------------------------------------------------------------
BANK OBLIGATIONS Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
COMMERCIAL PAPER Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
CORPORATE BONDS Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
MORTGAGES (DIRECTLY HELD) Debt instrument which gives the lender a lien on
property as security for the loan repayment.
- --------------------------------------------------------------------------------
MORTGAGE DOLLAR ROLLS The sale of mortgage-backed securities with the
commitment to buy back similar securities at a future date and at an agreed upon
price. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES Securities backed by pools of mortgages (such as
Ginnie Maes, Fannie Maes and Freddie Macs), including pass through certificates,
and other senior classes of collateralized mortgage obligations (CMOs) or
stripped mortgage-backed securities.
- --------------------------------------------------------------------------------
PARTICIPATION INTERESTS Securities representing an interest in another security
or in bank loans.
- --------------------------------------------------------------------------------
PRIVATE PLACEMENTS Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITs AND OTHER REAL-ESTATE RELATED INSTRUMENTS Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS Agreements between a seller and a buyer whereby the
seller agrees to repurchase the securities at an agreed upon price and at a
stated time.
- --------------------------------------------------------------------------------
SOVEREIGN DEBT, BRADY BONDS, AND DEBT OF SUPRANATIONAL ORGANIZATIONS Dollar-
and non-dollar-denominated securities issued to refinance foreign government
bank loans and other debt.
- --------------------------------------------------------------------------------
SWAPS Contractual agreement whereby a party agrees to exchange periodic
payments with a counterparty. Segregated accounts are used to offset leverage
risk.
- --------------------------------------------------------------------------------
SYNTHETIC VARIABLE RATE INSTRUMENTS Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
TAX EXEMPT MUNICIPAL SECURITIES Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- --------------------------------------------------------------------------------
ZERO COUPON, PAY-IN-KIND, AND DEFERRED PAYMENT SECURITIES Securities offering
non-cash or delayed-cash payment. Their prices are typically more volatile than
those of some other debt instruments and involve certain special tax
considerations.
- --------------------------------------------------------------------------------
RISK RELATED TO CERTAIN SECURITIES HELD BY J.P. MORGAN INSTITUTIONAL NEW YORK
TOTAL RETURN BOND FUND:
CREDIT RISK The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
CURRENCY RISK The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
EXTENSION RISK The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
INTEREST RATE RISK The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
LEVERAGE RISK The risk the costs associated with a liability are less than the
value of the underlying instrument.
LIQUIDITY RISK The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
12 FUND DETAILS
<PAGE>
X Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
+ Permitted, but not typically used
-- Not permitted
TYPES OF RISK
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW YORK TOTAL
RETURN BOND
<S> <C>
- ----------------------------------------------------------------------------------------------------
credit, interest rate, market, prepayment +
- ----------------------------------------------------------------------------------------------------
credit, currency, liquidity, political + Domestic
Only
- ----------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political X Tax
Exempt
Only
- ----------------------------------------------------------------------------------------------------
credit, currency, liquidity, political --
- ----------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political, valuation --
- ----------------------------------------------------------------------------------------------------
credit, extension, interest rate, market, natural event, prepayment --
- ----------------------------------------------------------------------------------------------------
extension, interest rate, leverage, liquidity, prepayment --
- ----------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage, market, political, prepayment --
- ----------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, liquidity, political, prepayment --
- ----------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation X
- ----------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, valuation --
- ----------------------------------------------------------------------------------------------------
credit, liquidity +
- ----------------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political --
- ----------------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political --
- ----------------------------------------------------------------------------------------------------
credit, leverage, market X
- ----------------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political X(1)
- ----------------------------------------------------------------------------------------------------
interest rate X
- ----------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political X
- ----------------------------------------------------------------------------------------------------
</TABLE>
MARKET RISK The risk that the market value of a security may move up or down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
bonds and the mutual funds that invest in them.
NATURAL EVENT RISK The risk of losses attributable to natural disasters, crop
failures and similar events.
POLITICAL RISK The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
PREPAYMENT RISK The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
VALUATION RISK The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
(1) At least 65% of assets must be in New York municipal securities.
FUND DETAILS 13
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
For investors who want more information on the fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
TELEPHONE: 1-800-766-7722
HEARING IMPAIRED: 1-888-468-4015
EMAIL: [email protected]
Text-only versions of these documents and this prospectus are available from the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. (1-800-SEC-0330) and may be viewed on-screen or downloaded from the SEC's
Internet site at http://www.sec.gov. The fund's investment company and 1933 Act
registration numbers are 811-07342 and 033-54642.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Institutional Funds combine a heritage of integrity and
financial leadership with comprehensive, sophisticated analysis and management
techniques. Drawing on J.P. Morgan's extensive experience and depth as an
investment manager, the J.P. Morgan Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.
JPMORGAN
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL FUNDS
ADVISOR DISTRIBUTOR
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
<PAGE>
J.P. MORGAN INSTITUTIONAL FUNDS
J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 2, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 2, 1998 FOR THE J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND
FUND, 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.
i:\dsfndlgl\pierpont\0198fix.pea\nytrbsai.doc
<PAGE>
Table of Contents
PAGE
General . . . . . . . . . . . . . . . . . . 2
Investment Objective and Policies . . . . . . 2
Investment Restrictions . . . . . . . . . . . 13
Trustees and Officers . . . . . . . . . . . . 15
Investment Advisor . . . . . . . . . . . . . . 19
Distributor . . . . . . . . . . . . . . . . 21
Co-Administrator . . . . . . . . . . . . . . 21
Services Agent . . . . . . . . . . . . . . . 22
Custodian and Transfer Agent . . . . . . . . . 23
Shareholder Servicing . . . . . . . . . . . . 23
Independent Accountants . . . . . . . . . . . 24
Expenses . . . . . . . . . . . . . . . . . . 24
Purchase of Shares . . . . . . . . . . . . . 25
Redemption of Shares . . . . . . . . . . . . . 25
Exchange of Shares . . . . . . . . . . . . . . 26
Dividends and Distributions . . . . . . . . . 26
Net Asset Value . . . . . . . . . . . . . . 26
Performance Data . . . . . . . . . . . . . . . 27
Portfolio Transactions . . . . . . . . . . . . 28
Massachusetts Trust . . . . . . . . . . . . . 29
Description of Shares . . . . . . . . . . . . 30
Taxes . . . . . . . . . . . . . . . . . . . 32
Additional Information . . . . . . . . . . . 35
Financial Statements . . . . . . . . . . . . . 36
Appendix A-Description of Securities Ratings . A-1
Appendix B-Additional Information Concerning
New York Obligations. . . . . . . . B-1
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
<PAGE>
GENERAL
This Statement of Additional Information relates only to the J.P.
Morgan Institutional New York Total Return Bond Fund (the "Fund"). The Fund is 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 Fund, 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 objective and policies, management and operation of the Fund
and provides additional information with respect to the Fund and should be read
in conjunction with the Fund's current Prospectus (the "Prospectus").
Capitalized terms not otherwise defined herein have the meanings accorded to
them in the Prospectus. The Fund's executive offices are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, the Fund seeks to achieve its investment objective by
investing all of its investable assets in The New York Total Return Bond
Portfolio (the "Portfolio"), a corresponding non-diversified open-end management
investment company having the same investment objective as the Fund. The Fund
invests in the Portfolio through a two-tier master-feeder investment fund
structure. See "Special Information Concerning Investment Structure."
The Portfolio is advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
Investments in the Fund are not deposits or obligations of, or
guaranteed or endorsed by, Morgan or any other bank. Shares of the Fund are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency. An investment in the Fund is
subject to risk that may cause the value of the investment to fluctuate, and
when the investment is redeemed, the value may be higher or lower than the
amount originally invested by the investor.
INVESTMENT OBJECTIVE AND POLICIES
The following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve this
objective by the Portfolio as set forth above and in the Prospectus. The
investment objective of the Fund and the investment objective of the Portfolio
are identical. Accordingly, references below to the Fund also include the
Portfolio; similarly, references to the Portfolio also include the Fund unless
the context requires otherwise.
The Fund is designed for investors subject to federal and New York
State income taxes who seek a high after tax total return and who are willing to
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
1
<PAGE>
receive some taxable income and capital gains to achieve that return.
Additionally, the Fund is designed to be an economical and convenient means of
investing in a portfolio consisting primarily of debt obligations that are
exempt from federal and New York State income taxes. The Fund's investment
objective is to provide a high after-tax total return for New York residents
consistent with moderate risk of capital. Total return will consist of income
plus capital gains and losses.
The Fund attempts to achieve its investment objective by investing
primarily in municipal securities issued by New York State and its political
subdivisions and by agencies, authorities and instrumentalities of New York and
its political subdivisions. These securities earn income exempt from federal and
New York State and local income taxes but, in certain circumstances, may be
subject to alternative minimum tax. In addition, the Fund may invest in
municipal securities issued by states other than New York, by territories and
possessions of the United States and by the District of Columbia and their
political subdivisions, agencies and instrumentalities. These securities earn
income exempt from federal income taxes but, in certain circumstances, may be
subject to alternative minimum tax. In order to seek to enhance the Portfolio's
after tax return, the Fund may also invest in securities which earn income
subject to New York and/or federal income taxes. These securities include U.S.
government securities, corporate securities and municipal securities issued on a
taxable basis. For more information regarding tax matters, including the
applicability of the alternative minimum tax, see "Taxes".
The Advisor actively manages the Fund's duration, the allocation of
securities across market sectors and the selection of securities to seek to
achieve a high after tax total return. Based on fundamental economic and capital
markets research, the Advisor adjusts the duration of the Fund in light of the
Advisor's interest rate outlook. For example, if interest rates are expected to
rise, the duration may be shortened to lessen the Fund's exposure to the
expected decrease in bond prices. If interest rates are expected to remain
stable, the Advisor may lengthen the duration in order to enhance the Fund's
yield.
Duration is a measure of the weighted average maturity of the bonds
held in the Fund and can be used as a measure of the sensitivity of the Fund's
market value to changes in interest rates. Generally, the longer the duration of
the Fund, the more sensitive its market value will be to changes in interest
rates. Under normal market conditions, the Advisor believes the Fund will have a
duration of three to seven years. The maturity of individual securities in the
Fund may vary widely, however.
The Advisor also attempts to enhance after tax total return by
allocating the Fund's assets among market sectors. Specific securities which the
Advisor believes are undervalued are selected for purchase within sectors using
advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk and the judgment of fixed income portfolio managers and
analysts.
In seeking to achieve the Fund's investment objective, the Advisor attempts
to consider the tax consequences to investors of all portfolio transactions. The
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
2
<PAGE>
Advisor will sell and purchase securities to change the Fund's duration, sector
allocation or securities holdings only if it believes that the expected benefit
to the Portfolio will be greater than the capital gains or income taxes
investors would incur as a result of these sales and purchases. The success of
this strategy depends on the Advisor's ability to forecast accurately changes in
interest rates and assess the value of fixed income securities.
TAX EXEMPT OBLIGATIONS
The Fund may invest in bonds issued by or on behalf of New York State,
other states, territories and possessions of the United States and their
political subdivisions, agencies, authorities and instrumentalities. These
obligations may be general obligation bonds secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest, or they may be revenue bonds payable from specific revenue sources,
but not generally backed by the issuer's taxing power. Under normal
circumstances, the Fund will invest at least 65% of its total assets in
municipal securities issued by New York State and its political subdivisions and
their agencies, authorities and instrumentalities. The Fund may also invest in
debt obligations of municipal issuers other than New York. The municipal
securities in which the Fund invests are primarily municipal bonds and municipal
notes.
The Fund will invest in tax exempt obligations. Because of the Fund's
significant investment in New York municipal securities, its performance will be
affected by the condition of New York's economy, as well as the fiscal condition
of the State, its agencies and municipalities. The New York State economy has
shown signs of recovery fueled by the strength of downstate financial services.
However, the State's performance continues to lag national averages. Despite
strong revenue performance during fiscal 1997 budget imbalances and limited
reserves remain as structural concerns. The Advisor currently views the New York
economy and financial condition as fundamentally stable. However, the
possibility of a disruption to economic and financial conditions which would
adversely affect the creditworthiness and marketability of New York municipal
securities continues to exist. For a more detailed discussion of the risks
associated with investing in New York municipal securities, see "Additional
Information Regarding New York Municipal Obligations". A description of the
various types of tax exempt obligations which may be purchased by the Fund
appears below. See "Quality and Diversification Requirements."
MUNICIPAL BONDS. The Fund may invest in bonds issued by or on behalf of
New York State, other states, territories and possessions of the United States
and their political subdivisions, agencies, authorities and instrumentalities.
These obligations may be general obligation bonds secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest, or they may be revenue bonds payable from specific revenue sources,
but not generally backed by the issuer's taxing power. Municipal bonds are debt
obligations issued by the states, territories and possessions of the United
States and the District of Columbia, by their political subdivisions and by duly
constituted authorities and corporations. For example, states, territories,
possessions and municipalities may issue municipal bonds to raise funds for
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
3
<PAGE>
various public purposes such as airports, housing, hospitals, mass
transportation, schools, water and sewer works. They may also issue municipal
bonds to refund outstanding obligations and to meet general operating expenses.
Public authorities issue municipal bonds to obtain funding for privately
operated facilities, such as housing and pollution control facilities, for
industrial facilities or for water supply, gas, electricity or waste disposal
facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
MUNICIPAL NOTES. The Fund may also invest in municipal notes of various
types, including notes issued in anticipation of receipt of taxes, the proceeds
of the sale of bonds, other revenues or grant proceeds, as well as municipal
commercial paper and municipal demand obligations such as variable rate demand
notes and master demand obligations. The interest rate on variable rate demand
notes is adjustable at periodic intervals as specified in the notes. Master
demand obligations permit the investment of fluctuating amounts at periodically
adjusted interest rates. They are governed by agreements between the municipal
issuer and Morgan acting as agent, for no additional fee, in its capacity as
Advisor to the Fund and as fiduciary for other clients. Although master demand
obligations are not marketable to third parties, the Fund considers them to be
liquid because they are payable on demand. There is no specific percentage
limitation on these investments. Municipal notes are subdivided into three
categories of short-term obligations: municipal notes, municipal commercial
paper and municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
4
<PAGE>
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Fund may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the Fund to receive the par value of the
obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, excluded from gross income for federal
income tax purposes. For a description of the attributes of master demand
obligations, see "Money Market Instruments" above. Although there is no
secondary market for master demand obligations, such obligations are considered
by the Fund to be liquid because they are payable upon demand. The Fund has no
specific percentage limitations on investments in master demand obligations.
PUTS. The Fund may purchase without limit, municipal bonds or notes
together with the right to resell the bonds or notes to the seller at an agreed
price or yield within a specified period prior to the maturity date of the bonds
or notes. Such a right to resell is commonly known as a "put." The aggregate
price for bonds or notes with puts may be higher than the price for bonds or
notes without puts. Consistent with the Fund's investment objective and subject
to the supervision of the Trustees, the purpose of this practice is to permit
the Fund to be fully invested in tax exempt securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions, and to purchase at a later date securities other
than those subject to the put. The principal risk of puts is that the writer of
the put may default on its obligation to repurchase. The Advisor will monitor
each writer's ability to meet its obligations under puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in order to take
advantage of alternative investment opportunities or in the event the Advisor
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration date
and in selecting which puts to exercise, the Advisor considers the amount of
cash
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
5
<PAGE>
available to the Fund, the expiration dates of the available puts, any future
commitments for securities purchases, alternative investment opportunities, the
desirability of retaining the underlying securities in the Fund's portfolio and
the yield, quality and maturity dates of the underlying securities.
The Fund values any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Fund were to invest in municipal bonds and notes with maturities of 60 days or
more that are subject to puts separate from the underlying securities, the puts
and the underlying securities would be valued at fair value as determined in
accordance with procedures established by the Board of Trustees. The Board of
Trustees would, in connection with the determination of the value of a put,
consider, among other factors, the creditworthiness of the writer of the put,
the duration of the put, the dates on which or the periods during which the put
may be exercised and the applicable rules and regulations of the SEC. Prior to
investing in such securities, the Tax Exempt Bond Fund, if deemed necessary
based upon the advice of counsel, will apply to the SEC for an exemptive order,
which may not be granted, relating to the valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Fund's policy is to enter
into put transactions only with municipal securities dealers who are approved by
the Advisor. Each dealer will be approved on its own merits, and it is each
Fund's general policy to enter into put transactions only with those dealers
which are determined to present minimal credit risks. In connection with such
determination, the Trustees will review regularly the Advisor's list of approved
dealers, taking into consideration, among other things, the ratings, if
available, of their equity and debt securities, their reputation in the
municipal securities markets, their net worth, their efficiency in consummating
transactions and any collateral arrangements, such as letters of credit,
securing the puts written by them. Commercial bank dealers normally will be
members of the Federal Reserve System, and other dealers will be members of the
National Association of Securities Dealers, Inc. or members of a national
securities exchange. In the case of the Tax Exempt Bond Fund, other put writers
will have outstanding debt rated Aa or better by Moody's Investors Service, Inc.
("Moody's") or AA or better by Standard & Poor's Ratings Group ("Standard &
Poor's"), or will be of comparable quality in the Advisor's opinion or such put
writers' obligations will be collateralized and of comparable quality in the
Advisor's opinion. The Trustees have directed the Advisor not to enter into put
transactions with any dealer which in the judgment of the Advisor becomes more
than a minimal credit risk. In the event that a dealer should default on its
obligation to repurchase an underlying security, the Funds are unable to predict
whether all or any portion of any loss sustained could subsequently be recovered
from such dealer.
The Trust has been advised by counsel that the Fund will be considered
the owner of the securities subject to the puts so that the interest on the
securities is tax exempt income to the Fund. Such advice of counsel is based on
certain assumptions concerning the terms of the puts and the attendant
circumstances.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
6
<PAGE>
NON-MUNICIPAL SECURITIES
The Fund may invest in bonds and other debt securities of domestic
issuers to the extent consistent with its investment objective and policies. The
Fund may invest in non-municipal securities including obligations of the U.S.
government and its agencies and instrumentalities, bank obligations, debt
securities of corporate issuers, asset-backed and mortgage-related securities
and repurchase agreements. The Fund will invest in non-municipal securities
when, in the opinion of the Advisor, these securities will enhance the after tax
total return to investors' who are subject to federal and New York State income
taxes in the highest tax bracket. Under normal circumstances, the Fund's
holdings of non-municipal securities and municipal securities of tax-exempt
issuers outside New York State will not exceed 35% of its total assets. A
description of these investments appears below. See "Quality and Diversification
Requirements." For information on short-term investments in these securities,
see "Money Market Instruments."
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists of
mortgage loans evidenced by promissory notes secured by first mortgages or first
deeds of trust or other similar security instruments creating a first lien on
owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support to these federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
There are several types of guaranteed mortgage-backed securities
currently available, including guaranteed mortgage pass-through certificates and
multiple
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
7
<PAGE>
class securities, which include guaranteed real estate mortgage investment
conduit certificates ("REMIC Certificates"), other collateralized mortgage
obligations ("CMOs") and stripped mortgage-backed securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class mortgage-backed securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Fund does not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae and Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class
of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets underlying
the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or
REMIC Certificates to be retired substantially earlier than their final
scheduled distribution dates. Generally, interest is paid or accrues on all
classes of CMOs or REMIC Certificates on a monthly basis.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities ("SMBS") are derivative multiclass mortgage securities, issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers. Although the market for such securities is increasingly liquid,
privately issued SMBS may not be readily marketable and will be considered
illiquid for purposes of the Fund's limitation on investments in illiquid
securities. The Advisor may determine that SMBS which are U.S. Government
securities are liquid for purposes of the Fund's limitation on investments in
illiquid securities in accordance with
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
8
<PAGE>
procedures adopted by the Board of Trustees. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from Mortgage Assets are generally higher
than prevailing market yields on other mortgage-backed securities because their
cash flow patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. While
interest payments are not made on such securities, holders of such securities
are deemed to have received "phantom income." Because the Fund will distribute
"phantom income" to shareholders, to the extent that shareholders elect to
receive dividends in cash rather than reinvesting such dividends in additional
shares, the Portfolio will have fewer assets with which to purchase income
producing securities.
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments to the extent
consistent with its investment objective and policies. The Fund may also invest
in municipal notes of various types, including notes issued in anticipation of
receipt of taxes, the proceeds of the sale of bonds, other revenues or grant
proceeds, as well as municipal commercial paper and municipal demand obligations
such as variable rate demand notes and master demand obligations. The interest
rate on variable rate demand notes is adjustable at periodic intervals as
specified in the notes. Master demand obligations permit the investment of
fluctuating amounts at periodically adjusted interest rates. They are governed
by agreements between the municipal issuer and Morgan acting as agent for no
additional fee, in its capacity as Advisor to the Portfolio and as fiduciary for
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
9
<PAGE>
other clients. Although master demand obligations are not marketable to third
parties, the Fund considers them to be liquid because they are payable on
demand. For more information about municipal notes, see "Investment Objectives
and Policies".
The Portfolio will invest in money market instruments that meet the
quality requirements described below except that short-term municipal
obligations of New York State issuers may be rated MIG-2 by Moody's or SP-2 by
Standard & Poor's. Under normal circumstances, the Fund will purchase these
securities to invest temporary cash balances or to maintain liquidity to meet
withdrawals. However, the Fund may also invest in money market instruments as a
temporary defensive measure taken during, or in anticipation of, adverse market
conditions. A description of the various types of money market instruments that
may be purchased by the Fund appears below. Also see "Quality and
Diversification Requirements."
U.S. TREASURY SECURITIES. The Fund may invest in direct obligations of the
U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
BANK OBLIGATIONS. The Fund 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 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 Fund may not
invest in obligations of foreign branches of foreign banks. See "Foreign
Investments."
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
10
<PAGE>
The Fund will not invest in obligations for which the Advisor, or any of its
affiliated persons, is the ultimate obligor or accepting bank.
COMMERCIAL PAPER. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan Guaranty Trust Company of New York
acting as agent, for no additional fee, in its capacity as investment advisor to
the Portfolio and as fiduciary for other clients for whom it exercises
investment discretion. The monies loaned to the borrower come from accounts
managed by the Advisor or its affiliates, pursuant to arrangements with such
accounts. Interest and principal payments are credited to such accounts. The
Advisor, acting as a fiduciary on behalf of its clients, has the right to
increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by the Advisor. Since master demand obligations typically
are not rated by credit rating agencies, the Fund may invest in such unrated
obligations only if at the time of an investment the obligation is determined by
the Advisor to have a credit quality which satisfies the Fund's quality
restrictions. See "Quality and Diversification Requirements." Although there is
no secondary market for master demand obligations, such obligations are
considered by the Fund to be liquid because they are payable upon demand. The
Fund does not have any specific percentage limitation on investments in master
demand obligations. It is possible that the issuer of a master demand obligation
could be a client of Morgan to whom Morgan, in its capacity as a commercial
bank, has made a loan.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines approved by the
Fund's Trustees. In a repurchase agreement, the 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 the Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Fund invest in repurchase agreements for more
than thirteen months. The securities which are subject to repurchase agreements,
however, may have maturity dates in excess of thirteen months from the effective
date of the repurchase agreement. The Fund will always receive securities as
collateral whose market value is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the Fund in the
agreement plus accrued interest, and the Fund will make payment for such
securities only
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
11
<PAGE>
upon physical delivery or upon evidence of book entry transfer to the account of
the Custodian. If the seller defaults, the Fund might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Fund may be delayed or
limited.
The Fund may make investments in other debt securities with remaining
effective maturities of not more than thirteen months, including without
limitation corporate bonds and other obligations described in this Statement of
Additional Information.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities
no interest accrues to the Fund until settlement takes place. At the time the
Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value each day of
such securities in determining its net asset value and, if applicable, calculate
the maturity for the purposes of average maturity from that date. At the time of
settlement a when-issued security may be valued at less than the purchase price.
To facilitate such acquisitions, the Fund will maintain with the Custodian a
segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If the Fund 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. Also, the Fund may be disadvantaged if the other party to
the transaction defaults. It is the current policy of the Fund not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Fund's total assets, less liabilities other than the obligations created by
when-issued commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Fund and the Portfolio to the extent permitted under the
1940 Act. These limits require that, as determined immediately after a purchase
is made, (i) not more than 5% of the value of the Fund's total assets will be
invested in the securities of any one investment company, (ii) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group, and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Fund, provided
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
12
<PAGE>
however, that the Fund may invest all of its investable assets in an open-end
investment company that has the same investment objective as the Fund and its
Portfolio. As a shareholder of another investment company, the Fund or Portfolio
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Fund or Portfolio bears
directly in connection with its own operations.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act a reverse repurchase agreement is also
considered as the borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for the Fund to be magnified.
The Fund will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, the Fund will enter into a reverse repurchase agreement
only when the interest income to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. The Fund will not
invest the proceeds of a reverse repurchase agreement for a period which exceeds
the duration of the reverse repurchase agreement. The Fund 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 the Fund's
limitations on reverse repurchase agreements and bank borrowings.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, the Fund is permitted to lend securities in an amount up to 331/3%
of the value of the Fund's net assets. The Fund 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 Fund 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 Fund any income accruing thereon. Loans will
be subject to termination by the Fund in the normal settlement time, generally
three business days after notice, or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated. Any gain or
loss in the market price of the borrowed securities which occurs during the term
of the loan inures to the Fund and its respective investors. The Fund may pay
reasonable finders' and custodial fees in connection with a loan. In addition,
the Fund will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, the Fund will not make
any loans in excess of one year. The Fund will not lend its securities to any
officer, Trustee, Director, employee or other affiliate of the Fund, the Advisor
or the Distributor, unless otherwise permitted by applicable law.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Fund may not acquire any illiquid securities if, as a result
thereof, more than 15% of the Fund's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Fund may
acquire investments that are illiquid or have limited liquidity, such as private
placements or investments
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
13
<PAGE>
that are not registered under the Securities Act of 1933, as amended (the "1933
Act"), and cannot be offered for public sale in the United States without first
being registered under the 1933 Act. An illiquid investment is any investment
that cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by the Portfolio. The price the
Fund pays for illiquid securities or receives upon resale may be lower than the
price paid or received for similar securities with a more liquid market.
Accordingly the valuation of these securities will reflect any limitations on
their liquidity.
The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.
As to illiquid investments, the Fund is subject to a risk that should
the Fund decide to sell them when a ready buyer is not available at a price the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected. Where an illiquid security must be registered under
the 1933 Act, before it may be sold, the Fund 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 Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
SYNTHETIC VARIABLE RATE INSTRUMENTS. The Fund may invest in certain
synthetic variable rate instruments. Such instruments generally involve the
deposit of a long-term tax exempt bond in a custody or trust arrangement and the
creation of a mechanism to adjust the long-term interest rate on the bond to a
variable short-term rate and a right (subject to certain conditions) on the part
of the purchaser to tender it periodically to a third party at par. Morgan will
review the structure of synthetic variable rate instruments to identify credit
and liquidity risks (including the conditions under which the right to tender
the instrument would no longer be available) and will monitor those risks. In
the event that the right to tender the instrument is no longer available, the
risk to the Fund will be that of holding the long-term bond. In the case of some
types of instruments credit enhancement is not provided, and if certain events,
which may include (a) default in the payment of principal or interest on the
underlying bond, (b) downgrading of the bond below investment grade or (c) a
loss of the bond's tax exempt status, occur, then (i) the put will terminate,
(ii) the risk to the Fund will be that of holding a long-term bond.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Fund is registered as a non-diversified investment company which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
14
<PAGE>
issuers and, as a result, may be subject to greater risk with respect to its
portfolio securities. The Fund, however, will comply with the diversification
requirements imposed by the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company. See "Taxes".
It is the current policy of the Fund that under normal circumstances at
least 90% of total assets will consist of securities that at the time of
purchase are rated Baa or better by Moody's Investors Service, Inc. ("Moody's)
or BBB or better by Standard & Poor's Ratings Group ("Standard & Poor's"). The
remaining 10% of total assets may be invested in securities that are rated B or
better by Moody's or Standard & Poor's. In each case, the Fund may invest in
securities which are unrated if in Morgan's opinion such securities are of
comparable quality. Securities rated Baa by Moody's or BBB by Standard & Poor's
are considered investment grade, but have some speculative characteristics.
Securities rated Ba or B by Moody's and BB or B by Standard & Poor's are below
investment grade and considered to be speculative with regard to payment of
interest and principal. These standards must be satisfied at the time an
investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment.
The Fund invests principally in a diversified portfolio of "investment
grade" tax exempt securities. An investment grade bond is rated, on the date of
investment within the four highest ratings of Moody's, currently Aaa, Aa, A and
Baa or of Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt
is rated, on the date of the investment within the two highest of such ratings.
Investment grade municipal notes are rated, on the date of investment, MIG-1 or
MIG-2 by Standard & Poor's or SP-1 and SP-2 by Moody's. Investment grade
municipal commercial paper is rated, on the date of investment, Prime 1 or Prime
2 by Moody's and A-1 or A-2 by Standard & Poor's. The Fund may also invest up to
10% of its total assets in securities which are "below investment grade." Such
securities must be rated, on the date of investment, B or better by Moody's or
Standard & Poor's, or of comparable quality. The Fund may invest in debt
securities which are not rated or other debt securities to which these ratings
are not applicable, if in the opinion of the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Fund invests in any taxable commercial paper, bank obligation or
repurchase agreement, the issuer must have outstanding debt rated A or higher by
Moody's or Standard & Poor's, the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion.
Certain lower rated securities purchased by the Fund, such as those
rated Ba or B by Moody's or BB or B by Standard & Poor's (commonly known as junk
bonds), may be subject to certain risks with respect to the issuing entity's
ability to make scheduled payments of principal and interest and to greater
market fluctuations. While generally providing higher coupons or interest rates
than investments in higher quality securities, lower quality fixed income
securities involve greater risk of loss of principal and income, including the
possibility of default or bankruptcy of the issuers of such
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
15
<PAGE>
securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Fund invests in such lower quality securities, the achievement of its
investment objective may be more dependent on the Advisor's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Portfolio's
portfolio securities for purposes of determining the Fund's net asset value. See
Appendix A for more detailed information on these ratings.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may (a) purchase and sell exchange traded and over-the-counter
("OTC") put and call options on fixed income securities and indexes of fixed
income securities, (b) purchase and sell futures contracts on fixed income
securities and indexes of fixed income securities and (c) purchase and sell put
and call options on futures contracts on fixed income securities and indexes of
fixed income securities.
The Fund may use futures contracts and options for hedging and risk
management purposes. The Fund may not use futures contracts and options for
speculation.
The Fund may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge the Fund's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of the Fund's overall strategy in a manner deemed appropriate to
the Advisor and consistent with the Fund's objective and policies. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the Portfolio's return. While the use of these
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
16
<PAGE>
instruments by the Fund may reduce certain risks associated with owning its
portfolio securities, these techniques themselves entail certain other risks. If
the Advisor applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower the
Fund's return. Certain strategies limit the Fund's possibilities to realize
gains as well as limiting its exposure to losses. The Fund could also experience
losses if the prices of its options and futures positions were poorly correlated
with its other investments, or if it could not close out its positions because
of an illiquid secondary market. In addition, the Fund will incur transaction
costs, including trading commissions and option premiums, in connection with its
futures and options transactions and these transactions could significantly
increase the Fund's turnover rate.
The Fund may purchase and sell put and call options on securities and
indexes of securities, or futures contracts or options on futures contracts, if
such options are written by other persons and if (i) the aggregate premiums paid
on all such options which are held at any time to not exceed 20% of the Fund's
net assets, and (ii) the aggregate margin deposits required on all such futures
or options thereon held at any time to not exceed 5% of the Fund's assets. In
addition, the Fund will not purchase or sell (write) futures contracts, options
on futures contracts or commodity options for risk management purposes if, as a
result, the aggregate initial margin and options premiums required to establish
these positions exceed 5% of the net asset value of the Fund.
OPTIONS
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities, indexes of securities prices, and futures
contracts. The Fund may terminate its position in a put option it has purchased
by allowing it to expire or by exercising the option. The Fund may also close
out a put option position by entering into an offsetting transaction, if a
liquid market exits. If the option is allowed to expire, the Fund will lose the
entire premium it paid. If the Fund exercises a put option on a security, it
will sell the instrument underlying the option at the strike price. If the Fund
exercises an option on an index, settlement is in cash and does not involve the
actual sale of securities. If an option is American style, it may be exercised
on any day up to its expiration date. A European style option may be exercised
only on its expiration date.
The buyer of a typical put option can expect to realize a gain if the
underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
17
<PAGE>
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Fund writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, a Fund assumes the obligation
to pay the strike price for the instrument underlying the option if the party to
the option chooses to exercise it. The Fund may seek to terminate its position
in a put option it writes before exercise by purchasing an offsetting option in
the market at its current price. If the market is not liquid for a put option
the Fund has written, however, the Fund must continue to be prepared to pay the
strike price while the option is outstanding, regardless of price changes, and
must continue to post margin as discussed below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Fund to sell or deliver the
option's underlying instrument in return for the strike price upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
OPTIONS ON INDEXES. The Fund may purchase put and call options on any
securities index based on securities in which the Fund may invest. Options on
securities indexes are similar to options on securities, except that the
exercise of securities index options is settled by cash payment and does not
involve the actual purchase or sale of securities. In addition, these options
are designed to reflect price fluctuations in a group of securities or segment
of the
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
18
<PAGE>
securities market rather than price fluctuations in a single security. The Fund,
in purchasing or selling index options, is subject to the risk that the value of
its portfolio securities may not change as much as index because the Fund's
investments generally will not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus the
Fund may not be able to close out an option position that it has previously
entered into. When the Fund purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and the Fund may incur additional
losses if the counterparty is unable to perform.
EXCHANGE TRADED AND OTC OPTIONS. All options purchased or sold by the
Fund 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 Fund's Board of Trustees. While exchange-traded options are obligations
of the Options Clearing Corporation, in the case of OTC options, the Fund relies
on the dealer from which it purchased the option to perform if the option is
exercised. Thus, when the Fund purchases an OTC option, it relies on the dealer
from which it purchased the option to make or take delivery of the underlying
securities. Failure by the dealer to do so would result in the loss of the
premium paid by the Portfolio as well as loss of the expected benefit of the
transaction.
Provided that the Fund has arrangements with certain qualified dealers
who agree that the Fund may repurchase any option it writes for a maximum price
to be calculated by a predetermined formula, the Fund 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
When the Fund purchases a futures contract, it agrees to purchase a
specified quantity of an underlying instrument at a specified future date or to
make a cash payment based on the value of a securities index. When the Fund
sells a futures contract, it agrees to sell a specified quantity of the
underlying instrument at a specified future date or to receive a cash payment
based on the value of a securities index. The price at which the purchase and
sale will take place is fixed when the Fund enters into the contract. Futures
can be held until their delivery dates or the position can be (and normally is)
closed out before then. There is no assurance, however, that a liquid market
will exist when the Fund wishes to close out a particular position.
When the Fund purchases a futures contract, the value of the futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Fund's exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying instrument
directly. When the Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the value of the
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
19
<PAGE>
underlying instrument. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the underlying
instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when the Fund buys or sells a futures contract it
will be required to deposit "initial margin" with its Custodian in a segregated
account in the name of its futures broker, known as a futures commission
merchant (FCM). Initial margin deposits are typically equal to a small
percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments equal to the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. The Fund may be
obligated to make payments of variation margin at a time when it is
disadvantageous to do so. Furthermore, it may not always be possible for the
Fund to close out its futures positions. Until it closes out a futures position,
the Fund will be obligated to continue to pay variation margin. Initial and
variation margin payments do not constitute purchasing on margin for purposes of
the Fund's investment restrictions. In the event of the bankruptcy of an FCM
that holds margin on behalf of the Fund, the Fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Fund.
The Fund will segregate liquid assets in connection with its use of
options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding. Unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund is
permitted to enter into futures and options transactions and may purchase or
sell (write) futures contracts and purchase put and call options, including put
and call options on futures contracts. Futures contracts obligate the buyer to
take and the seller to make delivery at a future date of a specified quantity of
a financial instrument or an amount of cash based on the value of a securities
index. Currently, futures contracts are available on various types of fixed
income securities, including but not limited to U.S. Treasury bonds, notes and
bills, Eurodollar certificates of deposit and on indexes of fixed income
securities 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
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
20
<PAGE>
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 Fund are paid by the Fund 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 Fund is permitted to purchase and write options
in combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the Fund's
current or anticipated investments exactly. The Fund 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 Fund'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
Fund's investments well. Options and futures contracts prices are affected by
such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Fund'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.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
21
<PAGE>
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the Fund
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
requires the Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions could also be impaired.
(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Fund 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 Fund
intends to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which the Fund can commit assets to
initial margin deposits and option premiums. In addition, the Fund 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 Fund's assets could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
PORTFOLIO TURNOVER
The portfolio turnover rates for the for the fiscal years ended March
31, 1996 and 1997 and for the six months ended September 30, 1997 were 41%, 35%
and 27% (unaudited), respectively. A rate of 100% indicates that the equivalent
of all of the Portfolio's assets have been sold and reinvested in a year. High
portfolio turnover may result in the realization of substantial net capital
gains or losses. To the extent net short term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes. See "Taxes" below.
INVESTMENT RESTRICTIONS
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
22
<PAGE>
The investment restrictions of the Fund and Portfolio are identical,
unless otherwise specified. Accordingly, references below to the Fund also
include the Portfolio unless the context requires otherwise; similarly,
references to the Portfolio also include the Fund unless the context requires
otherwise.
The investment restrictions below have been adopted by the Trust, with
respect to the Fund, and by the Portfolio. Except where otherwise noted, these
investment restrictions are "fundamental" policies which, under the 1940 Act,
may not be changed without the vote of a majority of the outstanding voting
securities of the Fund or Portfolio, as the case may be. A "majority of the
outstanding voting securities" is defined in the 1940 Act as the lesser of (a)
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities. Whenever the Fund is requested to vote on a change in
the fundamental investment restrictions of the Portfolio, the Trust will hold a
meeting of Fund shareholders and will cast its votes as instructed by the Fund's
shareholders.
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 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. Make loans to other persons, except through the purchase of debt obligations,
loans of portfolio securities, and participation in repurchase agreements;
4. Purchase or sell physical commodities or contracts thereon, unless acquired
as a result of the ownership of securities or instruments, but the Fund may
purchase or sell futures contracts or options (including options on futures
contracts, but excluding options or futures contracts on physical commodities)
and may enter into foreign currency forward contracts;
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
23
<PAGE>
5. Purchase or sell real estate, but the Fund may purchase or sell securities
that are secured by real estate or issued by companies (including real estate
investment trusts) that invest or deal in real estate;
6. Underwrite securities of other issuers, except to the extent the Fund, in
disposing of portfolio securities, may be deemed an underwriter within the
meaning of the 1933 Act;
7. Issue senior securities, except as permitted under the 1940 Act or any rule,
order or interpretation thereunder; or
8. Notwithstanding any other investment restriction of the Fund, the Fund may
invest all of its investable assets in an open-end management investment company
having the same investment objective and restrictions as the Fund.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restrictions
described below are not fundamental policies of the Fund and its corresponding
Portfolio and may be changed by their Trustees. These non-fundamental investment
policies require that the Fund and its corresponding Portfolio may not:
(i) Acquire securities of other investment companies, except as permitted by the
1940 Act or any rule, order or interpretation thereunder, or in connection with
a merger, consolidation, reorganization, acquisition of assets or an offer of
exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements with more
than seven days to maturity or fixed time deposits with a duration of over seven
calendar days, if as a result thereof, more than 15% of the market value of the
Fund's 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.
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, the Advisor 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 the Advisor determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
24
<PAGE>
it more appropriately considered to be engaged in a different industry, the
Advisor may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents.
TRUSTEES AND OFFICERS
TRUSTEES
The Trustees of the Trust, who are also the Trustees of the Portfolio,
their business addresses, principal occupations during the past five years and
dates of birth are set forth below.
FREDERICK S. ADDY--Trustee; Retired; 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 HEALEY1--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., 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 the
Portfolio. In accordance with applicable state requirements, a majority of the
disinterested Trustees have adopted written procedures reasonably appropriate to
deal with potential conflicts of interest arising from the fact that the same
individuals are Trustees of the Trust, the Portfolio and the J.P. Morgan
Institutional 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
- -------- 1 Mr. Healey is an "interested person" of the Trust, the
Advisor and the Portfolio as that term is defined in the 1940 Act.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
25
<PAGE>
(as defined below), 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 the Fund.
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 THE MASTER
AGGREGATE TRUSTEE PORTFOLIOS(*), J.P. MORGAN
COMPENSATION FUNDS, J.P. MORGAN SERIES
PAID BY THE TRUST AND THE TRUST DURING
NAME OF TRUSTEE TRUST DURING 1997 1997(**)_________________
- -------------------------------------------------- -------------------------------- --------------------------------------------
<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 adviser.
(**) No investment company within the fund complex has a pension or retirement
plan. Currently there are 18 investment companies (15 investment companies
comprising the Master Portfolios, the Trust, the J.P. Morgan Funds 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
Portfolio's various service providers, decide upon matters of general policy.
The Portfolio and the Trust have entered into a Fund Services Agreement with
Pierpont Group, Inc. to assist the Trustees in exercising their overall
supervisory responsibilities over the affairs of the Portfolio and the Trust.
Pierpont Group, Inc. was organized in July 1989 to provide services for The
Pierpont Family of Funds, and the Trustees are the equal and sole shareholders
of Pierpont Group,
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
26
<PAGE>
Inc. The Trust and the Portfolio have agreed to pay Pierpont Group, Inc. a fee
in an amount representing its reasonable costs in performing these services to
the Trust, the Portfolio and certain other registered investment companies
subject to similar agreements with Pierpont Group, Inc. These costs are
periodically reviewed by the Trustees. The principal offices of Pierpont Group,
Inc. are located at 461 Fifth Avenue, New York, NY 10017.
The aggregate fees paid to Pierpont Group, Inc. by the Fund and the
Portfolio during the indicated fiscal years are set forth below:
FUND -- For the period April 11, 1994 (commencement of operations) through
March 31, 1995: $1,297. For the fiscal year ended March 31, 1996: $2,409.
For the fiscal year ended March 31, 1997: $2,907. For the six months ended
September 30, 1997: $1,756 (unaudited).
PORTFOLIO -- For the period April 11, 1994 (commencement of operations)
through March 31, 1995: $4,140. For the fiscal year ended March 31, 1996:
$5,530. For the fiscal year ended March 31, 1997: $5,302. For the six months
ended September 30, 1997: $2,822 (unaudited).
OFFICERS
The Trust's and Portfolio's executive officers (listed below), other
than the Chief Executive Officer, are provided and compensated by Funds
Distributor, Inc. ("FDI"), a wholly owned indirect subsidiary of Boston
Institutional Group, Inc. The officers conduct and supervise the business
operations of the Trust and the Portfolio. The Trust and the Portfolio have no
employees.
The officers of the Trust and the Portfolio, their principal
occupations during the past five years and dates of birth are set forth below.
Unless otherwise specified, each officer holds the same position with the Trust
and the Portfolio. The business address of each of the officers unless otherwise
noted is Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts
02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 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
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
27
<PAGE>
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. His date of
birth is March 31, 1969.
RICHARD W. INGRAM; President and Treasurer. Executive Vice President
and Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director -Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant Vice
President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity Funds,
Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a senior paralegal at The Boston Company Advisors, Inc.
("TBCA"). Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse Investors Cash Management Fund, Inc. and certain investment
companies advised or administered by Harris or its affiliates. From April 1994
to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From
1992 to 1994, Mr. Kelley was employed by Putnam Investments in legal and
compliance capacities. His date of birth is December 24, 1964.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors
Cash Management Fund, Inc. and certain investment companies advised or
administered by Dreyfus or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.
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.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
28
<PAGE>
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 Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
INVESTMENT ADVISOR
The Advisor, a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan"), is a bank holding company organized under the laws
of the State of Delaware. The Advisor, whose principal offices are at 60 Wall
Street, New York, New York 10260, is a New York trust company which conducts a
general banking and trust business. The Advisor is subject to regulation by the
New York State Banking Department and is a member bank of the Federal Reserve
System. Through offices in New York City and abroad, the Advisor offers a wide
range of services, primarily to governmental, institutional, corporate and high
net worth individual customers in the United States and throughout the world.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of over $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
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
29
<PAGE>
over the long term. J.P. Morgan currently employs over 100 full time research
analysts, among the largest research staffs in the money management industry, in
its investment management divisions located in New York, London, Tokyo,
Frankfurt, Melbourne and Singapore to cover companies, industries and countries
on site. In addition, the investment management divisions employ approximately
300 capital market researchers, portfolio managers and traders. The Advisor's
fixed income investment process is based on analysis of real rates, sector
diversification, and quantitative and credit analysis.
The investment advisory services the Advisor provides to the Portfolio
are not exclusive under the terms of the Advisory Agreement. The Advisor is free
to and does render similar investment advisory services to others. The Advisor
serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolio. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolio. See
"Portfolio Transactions."
Sector weightings are generally similar to a benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Portfolio in which the Fund
invests is currently: Lehman Brothers 1-16 Year Municipal Bond Index.
J.P. Morgan Investment Management Inc., also a wholly owned subsidiary
of J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of J.P.
Morgan Investment Management Inc. and certain other investment management
affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Portfolio and the Fund has agreed to pay the Advisor a
fee, which is computed daily and may be paid monthly, equal to the annual rate
of 0.30% of the Portfolio's average daily net assets.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
30
<PAGE>
For the period April 11, 1994 (commencement of operations) through
March 31, 1995, the fiscal years ended March 31, 1996 and 1997 and the six
months ended September 30, 1997, the advisory fees paid by the Portfolio were
$120,281, $246,966, $380,380 and $243,251 (unaudited), respectively. See the
Prospectus and below for applicable expense limitations.
The Investment Advisory Agreement provides that it will continue in
effect for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Distributor" below. The Investment Advisory Agreement will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Portfolio's Trustees, or by a vote of the holders of a
majority of the Portfolio's outstanding voting securities, on 60 days' written
notice to the Advisor and by the Advisor on 90 days' written notice to the
Portfolio. See "Additional Information."
The Glass-Steagall Act and other applicable laws generally prohibit
banks such as the Advisor from engaging in the business of underwriting or
distributing securities, and the Board of Governors of the Federal Reserve
System has issued an interpretation to the effect that under these laws a bank
holding company registered under the federal Bank Holding Company Act or certain
subsidiaries thereof may not sponsor, organize, or control a registered open-end
investment company continuously engaged in the issuance of its shares, such as
the Trust. The interpretation does not prohibit a holding company or a
subsidiary thereof from acting as investment advisor and custodian to such an
investment company. The Advisor believes that it may perform the services for
the Portfolio contemplated by the Advisory Agreement without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State laws
on this issue may differ from the interpretation of relevant federal law, and
banks and financial institutions may be required to register as dealers pursuant
to state securities laws. However, it is possible that future changes in either
federal or state statutes and regulations concerning the permissible activities
of banks or trust companies, as well as further judicial or administrative
decisions and interpretations of present and future statutes and regulations,
might prevent the Advisor from continuing to perform such services for the
Portfolio.
If the Advisor were prohibited from acting as investment advisor to the
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Under separate agreements, Morgan also provides certain financial, fund
accounting and administrative services to the Trust and the Portfolio and
shareholder services for the Trust. See "Services Agent" and "Shareholder
Servicing" below.
DISTRIBUTOR
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
31
<PAGE>
FDI serves as the Trust's exclusive Distributor and holds itself
available to receive purchase orders for the Fund's shares. In that capacity,
FDI has been granted the right, as agent of the Trust, to solicit and accept
orders for the purchase of the Fund's shares in accordance with the terms of the
Distribution Agreement between the Trust and FDI. Under the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Trust's distributor.
The Distribution Agreement shall continue in effect with respect to the
Fund for a period of two years after execution only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by its Trustees and (ii) by a vote of a majority of the
Trustees of the Trust who are not "interested persons" (as defined by the 1940
Act) of the parties to the Distribution Agreement, cast in person at a meeting
called for the purpose of voting on such approval (see "Trustees and Officers").
The Distribution Agreement will terminate automatically if assigned by either
party thereto and is terminable at any time without penalty by a vote of a
majority of the Trustees of the Trust, a vote of a majority of the Trustees who
are not "interested persons" of the Trust, or by a vote of the holders of a
majority of the Fund's outstanding shares as defined under "Additional
Information," in any case without payment of any penalty on 60 days' written
notice to the other party. The principal offices of FDI are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under Co-Administration Agreements with the Trust and the Portfolio
dated August 1, 1996, FDI also serves as the Trust's and the Portfolio's
Co-Administrator. The Co-Administration Agreements may be renewed or amended by
the respective Trustees without a shareholder vote. The Co-Administration
Agreements are terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust or the Portfolio, as applicable, on not more than 60
days' written notice nor less than 30 days' written notice to the other party.
The Co-Administrator may subcontract for the performance of its obligations,
provided, however, that unless the Trust or the Portfolio, as applicable,
expressly agrees in writing, the Co-Administrator shall be fully responsible for
the acts and omissions of any subcontractor as it would for its own acts or
omissions. See "Services Agent" below.
For its services under the Co-Administration Agreements, the Fund and
Portfolio have agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Fund or Portfolio is based on the ratio of its net assets to
the aggregate net assets of the Trust, the Master Portfolios and certain other
investment companies subject to similar agreements with FDI.
The table below sets forth for the Fund and the Portfolio the
administrative fees paid to FDI for the fiscal periods indicated. See the
Prospectus and below for applicable expense limitations.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
32
<PAGE>
FUND -- For the period August 1, 1996 through March 31, 1997: $1,867. For the
six months ended September 30, 1997: $1,486 (unaudited).
PORTFOLIO -- For the period August 1, 1996 through March 31, 1997: $1,914.
For the six months ended September 30, 1997: $1,452 (unaudited).
The table below sets forth for the Fund and the Portfolio the
administrative fees paid to Signature Broker-Dealer Services, Inc. (which
provided distribution and administrative services to the Trust and placement
agent and administrative services to the Portfolio prior to August 1, 1996) for
the fiscal periods indicated. See the Prospectus and below for applicable
expense limitations.
FUND -- For the period April 11, 1994 (commencement of operations) through
March 31, 1995: $3,042. For the fiscal year ended March 31, 1996: $5,065.
For the period April 1, 1996 through July 31, 1996: $2,361.
PORTFOLIO -- For the period April 11, 1994 (commencement of operations)
through March 31, 1995: $2,563. For the fiscal year ended March 31, 1996:
$6,648. For the period April 1, 1996 through July 31, 1996: $4,617.
SERVICES AGENT
The Trust, on behalf of the Fund, and the Portfolio have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan,
pursuant to which Morgan is responsible for certain administrative and related
services provided to the Fund and Portfolio. The Services Agreements may be
terminated at any time, without penalty, by the Trustees or Morgan, in each case
on not more than 60 days' nor less than 30 days' written notice to the other
party.
Under the Services Agreements, the Fund and the Portfolio 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 aggregate average daily net assets in excess of $7
billion, less the complex-wide fees payable to FDI. The portion of this charge
payable by the Fund and Portfolio is determined by the proportionate share that
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 prior administrative services agreements in effect from December
29, 1995 through July 31, 1996, with Morgan, the Portfolio paid Morgan a fee
equal to its proportionate share of an annual complex-wide charge. This charge
was calculated daily based on the aggregate net assets of 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' aggregate average daily net assets in excess of $7 billion. Prior
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
33
<PAGE>
to December 29, 1995, the Trust and the Portfolio had entered into Financial and
Fund Accounting Services Agreements with Morgan, the provisions of which
included certain of the activities described above and, prior to September 1,
1995, also included reimbursement of usual and customary expenses.
The table below sets forth for the Fund and the Portfolio the fees paid
to Morgan as Services Agent. See the Prospectus and below for applicable expense
limitations.
FUND -- For the period April 11, 1994 (commencement of operations) through
March 31, 1995: $(49,096)*. For the fiscal year ended March 31, 1996:
$(10,606)*. For the fiscal year ended March 31, 1997: $21,188. For the six
months ended September 30, 1997: $15,431 (unaudited).
PORTFOLIO -- For the period April 11, 1994 (commencement of operations) through
March 31, 1995: $(11,830)*. For the fiscal year ended March 31, 1996: $7,691.
For the fiscal year ended March 31, 1997: $37,675. For the six months ended
September 30, 1997: $24,950 (unaudited).
- --------------------------
(*) Indicates a reimbursement by Morgan fro 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 the Portfolio's
custodian and fund accounting agent and the Fund's 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 subcustodian agreements on behalf of the Portfolio
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. The Custodian maintains portfolio transaction records. As
transfer agent and dividend disbursing agent, State Street is responsible for
maintaining account records detailing the ownership of Fund shares and for
crediting income, capital gains and other changes in share ownership to
shareholder accounts.
SHAREHOLDER SERVICING
The Trust, on behalf of the Fund, has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for its customers and for other Fund investors who are customers
of 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
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
34
<PAGE>
maintenance of shareholder accounts and records with the Fund's transfer agent;
transmitting purchase and redemption orders to the Fund's transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; monitoring the activities of the Fund's transfer agent; and providing
other related services.
Under the Shareholder Servicing Agreement, the Fund has agreed to pay
Morgan for these services a fee at an annual rate of 0.075% (expressed as a
percentage of the average daily net assets of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent). Morgan
acts as shareholder servicing agent for all shareholders.
The shareholder servicing fees paid by the Fund to Morgan for the
period April 11, 1994 (commencement of operations) through March 31, 1995, the
fiscal years ended March 31, 1996 and 1997 and the six months ended September
30, 1997 were $6,116, $21,606, $53,364 and $37,609 (unaudited), respectively.
As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing administrative services to the Fund and the Portfolio under the
Services Agreements and in acting as Advisor to the Portfolio under the
Investment Advisory Agreements may raise issues under these laws. However,
Morgan believes that it may properly perform these services and the other
activities described in the Prospectus without violation of the Glass-Steagall
Act or other applicable banking laws or regulations.
If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreements, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Fund or the Portfolio might occur and a shareholder might no
longer be able to avail himself or herself of any services then being provided
to shareholders by Morgan.
The Fund may be sold to or through financial intermediaries who are
customers of Morgan ("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 Fund. See
"Financial Professionals" below. Organizations that provide recordkeeping or
other services to certain employee benefit or retirement plans that include the
Fund as an investment alternative may also be paid a fee.
FINANCIAL PROFESSIONALS
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
35
<PAGE>
The services provided by financial professionals may include
establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for bank wires, performing shareholder
subacounting, 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 or other fee for their services.
Such charges may vary among financial professional and not remitted to a Fund or
Morgan.
The 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 the Fund's behalf.
The 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 Portfolio are Price
Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036. Price
Waterhouse LLP conducts an annual audit of the financial statements of the Fund
and the Portfolio, assists in the preparation and/or review of the Fund's and
the Portfolio's federal and state income tax returns and consults with the Fund
and the Portfolio as to matters of accounting and federal and state income
taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., Morgan and FDI
under various agreements discussed under "Trustees and Officers," "Investment
Advisor", "Co-Administrator and Distributor", "Services Agent" and "Shareholder
Servicing" above, the Fund and the Portfolio are responsible for usual and
customary expenses associated with their respective operations. Such expenses
include organization expenses, legal fees, accounting expenses, insurance costs,
the compensation and expenses of the Trustees, costs associated with
registration under federal securities laws, and extraordinary expenses
applicable to the Fund or the Portfolio. For the Fund, such expenses also
include transfer, registrar and dividend disbursing costs, the expenses of
printing and mailing reports, notices and proxy statements to Fund shareholders;
and filing fees under state
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
36
<PAGE>
securities laws. For the Portfolio, such expenses also include custodian fees
and brokerage expenses. Under fee arrangements prior to September 1, 1995,
Morgan as Services Agent was responsible for reimbursements to the Trust and the
Portfolio and the usual and customary expenses described above (excluding
organization and extraordinary expenses, custodian fees and brokerage expenses).
PURCHASE OF SHARES
Investors may open Fund accounts and purchase shares as described in
the Prospectus. 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
the Fund may make transactions in shares of the Fund.
The Fund may, at its own option, accept securities in payment for
shares. The securities delivered in such a transaction are valued by the method
described in "Net Asset Value" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of Morgan, appropriate
investments for the Fund's corresponding Portfolio. In addition, securities
accepted in payment for shares must: (i) meet the investment objective and
policies of Portfolio; (ii) be acquired by the Fund for investment and not for
resale (other than for resale to the Portfolio); (iii) be liquid securities
which are not restricted as to transfer either by law or liquidity of market;
and (iv) if stock, have a value which is readily ascertainable as evidenced by a
listing on a stock exchange, OTC market or by readily available market
quotations from a dealer in such securities. The Fund reserves the right to
accept or reject at its own option any and all securities offered in payment for
its shares.
Prospective investors may purchase shares with the assistance of a
Financial Professional, and a Financial Professional may charge the investor a
fee for this service and other services it provides to its customers.
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus.
Accordingly, a redemption request might result in payment of a dollar amount
which differs from the number of shares redeemed. See "Net Asset Value" below.
If the Trust, on behalf of the Fund, and the Portfolio determines 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
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
37
<PAGE>
as of the same time the redemption price is determined. The Trust on behalf of
the Fund and the Portfolio have elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Fund and the Portfolio are obligated to redeem
shares solely in cash up to the lesser of $250,000 or one percent of the net
asset value of the Fund during any 90 day period for any one shareholder. The
Trust will redeem Fund shares in kind only if it has received a redemption in
kind from the Portfolio and therefore shareholders of the Fund that receive
redemptions in kind will receive securities of the Portfolio. The Portfolio has
advised the Trust that the Portfolio will not redeem in kind except in
circumstances in which the Fund is permitted to redeem in kind.
FURTHER REDEMPTION INFORMATION. The Trust, on behalf of the Fund, and
the Portfolio reserves the right to suspend the right of redemption and to
postpone the date of payment upon redemption as follows: (i) for up to seven
days, (ii) during periods when the New York Stock Exchange is closed for other
than weekends and holidays or when trading on such Exchange is restricted as
determined by the SEC by rule or regulation, (iii) during periods in which an
emergency, as determined by the SEC, exists that causes disposal by the
Portfolio of, or evaluation of the net asset value of, its portfolio securities
to be unreasonable or impracticable, or (iv) for such other periods as the SEC
may permit.
EXCHANGE OF SHARES
An investor may exchange shares from any J.P. Morgan Institutional Fund
into any other J.P. Morgan Institutional Fund, J.P. Morgan Fund or shares of
J.P. Morgan Series Trust as described in the Prospectus. For complete
information, the Prospectus as it relates to the Fund into which a transfer is
being made should be read prior to the transfer. Requests for exchange are made
in the same manner as requests for redemptions. See "Redemption of Shares."
Shares of the Fund to be acquired are purchased for settlement when the proceeds
from redemption become available. In the case of investors in certain states,
state securities laws may restrict the availability of the exchange privilege.
The Trust reserves the right to discontinue, alter or limit the exchange
privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays dividends and distributions as described in
the Prospectus.
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
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
38
<PAGE>
The Fund computes its net asset value once daily on Monday through
Friday as described under "Net Asset Value" in the Prospectus. The net asset
value will not be computed on the day the following legal holidays are observed:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Fund and the Portfolio may also close for purchases and redemptions at such
other times as may be determined by the Board of Trustees to the extent
permitted by applicable law. The days on which net asset value is determined are
the Fund's business days.
The net asset value of the Fund is equal to the value of the Fund's
investment in the Portfolio (which is equal to the Fund's pro rata share of the
total investment of the Fund and of any other investors in the Portfolio less
the Fund's pro rata share of the Portfolio's liabilities) less the Fund's
liabilities. The following is a discussion of the procedures used by the
Portfolio in valuing its assets.
The 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 sales 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 4:00pm) 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 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.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
39
<PAGE>
PERFORMANCE DATA
From time to time, the Fund may quote performance in terms of yield,
actual distributions, total return or capital appreciation in reports, sales
literature and advertisements published by the Trust. Current performance
information for the Fund may be obtained by calling the number provided on the
cover page of this Statement of Additional Information.
As required by regulations of the SEC, the annualized yield for the
Fund is computed by dividing the Fund's net investment income per share earned
during a 30-day period by the net asset value on the last day of the period. The
average daily number of shares outstanding during the period that are eligible
to receive dividends is used in determining the net investment income per share.
Income is computed by totaling the interest earned on all debt obligations
during the period and subtracting from that amount the total of all recurring
expenses incurred during the period. The 30-day yield is then annualized on a
bond-equivalent basis assuming semi-annual reinvestment and compounding of net
investment income.
Below is set forth historical yield information for the period ended
December 31, 1997: 30-day yield: %; 30-day tax equivalent yield at 39.6% tax
rate: %.
TOTAL RETURN QUOTATIONS. As required by regulations of the SEC, the
annualized total return of the Fund for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Fund over the period are reinvested. It is
then assumed that at the end of the period, the entire amount is redeemed. The
annualized total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Below is set forth historical return information for the Fund for the
period ended December 31, 1997: Average annual total return, 1 year: %; average
annual total return, 5 years: N/A; average annual total return, commencement of
operations (January 4, 1993) to period end: %; aggregate total return, 1 year:
%; aggregate total return, 5 years: N/A; aggregate total return, commencement
of operations (January 4, 1993) to period end: %.
GENERAL. The Fund's performance will vary from time to time depending
upon market conditions, the composition of the Portfolio, and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
40
<PAGE>
Comparative performance information may be used from time to time in
advertising the Fund's shares, including appropriate market indices including
the benchmarks indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
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 the Portfolio for all purchases and sales of
portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See "Investment Objectives and Policies."
Fixed income, debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolio will be undertaken principally
to accomplish 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 Objective and Policies --
Portfolio Turnover"
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
41
<PAGE>
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek the best price and execution on a competitive basis for
both purchases and sales of securities.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
brokerage transactions to affiliates of the Advisor. In order for affiliates of
the Advisor to effect any portfolio transactions for the Portfolio, the
commissions, fees or other remuneration received by such affiliates must be
reasonable and fair compared to the commissions, fees, or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time. Furthermore, the Trustees of the Portfolio, including
a majority of the Trustees who are not "interested persons," have adopted
procedures which are reasonably designed to provide that any commissions, fees,
or other remuneration paid to such affiliates are consistent with the foregoing
standard.
Portfolio securities will not be purchased from or through or sold to
or through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Portfolio will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other customers
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 the Portfolio with those to be sold or purchased for
other customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Portfolio. In some instances,
this procedure might adversely affect the Portfolio.
If the Portfolio writes options that effect a closing purchase
transaction with respect to an option written by it, normally such transaction
will be executed by the same broker-dealer who executed the sale of the option.
The writing of options by the Portfolio will be subject to limitations
established by each of the exchanges governing the maximum number of options in
each class which may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written on the same or
different exchanges or are held or written in one or more accounts or through
one or more brokers. The number of options which the Portfolio may write may be
affected by options written by the Advisor for other investment advisory
clients. An exchange may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
42
<PAGE>
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which the Fund is a separate and distinct
series. A copy of the Declaration of Trust for the Trust is on file in the
office of the Secretary of The Commonwealth of Massachusetts. The Declaration of
Trust and the by-laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.
Effective January 1, 1998, the name of the Trust was changed from "The
JPM Institutional Funds" to "J.P. Morgan Institutional Funds", and the Fund's
name changed accordingly.
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall not be subject to any
personal liability for the acts or obligations of the Fund and that every
written agreement, obligation, instrument or undertaking made on behalf of the
Fund shall contain a provision to the effect that the shareholders are not
personally liable thereunder.
No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Trust in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Fund.
The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, and that no Trustee, officer, employee, or agent
is liable to any third persons in connection with the affairs of the Fund,
except as such liability may arise from his or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his or its duties to such
third persons. It also provides that all third persons shall look solely to Fund
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Trust's Declaration of Trust provides
that a Trustee, officer, employee, or agent is entitled to be indemnified
against all liability in connection with the affairs of the Fund.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
43
<PAGE>
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
DESCRIPTION OF SHARES
The Trust is an open-end management investment company organized as a
Massachusetts business trust in which the Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust."
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares (of any
series, if applicable) without changing the proportionate beneficial interest of
each shareholder in a Fund (or in the assets of other series, if applicable). To
date shares of 24 series have been authorized and 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 the Fund, holders are entitled
to share pro rata in the net assets of the Fund available for distribution to
such shareholders. See "Massachusetts Trust." Shares of a Fund have no
preemptive or conversion rights and are fully paid and nonassessable. The rights
of redemption and 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
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
44
<PAGE>
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 the
Prospectus.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
45
<PAGE>
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, the Fund is an open-end management investment company
which seeks to achieve its investment objective by investing all of its
investable assets in a corresponding Portfolio (the "Master Portfolio"), a
separate registered investment company with the same investment objective as the
Fund. Generally, when the Master Portfolio seeks a vote to change its investment
objective, its feeder fund(s) will hold a shareholder meeting and cast its vote
proportionately, as instructed by its shareholders. Fund shareholders are
entitled to one vote per fund share.
In addition to selling a beneficial interest to the Fund, the Portfolio
may sell beneficial interests to other mutual funds or institutional investors.
Such investors will invest in the Portfolio on the same terms and conditions and
will bear a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio may sell shares of their own fund using a
different pricing structure than the Fund. Such different pricing structures may
result in differences in returns experienced by investors in other funds that
invest in the Portfolio. Such differences in returns are not uncommon and are
present in other mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from Morgan at (800) 766-7722.
The Trust may withdraw the investment of the Fund from the Portfolio at
any time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same
investment objective and restrictions in accordance with the investment policies
with respect to the Portfolio described above and in the Fund's Prospectus.
Certain changes in the Portfolio's investment objective, policies or
restrictions, or a failure by the Fund's shareholders to approve a change in the
portfolio's investment objective or restrictions, may require withdrawal of the
Fund's interest in the Portfolio. Any such withdrawal could result in a
distribution in kind of portfolio securities (as opposed to a cash distribution)
from the Portfolio which may or may not be readily marketable. The distribution
in kind may result in the Fund having a less diversified portfolio of
investments or adversely affect the Fund's liquidity, and the Fund could incur
brokerage, tax or other charges in converting the securities to cash.
Notwithstanding the above, there are other means for meeting shareholder
redemption requests, such as borrowing.
Smaller funds investing in the Portfolio may be materially affected by
the actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may subsequently
experience higher pro rata operating expenses, thereby producing lower returns.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
46
<PAGE>
Additionally, because the Portfolio would become smaller, it may become
less diversified, resulting in potentially increased portfolio risk (however,
these possibilities also exist for traditionally structured funds which have
large or institutional investors who may withdraw from a fund). Also funds with
a greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. Whenever the Fund is requested to
vote on matters pertaining to the Portfolio (other than a vote by the Fund to
continue the operation of the Portfolio upon the withdrawal of another investor
in the Portfolio), the Trust will hold a meeting of shareholders of the Fund and
will cast all of its votes proportionately as instructed by the Fund's
shareholders. The Trust will vote the shares held by Fund shareholders who do
not give voting instructions in the same proportion as the shares of Fund
shareholders who do give voting instructions. Shareholders of the Fund who do
not vote will have no affect on the outcome of such matters.
TAXES
The 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; (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, the Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net investment
income and capital gain that it distributes to its shareholders, provided that
at least 90% of its net investment income and realized net short-term capital
gain in excess of net long-term capital loss for the taxable year is distributed
in accordance with the Code's timing requirements.
Under the Code, 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. The Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by 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
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
47
<PAGE>
31 of the year declared. Therefore, such dividends will be taxable to a
shareholder in the year declared rather than the year paid.
The Fund intends to qualify to pay exempt-interest dividends to its
shareholders by having, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets consist of tax exempt securities. An
exempt-interest dividend is that part of dividend distributions made by the Fund
which is properly designated as consisting of interest received by the Fund on
tax exempt securities. Shareholders will not incur any federal income tax on the
amount of exempt-interest dividends received by them from the Fund, other than
the alternative minimum tax under certain circumstances. In view of the Fund's
investment policies, it is expected that a substantial portion of all dividends
will be exempt-interest dividends, although the Fund may from time to time
realize and distribute net short-term capital gains and may invest limited
amounts in taxable securities under certain circumstances. See "Investment
Objective(s) and Policies" in the Prospectus.
Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital loss
(other than exempt interest dividends) are generally taxable to shareholders of
the Fund as ordinary income whether such distributions are taken in cash or
reinvested in additional shares. Distributions to corporate shareholders of the
Fund are not eligible for the dividends received deduction. If dividend payments
exceed income earned by the Fund, the excess distribution would be considered a
return of capital rather than a dividend payment. The Fund intends 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 the 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 the 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 such shareholders have held their 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 tax rate of 28% in respect of a capital asset held directly by such
individual for more than one year but no more than eighteen months, and the
maximum tax rate is reduced to 20% in respect of a capital asset held for more
than 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 the Fund.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
48
<PAGE>
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 such shareholders have held
their shares in the Fund. See the Prospectus for a discussion of the federal
income tax treatment of any gain or loss realized on the redemption or exchange
of the Fund's shares.
Any loss realized on a redemption or exchange of shares of the Fund
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before such disposition, such as pursuant to
reinvestment of a dividend in shares of the Fund.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where a put is acquired or a call option is
written thereon or the straddle rules described below are otherwise applicable.
Other gains or losses on the sale of securities will be short-term capital gains
or losses. Gains and losses on the sale, lapse or other termination of options
on securities will be treated as gains and losses from the sale of securities.
Except as described below, if an option written by the Portfolio lapses or is
terminated through a closing transaction, such as a repurchase by the Portfolio
of the option from its holder, the Portfolio will realize a short-term capital
gain or loss, depending on whether the premium income is greater or less than
the amount paid by the Portfolio in the closing transaction. If securities are
purchased by the Portfolio pursuant to the exercise of a put option written by
it, the Portfolio will subtract the premium received from its cost basis in the
securities purchased.
Any distribution of net investment income or capital gains will have
the effect of reducing the net asset value of Fund shares held by a shareholder
by the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above. 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
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
49
<PAGE>
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 the Portfolio accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time the
Portfolio actually collects such income or pays such liabilities, are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of debt securities held by the Portfolio, if any, denominated in
foreign currency, to the extent attributable to fluctuations in exchange rates
between the acquisition and disposition dates are also treated as ordinary
income or loss.
Forward currency contracts, options and futures contracts entered into
by the Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities.
Certain options, futures and foreign currency contracts held by the
Portfolio at the end of each taxable year will be required to be "marked to
market" for federal income tax purposes -- i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss regardless of how long the Portfolio has held such options
or futures. However, gain or loss recognized on certain foreign currency
contracts will be treated as ordinary income or loss.
FOREIGN SHAREHOLDERS. Dividends of net investment income and
distributions of realized net short-term gain in excess of net long-term loss to
a shareholder who, as to the United States, is a nonresident alien individual,
fiduciary of a foreign trust or estate, foreign corporation or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax at
the rate of 30% (or lower treaty rate) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions treated
as long term capital gains to foreign shareholders will not be subject to U.S.
tax unless the distributions are effectively connected with the shareholder's
trade or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder was present in the United States
for more than 182 days during the taxable year and certain other conditions are
met.
In the case of a foreign shareholder who is a nonresident alien
individual or foreign entity, the Fund may be required to withhold U.S. federal
income tax as "backup withholding" at the rate of 31% from distributions treated
as long-term capital gains and from the proceeds of redemptions, exchanges or
other dispositions of Fund shares unless IRS Form W-8 is provided. Transfers by
gift of shares of the Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of shares
of the Fund held by such a shareholder at his or her death will be includible in
his or her gross estate for U.S. federal estate tax purposes.
STATE AND LOCAL TAXES. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of 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 the Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that the
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code. The Portfolio is organized as a New York trust. The Portfolio is
not subject to any federal income taxation or income or franchise tax in the
State of New York or The Commonwealth of Massachusetts. The investment by the
Fund in the Portfolio does not cause the Fund to be liable for any income or
franchise tax in the State of New York.
ADDITIONAL INFORMATION
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares or the Portfolio's outstanding voting
securities present at a meeting, if the holders of more than 50% of the Fund's
outstanding shares or the Portfolio's outstanding voting securities are present
or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares
or the Portfolio's outstanding voting securities, whichever is less.
Telephone calls to the Fund, Morgan or Eligible Institutions as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's Registration Statement
filed with the SEC under the 1933 Act and the Trust's and the Portfolio's
Registration Statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The Registration
Statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
50
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
FINANCIAL STATEMENTS
The financial statements and the report thereon of Price Waterhouse LLP
are incorporated herein by reference to the Fund's March 31, 1997 annual report
filing made with the SEC on June 5, 1997 pursuant to Section 30(b) of the 1940
Act and Rule 30b2-1 thereunder (Accession Number 0000912057-97-019653).
Additionally, the financial statements are incorporated herein by reference to
the Fund's September 30, 1997 semi-annual report filing made with the SEC on
December 3, 1997 pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1
thereunder (Accession Number 0001047469-97-006632). The financial statements are
available without charge upon request by calling J.P. Morgan Funds Services at
(800) 766-7722. The Fund's financial statements include the financial statements
of the Portfolio.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
51
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA has the highest ratings assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB - Debt rated BB is regarded as having less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix A-1
<PAGE>
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.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix A-2
<PAGE>
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.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix A-3
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION CONCERNING NEW YORK MUNICIPAL OBLIGATIONS
The following information is a summary of special factors affecting
investments in New York municipal obligations. It does not purport to be a
complete description and is based on information from the supplement (dated June
6, 1997) to the Annual Information Statement of the State of New York dated July
26, 1996, as updated January 31 1997, and other sources of information. The
factors affecting the financial condition of New York State (the "State") and
New York City (the "City") are complex and the following description constitutes
only a summary.
GENERAL
The State is among the most populous states in the nation and has a
relatively high level of personal wealth. The State's economy is diverse with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment and a very small share of the nation's
farming and mining activity. The State's location, air transport facilities and
natural harbors have made it an important link in international commerce. Travel
and tourism constitute an important part of the economy. The State has a
declining proportion of its workforce engaged in manufacturing and an increasing
proportion engaged in service industries.
The State has historically been one of the wealthiest states in the
nation. The State economy has grown more slowly than that of the nation as a
whole, resulting in the gradual erosion of its relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Historically, the older northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
Although industry and commerce are broadly spread across the State,
particular activities are concentrated in the following areas: Westchester
County --headquarters for several major corporations; Buffalo -- diverse
manufacturing base; Rochester --manufacture of photographic and optical
equipment; Syracuse and Utica-Rome area --production of machinery and
transportation equipment; Albany-Troy-Schenectady -- government and education
center and production of electrical products; Binghampton --original site of the
International Business Machines Corporation and continued concentration of
employment in computer and other high technology manufacturing; and the City --
headquarters for the nation's securities business and for a major portion of the
nation's major commercial banks, diversified financial institutions and life
insurance companies. In addition, the City houses the home offices of major
radio and television broadcasting networks, many national magazines and a
substantial portion of the nation's book publishers. The City also retains
leadership in the
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-1
<PAGE>
design and manufacture of men's and women's apparel and is traditionally a
tourist destination.
ECONOMIC OUTLOOK
U. S. ECONOMY
The State has updated its mid-year forecast of national and State
economic activity through the end of calendar year 1998. The current projection
is for slightly slower growth than expected in October 1996. The revised
forecast projects real GDP growth of 2.3 percent in 1997, which is the same rate
now estimated for 1996, followed by a 2.4 percent increase in 1998. The growth
of nominal GDP is expected to rise from 4.3 percent in 1996 to 4.5 percent in
1997 and 4.8 percent in 1998. The inflation rate is expected to remain stable at
2.9 percent in 1997 and decrease to 2.8 percent in 1998. The annual rate of job
growth is expected to slow to 1.6 percent in both 1997 and 1998, down from the
2.0 percent increase in 1996. Growth in personal income and wages are expected
to slow accordingly in 1997 and 1998.
STATE ECONOMY
The State economic forecast has been changed only slightly from the one
formulated in October 1996. Moderate growth is projected to continue in 1997 for
employment, wages, and personal income, followed by a slight slowing in 1998.
Personal income is estimated to have grown by 5.2 percent in 1996, fueled in
part by an unusually large increase in financial sector bonus payments, and is
projected to grow 4.5 percent in 1997 and 4.2 percent in 1998. Overall
employment growth will continue at a modest rate, reflecting the moderate growth
of the national economy, continued spending restraint in government and
restructuring in the health care, social service and banking sectors.
STATE FINANCIAL PLAN
The State Constitution requires the Governor to submit to the
legislature a balanced executive budget which contains a complete plan of
expenditures (the "State Financial Plan") for the ensuing fiscal year and all
moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
A final budget must be approved before the statutory deadline of April 1. The
State Financial Plan is updated quarterly pursuant to law.
1997-98 STATE FINANCIAL PLAN
The Governor presented his 1997-98 executive budget to the legislature
on January 14, 1997. The executive budget also contains financial projections
for the State's 1998-99 and 1999-2000 fiscal years, detailed estimates of
receipts and an updated capital plan. It is expected that the Governor will
prepare amendments to his executive budget as permitted under law and that these
amendments will be reflected in a revised State Financial Plan to be released on
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-2
<PAGE>
or before February 13, 1997. There can be no assurance that the legislature will
enact the executive budget as proposed by the Governor into law, or that the
State's adopted budget projections will not differ materially and adversely from
the projections set forth in the State Financial Plan.
The 1997-98 State Financial Plan projects balance on a cash basis in
the General Fund. It reflects a continuing strategy of substantially reduced
State spending, including program restructurings, reductions in social welfare
spending and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $32.88 billion, a
decrease of $88 million from total receipts projected in the current fiscal
year. Total General Fund disbursement and transfers to other funds are projected
to be $32.84 billion, a decrease of $56 million from spending totals projected
for the current fiscal year. As compared to the 1996-97 State Financial Plan,
the executive budget proposes a year-to-year decline in General Fund spending of
0.2 percent. State funds spending (i.e., General Fund plus other dedicated
funds, with the exception of federal aid) is projected to grow by 1.2 percent.
Spending from all governmental funds (excluding transfers) is proposed to
increase by 2.2 percent from the prior fiscal year.
The executive budget proposes $2.3 billion in actions to balance the
1997-98 State Financial Plan. Before reflecting any actions proposed by the
Governor to restrain spending, General Fund disbursements for 1997-98 were
projected to grow by approximately 4 percent. This increase would have resulted
from growth in Medicaid, higher fixed costs such as pensions and debt service,
collective bargaining agreements, inflation and the loss of non-recurring
resources that offset spending in 1996-97. General Fund receipts were projected
to fall by roughly 3 percent. This reduction would have been attributable to
modest growth in the State's economy and underlying tax base, the loss of
non-recurring revenues available in 1996-97 and implementation of previously
enacted tax reduction programs.
The executive budget proposes to close this gap primarily through a
series of spending reductions and Medicaid cost containment measures, the use of
a portion of the 1996-97 projected budget surplus and other actions. The 1997-98
State Financial Plan projects receipts of $32.88 billion and spending of $32.84
billion, allowing for a deposit of $24 million into the Contingency Reserve Fund
("CRF") and a year-ending CRF reserve of $65 million, and a required repayment
of $15 million to the Tax Stabilization Reserve Fund ("TSRF").
The State has not yet adopted a budget for the 1997-98 fiscal year,
which began on April 1, 1997. Debt service appropriations for existing
State-supported obligations have been enacted for the entire 1997-98 fiscal
year. Legislation extending certain revenue-raising authority and making interim
appropriations for State personal service costs, various grants to local
governments and certain other items has been submitted by the Governor and
enacted by the legislature for the period through June 20, 1997. The Division of
the Budget expects that, if the 1997-98 budget is not enacted by that date,
additional interim appropriations will be submitted by the Governor and enacted
by the legislature. While there can be no assurances that a protracted delay in
adoption of the 1997-98 budget will
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-3
<PAGE>
not have an adverse impact on the State Financial Plan, the Division of the
Budget believes that continued reliance upon interim appropriations and
extension of existing law would not produce a materially adverse impact on the
State's cash flow position.
On February 13, 1997 the Governor submitted amendments to his executive
budget as permitted under the State Constitution. These amendments had the
effect of increasing total disbursements by $63 million, fully offset by
additional resources expected to be available in 1997-98. The 1997-98 State
Financial Plan, as amended, continued to project balance on a cash basis in the
General Fund. Total General Fund receipts and transfers from other funds were
projected to be $32.94 billion. Total General Fund disbursements and transfers
to other funds were projected to be $32.90 billion.
On March 10, 1997 the legislature and the Governor conducted a
consensus economic and revenue forecasting process as required under law. As a
part of the consensus revenue forecasting process, the Division of the Budget
updated the economic forecast upon which receipts estimates are based. The
forecast for income growth in 1997 was increased modestly to the 5.2 to 5.6
percent range, consistent with an economic outlook of modest growth in the
State's economy and moderate inflation. A complete revision to the State's
economic forecast will accompany the adopted budget and 1997-98 State Financial
Plan.
Since the submission of amendments to the executive budget, discussions
between the Governor and the State legislature have focused on the level of
resources available to finance the 1997-98 State Financial Plan, as well as
various approaches for resolving differences in a variety of programmatic areas.
The executive branch has identified approximately $1.56 billion in unbudgeted
resources for use in the 1997-98 State Financial Plan. The Governor has
indicated his willingness to seek agreement on an adopted budget for the 1997-98
fiscal year that addresses both executive and legislative priorities and any
newly identified costs to the State within the constraints of available
resources and a balanced State Financial Plan.
These additional resources have arisen primarily from revenues produced
by stronger-than-expected growth in the State's economy and higher final
personal income tax payments for the 1996 tax year; an additional $373 million
in non-recurring 1996-97 cash resources (discussed in the heading entitled
"1996-97 State Financial Plan" below); and approximately $200 million in
non-recurring federal aid for reimbursement of previous costs incurred by the
State for providing child protective services.
1996-97 STATE FINANCIAL PLAN
The State ended its 1996-97 fiscal year on March 31, 1997 in balance on
a cash basis, with a 1996-97 General Fund cash surplus as reported by the
Division of the Budget of approximately $1.4 billion. The cash surplus was
derived primarily from higher-than-expected revenues and lower-than-expected
spending for social services programs. Of the cash surplus amount, $1.05 billion
was previously budgeted by the Governor in his executive budget to finance the
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-4
<PAGE>
1997-98 State Financial Plan, and the additional $373 million is available for
use in financing the 1997-98 State Financial Plan when enacted by the
legislature.
The General Fund closing fund balance was $433 million. Of that amount,
$317 million was in the TSRF, after a required deposit of $15 million and an
additional deposit of $65 million in 1996-97. The TSRF can be used in the event
of any future General Fund deficit, as provided under the State Constitution and
State finance law. In addition, $41 million remains on deposit in the CRF. This
fund assists the State in financing any extraordinary litigation during the
fiscal year. The remaining $75 million reflects amounts on deposit in the
Community Projects Fund. This fund was created to fund certain legislative
initiatives. The General Fund closing fund balance does not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the Local Government Assistance Corporation ("LGAC")
financing program and was required to be on deposit as of March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97
fiscal year totaled $33.04 billion, an increase of less than 1 percent from
1995-96 levels (excluding deposits into the tax refund reserve account). This
was $129 million lower than originally projected in the 1996-97 State Financial
Plan as enacted in July 1996. As compared to the State's July projections,
personal income tax receipts were $730 million less than projected. Tax receipts
in all other categories were higher than estimated in the July projections,
including user taxes and fees ($72 million), business tax receipts ($457
million) and other taxes and fees ($133 million). Miscellaneous receipts and
transfers were a combined $63 million less than projected in the original
1996-97 State Financial Plan. The large variance in the personal income tax
projections reflects year-end actions that had the effect of reducing personal
income tax receipts and miscellaneous receipts by about $1.7 billion. These
actions included early implementation of withholding table changes accompanying
scheduled 1997 personal income tax reductions, accelerated payment of an
estimated $217 million in personal income tax refunds and a $1.26 billion
deposit of otherwise excess receipts to the tax refund reserve account. Adjusted
for these actions, personal income taxes were almost $1 billion higher than
expected, largely due to higher-than-projected withholding and estimated tax
collections as a result of stronger-than-projected economic growth, particularly
in the financial markets and the securities industries.
General Fund disbursements and transfers to other funds totaled $32.90
billion for the 1996-97 fiscal year, an increase of less than 1 percent from
unadjusted 1995-96 levels. Disbursements and transfers were $226 million lower
than levels projected in the July 1996-97 State Financial Plan forecast. As
compared to the July projections, grants to local governments were $250 million
lower, State operations spending was $38 million lower, general State charges
and debt service were $35 million lower than projected, and transfers to other
funds for debt service, capital projects and other purposes were $99 million
higher than originally projected. Much of the decline in local assistance
spending was the result of lower-than-projected public assistance
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-5
<PAGE>
caseload, while the increase in transfers relates to re-estimates in lottery
proceeds.
Disbursements in governmental funds for the 1996-97 fiscal year totaled
$62.95 billion, $3 billion lower than projected at the beginning of the fiscal
year. Much of this variance was due to the uncertainty surrounding federal
action on entitlement spending at the beginning of the fiscal year. Total
unadjusted governmental funds spending decreased $278 million or 0.4 percent
below the 1995-96 fiscal year.
SPECIAL CONSIDERATIONS
The Division of the Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1997-98 executive
budget, as modified by its revised economic forecast, are reasonable, and that
the 1997-98 State Financial Plan is balanced as currently projected. However,
the economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, can vary from fiscal year to fiscal year and are frequently the result
of actions taken not only by the State but also by entities such as the federal
government that are outside the State's control. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be no
assurance that the State economy will not experience results that are worse than
predicted, with corresponding material and adverse effects on the State's
financial projections. There can also be no assurance that the legislature will
enact the executive budget as currently proposed or that the State's actions
will be sufficient to preserve budgetary balance or to align recurring receipts
and disbursements in either 1997-98 or in future fiscal years.
Both houses of the legislature have proposed additional tax reductions
beyond those reflected in the State's current projections for 1997-98 and beyond
that, if enacted, could make it more difficult to achieve budget balance over
this period. In particular, reduction or elimination of the State's sales tax
treatment of clothing and footwear costing under $500 has been discussed. The
State now receives approximately $700 million annually under the current tax
statutes from taxation on clothing, and localities receive a roughly equivalent
amount.
Potential changes to federal tax law currently under discussion as part
of the federal government's efforts to enact a multiyear deficit and tax
reduction package could alter the federal definitions of income on which certain
State taxes rely. Certain proposals, if enacted, could have a significant impact
on State revenues in 1997-98 and thereafter. For example, proposals to alter the
maximum effective tax rate on capital gains could raise or lower State tax
receipts materially, depending upon the statutory approach adopted by Congress,
as well as on the resulting taxpayer behavior.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. This federal
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-6
<PAGE>
legislation fundamentally changed the programmatic and fiscal responsibilities
for administration of welfare programs at the federal, state and local levels:
The new law abolishes the federal Aid to Families with Dependent Children
program ("AFDC"), and creates a new Temporary Assistance to Needy Families
program ("TANF") funded with a fixed federal block grant to states. The new law
also imposes (with certain exceptions) a five-year durational limit on TANF
recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receiving benefits and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. States that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
Proposed legislation that includes both provisions necessary to
implement the State's TANF plan to conform with federal law and implement the
Governor's welfare reform proposal is still pending before the legislature.
There can be no assurances of timely enactment of certain conforming provisions
required under federal law. Further delay increases the risk that the State
could incur fiscal penalties for failure to comply with federal law.
GOVERNMENT FUNDS
The four governmental fund types that comprise the State Financial Plan
are the General Fund, the Special Revenue Funds, the Capital Projects Funds, and
the Debt Service Funds.
GENERAL FUND RECEIPTS
The 1997-98 State Financial Plan projects General Fund receipts
(including transfers from other funds) of $32.88 billion, a decrease of $88
million from the 1996-97 projected level. The estimate of taxes for 1997-98
reflects overall growth in the yield of the tax structures (when adjusted for
tax law and administrative changes) of between 4 and 4.5 percent, reflecting
modest growth in the economy and continued moderate inflation. The effects of
this growth are offset by the impact of previously enacted tax reductions and
new tax cut proposals as outlined below.
The executive budget contains several new tax initiatives which are
projected to reduce total receipts by $170 million in 1997-98. First, the
Governor has proposed a School Tax Relief initiative ("STAR"), a multiyear
property tax reduction proposal that, when fully implemented, would provide $1.7
billion in school property tax savings through the replacement of these local
revenues with dedicated State revenues. The initial year of the STAR property
tax reduction program has the effect of reducing personal income tax receipts by
$110 million in the 1997-98 State Financial Plan. Second, the executive budget
proposes to begin the process of eliminating the State portion of the estate tax
through adoption of the federal credit for State death taxes, and also phasing
out the State gift tax over a multiyear period. This proposal
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-7
<PAGE>
would reduce revenues from these taxes by $10 million in 1997-98 and larger
amounts in future years. Finally, the Governor has proposed an unspecified $50
million tax reduction program designed to spur private sector job creation in
the State. For State Financial Plan purposes, the $50 million is shown as a
charge against the personal income tax.
Personal income tax collections for 1997-98 are now projected to be
$17.04 billion, an increase of $471 million from the projected 1996-97 level.
This estimate reflects growth in "constant law" liability (i.e., taxpayer
liability before scheduled or proposed tax reductions) of about 5 percent in
1997, partially offset by personal income tax reductions already in law, which
are estimated to produce taxpayer savings of almost $4 billion in 1997-98 ($1.7
billion more than in the current fiscal year) and the proposed STAR tax
reduction program referenced above.
User tax and fee receipts are projected at $7.02 billion in 1997-98, up
$255 million from 1996-97 projected levels. Total collections in this category
are dominated by the State sales and use tax, which accounts for 77 percent of
total receipts in the category. The moderate economic expansion experienced this
year is expected to slow somewhat next year, producing an estimated growth in
the base of the sales and use tax of 4.2 percent in 1997-98.
Total business taxes are now projected at $4.76 billion in 1997-98, a
decrease of $65 million from 1996-97 levels. While "constant-law" liability
growth is anticipated to continue in 1997-98 the effect of scheduled tax
reductions taking effect in 1997 (including the elimination of the business tax
surcharge) leads to a year-to-year decline. The business tax decline also
reflects the continuing diversion of business tax receipts into dedicated
transportation funds.
Other tax receipts are now projected at $850 million, down $191 million
from the estimated current year level. The decline in receipts reflects the
dedication of the real estate transfer tax for support of environmental purposes
($87 million of receipts from this tax support the Environmental Protection
Fund, and the balance supports debt service on the Clean Water/Clean Air Bond
Act with any excess transferred back to the General Fund). The decline also
reflects the first full-year impact of the repeal of the real property gains tax
and the initial impact of the proposed gift and estate tax changes referenced
above.
Miscellaneous receipts, which include license revenues, fee and fine
income, investment income and abandoned property proceeds, as well as the
proceeds of the largest share of the State's medical provider assessment and
various one-time transactions, are estimated to total $l.49 billion in 1997-98,
a decline of $657 million from the current year. This decline is largely
attributable to the loss of several one-time transactions in 1996-97 that
contributed approximately $750 million in receipts in 1996-97.
Transfers from other funds consist primarily of sales tax revenues in
excess of debt service requirements used to support debt service payments to
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-8
<PAGE>
LGAC. Projected amounts in this category for 1997-98 total $1.72 billion, an
increase of $99 million from 1996-97 levels.
DISBURSEMENTS
The 1997-98 State Financial Plan projects General Fund disbursements of
$32.84 billion, a decrease of $56 million from projected spending levels for the
current year.
Disbursements from the category of Grants to Local Governments
constitute approximately 68 percent of all General Fund spending and include
payments to local governments, nonprofit providers and individuals.
Disbursements in this category are projected to decline by $705 million,
primarily reflecting proposed reductions in State Medicaid spending of $579
million. The State's tuition assistance program would be reduced to achieve
savings of $142 million. General Fund support for school aid would increase by
$293 million on a State fiscal year basis. This category is also affected by the
proposed reclassification of economic development spending previously reflected
in the State operations category ($13 million) and a further proposed
reclassification of higher education debt service payments from this category to
the debt service category of the State Financial Plan ($207 million).
Support for State operations is projected to decline by $615 million to
$5.2 billion in 1997-98. Almost all of this decline is attributable to the
proposed transfer of support for State University of New York ("SUNY")
operations from the General Fund to the Special Revenue fund type. All General
Fund support for SUNY is proposed for transfer into a single unified fund for
SUNY operations. After adjusting for this proposed change, State operations
disbursements increase modestly, reflecting the costs of previously negotiated
salary increases offset by proposed agency efficiencies and the continued
decline in the size of the State's workforce. The executive budget recommends
net reductions of approximately 1,700 positions, bringing the size of the State
workforce to approximately 191,000 by the end of the 1997-98 fiscal year.
General State charges are projected to total $2.29 billion in 1997-98,
an increase of $146 million from 1996-97 projected levels. This change is
affected by the proposed transfer of costs for SUNY operations to a Special
Revenue Fund, which lowers projected spending in this category by $126 million.
Pension-related costs are expected to increase by $270 million, reflecting the
impact of certain non-recurring actions taken in 1996-97 which lowered General
Fund costs, and the increase in costs associated with the amortization of
certain pension liabilities. Health insurance costs, the largest component of
this category, are projected to remain stable from calendar year 1996 to 1997.
General Fund debt service includes short-tern obligations of the
State's commercial paper program and debt service on its long-term bonds, which
are reflected as transfers to the Debt Service Fund. Projected short-term debt
service costs are expected to be $11 million for 1997-98. Transfers in support
of debt service are projected to be $1.89 billion in 1997-98, an increase of
$314 million. Of the projected increase, $207 million is attributable to the
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-9
<PAGE>
reclassification of City University of New York ("CUNY") higher education
spending from grants to local governments to the debt service category so that
this category conforms to debt service levels. Transfers to the Capital Projects
Fund are projected to be $180 million for 1997-98, an increase of $59 million.
This transfer is net of all other resources available in the Capital Projects
Fund and reflects increased General Fund support for maintenance and
rehabilitation of State facilities in order to replace certain non-recurring
revenues available in 1996-97 for this purpose.
GENERAL FUND CLOSING FUND BALANCE
The 1997-98 closing fund balance in the General Fund is projected to be
$397 million. The required deposit to the TSRF adds $15 million to the expected
1996-97 balance of $317 million in that fund, bringing the total to $332 million
at the close of 1997-98. The remaining General Fund balance reflects a reserve
of $65 million in the CRF (after an additional deposit of $24 million in
1997-98) to provide resources to finance potential costs associated with
litigation against the State. The closing fund balance excludes amounts on
deposit in the tax refund reserve account.
NON-RECURRING RESOURCES
The Division of the Budget estimates that the 1997-98 State Financial
Plan includes approximately $66 million in non-recurring resources, comprising
0.4 percent of the General Fund budget. These include $25 million from a
refunding of Housing Finance Agency bonds and $41 million in miscellaneous
receipts and revenue transfers. Recommendations included in the executive budget
are expected to provide fully annualized savings in 1998-99 which more than
offset the non-recurring resources used in 1997-98. The 1997-98 executive budget
also utilizes $943 million of projected 1996-97 resources for purposes of
balancing the 1997-98 State Financial Plan.
SPECIAL REVENUE FUNDS
For 1997-98, the State Financial Plan projects disbursements of $29.46
billion from Special Revenue Funds, increase of $2.13 billion. This includes
$8.4 billion from Special Revenue Funds containing State revenues and $21.05
billion from funds containing federal grants, primarily for social welfare
programs.
The 1997-98 executive budget recommends that all SUNY revenues be
consolidated in a single fund, permitting SUNY more flexibility and control in
the use of its revenues. As a result of this proposal, General Fund support
would be transferred to this fund, rather than spent directly from the General
Fund. SUNY's spending from this fund is projected to total $2.74 billion in
1997-98. The Mass Transportation Operating Assistance Fund and the Dedicated
Mass Transportation Trust Fund, which receive taxes earmarked for mass
transportation programs throughout the State, are projected to have total
disbursements of $1.29 billion in 1997-98. Disbursements also include $1.66
billion in STAR proceeds from a new fund financed by lottery proceeds and
dedicated personal
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-10
<PAGE>
income tax receipts. Proceeds from this fund will be used to make start-up
payments to school districts each year, as well as the local property tax
reduction payments for the STAR program. Disbursements of $660 million from the
Disproportionate Share Medicaid Assistance Fund constitute most of the remaining
estimated State Special Revenue Funds disbursements for 1997-98.
Total federal Special Revenue Fund disbursements are projected at
$21.05 billion in 1997-98, an increase of $944 million from the current year
projected level. Federal Special Revenue Fund projections assume the receipt of
$12.16 billion in total federal Medicaid reimbursements and $2.7 billion in
federal reimbursement for the State's welfare programs. Most of the increase in
federal funds is due to increased welfare funding under the new federal welfare
block grant. All other federal spending is projected at $6.19 billion for
1997-98, an increase of $405 million.
CAPITAL PROJECTS FUNDS
Disbursements from the Capital Projects Funds in 1997-98 are estimated
at $3.93 billion, or $57 million less than 1996-97 projections. The spending
plan includes: $2.2 billion in disbursements for the third year of the five-year
$12.7 billion State and local highway and bridge program; $110 million in
spending from the Clean Water/Clean Air Bond Act approved by the voters in 1996;
correctional services spending of $251 million; and SUNY capital spending of
$185 million.
The share of capital projects to be financed by "pay-as-you-go"
resources is projected to be approximately 24 percent. State-supported bond
issuances finance 48 percent of capital projects, with federal grants financing
the remaining 28 percent.
DEBT SERVICE FUNDS
Disbursements from Debt Service Funds are estimated at $3.02 billion m
1997-98, an increase of $464 million from 1996-97. Of this increase, $81 million
is attributable to transportation bonding for the State and local highway and
bridge programs which are financed by the Dedicated Highway and Bridge Trust
Fund, and $45 million is for the mental hygiene programs financed through the
Mental Health Services Fund. This increase also reflects $262 million in CUNY
senior and community college debt service formally classified as local
assistance in the General Fund. Debt service for LGAC bonds is projected at $340
million.
CASH FLOW
The projected 1997-98 General Fund cash flow will not depend on either
short-term spring borrowing or the issuance of LGAC bonds. The new-money bond
issuance portion of the LGAC program was completed in 1995-96, and provisions
prohibiting the State from returning to a reliance upon cash flow manipulation
to balance its budget will remain in bond covenants until the LGAC bonds are
retired.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-11
<PAGE>
The 1997-98 cash flow projects substantial closing balances in each
quarter of the fiscal year, with excesses in receipts over disbursements in
every quarter of the fiscal year, and no monthly balance (prior to March) lower
than $400 million. The closing fund balance is projected at $397 million. The
cash flow projections assume continuation of legislation enacted in 1996-97 that
permits the State to use balances in the Lottery Fund for cash flow purposes.
OUTYEAR PROJECTIONS OF RECEIPTS AND DISBURSEMENTS
General Fund receipts are projected at $33.02 billion and $33.91
billion for 1998-99 and 1999-2000, respectively. The receipts projections were
prepared on the basis of an economic forecast of a steadily growing national
economy, in an environment of low inflation and slow employment growth. The
forecast for the State's economic performance likewise is for slow but steady
economic growth. The receipt projections reflect tax reductions proposed in the
executive budget that will reduce receipts by an estimated $798 million in
1998-99 and at $1.43 billion in 1999-2000. The bulk of previously enacted tax
reductions are annualized in 1997-98, and their impact in the out years is
largely proportional to projected growth in the underlying tax liability.
Disbursements from the General Fund are projected at $34.60 billion in
1998-99 and $35.93 billion in 1999-2000, before assuming additional spending
efficiencies and/or additional federal revenue maximization. Assuming
implementation of proposed cost containment and other actions proposed in the
executive budget, annual disbursements for fiscal years 1998-99 and 1999-2000
grow by $1.77 billion and $1.33 billion, respectively. This includes additional
support for school aid pursuant to the STAR program. Disbursement growth is
higher in 1998-99, in part, because an additional payroll date and Medicaid
cycle will come due, adding non-recurring costs of $286 million to that year.
It is expected that the State's 1998-99 State Financial Plan will
reflect a continuing strategy of substantially reduced State spending, including
agency consolidations, reductions in the State workforce, and efficiency and
productivity initiatives. As Medicaid, welfare and other reforms continue to
evolve at both the State and federal level, additional savings are expected to
accrue to the State. As in the past, the State also expects to continue
aggressive efforts to secure federal funds. Therefore, the outyear projections
assume a target of $600 million in savings from these reforms in 1998-99,
growing to $800 million in 1999-2000. It is expected that the Governor will
propose to close these remaining budget imbalances primarily through further
spending reductions.
PRIOR FISCAL YEARS
1995-96 FISCAL YEAR
The State ended its 1995-96 fiscal year on March 31, 1996 with a
General Fund cash surplus. The Division of the Budget reported that revenues
exceeded projections by $270 million, while spending for social service programs
was lower than forecast by $120 million and all other spending was lower by $55
million.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-12
<PAGE>
From the resulting benefit of $445 million, a $65 million voluntary deposit was
made into the TSRF, and $380 million was used to reduce 1996-97 State Financial
Plan liabilities by accelerating 1996-97 payments, deferring 1995-96 revenues
and making a deposit to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of
$129 million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance includes $237
million on deposit in the TSRF, to be used in the event of any future General
Fund deficit as provided under the State Constitution and State finance law. In
addition, $41 million is on deposit in the CRF. The CRF was established in State
fiscal year 1993-94 to assist the State in financing the costs of extraordinary
litigation. The remaining $9 million reflects amounts on deposit in the Revenue
Accumulation Fund. This fund was created to hold certain tax receipts
temporarily before their deposit to other accounts. In addition, $678 million
was on deposit in the tax refund reserve account, of which $521 million was
necessary to complete the restructuring of the State's cash flow under LGAC.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions enacted
and effective in both 1994 and 1995. General Fund disbursements totaled $32.68
billion for the 1995-96 fiscal year, a decrease of 2.2 percent from 1994-95
levels. Mid-year spending reductions, taken as part of a management review
undertaken in October at the direction of the Governor, yielded savings from
Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements achieved
by State agencies. Together with decreased social services spending, this
management review accounts for the bulk of the decline in spending.
1994-95 FISCAL YEAR
The State ended its 1994-95 fiscal year with the General Fund in
balance. The $241 million decline in the fund balance reflects the planned use
of $264 million from the CRF, partially offset by the required deposit of $23
million to the TSRF. In addition, $278 million was on deposit in the tax refund
reserve account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million in
the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9%
percent from 1993-94 levels. General Fund disbursements totaled $33.40 billion
for the 1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal
year. The increase in disbursements was primarily the result of one-time
litigation costs for the State, funded by the use of the CRF, offset by $188
million in spending reductions initiated in January 1995 to avert a potential
gap in the 1994-95 State Financial Plan. These actions included savings from a
hiring
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-13
<PAGE>
freeze, halting the development of certain services and the suspension of
nonessential capital projects.
CERTAIN LITIGATION
The legal proceedings noted below involve State finances, State
programs or miscellaneous tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial. These
proceedings could affect adversely the financial condition of the State
hereafter. The State will describe newly initiated proceedings.
STATE FINANCE POLICIES
INSURANCE LAW
In TRUSTEES OF AND THE PENSION, HOSPITALIZATION BENEFIT PLAN OF THE
ELECTRICAL INDUSTRY, ET AL. V. CUOMO, ET AL. (commenced November 25, 1992 in the
United States District Court for the Eastern District of New York), plaintiff
employee welfare benefit plans sought a declaratory judgment nullifying on the
ground of federal preemption provisions of Section 2807-c of the Public Health
Law and implementing regulations which impose a bad debt and charity care
allowance on all hospital bills and a 13 percent surcharge on inpatient bills
paid by employee welfare benefit plans. This case has been dismissed by
stipulation and order, by and among the parties, with prejudice.
Two separate proceedings challenge regulations promulgated by the
Superintendent of Insurance establishing excess medical malpractice premium
rates for the 1986-87 through 1995-96 and 1996-97 fiscal years, respectively
(NEW YORK STATE HEALTH MAINTENANCE ORGANIZATION CONFERENCE, INC., ET AL. V.
MUHL, ET AL., Supreme Court, Albany County). Plaintiffs allege that the method
of rate calculation is arbitrary, capricious and excessive and seek, INTER ALIA,
to annul the present rates and to compel the State to refund accumulated
surpluses not actuarially required.
TAX LAW
Aspects of petroleum business taxes are the subject of administrative
claims and litigation. In TUG BUSTER BOUCHARD, ET AL. V. WETZLER (Supreme Court,
Albany County, commenced November 13, 1992), petitioner tugboat corporations,
which purchased fuel out of State and consumed such fuel within the State,
contended that the assessment of the petroleum business tax pursuant to Tax Law
ss.301 to such fuel violated the commerce clause of the United States
Constitution. Petitioners contended that the application of Section 301 to the
interstate transaction but not to purchasers who purchased and consumed fuel
within the State discriminated against interstate commerce. By decision dated
November 14, 1996, based upon the State's concession that the challenged
provision was unconstitutional as applied to the petitioners and other similarly
situated vessels, the Court of Appeals affirmed the order of the Appellate
Division, Third Department, dated January 4, 1996, which held that Tax Law
ss.301(a)(l)(ii) (the portion of the petroleum business tax applicable between
1984 and September 1,
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-14
<PAGE>
1990 to petroleum businesses which import petroleum into the State for
consumption in the State) was unconstitutional. The State's motion for
reargument, seeking clarification and/or modification of the Court of Appeals
decision, was denied by order dated December 20, 1996.
In MATTER OF THE PETITION OF CONSOLIDATED RAIL CORPORATION V. TAX
APPEALS TRIBUNAL (Appellate Division, Third Department, commenced December 22,
1995), petitioner rail freight corporation, which purchases diesel motor fuel
out of State and imports the fuel into the State for use, distribution, storage
or sale in the State, contends that the assessment of the petroleum business tax
pursuant to Tax Law ss.301-a to such fuel purchases violates the commerce clause
of the United States Constitution. Petitioner contends that the application of
Section 301-a to the interstate transaction but not to purchasers who purchase
fuel within the State for use, distribution, storage or sale within the State
discriminates against interstate commerce.
In NEW YORK ASSOCIATION OF CONVENIENCE STORES, ET AL. V. URBACH, ET
AL., petitioners New York Association of Convenience Stores, National
Association of Convenience Stores, M.W.S. Enterprises, Inc. and Sugarcreek
Stores, Inc. seek to compel respondents, the Commissioner of Taxation and
Finance and the Department of Taxation and Finance, to enforce sales and excise
taxes pursuant to Tax Law Articles 12-A, 20 and 28 on tobacco products and motor
fuel sold to non-Indian consumers on Indian reservations. In orders dated August
13, 1996 and August 24, 1996, the Supreme Court, Albany County, ordered, INTER
ALIA, that there be equal implementation and enforcement of said taxes for sales
to non-Indian consumers on and off Indian reservations and further ordered that
if respondents failed to comply within 120 days, no tobacco products or motor
fuel could be introduced onto Indian reservations other than for Indian
consumption or, alternatively, the collection and enforcement of such taxes
would be suspended statewide. Respondents appealed to the Appellate Division,
Third Department and invoked CPLR 5519(a)(1), which provides that the taking of
the appeal stayed all proceedings to enforce the orders pending the appeal.
Petitioner's motion to vacate the stay was denied. In a decision entered May 8,
1997, the Third Department modified the orders by deleting the portion thereof
that provided for the statewide suspension of the enforcement and collection of
the sales and excise taxes on motor fuel and tobacco products. The Third
Department held, INTER ALIA, that petitioners had not sought such relief in
their petition and that it was an error for the Supreme Court to have awarded
such undemanded relief without adequate notice of its intent to do so. On May
22, 1997, respondents appealed to the Court of Appeals on other grounds and
again invoked the statutory stay.
On May 23, 1997, petitioners moved in Supreme Court, Albany County, for
an order compelling the enforcement of the provisions of Articles 12-A, 20 and
28 as applicable to tobacco products and motor fuel sold to non-Indian consumers
on Indian reservations by barring introduction of tobacco products and motor
fuel onto Indian reservations other than for Indian consumption or, in the
alternative, suspending statewide the collection of Articles 12-A, 20 and 28
taxes respecting tobacco products and motor fuel.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-15
<PAGE>
LOCALITIES
THE CITY OF NEW YORK
The fiscal health of the State may also be affected by the fiscal
health of the City, which continues to require significant financial assistance
from the State. The City depends on State aid both to enable the City to balance
its budget and to meet its cash requirements. The City has achieved balanced
operating results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAAP standards.
FISCAL OVERSIGHT
In response to the City's fiscal crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among those actions, the
State established the Municipal Assistance Corporation For The City of New York
("NYC MAC") to provide financing assistance to the City; the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs; and the Office of the State Deputy Comptroller for the City of New York
("OSDC") to assist the Control Board in exercising its powers and
responsibilities. A control period existed from 1975 to 1986 during which the
City was subject to certain statutorily prescribed fiscal controls. Although the
Control Board terminated the control period in 1986 when certain statutory
conditions were met and suspended certain Control Board powers, upon the
occurrence or "substantial likelihood and imminence" of the occurrence of
certain events, including (but not limited to) a City operating budget deficit
of more than $100 million or impaired access to public credit markets, the
Control Board is required by law to reimpose a control period.
Currently, the City and its covered organizations (i.e., those which
receive or may receive moneys from the City directly, indirectly or
contingently) operate under a four-year financial plan which the City prepares
annually and periodically updates. The City's financial plan includes its
capital, revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The City's projections set forth
in its financial plan are based on various assumptions and contingencies, some
of which are uncertain and may not materialize. Unforeseen developments and
changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements.
Implementation of the City's financial plan is also dependent upon the
ability of the City and certain covered organizations to market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
The City currently projects that if no action is taken, it will exceed its State
constitutional general debt limit beginning in City fiscal year 1998. The
current financial plan includes certain alternative methods of financing a
portion of the City's capital program which require State or other outside
approval. Future developments concerning the City or its covered organizations
and public discussion of such developments, as well as prevailing market
conditions and
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-16
<PAGE>
securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such covered organizations and may also affect the market
for their outstanding securities.
MONITORING AGENCIES
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's financial plans which analyze the City's
forecasts of revenues and expenditures, cash flow and debt service requirements
for, and financial plan compliance by, the City and its covered organizations.
According to recent staff reports, the City's economy has experienced
weak employment and moderate wage and income growth throughout the mid-1990's.
Although this trend is expected to continue for the rest of the decade, there is
the risk of a slowdown in the City's economy in the next few years, which would
depress revenue growth and put further strains on the City's budget. These
reports have also indicated that recent City budgets have been balanced in part
through the use of non-recurring resources; that the City's financial plan tends
to rely on actions outside its direct control; that the City has not yet brought
its long-term expenditure growth in line with recurring revenue growth; and that
the City is therefore likely to continue to face substantial future budget gaps
that must be closed with reduced expenditures and/or increased revenues.
OTHER LOCALITIES
Certain localities outside the City have experienced financial problems
and have requested and received additional State assistance during the last
several State fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1996-97
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
reestablishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy Municipal Assistance Corporation ("Troy MAC") was created to help Troy
avoid default on certain obligations. The legislation creating Troy MAC
prohibits the city from seeking federal bankruptcy protection while Troy MAC
bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-17
<PAGE>
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1994, the total indebtedness of all
localities in the State other that in the City was approximately $17.7 billion.
A small portion (approximately $82.9 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to State
enabling legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than the City authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Seventeen localities had
outstanding indebtedness for deficit financing at the close of their fiscal year
ending in 1994.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the public authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential problems
of declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in the
future.
i:\dsfndlgl\institut\0198fix.pea\nytrbsai.doc
Appendix B-18
<PAGE>
- --------------------------------------------------------------------------------
|
MARCH 2, 1998 | PROSPECTUS
|
================================================================================
J.P. MORGAN INSTITUTIONAL
BOND FUND-ULTRA
========================================
Seeking high total return
by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense to state or suggest otherwise.
[LOGO] JPMorgan
Distributed by Funds Distributor, Inc.
<PAGE>
CONTENTS
<TABLE>
====================================================================================================================================
<S> <C>
2 | FIXED INCOME MANAGEMENT APPROACH
Fixed income investment process ..........................................................2
4 | J.P. MORGAN INSTITUTIONAL BOND FUND-ULTRA
The fund's goal, investment approach, Fund description .........................................................................4
risks, expenses, performance
Investor expenses ........................................................................4
Performance ..............................................................................5
6 | YOUR INVESTMENT
Investing in the J.P. Morgan Investing through a financial professional ...............................................6
Institutional Bond Fund-Ultra
Investing through an employer-sponsored retirement plan ..................................6
Investing through an IRA or rollover IRA .................................................6
Investing directly .......................................................................6
Opening your account .....................................................................6
Adding to your account ...................................................................6
Selling shares ...........................................................................7
Account and transaction policies .........................................................7
Dividends and distributions ..............................................................8
Tax considerations .......................................................................8
9 | FUND DETAILS
More about risk and the fund's Master/feeder structure ..................................................................9
business operations
Management and administration ............................................................9
Risk and reward elements ................................................................10
Securities ..............................................................................12
FOR MORE INFORMATION ............................................................back cover
</TABLE>
<PAGE>
INTRODUCTION
================================================================================
J.P. MORGAN INSTITUTIONAL BOND FUND-ULTRA
This fund invests primarily in bonds and other fixed income securities through a
master portfolio (another fund with the same goal). The fund seeks high total
return consistent with moderate risk.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
The fund is not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $250 billion in assets under management,
including assets managed by the fund's advisor, Morgan Guaranty Trust Company of
New York.
========================================
Before you invest
Investors considering the fund should
understand that:
o The value of the fund's shares will
fluctuate over time. You could lose
money if you sell when the fund's
share price is lower than when you
invested.
o There is no assurance that the fund
will meet its investment goal.
o Future returns will not necessarily
resemble past performance.
o The fund invests a portion of assets
in non-investment-grade bonds ("junk
bonds"), which offer higher
potential yields but have a higher
risk of default and are more
sensitive to market risk than
investment-grade bonds.
- ----------------------------------------
|
| 1
|
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
================================================================================
The J.P. Morgan Institutional Bond
Fund-Ultra invests primarily in bonds
and other fixed income securities.
The fund's investment philosophy,
developed by its advisor, emphasizes the
potential for consistently enhancing
performance while managing risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an
information advantage through the depth
of its global fixed-income research and
the sophistication of its analytical
systems. Using a team-oriented approach,
J.P. Morgan seeks to gain insights in a
broad range of distinct areas and takes
positions in many different ones,
helping the fund to limit exposure to
concentrated sources of risk.
In managing the fund, J.P. Morgan
employs a three-step process that
combines sector allocation, fundamental
research for identifying portfolio
securities, and duration management.
[GRAPHIC] Sector allocation The sector allocation
team meets monthly, analyzing the
The fund invests across a range fundamentals of a very broad range of
of different types of securities sectors. The team seeks to enhance
performance and manage risk by
underweighting or overweighting sectors.
[GRAPHIC] Security selection Relying on the
insights of different specialists,
The fund makes its portfolio including credit analysts, quantitative
decisions as described later in researchers, and dedicated fixed income
this prospectus traders, the portfolio managers make buy
and sell decisions according to the
fund's goal and strategy.
[GRAPHIC] Duration management Forecasting teams
use fundamental economic factors to
J.P. Morgan uses a disciplined develop strategic forecasts of the
process to control the fund's direction of interest rates. Based on
sensitivity to interest rates these forecasts, strategists establish
the fund's exposure to interest
rate risk (a goal of duration
management), typically remaining
relatively close to the duration of the
market as a whole, as represented by the
fund's benchmark. The strategists
closely monitor the fund and make
tactical adjustments as necessary.
|
2 | FIXED INCOME MANAGEMENT APPROACH
|
<PAGE>
================================================================================
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
|
| 3
|
<PAGE>
J.P. MORGAN INSTITUTIONAL
BOND FUND-ULTRA |
================================================================================
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL BOND FUND-ULTRA)
[GRAPHIC] GOAL
The fund seeks to provide high total return consistent with moderate risk of
capital and maintenance of liquidity.
[GRAPHIC] INVESTMENT APPROACH
The fund invests primarily in fixed income securities, including U.S. government
and agency securities, corporate bonds, private placements, asset-backed and
mortgage-backed securities, and others. These securities may be of any maturity,
but under normal market conditions the management team will keep the fund's
duration within one year of that of the Salomon Brothers Broad Investment Grade
Bond Index (currently about five years).
Up to 25%of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. At least
75% of total assets must be invested in securities that, at the time of
purchase, are rated investment-grade (BBB/Baa or better) or are the unrated
equivalent, including at least 65% A or better. No more than 25% of assets may
be invested in securities as low as B.
[GRAPHIC] POTENTIAL RISKS AND REWARDS
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 2.
To the extent that the fund seeks higher returns by investing in
non-investment-grade bonds, it takes on additional risks, because these bonds
are more sensitive to economic news and their issuers are in less secure
financial condition. Additionally, because the fund may invest up to 25% of
assets in foreign securities, it takes on additional risks.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on pages 10-13.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $250
billion, including more than $31 billion using the same strategy as this fund.
The portfolio management team is led by William G. Tennille, vice president, who
has been at J.P. Morgan since 1992, and by Connie J. Plaehn, managing director,
who has been at J.P. Morgan since 1984. Both have been on the team since January
of 1994.
================================================================================
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund are
shown at right. The fund has no sales, redemption, exchange, or account fees,
although some institutions may charge you a fee for shares you buy through them.
The annual fund expenses shown are deducted from fund assets prior to
performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
================================================================================
Annual fund operating expenses(1) (%)
================================================================================
<S> <C>
Management fees (actual) 0.30
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.07
- --------------------------------------------------------------------------------
Total operating expenses(2)
(after reimbursement) 0.37
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Expense example
================================================================================
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
Your cost($) 4 12 21 47
- --------------------------------------------------------------------------------
</TABLE>
|
4 | J.P. MORGAN INSTITUTIONAL BOND FUND
|
<PAGE>
<TABLE>
====================================================================================================================================
PERFORMANCE (unaudited)
===================================
Average annual total return (%) Shows performance over time, for periods ended December 31, 1997
===================================-------------------------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. Since inception (3)
<S> <C> <C> <C> <C>
J.P. Morgan Bond Fund (after expenses) 9.13 9.97 7.23 8.06
- ------------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers Broad Investment Grade Bond Index(4) (no expenses) 9.62 10.43 7.53 8.91
- ------------------------------------------------------------------------------------------------------------------------------------
===================================
Year-by-year total return (%) Shows changes in returns by calendar year
===================================-------------------------------------------------------------------------------------------------
</TABLE>
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
J.P. Morgan Bond Fund 10.23 10.09 13.45 6.53 9.87 (2.97) 18.17 3.13 9.13
Bond Index (4) 14.24 8.28 15.78 7.59 9.89 (2.85) 18.55 3.62 9.62
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 The fund has a master/feeder structure as described on page 9. This table
shows the fund's estimated expenses and its estimated share of master
portfolio expenses for the fiscal year ending 10/31/98, expressed as a
percentage of the fund's estimated average net assets and reflecting
reimbursement for ordinary expenses over 0.37%.
2 Without reimbursement, other expenses and total operating expenses, on an
annualized basis, are estimated to be 0.29% and 0.59%, respectively. If actual
assets of the master portfolio are lower than estimated, the fund's share of
master portfolio total operating expenses may exceed 0.37%. Morgan has agreed
to limit the fund's total operating expenses to an amount which will not be
less than 0.35% nor more than 0.40%.There is no guarantee that reimbursement
will continue beyond 2/28/99.
3 The fund commenced operations on 12/15/97. Returns reflect performance of
J.P. Morgan Bond Fund (a separate feeder fund investing in the same master
portfolio) from 7/31/93 through 12/31/97. Returns for the period 3/31/88
through 7/31/93 reflect performance of The Pierpont Bond Fund, the predecessor
of J.P. Morgan Bond Fund.
4 The Bond Index is composed of the Lehman Brothers Government/Corporate
Intermediate Bond Index, consisting of all investment-grade bonds with
maturities between 1 and 9.99 years, from February 1988 through 9/30/91, and
the Salomon Brothers Broad Investment Grade Bond Index, consisting of U.S.
Treasury and agency securities and investment grade mortgage and corporate
bonds, from 10/1/91 forward. Both are unmanaged indices that measure bond
market performance.
|
J.P. MORGAN INSTITUTIONAL BOND FUND-ULTRA | 5
|
<PAGE>
YOUR INVESTMENT
================================================================================
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Determine the amount you are investing. The minimum amount for initial
investments is $20,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on minimum
investments, call 1-800-766-7722.
o Complete the application, indicating how much of your investment you want to
allocate to which fund(s). Please apply now for any account privileges you may
want to use in the future, in order to avoid the delays associated with adding
them later on.
o Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
OPENING YOUR ACCOUNT
By wire
o Mail your completed application to the Shareholder Services Agent.
o Call the Shareholder Services Agent to obtain an account number and to place a
purchase order. Funds that are wired without a purchase order will be returned
uninvested.
o After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York
Routing number: 021-000-238
Credit: J.P. Morgan Institutional Funds
Account number: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
By check
o Make out a check for the investment amount payable
to J.P. Morgan Institutional Funds.
o Mail the check with your completed application to the Shareholder Services
Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ADDING TO YOUR ACCOUNT
By wire
o Call the Shareholder Services Agent to place a purchase order. Funds that are
wired without a purchase order will be returned uninvested.
o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with a completed investment slip to the Shareholder Services
Agent. If you do not have an investment slip, attach a note indicating your
account number and how much you wish to invest in which fund(s).
By exchange
o Call the Shareholder Services Agent for an exchange.
|
6 | YOUR INVESTMENT
|
<PAGE>
================================================================================
SELLING SHARES
By phone -- wire payment
o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can help
you add it.
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your fund
account.
By phone -- check payment
o Call the Shareholder Services Agent and place your request. Once your request
has been verified, a check for the net amount, payable to the registered
owner(s), will be mailed to the address of record. For checks payable to any
other party or mailed to any other address, please make your request in
writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the fund
name; the amount you want to sell; and the recipient's name and address or
wire information, if different from those of the account registration.
o Indicate whether you want the proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party.
The Shareholder Services Agent may require additional information, such as a
signature guarantee.
o Mail the letter to the Shareholder Services Agent.
By exchange
o Call the Shareholder Services Agent for an exchange.
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in this fund for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
Business hours and NAV calculations The fund's regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time).
Timing of orders Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the NYSE every business day and are executed the same day,
at that day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
================================================================================
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available 8:00 a.m. to 5:00 p.m. eastern
time on fund business days.
|
YOUR INVESTMENT | 7
|
<PAGE>
Timing of settlements When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
Statements and reports The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically declares income dividends daily and pays them monthly. If an
investor's shares are redeemed during the month, accrued but unpaid dividends
are paid with the redemption proceeds. Shares of the fund earn dividends on the
business day the purchase is effective, but not on the business day the
redemption is effective. The fund distributes capital gains, if any, once a
year. However, the fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. These
dividends and distributions consist of most or all of the fund's net investment
income and net realized capital gains.
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.
TAX CONSIDERATIONS
In general, selling shares, exchanging shares, and receiving distributions
(whether reinvested or taken in cash) are all taxable events. These transactions
typically create the following tax liabilities:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Transaction Tax status
- --------------------------------------------------------------------------------
Income dividends Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------
</TABLE>
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
|
8 | YOUR INVESTMENT
|
<PAGE>
FUND DETAILS
================================================================================
MASTER/FEEDER STRUCTURE
As noted earlier, the fund is a "feeder" fund that invests in a master
portfolio. (Except where indicated, this prospectus uses the term "the fund" to
mean the feeder fund and its master portfolio taken together.)
The master portfolio accepts investments from other feeder funds, and the
feeders bear the master portfolio's expenses in proportion to their assets.
However, each feeder can set its own transaction minimums, fund-specific
expenses, and other conditions. This means that one feeder could offer access to
the same master portfolio on more attractive terms, or could experience better
performance, than another feeder. Information about other feeders is available
by calling 1-800-766-7722. Generally, when the master portfolio seeks a vote,
the funds will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
The fund and its master portfolio expect to maintain consistent goals, but if
they do not, the fund will withdraw from the master portfolio, receiving its
assets either in cash or securities. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
MANAGEMENT AND ADMINISTRATION
The fund and its master portfolio are governed by the same trustees. The
trustees are responsible for overseeing all business activities. The trustees
are assisted by Pierpont Group, Inc., which they own and operate on a cost
basis; costs are shared by all funds governed by these trustees. Funds
Distributor, Inc., as co-administrator, along with J.P. Morgan, provides fund
officers. J.P. Morgan, as co-administrator, oversees the fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Advisory services 0.30% of the master portfolio's
average net assets
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion in J.P. Morgan-
advised portfolios, plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.05% of the fund's average
net assets
- --------------------------------------------------------------------------------
</TABLE>
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
|
FUND DETAILS | 9
|
<PAGE>
================================================================================
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 4). It also outlines the fund's
policies toward various securities, including those that are designed to help
the fund manage risk.
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market conditions
o The fund's share price, o Bonds have generally o Under normal circumstances the fund plans to
yield, and total return outperformed money market remain fully invested in bonds and other
will fluctuate in investments over the long fixed income securities as noted in the table
response to bond market term, with less risk than on pages 12-13
movements stocks
o The fund seeks to limit risk and enhance
o The value of most bonds o Most bonds will rise in yields through careful management, sector
will fall when interest value when interest rates allocation, individual securities selection,
rates rise; the longer a fall and duration management
bond's maturity and the
lower its credit quality, o Mortgage-backed and o During severe market downturns, the fund has
the more its value asset-backed securities the option of investing up to 100% of assets
typically falls can offer attractive in investment-grade short-term securities
returns
o Mortgage-backed and o J.P. Morgan monitors interest rate trends, as
asset-backed securities well as geographic and demographic
(securities representing information related to mortgage-backed
an interest in, or securities and mortgage prepayments
secured by, a pool of
mortgages or other assets
such as receivables)
could generate capital
losses or periods of low
yields if they are paid
off substantially earlier
or later than anticipated
- ------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could o The fund could outperform o J.P. Morgan focuses its active management on
underperform its its benchmark due to those areas where it believes its commitment
benchmark due to its these same choices to research can most enhance returns and
sector, securities, or manage risks in a consistent way
duration choices
- ------------------------------------------------------------------------------------------------------------------------------------
Credit quality
o The default of an issuer o Investment-grade bonds o The fund maintains its own policies for
would leave the fund with have a lower risk of balancing credit quality against potential
unpaid interest or default yields and gains in light of its investment
principal goals
o Junk bonds offer higher
o Junk bonds (those rated yields and higher o J.P. Morgan develops its own ratings of
BB/Ba or lower) have a potential gains unrated securities and makes a credit quality
higher risk of default determination for unrated securities
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign investments
o The fund could lose money o Foreign bonds, which o Foreign bonds are a secondary investment for
because of foreign represent a major portion the fund
government actions, of the world's fixed
political instability, or income securities, offer o To the extent that the fund invests in
lack of adequate and attractive potential foreign bonds, it may manage the currency
accurate information performance and exposure of its foreign investments relative
opportunities for to its benchmark, and may hedge back into the
o Currency exchange rate diversification U.S. dollar from time to time (see also
movements could reduce "Derivatives")
gains or create losses o Favorable exchange rate
movements could generate
gains or reduce losses
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
|
10 | FUND DETAILS
|
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivatives
o Derivatives such as o Hedges that correlate o The fund uses derivatives for hedging (i.e.,
futures, options, and well with underlying to adjust duration or to establish or adjust
foreign currency forward positions can reduce or exposure to particular securities, markets, or
contracts that are used eliminate losses at low currencies)
for hedging the portfolio cost
or specific securities o The fund only establishes hedges that it
may not fully offset the o The fund could make money expects will be highly correlated with
underlying positions(1) and protect against underlying positions
losses if management's
o Derivatives that involve analysis proves correct o While the fund may use derivatives that
leverage could magnify incidentally involve leverage, it does not
losses o Derivatives that involve use them for the specific purpose of
leverage could generate leveraging the portfolio
substantial gains at low
cost
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o The fund could have o These holdings may offer o The fund may not invest more than 15% of net
difficulty valuing these more attractive yields or assets in illiquid holdings
holdings precisely potential growth than
comparable widely traded o To maintain adequate liquidity to meet
o The fund could be unable securities redemptions, the fund may hold
to sell these holdings at investment-grade short-term securities
the time or price desired (including repurchase agreements) and, for
temporary or extraordinary purposes, may
borrow from banks up to 30% of the value
of its assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed delivery
securities
o When the fund buys o The fund can take o The fund uses segregated accounts to offset
securities before issue advantage of attractive leverage risk
or for delayed delivery, transaction opportunities
it could be exposed to
leverage risk if it does
not use segregated
accounts
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would o The fund could realize o The fund anticipates a portfolio turnover
raise the fund's gains in a short period rate of approximately 300%
transaction costs of time
o The fund generally avoids short-term trading,
o Increased short-term o The fund could protect except to take advantage of attractive or
capital gains against losses if a bond unexpected opportunities or to meet demands
distributions would raise is overvalued and its generated by shareholder activity
shareholders' income tax value later falls
liability
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on the value of a securities index. An option is the right to
buy or sell securities that is granted in exchange for an agreed-upon sum.
A foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
|
FUND DETAILS | 11
|
<PAGE>
================================================================================
================================================================================
Securities
================================================================================
This table discusses the customary types of securities which can be held by the
fund. In each case the principal types of risk are listed on the following page
(see below for definitions). This table reads across two pages.
- --------------------------------------------------------------------------------
Asset-backed securities Bonds or notes backed by unsecured debt, such as credit
card receivables; these securities are often guaranteed or over-collateralized
to enhance their credit quality.
- --------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by banks or corporations.
These securities are usually discounted and are rated by S&P or Moody's.
- --------------------------------------------------------------------------------
Convertible securities Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
Corporate bonds Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
Mortgages (directly held) Debt instrument which gives the lender a lien on
property as security for the loan repayment.
- --------------------------------------------------------------------------------
Mortgage dollar rolls The sale of mortgage-backed securities with the
commitment to buy back similar securities at a future date and at an agreed upon
price. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Mortgage-backed securities Securities backed by pools of mortgages (such as
Ginnie Maes, Fannie Maes and Freddie Macs), including pass through certificates,
and other senior classes of collateralized mortgage obligations (CMOs) or
stripped mortgage-backed securities.
- --------------------------------------------------------------------------------
Participation interests Securities representing an interest in another security
or in bank loans.
- --------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITs and other real-estate related instruments Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
Repurchase agreements Agreements between a seller and a buyer whereby the
seller agrees to repurchase the securities at an agreed upon price and at a
stated time.
- --------------------------------------------------------------------------------
Sovereign debt, Brady bonds, and debt of supranational organizations Dollar-
and non-dollar-denominated securities issued to refinance foreign government
bank loans and other debt.
- --------------------------------------------------------------------------------
Swaps Contractual agreement whereby a party agrees to exchange periodic
payments with a counterparty. Segregated accounts are used to offset leverage
risk.
- --------------------------------------------------------------------------------
Synthetic variable rate instruments Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
Tax exempt municipal securities Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- --------------------------------------------------------------------------------
U.S. government securities Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- --------------------------------------------------------------------------------
Zero coupon, pay-in-kind, and deferred payment securities Securities offering
non-cash or delayed-cash payment. Their prices are typically more volatile than
those of some other debt instruments and involve certain special tax
considerations.
- --------------------------------------------------------------------------------
Risk related to certain securities held by J.P. Morgan Institutional
Bond Fund - Ultra:
Credit risk The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation.
Currency risk The risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency-denominated investments, and may widen any losses.
Extension risk The risk that an unexpected rise in interest rates will extend
the life of a mortgage-backed security beyond the expected prepayment time,
typically reducing the security's value.
Interest rate risk The risk of market losses attributable to changes in
interest rates. With fixed-rate securities, a rise in interest rates typically
causes a fall in values, while a fall in rates typically causes a rise in
values.
Leverage risk The risk the costs associated with a liability are less than the
value of the underlying instrument.
Liquidity risk The risk that certain securities may be difficult or impossible
to sell at the time and the price that the seller would like. The seller may
have to lower the price, sell other securities instead, or forego an investment
opportunity, any of which could have a negative effect on fund management or
performance.
|
12 | FUND DETAILS
|
<PAGE>
================================================================================
================================================================================
* Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
o Permitted, but not typically used
- -- Not permitted
Types of Risk
<TABLE>
<CAPTION>
Bond - Ultra
- -------------------------------------------------------------------------------------------
<S> <C>
credit, interest rate, market, prepayment *
- -------------------------------------------------------------------------------------------
credit, currency, liquidity, political *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political *
- -------------------------------------------------------------------------------------------
credit, currency, liquidity, political * 25%
Foreign
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political, valuation * 25%
Foreign
- -------------------------------------------------------------------------------------------
credit, extension, interest rate, market, natural event prepayment --
- -------------------------------------------------------------------------------------------
extension, interest rate, leverage, liquidity, prepayment * 30%
- -------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, leverage, market, political, *
prepayment
- -------------------------------------------------------------------------------------------
credit, currency, extension, interest rate, liquidity, political, prepayment *
- -------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market, valuation *
- -------------------------------------------------------------------------------------------
credit, interest rate, liquidity, valuation *
- -------------------------------------------------------------------------------------------
credit, liquidity *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, market, political o
- -------------------------------------------------------------------------------------------
credit, leverage, market --
- -------------------------------------------------------------------------------------------
credit, interest rate, market, natural event, political o
- -------------------------------------------------------------------------------------------
interest rate *
- -------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity, market, political *
- -------------------------------------------------------------------------------------------
</TABLE>
Market risk The risk that the market value of a security may move up or down,
sometimes rapidly and unpredictably. Market risk may affect a single issuer, an
industry, a sector of the bond market or the market as a whole. Common to all
bonds and the mutual funds that invest in them.
Natural event risk The risk of losses attributable to natural disasters, crop
failures and similar events.
Political risk The risk of losses attributable to government or political
actions, from changes in tax or trade statutes to governmental collapse and war.
Prepayment risk The risk that unanticipated prepayments may occur, reducing the
value of mortgage-backed securities.
Valuation risk The risk that a fund has valued certain of its securities at a
higher price than it can sell them for.
|
FUND DETAILS | 13
|
<PAGE>
================================================================================
FOR MORE INFORMATION
================================================================================
For investors who want more information on the fund, the following documents are
available free upon request:
Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the fund's SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. Morgan Institutional Bond Fund-Ultra
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
Telephone: 1-800-766-7722
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available from the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. (1-800-SEC-0330) and may be viewed on-screen or downloaded from the SEC's
Internet site at http://www.sec.gov. The fund's investment company and 1933 Act
registration numbers are 811-07342 and 033-54642.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Institutional Funds combine a heritage of integrity and
financial leadership with comprehensive, sophisticated analysis and management
techniques. Drawing on J.P. Morgan's extensive experience and depth as an
investment manager, the J.P. Morgan Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.
================================================================================
J.P. Morgan Institutional Funds
Advisor Distributor
Morgan Guaranty Trust Company of New York Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
PROS309-983
<PAGE>
J.P. MORGAN INSTITUTIONAL FUNDS
J.P. MORGAN INSTITUTIONAL BOND FUND - ULTRA
STATEMENT OF ADDITIONAL INFORMATION
MARCH 2, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 2, 1998 FOR THE J.P. MORGAN INSTITUTIONAL BOND FUND - ULTRA, 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.
<PAGE>
Table of Contents
PAGE
General . . . . . . . . . . . . . . . . . . . 1
Investment Objectives and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 14
Trustees and Officers . . . . . . . . . . . . 16
Investment Advisor . . . . . . . . . . . . . . 21
Distributor . . . . . . . . . . . . . . . . . 24
Co-Administrator . . . . . . . . . . . . . . . 24
Services Agent . . . . . . . . . . . . . . . . 25
Custodian and Transfer Agent . . . . . . . . . 26
Shareholder Servicing . . . . . . . . . . . . 26
Independent Accountants . . . . . . . . . . . 27
Expenses . . . . . . . . . . . . . . . . . . . 27
Purchase of Shares . . . . . . . . . . . . . . 27
Redemption of Shares . . . . . . . . . . . . . 28
Exchange of Shares . . . . . . . . . . . . . . 29
Dividends and Distributions . . . . . . . . . 29
Net Asset Value . . . . . . . . . . . . . . . 29
Performance Data . . . . . . . . . . . . . . . 30
Portfolio Transactions . . . . . . . . . . . . 32
Massachusetts Trust . . . . . . . . . . . . . 33
Description of Shares . . . . . . . . . . . . 34
Taxes . . . . . . . . . . . . . . . . . . . . 36
Additional Information . . . . . . . . . . . 38
Financial Statements . . . . . . . . . . . 38
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . . Appendix-1
<PAGE>
GENERAL
This Statement of Additional Information relates only to the J.P.
Morgan Institutional Bond Fund - Ultra (the "Fund"). The Fund is 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 Fund, 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 investment
objectives and policies, management and operation of the Fund. The Fund operates
through a two-tier master-feeder investment fund structure.
This Statement of Additional Information provides additional
information with respect to the Fund and should be read in conjunction with the
Fund's current Prospectus (the "Prospectus"). Capitalized terms not otherwise
defined herein have the meanings accorded to them in the Prospectus. The Fund's
executive offices are located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
INVESTMENT OBJECTIVE AND POLICIES
The Fund is designed to be an economical and convenient means of making
substantial investments in a broad range of corporate and government debt
obligations and related investments of domestic and foreign issuers, subject to
certain quality and other restrictions. See "Quality and Diversification
Requirements." The Fund's investment objective is to provide a high total return
consistent with moderate risk of capital and maintenance of liquidity. Although
the net asset value of the Fund will fluctuate, the Fund attempts to conserve
the value of its investments to the extent consistent with its objective. The
Fund attempts to achieve its objective by investing all of its investable assets
in The U.S. Fixed Income Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the Fund.
The Portfolio attempts to achieve its investment objective by investing
in high grade corporate and government debt obligations and related securities
of domestic and foreign issuers described in this Statement of Additional
Information.
INVESTMENT PROCESS FOR THE U.S. FIXED INCOME PORTFOLIO
Sector allocations: Sector allocations are driven by Morgan's
fundamental and quantitative analysis of the relative valuation of a broad array
of fixed income sectors. Specifically, Morgan utilizes market and credit
analysis to assess whether the current risk-adjusted yield spreads of various
sectors are likely to widen or narrow. Morgan then overweights (underweights)
those sectors its analysis indicates offer the most (least) relative value,
basing the speed and magnitude of these shifts on valuation considerations.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
1
<PAGE>
Security selection: Securities are selected by the portfolio manager,
with substantial input from Morgan's fixed income analysts and traders. Using
quantitative analysis as well as traditional valuation methods, Morgan's
applied- research analysts aim to optimize security selection within the bounds
of the Portfolio's investment objective. In addition, credit analysts --
supported by Morgan's equity analysts -- assess the creditworthiness of issuers
and counterparties. A dedicated trading desk contributes to security selection
by tracking new issuance, monitoring dealer inventories, and identifying
attractively priced bonds. The traders also handle all transactions for the
Portfolio.
Duration/yield curve management: Morgan's duration decision begins with
an analysis of real yields, which its research indicates are generally a
reliable indicator of longer term interest rate trends. Other factors Morgan
studies in regard to interest rates include economic growth and inflation,
capital flows and monetary policy. Based on this analysis, Morgan forms a view
of the most likely changes in the level and shape of the yield curve -- as well
as the timing of those changes -- and sets the Portfolio's duration and maturity
structure accordingly. Morgan typically limits the overall duration of the
Portfolio to a range between one year shorter and one year longer than that of
the Salomon Brothers Broad Investment Grade Bond Index, the Fund's benchmark.
The following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve this
objective by the Portfolio as set forth above and in the Prospectus. The
investment objective of the Fund and the Portfolio are identical. Accordingly,
references below to the Fund also include the Portfolio; similarly, references
to the Portfolio also include the Fund unless the context requires otherwise.
CORPORATE BONDS AND OTHER DEBT SECURITIES
The Fund may invest in bonds and other debt securities of domestic and
foreign issuers to the extent consistent with its investment objective and
policies. A description of these investments appears below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists of
mortgage loans evidenced by promissory notes secured by first mortgages or first
deeds of trust or other similar security instruments creating a first lien on
owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
2
<PAGE>
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support to these federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
There are several types of guaranteed mortgage-backed securities
currently available, including guaranteed mortgage pass-through certificates and
multiple class securities, which include guaranteed real estate mortgage
investment conduit certificates ("REMIC Certificates"), other collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class mortgage-backed securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Fund does not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
3
<PAGE>
obligations of Fannie Mae and Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class
of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets underlying
the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or
REMIC Certificates to be retired substantially earlier than their final
scheduled distribution dates. Generally, interest is paid or accrues on all
classes of CMOs or REMIC Certificates on a monthly basis.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities ("SMBS") are derivative multiclass mortgage securities, issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers. Although the market for such securities is increasingly liquid,
privately issued SMBS may not be readily marketable and will be considered
illiquid for purposes of the Fund's limitation on investments in illiquid
securities. The Advisor may determine that SMBS which are U.S. Government
securities are liquid for purposes of the Fund's limitation on investments in
illiquid securities in accordance with procedures adopted by the Board of
Trustees. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. While
interest payments are not made on such securities, holders of such securities
are deemed to have received "phantom income." Because the Fund will distribute
"phantom income" to shareholders, to the extent that shareholders elect to
receive dividends in cash rather than reinvesting such dividends in additional
shares, the Portfolio will have fewer assets with which to purchase income
producing securities.
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
4
<PAGE>
off certain amounts on credit card debt thereby reducing the balance due.
Additionally, if the letter of credit is exhausted, holders of asset-backed
securities may also experience delays in payments or losses if the full amounts
due on underlying sales contracts are not realized. Because asset-backed
securities are relatively new, the market experience in these securities is
limited and the market's ability to sustain liquidity through all phases of the
market cycle has not been tested.
MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments to the extent
consistent with its investment objective and policies. A description of the
various types of money market instruments that may be purchased by the Fund
appears below.
Also see "Quality and Diversification Requirements."
U.S. TREASURY SECURITIES. The Fund may invest in direct obligations of the
U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
FOREIGN GOVERNMENT OBLIGATIONS. The Fund, subject to its investment
policies, may also invest in short-term obligations of foreign sovereign
governments or of their agencies, instrumentalities, authorities or political
subdivisions. These securities may be denominated in the U.S. dollar or in
another currency. See "Foreign Investments."
BANK OBLIGATIONS. The Fund 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
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
5
<PAGE>
(the "Asset Limitation") and are organized under the laws of the United States
or any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees). See "Foreign Investments." The Fund will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank. The Fund may also invest in obligations of
international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade between
nations (e.g., the European Investment Bank, the Inter-American Development
Bank, or the World Bank).
COMMERCIAL PAPER. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan Guaranty Trust Company of New York
acting as agent, for no additional fee, in its capacity as investment advisor to
the Portfolio and as fiduciary for other clients for whom it exercises
investment discretion. The monies loaned to the borrower come from accounts
managed by the Advisor or its affiliates, pursuant to arrangements with such
accounts. Interest and principal payments are credited to such accounts. The
Advisor, acting as a fiduciary on behalf of its clients, has the right to
increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by the Advisor. Since master demand obligations typically
are not rated by credit rating agencies, the Fund may invest in such unrated
obligations only if at the time of an investment the obligation is determined by
the Advisor to have a credit quality which satisfies the Fund's quality
restrictions. See "Quality and Diversification Requirements." Although there is
no secondary market for master demand obligations, such obligations are
considered by the Fund to be liquid because they are payable upon demand. The
Fund does not have any specific percentage limitation on investments in master
demand obligations. It is possible that the issuer of a master demand obligation
could be a client of Morgan to whom Morgan, in its capacity as a commercial
bank, has made a loan.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines approved by the
Fund's Trustees. In a repurchase agreement, the 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 the Fund to the seller. The
period of these
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
6
<PAGE>
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however, may
have maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. The Fund will always receive securities as collateral
whose market value is, and during the entire term of the agreement remains, at
least equal to 100% of the dollar amount invested by the Fund in each agreement
plus accrued interest, and the Fund will make payment for such securities only
upon physical delivery or upon evidence of book entry transfer to the account of
the Custodian. If the seller defaults, the Fund might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Fund may be delayed or
limited.
The Fund may make investments in other debt securities with remaining
effective maturities of not more than thirteen months, including without
limitation corporate and foreign bonds, asset-backed securities and other
obligations described in this Statement of Additional Information.
TAX EXEMPT OBLIGATIONS
In certain circumstances the Fund may invest in tax exempt obligations to
the extent consistent with its investment objective and policies. A description
of the various types of tax exempt obligations which may be purchased by the
Fund appears below. See "Quality and Diversification Requirements."
MUNICIPAL BONDS. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
MUNICIPAL NOTES. Municipal notes are subdivided into three categories of
short-term obligations: municipal notes, municipal commercial paper and
municipal demand obligations.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
7
<PAGE>
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
While these obligations are intended to be paid from general revenues or
refinanced with long-term debt, they frequently are backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Fund may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the Fund to receive the par value of the
obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, excluded from gross income for federal
income tax purposes. For a description of the attributes of master demand
obligations, see "Money Market Instruments" above. Although there is no
secondary market for master demand obligations, such obligations are considered
by the Fund to be liquid because they are payable upon demand. The Fund has no
specific percentage limitations on investments in master demand obligations.
FOREIGN INVESTMENTS
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
8
<PAGE>
The Fund may invest in certain foreign securities. The Fund may invest
up to 20% of total assets in fixed income securities of foreign issuers
denominated in foreign currencies. The Fund does not expect to invest more than
25% of its total assets, at the time of purchase, in securities of foreign
issuers. No foreign commercial paper may be subject to foreign withholding tax
at the time of purchase. Foreign investments may be made directly in securities
of foreign issuers or in the form of American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or
in 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. An
unsponsored depositary may not provide the same shareholder information that a
sponsored is required to provide under its contractual arrangements with the
issuer of the underlying foreign security. Generally, ADRs, in registered form,
are designed for use in the U.S. securities markets, and EDRs, in bearer form,
are designed for use in European securities markets.
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.
Investment in securities of foreign issuers and in obligations of
foreign branches of domestic banks involves somewhat different investment risks
from those affecting securities of U.S. domestic issuers. There may be limited
publicly available information with respect to foreign issuers, and foreign
issuers are not 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.
Investors should realize that the value of the Portfolio's 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 administration or economic or monetary
policies in the United States or abroad could result in appreciation or
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
9
<PAGE>
depreciation of portfolio securities and could favorably or unfavorably affect
the Portfolio's operations. Furthermore, the economies of individual foreign
nations may differ from the U.S. economy, whether favorably or unfavorably, in
areas such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgement against a foreign
issuer. Any foreign investment made by the Portfolio must be made in compliance
with U.S. and foreign currency restrictions and tax laws restricting the amounts
and types of foreign investments.
In addition, while the volume of transactions effected on foreign
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, the Portfolio's foreign
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 addition, there is generally
less government supervision and regulation of securities exchanges, brokers and
issuers located in foreign countries than in the United States.
Since investments in foreign securities may involve foreign currencies,
the value of the 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 Fund 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 Fund's
currency exposure. See "Foreign Currency Exchange Transactions" below.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Portfolio may buy
and sell securities and receive interest in currencies other than the U.S.
dollar, the Portfolio may enter from time to time into foreign currency exchange
transactions. The Portfolio either enters into these transactions on a spot
(i.e. cash) basis at the spot rate prevailing in the foreign currency exchange
market or uses forward contracts to purchase or sell foreign currencies. The
cost of the Portfolio's spot currency exchange transactions is generally the
difference between the bid and offer spot rate of the currency being purchased
or sold.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are derivative instruments, as their value derives from the spot exchange rates
of the currencies underlying the contract. These contracts are entered into in
the interbank market directly between currency traders (usually large commercial
banks) and their customers. A forward foreign currency exchange contract
generally has no deposit requirement and is traded at a net price without
commission. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of the Portfolio's securities or
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
10
<PAGE>
in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
The Portfolio may enter into forward foreign currency exchange
transactions in an attempt to protect against changes in forward foreign
currency exchange rates between the trade and settlement dates of specific
securities transactions or anticipated securities transactions. The Portfolio
may also enter into forward contracts to hedge against a change in foreign
currency exchange rates that would cause a decline in the value of existing
investments denominated or principally traded in a foreign currency. To do this,
the Portfolio would enter into a forward contract to sell the foreign currency
in which the investment is denominated or principally traded in exchange for
U.S. dollars or in exchange for another foreign currency. The Portfolio will
only enter into forward contracts to sell a foreign currency for another foreign
currency if the Advisor expects the foreign currency purchased to appreciate
against the U.S. dollar.
Although these transactions are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
limit any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause the Portfolio to assume the
risk of fluctuations in the value of the currency purchased against the hedged
currency and the U.S. dollar. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market movements in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities
no interest accrues to the Portfolio until settlement takes place. At the time
the Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction, reflect the value each
day of such securities in determining its net asset value and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, the Portfolio will maintain
with the Custodian a segregated account with liquid assets, consisting of cash,
U.S. Government securities or other appropriate securities, in an amount at
least equal to such commitments. On delivery dates for such transactions, the
Portfolio will meet its obligations from maturities or sales of the securities
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
11
<PAGE>
held in the segregated account and/or from cash flow. If the Portfolio chooses
to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. Also, the Portfolio
may be disadvantaged if the other party to the transaction defaults. It is the
current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Fund and the Portfolio to the extent permitted under the
1940 Act. These limits require that, as determined immediately after a purchase
is made, (i) not more than 5% of the value of the Fund's total assets will be
invested in the securities of any one investment company, (ii) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group, and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Fund, provided however, that the Fund may invest all of its investable assets in
an open-end investment company that has the same investment objective as the
Fund (the Portfolio). As a shareholder of another investment company, the Fund
or Portfolio would bear, along with other shareholders, its pro rata portion of
the other investment company's expenses, including advisory fees. These expenses
would be in addition to the advisory and other expenses that the Fund or
Portfolio bears directly in connection with its own operations.
REVERSE REPURCHASE AGREEMENTS. The Portfolio 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 reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act a reverse repurchase agreement is also
considered as the borrowing of money by the Portfolio and, therefore, a form of
leverage. Leverage may cause any gains or losses for the Portfolio to be
magnified. The Portfolio will invest the proceeds of borrowings under reverse
repurchase agreements. In addition, the Portfolio will enter into a reverse
repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Portfolio will establish and maintain with the Custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to its purchase obligations under its reverse repurchase agreements. See
"Investment Restrictions" for the Portfolio's limitations on reverse repurchase
agreements and bank borrowings.
MORTGAGE DOLLAR ROLL TRANSACTIONS. The Portfolio may engage in mortgage
dollar roll transactions with respect to mortgage securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. In a mortgage dollar
roll transaction, the Portfolio sells a mortgage backed security and
simultaneously agrees to repurchase a similar security on a specified future
date
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
12
<PAGE>
at an agreed upon price. During the roll period, the Portfolio will not be
entitled to receive any interest or principal paid on the securities sold. The
Portfolio is compensated for the lost interest on the securities sold by the
difference between the sales price and the lower price for the future repurchase
as well as by the interest earned on the reinvestment of the sales proceeds. The
Portfolio may also be compensated by receipt of a commitment fee. When the
Portfolio enters into a mortgage dollar roll transaction, liquid assets in an
amount sufficient to pay for the future repurchase are segregated with the
Custodian. Mortgage dollar roll transactions are considered reverse repurchase
agreements for purposes of the Portfolio's investment restrictions.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, the Fund is permitted to lend securities in an amount up to 33
1/3% of the value of the Fund's net assets. The Portfolio may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolio in the normal settlement time, generally three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Portfolio and its respective investors. The Portfolio may pay reasonable
finders' and custodial fees in connection with a loan. In addition, the
Portfolio will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and will not make any
loans in excess of one year. The Portfolio will not lend securities to any
officer, Trustee, Director, employee or other affiliate of the Portfolio, the
Advisor or the Distributor, unless otherwise permitted by applicable law.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of the Portfolio's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Portfolio
may acquire investments that are illiquid or have limited liquidity, such as
private placements or investments that are not registered under the Securities
Act of 1933, as amended (the "1933 Act"), and cannot be offered for public sale
in the United States without first being registered under the 1933 Act. An
illiquid investment is any investment that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which it is
valued by the Portfolio. The price the Portfolio pays for illiquid securities or
receives upon resale may be lower than the price paid or received for similar
securities with a more liquid market. Accordingly the valuation of these
securities will reflect any limitations on their liquidity.
The Portfolio may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
13
<PAGE>
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.
As to illiquid investments, the Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the 1933 Act, before it may be sold, the Portfolio may
be obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it decided
to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Fund intends to meet the diversification requirements of the 1940
Act. To meet these requirements, 75% of the assets of the Fund 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 Fund will comply with the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company. See "Taxes."
If the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government creating
the subdivision and the obligation is backed only by the assets and revenues of
the subdivision, such subdivision is regarded as the sole issuer. Similarly, in
the case of an industrial development revenue bond or pollution control revenue
bond, if the bond is backed only by the assets and revenues of the
nongovernmental user, the nongovernmental user is regarded as the sole issuer.
If in either case the creating government or another entity guarantees an
obligation, the guaranty is regarded as a separate security and treated as an
issue of such guarantor. Since securities issued or guaranteed by states or
municipalities are not voting securities, there is no limitation on the
percentage of a single issuer's securities which the Fund may own so long as it
does not invest more than 5% of its total assets that are subject to the
diversification limitation in the securities of such issuer, except obligations
issued or guaranteed by the U.S. Government. Consequently, the Fund may invest
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
14
<PAGE>
in a greater percentage of the outstanding securities of a single issuer than
would an investment company which invests in voting securities. See "Investment
Restrictions.
The Fund invests in a diversified portfolio of securities with the
quality ratings described in the Prospectus. These securities are considered
"high grade," "investment grade" and "below investment grade" as described in
Appendix A. In addition, at the time the Fund invests in any commercial paper,
bank obligation or repurchase agreement, the issuer must have outstanding debt
rated A or higher by Moody's or Standard & Poor's, the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by Standard & Poor's, or if no such ratings are available, the
investment must be of comparable quality in the Advisor's opinion.
Certain lower rated securities purchased by the Portfolio, such as
those rated Ba or B by Moody's or BB or B by Standard & Poor's (commonly known
as junk bonds), may be subject to certain risks with respect to the issuing
entity's ability to make scheduled payments of principal and interest and to
greater market fluctuations. While generally providing higher coupons or
interest rates income than investments in higher quality securities, lower
quality fixed income securities involve greater risk of loss of principal and
income, including the possibility of default or bankruptcy of the issuers of
such securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Portfolio invests in such lower quality securities, the achievement of
its investment objective may be more dependent on the Advisor's own credit
analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to determine accurately the Portfolio's net
asset value.
OPTIONS AND FUTURES TRANSACTIONS
The Fund may (a) purchase exchange traded and over-the-counter (OTC)
put and call options on fixed income securities and indexes of fixed income
securities, (b) purchase and sell futures contracts on fixed income securities
and indexes of fixed income securities, and (c) purchase put and call options on
futures contracts on fixed income securities and indexes of fixed income
securities. Each of these instruments is a derivative instrument as its value
derives from the underlying asset or index.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
15
<PAGE>
The Fund may use futures contracts and options for hedging purposes.
The Fund may not use futures contracts and options for speculation.
The Fund may utilize options and futures contracts to manage their
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge the Fund's investments against price fluctuations. Other strategies,
including buying futures contracts and buying calls, tend to increase market
exposure. Options and futures contracts may be combined with each other or with
forward contracts in order to adjust the risk and return characteristics of the
Fund's overall strategy in a manner deemed appropriate to the Advisor and
consistent with the Fund's objective and policies. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the Fund's return. While the use of these instruments by
the Fund may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If the
Advisor applies a strategy at an inappropriate time or judges market conditions
or trends incorrectly, options and futures strategies may lower the Fund's
return. Certain strategies limit the Fund's possibilities to realize gains as
well as its exposure to losses. The Fund could also experience losses if the
prices of its options and futures positions were poorly correlated with its
other investments, or if it could not close out its positions because of an
illiquid secondary market. In addition, the Fund will incur transaction costs,
including trading commissions and option premiums, in connection with its
futures and options transactions and these transactions could significantly
increase the Fund's turnover rate.
The Fund may purchase put and call options on securities, indexes of
securities and futures contracts, or purchase and sell futures contracts, only
if such options are written by other persons and if (i) the aggregate premiums
paid on all such options which are held at any time do not exceed 20% of the
Fund's net assets, and (ii) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the Fund's total
assets.
OPTIONS
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. The Fund may
terminate its position in a put option it has purchased by allowing it to expire
or by exercising the option. The Fund may also close out a put option position
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
16
<PAGE>
by entering into an offsetting transaction, if a liquid market exits. If the
option is allowed to expire, the Fund will lose the entire premium it paid. If
the Fund exercises a put option on a security, it will sell the instrument
underlying the option at the strike price. If the Fund exercises an option on an
index, settlement is in cash and does not involve the actual sale of securities.
If an option is American style, it may be exercised on any day up to its
expiration date. A European style option may be exercised only on its expiration
date.
The buyer of a typical put option can expect to realize a gain if the
underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
OPTIONS ON INDEXES. The Fund may purchase put and call options on any
securities index based on securities in which the Fund may invest. Options on
securities indexes are similar to options on securities, except that the
exercise of securities index options is settled by cash payment and does not
involve the actual purchase or sale of securities. In addition, these options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
The Fund, in purchasing or selling index options, is subject to the risk that
the value of its portfolio securities may not change as much as an index because
the Fund's investments generally will not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus the
Fund may not be able to close out an option position that it has previously
entered into. When the Fund purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and the Fund may incur additional
losses if the counterparty is unable to perform.
EXCHANGE TRADED AND OTC OPTIONS. All options purchased by the Portfolio
will be traded on a securities exchange or will be purchased by securities
dealers (OTC options) that meet creditworthiness standards approved by the
Portfolio's Board of Trustees. While exchange-traded options are obligations of
the Options Clearing Corporation, in the case of OTC options, the Portfolio
relies on the dealer from which it purchased the option to perform if the option
is exercised. Thus, when the Portfolio purchases an OTC option, it relies on the
dealer from which it purchased the option to make or take delivery of the
underlying securities. Failure by the dealer to do so would result in the loss
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
17
<PAGE>
of the premium paid by the Portfolio as well as loss of the expected benefit of
the transaction.
FUTURES CONTRACTS
When the Fund purchases a futures contract, it agrees to purchase a
specified quantity of an underlying instrument at a specified future date or to
make a cash payment based on the value of a securities index. When the Fund
sells a futures contract, it agrees to sell a specified quantity of the
underlying instrument at a specified future date or to receive a cash payment
based on the value of a securities index. The price at which the purchase and
sale will take place is fixed when the Fund enters into the contract. Futures
can be held until their delivery dates or the position can be (and normally is)
closed out before then. There is no assurance, however, that a liquid market
will exist when the Fund wishes to close out a particular position.
When the Fund purchases a futures contract, the value of the futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Fund's exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying instrument
directly. When the Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the value of the
underlying instrument. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the underlying
instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when the Fund buys or sells a futures contract it
will be required to deposit "initial margin" with its Custodian in a segregated
account in the name of its futures broker, known as a futures commission
merchant (FCM). Initial margin deposits are typically equal to a small
percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments equal to the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. The Fund may be
obligated to make payments of variation margin at a time when it is
disadvantageous to do so. Furthermore, it may not always be possible for the
Fund to close out its futures positions. Until it closes out a futures position,
the Fund will be obligated to continue to pay variation margin. Initial and
variation margin payments do not constitute purchasing on margin for purposes of
the Fund's investment restrictions. In the event of the bankruptcy of an FCM
that holds margin on behalf of the Fund, the Fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Fund.
The Fund will segregate liquid assets in connection with its use of
options and futures contracts to the extent required by the staff of the
Securities and
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
18
<PAGE>
Exchange Commission. Securities held in a segregated account cannot be sold
while the futures contract or option is outstanding, unless they are replaced
with other suitable assets. As a result, there is a possibility that segregation
of a large percentage of the Fund's assets could impede portfolio management or
the Fund's ability to meet redemption requests or other current obligations.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase or sell (write) futures contracts and purchase put and call options,
including put and call options on futures contracts. Futures contracts obligate
the buyer to take and the seller to make delivery at a future date of a
specified quantity of a financial instrument or an amount of cash based on the
value of a securities index. Currently, futures contracts are available on
various types of fixed income securities, including but not limited to U.S.
Treasury bonds, notes and bills, Eurodollar certificates of deposit and on
indexes of fixed income securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the
Portfolio's current or anticipated investments exactly. The Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Portfolio may purchase or sell futures
contracts or purchase put or call options, including put and call options on
futures contracts, with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
19
<PAGE>
in volatility between the contract and the securities, although this may not be
successful in all cases. If price changes in the Portfolio's options or futures
positions are poorly correlated with its other investments, the positions may
fail to produce anticipated gains or result in losses that are not offset by
gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require the Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired. (See "Exchange Traded and OTC Options" above
for a discussion of the liquidity of options not traded on an exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Portfolio or the Advisor may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The
Portfolio intends to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which a Portfolio can commit
assets to initial margin deposits and option premiums. In addition, the
Portfolio will comply with guidelines established by the SEC with respect to
coverage of options and futures contracts by mutual funds, and if the guidelines
so require, will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account cannot
be sold while the futures contract or option is outstanding, unless they are
replaced with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
PORTFOLIO TURNOVER
For the fiscal years ended October 31, 1996 and 1997, the portfolio
turnover rates for the Portfolio were 186% and 93%, respectively. A rate of 100%
indicates that the equivalent of all of the Portfolio's assets have been sold
and reinvested in a year. High portfolio turnover may result in the realization
of substantial net capital gains or losses. To the extent net short term capital
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
20
<PAGE>
gains are realized, any distributions resulting from such gains are considered
ordinary income for federal income tax purposes. See "Taxes" below.
INVESTMENT RESTRICTIONS
The investment restrictions of the Fund and the Portfolio are
identical, unless otherwise specified. Accordingly, references below to the Fund
also include the Portfolio unless the context requires otherwise; similarly,
references to the Portfolio also include the Fund unless the context requires
otherwise.
The investment restrictions below have been adopted by the Trust with
respect to the Fund and by the Portfolio. Except where otherwise noted, these
investment restrictions are "fundamental" policies which, under the 1940 Act,
may not be changed without the vote of a majority of the outstanding voting
securities of the Fund or Portfolio, as the case may be. A "majority of the
outstanding voting securities" is defined in the 1940 Act as the lesser of (a)
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities. Whenever the Fund is requested to vote on a change in
the fundamental investment restrictions of the Portfolio, the Trust will hold a
meeting of Fund shareholders and will cast its votes as instructed by the Fund's
shareholders.
The Fund and its corresponding Portfolio may not:
1. Borrow money, except from banks for extraordinary or emergency
purposes and then only in amounts up to 30% of the value of the Fund's
total assets, taken at cost at the time of such borrowing and except in
connection with reverse repurchase agreements permitted by Investment
Restriction No. 8. Mortgage, pledge, or hypothecate any assets except
in connection with any such borrowing in amounts up to 30% of the value
of the Fund's net assets at the time of such borrowing. The Fund will
not purchase securities while borrowings (including reverse repurchase
agreements) exceed 5% of the Fund's total assets; provided, however,
that the Fund may increase its interest in an open-end management
investment company with the same investment objective and restrictions
as the Fund's while such borrowings are outstanding. This borrowing
provision facilitates the orderly sale of portfolio securities, for
example, in the event of abnormally heavy redemption requests. This
provision is not for investment purposes. Collateral arrangements for
premium and margin payments in connection with the Fund's hedging
activities are not deemed to be a pledge of assets;
2. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the
Fund's total assets would be invested in securities or other
obligations of any one such issuer; provided, however, that the Fund
may invest all or part
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
21
<PAGE>
of its investable assets in an open-end management investment company
with the same investment objective and restrictions as the Fund's. This
limitation shall not apply to securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities or to permitted
investments of up to 25% of the Fund's total assets;
3. Purchase the securities of an issuer if, immediately after such
purchase, the Fund owns more than 10% of the outstanding voting
securities of such issuer; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management
investment company with the same investment objective and restrictions
as the Fund's. This limitation shall not apply to permitted investments
of up to 25% of the Fund's total assets;
4. Purchase securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after
such purchase the value of its investments in such industry would
exceed 25% of the value of the Fund's total assets; provided, however,
that the Fund may invest all or part of its investable assets in an
open-end management investment company with the same investment
objective and restrictions as the Fund's. For purposes of industry
concentration, there is no percentage limitation with respect to
investments in U.S. Government securities;
5. Make loans, except through the purchase or holding of debt
obligations (including privately placed securities) or the entering
into of repurchase agreements, or loans of portfolio securities in
accordance with the Fund's investment objective and policies;
6. Purchase or sell puts, calls, straddles, spreads, or any combination
thereof, real estate, commodities, commodity contracts, except for the
Fund's interest in hedging activities as described under "Investment
Objectives and Policies"; or interests in oil, gas, or mineral
exploration or development programs. However, the Fund may purchase
debt obligations secured by interests in real estate or issued by
companies which invest in real estate or interests therein including
real estate investment trusts;
7. Purchase securities on margin, make short sales of securities, or
maintain a short position in securities, except in the course of the
Fund's hedging activities, unless at all times when a short position is
open the Fund owns an equal amount of such securities, provided that
this restriction shall not be deemed to be applicable to the purchase
or sale of when-issued securities or delayed delivery securities;
8. Issue any senior security, except as appropriate to evidence
indebtedness which constitutes a senior security and which the Fund is
permitted to incur pursuant to Investment Restriction No. 1 and except
that the Fund may enter into reverse repurchase agreements, provided
that the aggregate of senior securities, including reverse repurchase
agreements, shall not exceed one-third of the market value of the
Fund's total assets, less
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
22
<PAGE>
liabilities other than obligations created by reverse repurchase
agreements. The Fund's arrangements in connection with its hedging
activities as described in "Investment Objectives and Policies" shall
not be considered senior securities for purposes hereof;
9. Acquire securities of other investment companies, except as permitted by
the 1940 Act; or
10. Act as an underwriter of securities.
The investment restriction described below is not a fundamental policy
of the Fund or the Portfolio and may be changed by their respective Trustees.
This non-fundamental investment policy requires that the Fund may not acquire
any illiquid securities, such as repurchase agreements with more than seven days
to maturity or fixed time deposits with a duration of over seven calendar days,
if as a result thereof, more than 15% of the market value of the Fund's net
assets would be in investments that are illiquid.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of fundamental investment restrictions regarding industry
concentration, Morgan may classify issuers by industry in accordance with
classifications set forth in the DIRECTORY OF COMPANIES FILING ANNUAL REPORTS
WITH THE SECURITIES AND EXCHANGE COMMISSION or other sources. In the absence of
such classification or if Morgan determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, Morgan
may classify an issuer accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.
TRUSTEES AND OFFICERS
TRUSTEES
The Trustees of the Trust, who are also the Trustees of the Portfolio,
their business addresses, principal occupations during the past five years and
dates of birth are set forth below.
FREDERICK S. ADDY--Trustee; Retired; 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.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
23
<PAGE>
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 HEALEY1--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., 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 the
Portfolio. In accordance with applicable state requirements, a majority of the
disinterested Trustees have adopted written procedures reasonably appropriate to
deal with potential conflicts of interest arising from the fact that the same
individuals are Trustees of the Trust, the Portfolio and the 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.
Trustee compensation expenses paid by the Trust for the calendar year
ended December 31, 1997 are set forth below.
-------- 1 Mr. Healey is an "interested person" of the Trust, the Advisor
and the Portfolio as that term is defined in the 1940 Act.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
24
<PAGE>
<TABLE>
<CAPTION>
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
AGGREGATE TRUSTEE PORTFOLIOS(*), J.P. MORGAN
COMPENSATION FUNDS, J.P. MORGAN SERIES
PAID BY THE TRUST TRUST AND THE TRUST DURING
NAME OF TRUSTEE DURING 1997 1997(**)
- --------------- ----------------- --------
- -------------------------------------------------- -------------------------------- --------------------------------------------
<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, the 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
Portfolio's various service providers, decide upon matters of general policy.
The Portfolio and the Trust have entered into a Fund Services Agreement with
Pierpont Group, Inc. to assist the Trustees in exercising their overall
supervisory responsibilities over the affairs of the Portfolio and the Trust.
Pierpont Group, Inc. was organized in July 1989 to provide services for The
Pierpont Family of Funds, and the Trustees are the equal and sole shareholders
of Pierpont Group, Inc. The Trust and the Portfolio have agreed to pay Pierpont
Group, Inc. a fee in an amount representing its reasonable costs in performing
these services to the Trust, the Portfolio and certain other registered
investment companies subject to similar agreements with Pierpont Group, Inc.
These costs are periodically reviewed by the Trustees.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
25
<PAGE>
The aggregate fees paid to Pierpont Group, Inc. by the Portfolio for
the fiscal years ended October 31, 1995, 1996 and 1997 were $40,729, $36,922 and
$35,577, respectively.
OFFICERS
The Trust's and Portfolio's executive officers (listed below), other
than the Chief Executive Officer, are provided and compensated by Funds
Distributor, Inc. ("FDI"), a wholly owned indirect subsidiary of Boston
Institutional Group, Inc. The officers conduct and supervise the business
operations of the Trust and the Portfolio. The Trust and the Portfolio have no
employees.
The officers of the Trust and the Portfolio, their principal
occupations during the past five years and dates of birth are set forth below.
Unless otherwise specified, each officer holds the same position with the Trust
and the Portfolio. The business address of each of the officers unless otherwise
noted is Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts
02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 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
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, BWI. 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
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
26
<PAGE>
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director -Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant Vice
President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity Funds,
Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a senior paralegal at The Boston Company Advisors, Inc.
("TBCA"). Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse Investors Cash Management Fund, Inc. and certain investment
companies advised or administered by Harris or its affiliates. From April 1994
to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From
1992 to 1994, Mr. Kelley was employed by Putnam Investments in legal and
compliance capacities. His date of birth is December 24, 1964.
LENORE J. MCCABE; Assistant Secretary and Assistant Treasurer of the
Portfolio only. Assistant Vice President, State Street Bank and Trust Company
since November 1994. Assigned as Operations Manager, State Street Cayman Trust
Company, Ltd. since February 1995. Prior to November, 1994, employed by Boston
Financial Data Services, Inc. as Control Group Manager. Address: P.O. Box 2508
GT, Elizabethan Square, 2nd Floor, Shedden Road, George Town, Grand Cayman,
Cayman Islands, BWI. Her date of birth is May 31, 1961.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors
Cash Management Fund, Inc. and certain investment companies advised or
administered by Dreyfus or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.
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.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
27
<PAGE>
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 Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
INVESTMENT ADVISOR
The Advisor, a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan"), is 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
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
28
<PAGE>
over the long term. J.P. Morgan currently employs over 100 full time research
analysts, among the largest research staffs in the money management industry, in
its investment management divisions located in New York, London, Tokyo,
Frankfurt, Melbourne and Singapore to cover companies, industries and countries
on site. In addition, the investment management divisions employ approximately
300 capital market researchers, portfolio managers and traders. The Advisor's
fixed income investment process is based on analysis of real rates, sector
diversification and quantitative and credit analysis.
The investment advisory services the Advisor provides to the Portfolio
are not exclusive under the terms of the Advisory Agreement. The Advisor is free
to and does render similar investment advisory services to others. The Advisor
serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolio. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolio. See
"Portfolio Transactions."
Sector weightings are generally similar to a benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Portfolio in which the Fund
invests is currently the Salomon Brothers Broad Investment Grade Bond Index.
J.P. Morgan Investment Management Inc., also a wholly owned subsidiary
of J.P. Morgan, is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, which manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including investment companies. Certain of the assets
of employee benefit accounts under its management are invested in commingled
pension trust funds for which the Advisor serves as trustee. J.P. Morgan
Investment Management Inc. advises the Advisor on investment of the commingled
pension trust funds.
The Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of J.P.
Morgan Investment Management Inc. and certain other investment management
affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Advisory
Agreements, the Portfolio has agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to the annual rate of 0.30% of the
Portfolio's average daily net assets.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
29
<PAGE>
The advisory fees paid by the Portfolio to the Advisor for the fiscal
years ended October 31, 1995, 1996 and 1997 were $1,339,147, $2,402,660 and
$2,908,384, respectively.
The Investment Advisory Agreement provides that it will continue in
effect for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Distributor" below. The Investment Advisory Agreement will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Portfolio's Trustees, or by a vote of the holders of a
majority of the Portfolio's outstanding voting securities, on 60 days' written
notice to the Advisor and by the Advisor on 90 days' written notice to the
Portfolio. See "Additional Information."
The Glass-Steagall Act and other applicable laws generally prohibit
banks such as the Advisor from engaging in the business of underwriting or
distributing securities, and the Board of Governors of the Federal Reserve
System has issued an interpretation to the effect that under these laws a bank
holding company registered under the federal Bank Holding Company Act or certain
subsidiaries thereof may not sponsor, organize, or control a registered open-end
investment company continuously engaged in the issuance of its shares, such as
the Trust. The interpretation does not prohibit a holding company or a
subsidiary thereof from acting as investment advisor and custodian to such an
investment company. The Advisor believes that it may perform the services for
the Portfolio contemplated by the Advisory Agreement without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State laws
on this issue may differ from the interpretation of relevant federal law, and
banks and financial institutions may be required to register as dealers pursuant
to state securities laws. However, it is possible that future changes in either
federal or state statutes and regulations concerning the permissible activities
of banks or trust companies, as well as further judicial or administrative
decisions and interpretations of present and future statutes and regulations,
might prevent the Advisor from continuing to perform such services for the
Portfolio.
If the Advisor were prohibited from acting as investment advisor to the
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Under separate agreements, Morgan also provides certain financial, fund
accounting and administrative services to the Trust and the Portfolio and
shareholder services for the Trust. See "Services Agent" and "Shareholder
Servicing" below.
DISTRIBUTOR
FDI serves as the Trust's exclusive Distributor and holds itself
available to receive purchase orders for the Fund's shares. In that capacity,
FDI has been granted the right, as agent of the Trust, to solicit and accept
orders for the
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
30
<PAGE>
purchase of the Fund's shares in accordance with the terms of the Distribution
Agreement between the Trust and FDI. Under the terms of the Distribution
Agreement between FDI and the Trust, FDI receives no compensation in its
capacity as the Trust's distributor.
The Distribution Agreement shall continue in effect with respect to the
Fund for a period of two years after execution only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by its Trustees and (ii) by a vote of a majority of the
Trustees of the Trust who are not "interested persons" (as defined by the 1940
Act) of the parties to the Distribution Agreement, cast in person at a meeting
called for the purpose of voting on such approval (see "Trustees and Officers").
The Distribution Agreement will terminate automatically if assigned by either
party thereto and is terminable at any time without penalty by a vote of a
majority of the Trustees of the Trust, a vote of a majority of the Trustees who
are not "interested persons" of the Trust, or by a vote of the holders of a
majority of the Fund's outstanding shares as defined under "Additional
Information," in any case without payment of any penalty on 60 days' written
notice to the other party. The principal offices of FDI are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under Co-Administration Agreements with the Trust and the Portfolio
dated August 1, 1996, FDI also serves as the Trust's and the Portfolio's
Co-Administrator. The Co-Administration Agreements may be renewed or amended by
the respective Trustees without a shareholder vote. The Co-Administration
Agreements are terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust or the Portfolio, as applicable, on not more than 60
days' written notice nor less than 30 days' written notice to the other party.
The Co-Administrator may subcontract for the performance of its obligations,
provided, however, that unless the Trust or the Portfolio, as applicable,
expressly agrees in writing, the Co-Administrator shall be fully responsible for
the acts and omissions of any subcontractor as it would for its own acts or
omissions. See "Services Agent" below.
For its services under the Co-Administration Agreements, the Fund and
Portfolio have agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Fund or Portfolio is based on the ratio of its net assets to
the aggregate net assets of the Trust, the Master Portfolios and certain other
investment companies subject to similar agreements with FDI.
The administrative fees paid by the Portfolio to FDI for the period
August 1, 1996 through October 31, 1996 and the fiscal years ended October 31,
1997 were $6,419 and $23,296, respectively.
The administrative fees paid by the Portfolio to Signature
Broker-Dealer Services, Inc. (which provided distribution and administrative
services to the Trust and placement agent and administrative services to the
Portfolio prior to
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
31
<PAGE>
August 1, 1996) for the fiscal year ended October 31, 1995 and the period
November 1, 1995 through July 31, 1996 were $27,436 and $65,610, respectively.
See the Prospectus and below for applicable expense limitations.
SERVICES AGENT
The Trust, on behalf of the Fund, and the Portfolio have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan
pursuant to which Morgan is responsible for certain administrative and related
services provided to the Fund and the Portfolio. The Services Agreements may be
terminated at any time, without penalty, by the Trustees or Morgan, in each case
on not more than 60 days' nor less than 30 days' written notice to the other
party.
Under the Services Agreements, the Fund and the Portfolio have agreed
to pay Morgan fees equal to their allocable share of an annual complex-wide
charge. This charge is calculated daily based on the aggregate net assets of the
Master Portfolios and 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
the Fund and Portfolio is determined by the proportionate share that their 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 prior administrative services agreements in effect from December
29, 1995 through July 31, 1996, with Morgan, the Portfolio paid Morgan a fee
equal to its proportionate share of an annual complex-wide charge. This charge
was calculated daily based on the aggregate net assets of the Portfolio in
accordance with the following schedule: 0.06% of the first $7 billion of the
Portfolio's aggregate average daily net assets, and 0.03% of the Portfolio's
average daily net assets in excess of $7 billion. Prior to December 29, 1995,
the Trust and the Portfolio had entered into Financial and Fund Accounting
Services Agreements with Morgan, the provisions of which included certain of the
activities described above and, prior to September 1, 1995, also included
reimbursement of usual and customary expenses.
For the fiscal years ended October 31, 1995, 1996 and 1997, the
Portfolio paid Morgan, net of fee waivers and reimbursements, fees in the amount
of $167,081, $191,348 and $300,675, respectively, for acting as Services Agent.
See the Prospectus and below for applicable expense limitations.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Trust's and the Portfolio's
custodian and fund accounting agent and the Fund's transfer and dividend
disbursing agent. Pursuant to the Custodian Contract, State Street is
responsible for maintaining the books of account and records of portfolio
transactions and holding portfolio
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
32
<PAGE>
securities and cash. In the case of foreign assets held outside the United
States, the Custodian employs various subcustodians who were approved by the
Trustees of the Portfolio in accordance with the regulations of the SEC. The
Custodian maintains portfolio transaction records. As Transfer Agent and
Dividend Disbursing Agent, State Street is responsible for maintaining account
records detailing the ownership of Fund shares and for crediting income, capital
gains and other changes in share ownership to shareholder accounts.
SHAREHOLDER SERVICING
The Trust on behalf of the Fund has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for its customers and for other Fund investors who are customers
of 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 the Fund; assisting customers
in designating and changing dividend options, account designations and
addresses; providing necessary personnel and facilities to coordinate the
establishment and maintenance of shareholder accounts and records with the
Fund's transfer agent; transmitting purchase and redemption orders to the Fund's
transfer agent and arranging for the wiring or other transfer of funds to and
from customer accounts in connection with orders to purchase or redeem Fund
shares; verifying purchase and redemption orders, transfers among and changes in
accounts; informing the Distributor of the gross amount of purchase orders for
Fund shares; and providing other related services.
Under the Shareholder Servicing Agreement, the Fund has agreed to pay
Morgan for these services a fee at the annual rate of 0.05% (expressed as a
percentage of the average daily net asset values of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent). Morgan
acts as shareholder servicing agent for all shareholders.
As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing administrative services to the Fund and the Portfolio under the
Services Agreement and in acting as Advisor to the Portfolio under the
Investment Advisory Agreement, may raise issues under these laws. However,
Morgan believes that it may properly perform these services and the other
activities without violation of the Glass-Steagall Act or other applicable
banking laws or regulations.
If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreement, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Fund or the Portfolio might occur and a shareholder might no
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
33
<PAGE>
longer be able to avail himself or herself of any services then being provided
to shareholders by Morgan.
The Fund may be sold to or through financial intermediaries who are
customers of Morgan ("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 Fund. See
"Financial Professionals" below. Organizations that provide record keeping or
other services to certain employee benefit or retirement plans that include the
Fund 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 the 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.
The 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 the Fund's behalf.
The 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 Portfolio are Price
Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036. Price
Waterhouse LLP conducts an annual audit of the financial statements of the Fund
and the Portfolio, assists in the preparation and/or review of the Fund's and
the Portfolio's federal and state income tax returns and consults with the Fund
and the Portfolio as to matters of accounting and federal and state income
taxation.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
34
<PAGE>
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., Morgan and FDI
under various agreements discussed under "Trustees and Officers," "Investment
Advisor," "Co-Administrator and Distributor," "Services Agent" and "Shareholder
Servicing" above, the Fund and the Portfolio are responsible for usual and
customary expenses associated with their respective operations. Such expenses
include organization expenses, legal fees, accounting expenses, insurance costs,
the compensation and expenses of the Trustees, registration fees under federal
securities laws, and extraordinary expenses applicable to the Fund or the
Portfolio. For the Fund, such expenses also include transfer, registrar and
dividend disbursing costs, the expenses of printing and mailing reports, notices
and proxy statements to Fund shareholders, and filing fees under state
securities laws. For the Portfolio, such expenses also include applicable
registration fees under foreign securities laws, custodian fees and brokerage
expenses.
PURCHASE OF SHARES
Investors may open Fund accounts and purchase shares as described in
the Prospectus. 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
the Fund may make transactions in shares of the Fund.
The Fund may, at its own option, accept securities in payment for
shares. The securities delivered in such a transaction are valued by the method
described in "Net Asset Value" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of Morgan, appropriate
investments for the Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the acquiring
Portfolio; (ii) be acquired by the Fund for investment and not for resale (other
than for resale to the Portfolio); (iii) be liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (iv) if
stock, have a value which is readily ascertainable as evidenced by a listing on
a stock exchange, OTC market or by readily available market quotations from a
dealer in such securities. The Fund reserves the right to accept or reject at
its own option any and all securities offered in payment for its shares.
Prospective investors may purchase shares with the assistance of a
Financial Professional, and the Financial Professional may charge the investor a
fee for this service and other services it provides to its customers.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
35
<PAGE>
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus. If the
Trust, on behalf of the Fund, and the Portfolio determine that it would be
detrimental to the best interest of the remaining shareholders of the Fund to
make payment wholly or partly in cash, payment of the redemption price may be
made in whole or in part by a distribution in kind of securities from the
Portfolio, in lieu of cash, in conformity with the applicable rule of the SEC.
If shares are redeemed in kind, the redeeming shareholder might incur
transaction costs in converting the assets into cash. The method of valuing
portfolio securities is described under "Net Asset Value," and such valuation
will be made as of the same time the redemption price is determined. The Trust,
on behalf of the Fund, and the Portfolio have elected to be governed by Rule
18f-1 under the 1940 Act pursuant to which the Fund and the Portfolio are
obligated to redeem shares solely in cash up to the lesser of $250,000 or one
percent of the net asset value of the Fund during any 90 day period for any one
shareholder. The Trust will redeem Fund shares in kind only if it has received a
redemption in kind from the Portfolio and therefore shareholders of the Fund
that receive redemptions in kind will receive securities of the Portfolio. The
Portfolio has advised the Trust that the Portfolio will not redeem in kind
except in circumstances in which the Fund is permitted to redeem in kind.
FURTHER REDEMPTION INFORMATION. The Trust, on behalf of the Fund, and
the Portfolio reserve the right to suspend the right of redemption and to
postpone the date of payment upon redemption as follows: (i) for up to seven
days, (ii) during periods when the New York Stock Exchange is closed for other
than weekends and holidays or when trading on such Exchange is restricted as
determined by the SEC by rule or regulation, (iii) during periods in which an
emergency, as determined by the SEC, exists that causes disposal by the
Portfolio of, or evaluation of the net asset value of, its portfolio securities
to be unreasonable or impracticable, or (iv) for such other periods as the SEC
may permit.
EXCHANGE OF SHARES
An investor may exchange shares from any J.P. Morgan Institutional Fund
into any other J.P. Morgan Institutional Fund, J.P. Morgan Fund or shares of
J.P. Morgan Series Trust as described in the Prospectus. For complete
information, the Prospectus as it relates to the Fund into which a transfer is
being made should be read prior to the transfer. Requests for exchange are made
in the same manner as requests for redemptions. See "Redemption of Shares."
Shares of the Fund to be acquired are purchased for settlement when the proceeds
from redemption become available. In the case of investors in certain states,
state securities laws may restrict the availability of the exchange privilege.
The Trust reserves the right to discontinue, alter or limit the exchange
privilege at any time.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
36
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays dividends and distributions as described in
the Prospectus.
Determination of the net income for the Fund is made at the times
described in the Prospectus; in addition, net investment income for days other
than business days is determined at the time net asset value is determined on
the prior business day.
NET ASSET VALUE
The Fund computes its net asset value once daily on Monday through
Friday as described in the Prospectus. The net asset value will not be computed
on the day the following legal holidays are observed: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. The Fund and the Portfolio
may also close for purchases and redemptions at such other times as may be
determined by the Board of Trustees to the extent permitted by applicable law.
The days on which net asset value is determined are the Fund's business days.
The net asset value of the Fund is equal to the value of the Fund's
investment in the Portfolio (which is equal to the Fund's pro rata share of the
total investment of the Fund and of any other investors in the Portfolio less
the Fund's pro rata share of the Portfolio's liabilities) less the Fund's
liabilities. The following is a discussion of the procedures used by the
Portfolio in valuing its assets.
The 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
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
37
<PAGE>
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 4:00pm) 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 Fund may quote performance in terms of yield,
actual distributions, total return or capital appreciation in reports, sales
literature and advertisements published by the Trust. Current performance
information for the Fund may be obtained by calling the number provided on the
cover page of this Statement of Additional Information. See also the Prospectus.
YIELD QUOTATIONS. As required by regulations of the SEC, the annualized
yield for the Fund is computed by dividing the Fund's net investment income per
share earned during a 30-day period by the net asset value on the last day of
the period. The average daily number of shares outstanding during the period
that are eligible to receive dividends is used in determining the net investment
income per share. Income is computed by totaling the interest earned on all debt
obligations during the period and subtracting from that amount the total of all
recurring expenses incurred during the period. The 30-day yield is then
annualized on a bond-equivalent basis assuming semi-annual reinvestment and
compounding of net investment income.
Historical performance of the Fund shown below is that of the J.P.
Morgan Institutional Bond Fund, a series of the Trust which also invests in the
Portfolio, and is presented in accordance with applicable SEC staff
interpretations. Historical 30-day yield information of the J.P. Morgan
Institutional Bond Fund for the period ended December 31, 1997 is %.
TOTAL RETURN QUOTATIONS. As required by regulations of the SEC, the
annualized total return of the Fund for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Fund over the period are reinvested. It is
then assumed that at the end of the period, the entire amount is redeemed. The
annualized total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
38
<PAGE>
Historical performance information for any period or portion thereof
prior to the establishment of the Fund will be that of the J.P. Morgan Bond
Fund, a series of the J.P. Morgan Funds which also invests in the Portfolio, and
is presented in accordance with applicable SEC staff interpretations. The
applicable financial information in the registration statements for the J.P.
Morgan Funds (Registration Nos. 033-54632 and 811-07340) is incorporated herein
by reference.
Historical return information of the Fund for the period ended December
31, 1997 is as follows:
Average annual total return, 1 year: %; average annual total return, 5
years: %; average annual total return, commencement of operations2 to period
end: %; aggregate total return, 1 year: %; aggregate total return, 5 years: %;
aggregate total return, commencement of operations to period end: %.
GENERAL. The Fund's performance will vary from time to time depending
upon market conditions, the composition of the Portfolio, and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising the Fund's shares, including appropriate market indices including
the benchmark indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
From time to time, the Fund 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 the Fund; (5)
descriptions of investment strategies for the Fund; (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 Fund; (7) comparisons of
investment products (including the Fund) 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
-------- 2The Fund commenced operations on December 15, 1997.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
39
<PAGE>
performance, including risk adjusted measures. The Fund 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 Fund.
PORTFOLIO TRANSACTIONS
The Advisor places orders for the Portfolio for all purchases and sales of
portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See "Investment Objectives and Policies."
Fixed income and debt securities and municipal bonds and notes are generally
traded at a net price with dealers acting as principal for their own accounts
without a stated commission. The price of the security usually includes profit
to the dealers. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolio will be undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short-term trading
consistent with its objectives. See "Investment Objectives and Policies --
Portfolio Turnover."
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek best price and execution on a competitive basis for both
purchases and sales of securities.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
brokerage transactions to affiliates of the Advisor. In order for affiliates of
the Advisor to effect any portfolio transactions for the Portfolio, the
commissions, fees or other remuneration received by such affiliates must be
reasonable and fair compared to the commissions, fees, or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time. Furthermore, the Trustees of the Portfolio, including
a majority of the Trustees who are not "interested persons," have adopted
procedures which are reasonably designed to provide that any commissions, fees,
or other remuneration paid to such affiliates are consistent with the foregoing
standard.
Portfolio securities will not be purchased from or through or sold to
or through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
40
<PAGE>
extent permitted by law. In addition, the Portfolio will not purchase securities
during the existence of any underwriting group relating thereto of which the
Advisor or an affiliate of the Advisor is a member, except to the extent
permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other
customers, the Advisor to the extent permitted by applicable laws and
regulations, may, but is not obligated to, aggregate the securities to be sold
or purchased for the Portfolio with those to be sold or purchased for other
customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Portfolio. In some instances,
this procedure might adversely affect the Portfolio.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which the Fund is a separate and distinct
series. A copy of the Declaration of Trust for the Trust is on file in the
office of the Secretary of The Commonwealth of Massachusetts. The Declaration of
Trust and the By-Laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.
Effective January 1, 1998, the name of the Trust was changed from "The
JPM Institutional Funds to "J.P. Morgan Institutional Funds", and the Fund's
name changed accordingly.
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall not be subject to any
personal liability for the acts or obligations of the Fund or of any other
series of the Trust and that every written agreement, obligation, instrument or
undertaking made on behalf of the Fund shall contain a provision to the effect
that the shareholders are not personally liable thereunder.
No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
41
<PAGE>
conduct the operations of the Trust in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Fund.
The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, and that no Trustee, officer, employee, or agent
is liable to any third persons in connection with the affairs of the Fund,
except as such liability may arise from his or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his or its duties to such
third persons. It also provides that all third persons shall look solely to Fund
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Trust's Declaration of Trust provides
that a Trustee, officer, employee, or agent is entitled to be indemnified
against all liability in connection with the affairs of the Fund.
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 Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares (of any
series, if applicable) without changing the proportionate beneficial interest of
each shareholder in the Fund (or in the assets of other series, if applicable).
To date shares of 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 that Fund available for distribution to such shareholders. See
"Massachusetts Trust." Fund shares have no preemptive or conversion rights and
are fully paid and nonassessable. The rights of redemption and exchange are
described in the Prospectus and elsewhere in this Statement of Additional
Information.
The shareholders of the Trust are entitled to a full vote for each full
share held and to a fractional vote for each fractional share. Subject to the
1940 Act, the Trustees themselves have the power to alter the number and the
terms of office of the Trustees, to lengthen their own terms, or to make their
terms of unlimited duration subject to certain removal procedures, and appoint
their own successors, PROVIDED, HOWEVER, that immediately after such appointment
the requisite majority of the Trustees have been elected by the shareholders of
the Trust. The voting rights of shareholders are not cumulative so that holders
of more than 50% of the shares voting can, if they choose, elect all Trustees
being selected while the shareholders of the remaining shares would be unable to
elect any Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for action
by shareholder vote as may be required by either the 1940 Act or the Trust's
Declaration of Trust.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
42
<PAGE>
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
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
43
<PAGE>
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 the
Prospectus.
As of January 31, 1998, owned of record or, to the knowledge of
management, beneficially owned more than 5% of the outstanding shares of the
Fund:
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, the Fund is an open-end management investment company
which seeks to achieve its investment objective by investing all of its
investable assets in a corresponding Portfolio, a separate registered investment
company with the same investment objective as the Fund. The investment objective
of the Fund or Portfolio may be changed only with the approval of the holders of
the outstanding shares of the Fund and the Portfolio.
In addition to selling a beneficial interest to the Fund, the Portfolio
may sell beneficial interests to other mutual funds or institutional investors.
Such investors will invest in the Portfolio on the same terms and conditions and
will bear a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio may sell shares of their own fund using a
different pricing structure than the Fund. Such different pricing structures may
result in differences in returns experienced by investors in other funds that
invest in the Portfolio. Such differences in returns are not uncommon and are
present in other mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from Morgan at (800) 766-7722.
The Trust may withdraw the investment of the Fund from the Portfolio at
any time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same
investment objective and restrictions as the Fund or the retaining of an
investment adviser to manage the Fund's assets in accordance with the investment
policies described below with respect to the Portfolio.
Certain changes in the Portfolio's investment objective, policies or
restrictions, or a failure by the Fund's shareholders to approve a change in the
Portfolio's investment objective or restrictions, may require withdrawal of the
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
44
<PAGE>
Fund's interest in the Portfolio. Any such withdrawal could result in a
distribution in kind of portfolio securities (as opposed to a cash distribution)
from the Portfolio which may or may not be readily marketable. The distribution
in kind may result in the Fund having a less diversified portfolio of
investments or adversely affect the Fund's liquidity, and the Fund could incur
brokerage, tax or other charges in converting the securities to cash.
Notwithstanding the above, there are other means for meeting shareholder
redemption requests, such as borrowing.
Smaller funds investing in the Portfolio may be materially affected by
the actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may subsequently
experience higher pro rata operating expenses, thereby producing lower returns.
Additionally, because the Portfolio would become smaller, it may become
less diversified, resulting in potentially increased portfolio risk (however,
these possibilities also exist for traditionally structured funds which have
large or institutional investors who may withdraw from a fund). Also, funds with
a greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. Whenever the Fund is requested to
vote on matters pertaining to the Portfolio (other than a vote by the Fund to
continue the operation of the Portfolio upon the withdrawal of another investor
in the Portfolio), the Trust will hold a meeting of shareholders of the Fund and
will cast all of its votes proportionately as instructed by the Fund's
shareholders. The Trust will vote the shares held by Fund shareholders who do
not give voting instructions in the same proportion as the shares of Fund
shareholders who do give voting instructions. Shareholders of the Fund who do
not vote will have no affect on the outcome of such matters.
TAXES
The Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, the
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock, securities or foreign
currency and other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; (b) derive less than
30% of its gross income from the sale or other disposition of stock, securities,
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held less than three months, or foreign
currencies (or options, futures or forward contracts on foreign currencies) held
less than three months, but only if such currencies (or options, futures or
forward contracts on foreign currencies) are not directly related to the Fund's
principal business of investing in stocks or securities (or options and futures
with respect to stocks or securities); and (C) diversify its holdings so that,
at the end of each quarter of its taxable year, (I) at least 50% of the value of
the Fund's total assets is represented by cash, cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities limited, in respect of any
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
45
<PAGE>
one issuer, to an amount not greater than 5% of the Fund's total assets, and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or securities of other regulated
investment companies).
As a regulated investment company, the Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net investment
income and capital gain that it distributes to its shareholders, provided that
at least 90% of its net investment income and realized net short-term capital
gain in excess of net long-term capital loss for the taxable year is distributed
in accordance with the Code's timing requirements.
Under the Code, the Fund will be subject to a 4% excise tax on a
portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. The Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by the
Fund in October, November or December as of a record date in such month and
actually paid in January of the following year will be treated as if they were
paid on December 31 of the year declared. Therefore, such dividends will be
taxable to a shareholder in the year declared rather than the year paid.
Distributions of net investment income, certain foreign currency gains, and
realized net short-term capital gain in excess of net long-term capital loss
(other than exempt interest dividends) are generally taxable to shareholders of
the Funds as ordinary income whether such distributions are taken in cash or
reinvested in additional shares. Distributions to corporate shareholders of the
Fund are not eligible for the dividends received deduction. Distributions of net
long-term capital gain (i.e., net long-term capital gain in excess of net
short-term capital loss) are taxable to shareholders of the Fund as long-term
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 tax 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 tax rate is reduced to 20% in respect of a capital asset held for
more than 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 the 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 rate of 20% in respect of capital gains
distributions designated as 20% rate gain distributions, regardless of how long
such shareholders have held their shares in the Fund. See the Prospectus for a
discussion of the federal income tax treatment of any gain or loss realized on
the redemption or exchange of the Fund's shares.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
46
<PAGE>
Any loss realized on a redemption or exchange of shares of the Fund
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before such disposition, such as pursuant to
reinvestment of a dividend in shares of the Fund.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where a put is acquired or a call option is
written thereon or the straddle rules described below are otherwise applicable.
Other gains or losses on the sale of securities will be short-term capital gains
or losses. Gains and losses on the sale, lapse or other termination of options
on securities will be treated as gains and losses from the sale of securities.
Except as described below, if an option written by the Portfolio lapses or is
terminated through a closing transaction, such as a repurchase by the Portfolio
of the option from its holder, the Portfolio will realize a short-term capital
gain or loss, depending on whether the premium income is greater or less than
the amount paid by the Portfolio in the closing transaction. If securities are
purchased by the Portfolio pursuant to the exercise of a put option written by
it, the Portfolio will subtract the premium received from its cost basis in the
securities purchased.
Any distribution of net investment income or capital gains will have
the effect of reducing the net asset value of Fund shares held by a shareholder
by the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above. 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 the Portfolio accrues income or receivables or
expenses
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
47
<PAGE>
or other liabilities denominated in a foreign currency and the time the
Portfolio actually collects such income or pays such liabilities, are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of debt securities held by the Portfolio, if any, denominated in
foreign currency, to the extent attributable to fluctuations in exchange rates
between the acquisition and disposition dates are also treated as ordinary
income or loss.
Forward currency contracts, options and futures contracts entered into
by the Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities.
Certain options, futures and foreign currency contracts held by the
Portfolio at the end of each taxable year will be required to be "marked to
market" for federal income tax purposes -- i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss regardless of how long the Portfolio has held such options
or futures. However, gain or loss recognized on certain foreign currency
contracts will be treated as ordinary income or loss.
FOREIGN SHAREHOLDERS. Dividends of net investment income and
distributions of realized net short-term gain in excess of net long-term loss to
a shareholder who, as to the United States, is a nonresident alien individual,
fiduciary of a foreign trust or estate, foreign corporation or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax at
the rate of 30% (or lower treaty rate) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions treated
as long term capital gains to foreign shareholders will not be subject to U.S.
tax unless the distributions are effectively connected with the shareholder's
trade or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder was present in the United States
for more than 182 days during the taxable year and certain other conditions are
met.
In the case of a foreign shareholder who is a nonresident alien
individual or foreign entity, the Fund may be required to withhold U.S. federal
income tax as "backup withholding" at the rate of 31% from distributions treated
as long-term capital gains and from the proceeds of redemptions, exchanges or
other dispositions of Fund shares unless IRS Form W-8 is provided. Transfers by
gift of shares of the Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of shares
of the Fund held by such a shareholder at his or her death will be includible in
his or her gross estate for U.S. federal estate tax purposes.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
48
<PAGE>
STATE AND LOCAL TAXES. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.
OTHER TAXATION. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor the Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that the
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code. The Portfolio is organized as a New York trust. The Portfolio is
not subject to any federal income taxation or income or franchise tax in the
State of New York or The Commonwealth of Massachusetts. The investment by the
Fund in the Portfolio does not cause the Fund to be liable for any income or
franchise tax in the State of New York.
ADDITIONAL INFORMATION
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares or the Portfolio's outstanding voting
securities present at a meeting, if the holders of more than 50% of the Fund's
outstanding shares or the Portfolio's outstanding voting securities are present
or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares
or the Portfolio's outstanding voting securities, whichever is less.
Telephone calls to the Fund, Morgan or Financial Professionals as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's Registration Statement
filed with the SEC under the 1933 Act and the Trust's and the Portfolios'
Registration Statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The Registration
Statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
49
<PAGE>
<PAGE>
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
FINANCIAL STATEMENTS
The following financial statements and the report thereon of Price
Waterhouse LLP of the Portfolio is incorporated herein by reference to its
respective annual report filings made with the SEC pursuant to Section 30(b) of
the 1940 Act and Rule 30b2-1 thereunder. The following financial report is
available without charge upon request by calling J.P. Morgan Funds Services at
(800) 766-7722.
<TABLE>
<CAPTION>
Date of Annual Report; Date
Annual Report Filed; and
Name of Portfolio Accession Number
============================================================= ====================================================
<S> <C>
The U.S. Fixed Income Portfolio 10/31/97;
01/08/98;
0001047469-98-000473
- ------------------------------------------------------------- ----------------------------------------------------
</TABLE>
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
50
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA has the highest ratings assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
Appendix-1
<PAGE>
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
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
Appendix-2
<PAGE>
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.
i:\dsfndlgl\institut\0198fix.pea\ultrasai.wpf
Appendix-3
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
The following financial statements are included in Part A:
Financial Highlights: J.P. Morgan Institutional Short Term Bond Fund
J.P. Morgan Institutional Bond Fund
J.P. Morgan Institutional Global Strategic Income Fund
J.P. Morgan Institutional International Bond Fund
J.P. Morgan Institutional Tax Exempt Bond Fund
J.P. Morgan Institutional New York Total Return Bond
Fund
The following financial statements are incorporated by reference into Part B:
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
Statement of Assets and Liabilities at October 31, 1997
Statement of Operations for the fiscal year ended October 31, 1997
Statement of Changes in Net Assets for the fiscal years ended October 31, 1997
and 1996
Financial Highlights
Notes to Financial Statements October 31, 1997
THE SHORT TERM BOND PORTFOLIO Schedule of Investments at October 31, 1997
Statement of Assets and Liabilities at October 31, 1997
Statement of Operations for the fiscal year ended October 31, 1997
Statement of Changes in Net Assets for the fiscal years ended October 31,
1997 and 1996
Supplementary Data Notes to Financial Statements October 31, 1997
J.P. MORGAN INSTITUTIONAL BOND FUND
Statement of Assets and Liabilities at October 31, 1997
Statement of Operations for the fiscal year ended October 31, 1997
Statement of Changes in Net Assets for the fiscal years ended October 31, 1997
and 1996
Financial Highlights
Notes to Financial Statements October 31, 1997
THE U.S. FIXED INCOME PORTFOLIO
Schedule of Investments at October 31, 1997
Statement of Assets and Liabilities at October 31, 1997
Statement of Operations for the fiscal year ended October 31, 1997
Statement of Changes in Net Assets for the fiscal years ended October 31,
1997 and 1996
Supplementary Data
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-1
<PAGE>
Notes to Financial Statements October 31, 1997
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
Statement of Assets and Liabilities at September 30, 1997
Statement of Operations for the fiscal year ended September 30, 1997
Statement of Changes in Net Assets for the fiscal years ended September 30, 1997
and 1996
Financial Highlights
Notes to Financial Statements September 30, 1997
THE NON-U.S. FIXED INCOME PORTFOLIO
Schedule of Investments at September 30, 1997
Statement of Assets and Liabilities at September 30, 1997
Statement of Operations for the fiscal year ended September 30, 1997
Statement of Changes in Net Assets for the fiscal years ended September 30,
1997 and 1996
Financial Highlights
Notes to Financial Statements September 30, 1997
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
Statement of Assets and Liabilities at October 31, 1997
Statement of Operations for the period March 17, 1997 (commencement of
operations) to October 31, 1997
Statement of Changes in Net Assets for the period March 17, 1997 (commencement
of operations) to October 31, 1997
Financial Highlights
Notes to Financial Statements October 31, 1997
THE GLOBAL STRATEGIC INCOME PORTFOLIO
Schedule of Investments at October 31, 1997
Statement of Assets and Liabilities at October 31, 1997
Statement of Operations for the period March 17, 1997 (commencement of
operations) to October 31, 1997
Statement of Changes in Net Assets for the period March 17, 1997 (commencement
of operations) to October 31, 1997
Supplementary Data
Notes to Financial Statements October 31, 1997
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
Statement of Assets and Liabilities at August 31, 1997
Statement of Operations for the fiscal year ended August 31, 1997
Statement of Changes in Net Assets for the fiscal years ended August 31, 1997
and 1996
Financial Highlights
Notes to Financial Statements August 31, 1997
THE TAX EXEMPT BOND PORTFOLIO
Schedule of Investments at August 31, 1997
Statement of Assets and Liabilities at August 31, 1997
Statement of Operations for the fiscal year ended August 31, 1997
Statement of Changes in Net Assets for the fiscal years ended August 31,
1997 and 1996
Financial Highlights
Notes to Financial Statements August 31, 1997
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-2
<PAGE>
J.P. MORGAN INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
Statement of Assets and Liabilities at March 31, 1997
Statement of Operations for the fiscal year ended March 31, 1997
Statement of Changes in Net Assets for the fiscal years ended March 31, 1997 and
1996
Financial Highlights
Notes to Financial Statements March 31, 1997
Statement of Assets and Liabilities at September 30, 1997 (unaudited)
Statement of Operations for the six months ended September 30, 1997 (unaudited)
Statement of Changes in Net Assets for the fiscal years ended March 31,
1997 and 1996 (unaudited)
Financial Highlights (unaudited)
Notes to Financial Statements September 30, 1997 (unaudited)
THE NEW YORK TOTAL RETURN PORTFOLIO
Schedule of Investments at March 31, 1997
Statement of Assets and Liabilities at March 31, 1997
Statement of Operations for the fiscal year ended March 31, 1997
Statement of Changes in Net Assets for the fiscal years ended March 31,
1997 and 1996
Supplementary Data
Notes to Financial Statements March 31, 1997
Schedule of Investments at September 30, 1997 (unaudited)
Statement of Assets and Liabilities at September 30, 1997 (unaudited)
Statement of Operations for the six months ended September 30, 1997 (unaudited)
Statement of Changes in Net Assets for the fiscal years ended March 31,
1997 and 1996 (unaudited)
Supplementary Data (unaudited)
Notes to Financial Statements September 30, 1997 (unaudited)
(b) Exhibits
Exhibit Number
1. Declaration of Trust, as amended, was filed as Exhibit No. 1 to
Post-Effective Amendment No. 25 to the Registration Statement filed on September
26, 1996 (Accession Number 0000912057-96-021281).
1(a). Amendment No. 5 to Declaration of Trust; Amendment and Fifth Amended and
Restated Establishment and Designation of Series of Shares of Beneficial
Interest.*
1(b). Amendment No. 6 to Declaration of Trust; Amendment and Sixth Amended and
Restated Establishment and Designation of Series of Shares of Beneficial
Interest filed as Exhibit No. 1(b) to Post-Effective Amendment No. 31 to the
Registration Statement on February 28, 1997 (Accession Number
0001016964-97-000041).
1(c). Amendment No. 7 to Declaration of Trust; Amendment and Seventh Amended and
Restated Establishment and Designation of Series of Shares of Beneficial
Interest filed as Exhibit No. 1(c) to Post-Effective
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-3
<PAGE>
Amendment No. 32 to the Registration Statement on April 15, 1997 (Accession
Number 0001016964-97-000053).
1(d). Amendment No. 8 to Declaration of Trust; Amendment and Eighth Amended and
Restated Establishment and Designation of Series of Shares of Beneficial
Interest filed as Exhibit No. 1(d) to Post-Effective Amendment No. 40 to the
Registration Statement on October 9, 1997 (Accession Number
0001016964-97-000158).
1(e) Amendment No. 9 to Declaration of Trust; Amendment and Ninth Amended and
Restated Establishment and Designation of Series of Shares of Beneficial
Interest. (filed herewith)
2. Restated By-Laws of Registrant.*
4. Form of Share Certificate.*
6. Distribution Agreement between Registrant and Funds Distributor, Inc.
("FDI").*
8. Custodian Contract between Registrant and State Street Bank and Trust Company
("State Street").*
9(a). Co-Administration Agreement between Registrant and FDI.*
9(b). Restated Shareholder Servicing Agreement between Registrant and Morgan
Guaranty Trust Company of New York ("Morgan Guaranty").**
9(c). Transfer Agency and Service Agreement between Registrant and State
Street.*
9(d). Restated Administrative Services Agreement between Registrant and Morgan
Guaranty.*
9(e). Fund Services Agreement, as amended, between Registrant and Pierpont
Group, Inc.*
9(f). Service Plan with respect to Registrant's Service Money Market Funds.**
10. Opinion and consent of Sullivan & Cromwell.*
11. Consents of independent accountants. (filed herewith)
13. Purchase agreements with respect to Registrant's initial shares.*
16. Schedule for computation of performance quotations.*
18. Powers of Attorney were filed as Exhibit No. 18 to Post-Effective Amendment
No. 40 to the Registration Statement on October 9, 1997 (Accession Number
0001016964-97-000158).
27. Financial Data Schedules. (filed herewith)
- -------------------------
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-4
<PAGE>
* Incorporated herein by reference to Post-Effective Amendment No. 29 to
the Registration Statement filed on December 26, 1996 (Accession Number
0001016964-96-000061).
** Incorporated herein by reference to Post-Effective Amendment No. 33 to
the Registration Statement filed on April 30, 1997 (Accession Number
00001016964-97-000059).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Shares of Beneficial Interest ($0.001 par value).
Title of Class: Number of Record Holders as of January 30, 1998.
J.P. Morgan Institutional Prime Money Market Fund: 380
J.P. Morgan Institutional Federal Money Market Fund: 83
J.P. Morgan Institutional Bond Fund: 238
J.P. Morgan Institutional Diversified Fund: 87
J.P. Morgan Institutional U.S. Small Company Fund: 576
J.P. Morgan Institutional International Equity Fund: 548
J.P. Morgan Institutional Emerging Markets Equity Fund: 629
J.P. Morgan Institutional International Bond Fund: 44
J.P. Morgan Institutional Short Term Bond Fund: 68
J.P. Morgan Institutional U.S. Equity Fund: 198
J.P. Morgan Institutional Tax Exempt Money Market Fund: 234
J.P. Morgan Institutional Tax Exempt Bond Fund: 273
J.P. Morgan Institutional New York Total Return Bond Fund: 109
J.P. Morgan Institutional European Equity Fund: 36
J.P. Morgan Institutional Japan Equity Fund: 35
J.P. Morgan Institutional Disciplined Equity Fund: 175
J.P. Morgan Institutional International Opportunities Fund: 334
J.P. Morgan Institutional Global Strategic Income Fund: 170
J.P. Morgan Institutional Treasury Money Market Fund: 27
J.P. Morgan Institutional Service Prime Money Market Fund: 15
J.P. Morgan Institutional Service Federal Money Market Fund: 12
J.P. Morgan Institutional Service Tax Exempt Money Market Fund: 12
J.P. Morgan Institutional Service Treasury Money Market Fund: 14
J.P. Morgan Institutional Bond-Ultra Fund: 15
ITEM 27. INDEMNIFICATION.
Reference is made to Section 5.3 of Registrant's Declaration of Trust and
Section 5 of Registrant's Distribution Agreement.
Registrant, its Trustees and officers are insured against certain expenses in
connection with the defense of claims, demands, actions, suits, or proceedings,
and certain liabilities that might be imposed as a result of such actions, suits
or proceedings.
Insofar as indemnification for liabilities arising under the Securities Act of
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-5
<PAGE>
1933, as amended (the "1933 Act"), may be permitted to directors, trustees,
officers and controlling persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, trustee, officer, or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suite or proceeding) is asserted against the Registrant by such
director, trustee, officer or controlling person or principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Not Applicable.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) FDI, located at 60 State Street, Suite 1300, Boston, Massachusetts 02109, is
the principal underwriter of the Registrant's shares.
FDI acts as principal underwriter of the following investment companies other
than the Registrant:
BJB Investment Funds
Burridge Funds
Foreign Fund, Inc.
Fremont Mutual Funds, Inc.
Harris Insight Funds Trust
H.T. Insight Funds, Inc. d/b/a
Harris Insight Funds
LKCM Fund
Monetta Fund, Inc.
Monetta Trust
The Munder Framlington Funds Trust
The Munder Funds, Inc.
The Munder Funds Trust
The PanAgora Institutional Funds
RCM Capital Funds, Inc.
RCM Equity Funds, Inc.
The Skyline Funds
St. Clair Money Market Fund
Waterhouse Investors Cash Management Funds, Inc.
J.P. Morgan Funds
J.P. Morgan Series Trust
J.P. Morgan Series Trust II
FDI is registered with the Securities and Exchange Commission as a broker-dealer
and is a member of the National Association of Securities Dealers. FDI is an
indirect wholly-owned subsidiary of Boston Institutional Group, Inc., a holding
company all of whose outstanding shares are owned by key employees.
(b) The information required by this Item 29(b) with respect to each director,
officer and partner of FDI is incorporated herein by reference to Schedule A of
Form BD filed by FDI with the Securities and Exchange Commission pursuant to the
Securities Act of 1934 (SEC File No. 8-20518).
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
PIERPONT GROUP, INC.: 461 Fifth Avenue, New York, New York 10017 (records
relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
MORGAN GUARANTY TRUST COMPANY OF NEW YORK: 60 Wall Street, New York, New York
10260-0060, 522 Fifth Avenue, New York, New York 10036 or 9 West 57th Street,
New York, New York 10019 (records relating to its functions as shareholder
servicing agent and administrative services agent).
STATE STREET BANK AND TRUST COMPANY: 1776 Heritage Drive, North Quincy,
Massachusetts 02171 and 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as fund accountant, custodian, transfer agent
and dividend disbursing agent).
FUNDS DISTRIBUTOR, INC.: 60 State Street, Suite 1300, Boston, Massachusetts
02109 (records relating to its functions as distributor and co-administrator).
ITEM 31. MANAGEMENT SERVICES.
Not Applicable.
ITEM 32. UNDERTAKINGS.
(a) If the information called for by Item 5A of Form N-1A is contained
in the latest annual report to shareholders, the Registrant shall
furnish each person to whom a prospectus is delivered with a copy of
the Registrant's latest annual report to shareholders upon request and
without charge.
(b) The Registrant undertakes to comply with Section 16(c) of the 1940
Act as though such provisions of the 1940 Act were applicable to the
Registrant, except that the request referred to in the third full
paragraph thereof may only be made by shareholders who hold in the
aggregate at least 10% of the outstanding shares of the Registrant,
regardless of the net asset value of shares held by such requesting
shareholders.
(c) The Registrant undertakes to file a Post-Effective Amendment
on behalf of J.P. Morgan Institutional Service Federal Money Market
Fund, J.P. Morgan Institutional Service Tax Exempt Money Market Fund
and J.P.
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-6
<PAGE>
Morgan Institutional Bond Fund - Ultra using financial statements which
need not be certified, within four to six months from the commencement
of public investment operations of such funds.
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Boston and Commonwealth of Massachusetts on the 2nd day of March, 1998.
J.P. MORGAN INSTITUTIONAL FUNDS
By /s/ Richard W. Ingram
-----------------------
Richard W. Ingram
President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities
indicated on March 2, 1998.
/s/ Richard W. Ingram
- ------------------------------
Richard W. Ingram
President and Treasurer (Principal Financial and Accounting Officer)
Matthew Healey*
- -----------------------------
Matthew Healey
Trustee, Chairman and Chief Executive Officer (Principal Executive Officer)
Frederick S. Addy*
- ------------------------------
Frederick S. Addy
Trustee
William G. Burns*
- ------------------------------
William G. Burns
Trustee
Arthur C. Eschenlauer*
- ------------------------------
Arthur C. Eschenlauer
Trustee
Michael P. Mallardi*
- ------------------------------
Michael P. Mallardi
Trustee
*By /s/ Richard W. Ingram
----------------------------
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-8
<PAGE>
Richard W. Ingram
as attorney-in-fact pursuant to a power of attorney previously filed.
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-9
<PAGE>
SIGNATURES
Each Portfolio has duly caused this registration statement on Form N-1A
("Registration Statement") of the J.P. Morgan Institutional Funds (the "Trust")
(File No. 033-54642) to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Boston, and Commonwealth of Massachusetts on the 2nd
day of March, 1998.
SERIES PORTFOLIO II, THE TAX EXEMPT BOND PORTFOLIO, THE NEW YORK TOTAL RETURN
BOND PORTFOLIO
/s/ Richard W. Ingram
By -------------------------
Richard W. Ingram
President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, the Trust's
Registration Statement has been signed below by the following persons in the
capacities indicated on March 2, 1998.
/s/ Richard W. Ingram
- ----------------------------
Richard W. Ingram
President and Treasurer (Principal Financial and Accounting Officer) of the
Portfolios
Matthew Healey*
- ----------------------------
Matthew Healey
Trustee, Chairman and Chief Executive Officer (Principal Executive Officer) of
the Portfolios
Frederick S. Addy*
- ----------------------------
Frederick S. Addy
Trustee of the Portfolios
William G. Burns*
- ----------------------------
William G. Burns
Trustee of the Portfolios
Arthur C. Eschenlauer*
- ----------------------------
Arthur C. Eschenlauer
Trustee of the Portfolios
Michael P. Mallardi*
- ----------------------------
Michael P. Mallardi
Trustee of the Portfolios
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-10
<PAGE>
/s/ Richard W. Ingram
*By ------------------------
Richard W. Ingram
as attorney-in-fact pursuant to a power of attorney previously filed.
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-11
<PAGE>
SIGNATURES
Each Portfolio has duly caused this registration statement on Form N-1A
("Registration Statement") of the J.P. Morgan Institutional Funds (the "Trust")
(File No. 033-54642) to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of George Town, Grand Cayman, BWI on the 2nd day of
March, 1998.
THE SHORT TERM BOND PORTFOLIO, THE U.S. FIXED INCOME PORTFOLIO , THE NON-U.S.
FIXED INCOME PORTFOLIO
/s/ Lenore J. McCabe
By -------------------------
Lenore J. McCabe
Assistant Secretary and Assistant Treasurer
Pursuant to the requirements of the Securities Act of 1933, the Trust's
Registration Statement has been signed below by the following persons in the
capacities indicated on March 2, 1998.
Richard W. Ingram
- ----------------------------
Richard W. Ingram
President and Treasurer (Principal Financial and Accounting Officer) of the
Portfolios
Matthew Healey*
- ----------------------------
Matthew Healey
Trustee, Chairman and Chief Executive Officer (Principal Executive Officer) of
the Portfolios
Frederick S. Addy*
- ----------------------------
Frederick S. Addy
Trustee of the Portfolios
William G. Burns*
- ----------------------------
William G. Burns
Trustee of the Portfolios
Arthur C. Eschenlauer*
- ----------------------------
Arthur C. Eschenlauer
Trustee of the Portfolios
Michael P. Mallardi*
- ----------------------------
Michael P. Mallardi
Trustee of the Portfolios
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-12
<PAGE>
/s/ Lenore J. McCabe
*By ------------------------
Lenore J. McCabe
as attorney-in-fact pursuant to a power of attorney previously filed.
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-13
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
- ------------- ----------------------
EX-11 Consent of Independent Accountants
EX-27.1-27.21 Financial Data Schedules
i:\dsfndlgl\institut\121797.pea\wrapper.wpf
C-14
CONSENTS OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 50 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated December 22, 1997, relating to the financial
statements and financial highlights of J.P. Morgan Institutional Global
Strategic Income Fund (formerly The JPM Institutional Global Strategic Income
Fund) and the financial statements and supplementary data of The Global
Strategic Income Portfolio appearing in the October 31, 1997 Annual Report,
which is also incorporated by reference into the Registration Statement.
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of the Registration
Statement of our reports dated December 19, 1997, relating to the financial
statements and financial highlights of J.P. Morgan Institutional Bond Fund
(formerly The JPM Institutional Bond Fund) and the financial statements and
supplementary data of The U.S. Fixed Income Portfolio appearing in the
October 31, 1997 Annual Report, which is also incorporated by reference into the
Registration Statement.
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of the Registration
Statement of our reports dated December 18, 1997, relating to the financial
statements and financial highlights of J.P. Morgan Institutional Short Term Bond
Fund (formerly The JPM Institutional Short Term Bond Fund), and the financial
statements and supplementary data of The Short Term Bond Portfolio appearing in
the October 31, 1997 Annual Report, which is also incorporated by reference into
the Registration Statement.
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of the Registration
Statement of our reports dated December 18, 1997, relating to the financial
statements and financial highlights of J.P. Morgan Institutional International
Bond Fund (formerly The JPM Institutional International Bond Fund), and the
financial statements and supplementary data of The Non-U.S. Fixed Income
Portfolio appearing in the September 30, 1997 Annual Report, which is also
incorporated by reference into the Registration Statement.
<PAGE>
Consents of Independent Accountants
Page 2
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of the Registration
Statement of our reports dated October 23, 1997, relating to the financial
statements and financial highlights of J.P. Morgan Institutional Tax Exempt Bond
Fund (formerly The JPM Institutional Tax Exempt Bond Fund), and the financial
statements and supplementary data of The Tax Exempt Bond Portfolio appearing in
the August 31, 1997 Annual Report, which is also incorporated by reference into
the Registration Statement.
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of the Registration
Statement of our reports dated May 14, 1997, relating to the financial
statements and financial highlights of J.P. Morgan Institutional New York Total
Return Bond Fund (formerly The JPM Institutional New York Total Return Bond
Fund), and the financial statements and supplementary data of The New York Total
Return Bond Portfolio appearing in the March 31, 1997 Annual Report, which is
also incorporated by reference into the Registration Statement.
We also consent to the references to us under the heading "Financial
Highlights" in the Prospectus and under the headings "Independent Accountants"
and "Financial Statements" in the Statements of Additional Information.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED NOVEMBER 30, 1997 FOR J.P.MORGAN INSTITUTIONAL PRIME MONEY
MARKET FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> J.P.MORGAN INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 012
<NAME> J.P.MORGAN INSTITUTIONAL PRIME MONEY MARKET FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 1389606
<RECEIVABLES> 94
<ASSETS-OTHER> 18
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1389718
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1926
<TOTAL-LIABILITIES> 1926
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1388112
<SHARES-COMMON-STOCK> 1388102
<SHARES-COMMON-PRIOR> 1126480
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (34)
<OVERDISTRIBUTION-GAINS> (286)
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1389792
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 68054
<OTHER-INCOME> 0
<EXPENSES-NET> 205
<NET-INVESTMENT-INCOME> 67847
<REALIZED-GAINS-CURRENT> (34)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 67813
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 67847
<DISTRIBUTIONS-OF-GAINS> 372
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6802405
<NUMBER-OF-SHARES-REDEEMED> 6681230
<SHARES-REINVESTED> 46622
<NET-CHANGE-IN-ASSETS> 167391
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 1250748
<PER-SHARE-NAV-BEGIN> 1
<PER-SHARE-NII> .054
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .054
<PER-SHARE-DISTRIBUTIONS> 0000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1
<EXPENSE-RATIO> .20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REPORT
ON FORM N-SAR DATED AUGUST 31, 1997 FOR THE JPM INSTITUTIONAL TAX EXEMPT
MONEY MARKET FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 007
<NAME> THE JPM INSTITUTIONAL TAX EXEMPT MONEY MARKET FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 291372
<INVESTMENTS-AT-VALUE> 291372
<RECEIVABLES> 10
<ASSETS-OTHER> 10
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 291392
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 449
<TOTAL-LIABILITIES> 449
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 290970
<SHARES-COMMON-STOCK> 290970
<SHARES-COMMON-PRIOR> 163593
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (26)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 290943
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6495
<OTHER-INCOME> 0
<EXPENSES-NET> 102
<NET-INVESTMENT-INCOME> 6393
<REALIZED-GAINS-CURRENT> 2
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 6391
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6393
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 615734
<NUMBER-OF-SHARES-REDEEMED> 492289
<SHARES-REINVESTED> 3931
<NET-CHANGE-IN-ASSETS> 127375
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 302
<AVERAGE-NET-ASSETS> 194401
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .033
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .033
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED OCTOBER 31, 1997 FOR THE JPM INSTITUTIONAL FEDERAL MONEY MARKET
FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 001
<NAME> THE JPM INSTITUTIONAL FEDERAL MONEY MARKET FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 137474
<RECEIVABLES> 28
<ASSETS-OTHER> 8
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 137510
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 204
<TOTAL-LIABILITIES> 204
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 137308
<SHARES-COMMON-STOCK> 137308
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 137306
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5653
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 5653
<REALIZED-GAINS-CURRENT> 14
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5667
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5653
<DISTRIBUTIONS-OF-GAINS> 75
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 345870
<NUMBER-OF-SHARES-REDEEMED> 321355
<SHARES-REINVESTED> 3802
<NET-CHANGE-IN-ASSETS> 28256
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 195
<AVERAGE-NET-ASSETS> 108855
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .052
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .053
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED OCTOBER 31, 1997 FOR THE JPM INSTITUTIONAL SHORT TERM BOND
FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 002
<NAME> THE JPM INSTITUTIONAL SHORT TERM BOND FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 27412
<RECEIVABLES> 16
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 27428
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52
<TOTAL-LIABILITIES> 52
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27595
<SHARES-COMMON-STOCK> 2781
<SHARES-COMMON-PRIOR> 1808
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 9
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 243
<ACCUM-APPREC-OR-DEPREC> 33
<NET-ASSETS> 27375
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1496
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 1496
<REALIZED-GAINS-CURRENT> 53
<APPREC-INCREASE-CURRENT> (96)
<NET-CHANGE-FROM-OPS> 1454
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1495
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20392
<NUMBER-OF-SHARES-REDEEMED> 12209
<SHARES-REINVESTED> 1424
<NET-CHANGE-IN-ASSETS> 9565
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 11
<OVERDIST-NET-GAINS-PRIOR> 296
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 99
<AVERAGE-NET-ASSETS> 24185
<PER-SHARE-NAV-BEGIN> 9.85
<PER-SHARE-NII> .61
<PER-SHARE-GAIN-APPREC> (.01)
<PER-SHARE-DIVIDEND> .61
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.84
<EXPENSE-RATIO> .25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED OCTOBER 31, 1997 FOR THE JPM INSTITUTIONAL BOND
FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 003
<NAME> THE JPM INSTITUTIONAL BOND FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 912233
<RECEIVABLES> 5600
<ASSETS-OTHER> 20
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 917853
<PAYABLE-FOR-SECURITIES> 3267
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2532
<TOTAL-LIABILITIES> 5799
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 890181
<SHARES-COMMON-STOCK> 91147
<SHARES-COMMON-PRIOR> 84945
<ACCUMULATED-NII-CURRENT> 450
<OVERDISTRIBUTION-NII> 5813
<ACCUMULATED-NET-GAINS> 15610
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15610
<NET-ASSETS> 912054
<DIVIDEND-INCOME> 1099
<INTEREST-INCOME> 56432
<OTHER-INCOME> 0
<EXPENSES-NET> 4021
<NET-INVESTMENT-INCOME> 53510
<REALIZED-GAINS-CURRENT> 5993
<APPREC-INCREASE-CURRENT> 9054
<NET-CHANGE-FROM-OPS> 68557
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 53248
<DISTRIBUTIONS-OF-GAINS> 1207
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 40888
<NUMBER-OF-SHARES-REDEEMED> 37417
<SHARES-REINVESTED> 2730
<NET-CHANGE-IN-ASSETS> 75988
<ACCUMULATED-NII-PRIOR> 13
<ACCUMULATED-GAINS-PRIOR> 1202
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4038
<AVERAGE-NET-ASSETS> 811699
<PER-SHARE-NAV-BEGIN> 9.84
<PER-SHARE-NII> .65
<PER-SHARE-GAIN-APPREC> .18
<PER-SHARE-DIVIDEND> .64
<PER-SHARE-DISTRIBUTIONS> .02
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.01
<EXPENSE-RATIO> .50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REPORT
ON FORM N-SAR DATED AUGUST 31, 1997 FOR THE JPM INSTITUTIONAL TAX EXEMPT
BOND FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 006
<NAME> THE JPM INSTITUTIONAL TAX EXEMPT BOND FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 202235
<RECEIVABLES> 0
<ASSETS-OTHER> 8
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 202243
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 629
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 629
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 197813
<SHARES-COMMON-STOCK> 19914
<SHARES-COMMON-PRIOR> 12215
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (20)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3821
<NET-ASSETS> 201614
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8106
<OTHER-INCOME> 0
<EXPENSES-NET> 288
<NET-INVESTMENT-INCOME> 7908
<REALIZED-GAINS-CURRENT> 22
<APPREC-INCREASE-CURRENT> 3160
<NET-CHANGE-FROM-OPS> 11090
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7908
<DISTRIBUTIONS-OF-GAINS> 35
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10894
<NUMBER-OF-SHARES-REDEEMED> 3369
<SHARES-REINVESTED> 174
<NET-CHANGE-IN-ASSETS> 80484
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 908
<AVERAGE-NET-ASSETS> 163667
<PER-SHARE-NAV-BEGIN> 9.92
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .20
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.12
<EXPENSE-RATIO> .50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REPORT ON FORM N-SAR DATED SEPTEMBER 30, 1997 FOR THE JPM INSTITUTIONAL NEW
YORK TOTAL RETURN BOND FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 013
<NAME> THE JPM INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 102033
<RECEIVABLES> 6
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 102043
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 350
<TOTAL-LIABILITIES> 350
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 98127
<SHARES-COMMON-STOCK> 9556
<SHARES-COMMON-PRIOR> 8809
<ACCUMULATED-NII-CURRENT> 44
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3502
<NET-ASSETS> 101693
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2373
<OTHER-INCOME> 0
<EXPENSES-NET> 48
<NET-INVESTMENT-INCOME> 2325
<REALIZED-GAINS-CURRENT> 85
<APPREC-INCREASE-CURRENT> 3046
<NET-CHANGE-FROM-OPS> 3456
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2325
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 28475
<NUMBER-OF-SHARES-REDEEMED> 21132
<SHARES-REINVESTED> 427
<NET-CHANGE-IN-ASSETS> 10901
<ACCUMULATED-NII-PRIOR> 44
<ACCUMULATED-GAINS-PRIOR> (64)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 84
<AVERAGE-NET-ASSETS> 100017
<PER-SHARE-NAV-BEGIN> 10.31
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> .33
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .24
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.64
<EXPENSE-RATIO> .50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED NOVEMBER 30, 1997 FOR J.P. MORGAN INSTITUTIONAL U.S. EQUITY FUND AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> J.P. MORGAN INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 010
<NAME> J.P. MORGAN INSTITUTIONAL U.S EQUITY FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 298,504
<INVESTMENTS-AT-VALUE> 356,181
<RECEIVABLES> 8
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 27
<TOTAL-ASSETS> 356,225
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 117
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 264,352
<SHARES-COMMON-STOCK> 22,357
<SHARES-COMMON-PRIOR> 21,060
<ACCUMULATED-NII-CURRENT> 1,523
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,556
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 57,677
<NET-ASSETS> 356,108
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 1,757
<EXPENSES-NET> 235
<NET-INVESTMENT-INCOME> 1,522
<REALIZED-GAINS-CURRENT> 33,442
<APPREC-INCREASE-CURRENT> 794
<NET-CHANGE-FROM-OPS> 35,758
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,442
<DISTRIBUTIONS-OF-GAINS> 27,769
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30,204
<NUMBER-OF-SHARES-REDEEMED> 36,792
<SHARES-REINVESTED> 26,373
<NET-CHANGE-IN-ASSETS> 26,332
<ACCUMULATED-NII-PRIOR> 1,443
<ACCUMULATED-GAINS-PRIOR> 26,884
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 293
<AVERAGE-NET-ASSETS> 350,767
<PER-SHARE-NAV-BEGIN> 15.66
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 1.64
<PER-SHARE-DIVIDEND> 0.07
<PER-SHARE-DISTRIBUTIONS> 1.37
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.93
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED NOVEMBER 30, 1997 FOR J.P. MORGAN INSTITUTIONAL U.S. SMALL COMPANY
FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> J.P. MORGAN INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 011
<NAME> J.P. MORGAN INSTITUTIONAL U.S. SMALL COMPANY FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 369630
<INVESTMENTS-AT-VALUE> 442150
<RECEIVABLES> 26
<ASSETS-OTHER> 26
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 442202
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 99
<TOTAL-LIABILITIES> 99
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 330780
<SHARES-COMMON-STOCK> 28389
<SHARES-COMMON-PRIOR> 28511
<ACCUMULATED-NII-CURRENT> 1326
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 37477
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 72520
<NET-ASSETS> 442103
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 1597
<EXPENSES-NET> 272
<NET-INVESTMENT-INCOME> 1325
<REALIZED-GAINS-CURRENT> 41074
<APPREC-INCREASE-CURRENT> 23206
<NET-CHANGE-FROM-OPS> 65605
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 551
<DISTRIBUTIONS-OF-GAINS> 21466
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 49897
<NUMBER-OF-SHARES-REDEEMED> 60703
<SHARES-REINVESTED> 7524
<NET-CHANGE-IN-ASSETS> 40306
<ACCUMULATED-NII-PRIOR> 553
<ACCUMULATED-GAINS-PRIOR> 17869
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 374
<AVERAGE-NET-ASSETS> 444433
<PER-SHARE-NAV-BEGIN> 14.09
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 2.20
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .77
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.57
<EXPENSE-RATIO> .80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT
ON FORM N-SAR DATED OCTOBER 31, 1997 FOR THE JPM INSTITUTIONAL INTERNATIONAL
EQUITY FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 004
<NAME> THE JPM INSTITUTIONAL INTERNATIONAL EQUITY FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 615861
<RECEIVABLES> 467
<ASSETS-OTHER> 21
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 616349
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1690
<TOTAL-LIABILITIES> 1690
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 557243
<SHARES-COMMON-STOCK> 53982
<SHARES-COMMON-PRIOR> 63585
<ACCUMULATED-NII-CURRENT> 15062
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 16571
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25783
<NET-ASSETS> 614659
<DIVIDEND-INCOME> 13424
<INTEREST-INCOME> 2378
<OTHER-INCOME> 0
<EXPENSES-NET> 6524
<NET-INVESTMENT-INCOME> 9278
<REALIZED-GAINS-CURRENT> 23038
<APPREC-INCREASE-CURRENT> (2944)
<NET-CHANGE-FROM-OPS> 29372
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 16232
<DISTRIBUTIONS-OF-GAINS> 12924
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9984
<NUMBER-OF-SHARES-REDEEMED> 20659
<SHARES-REINVESTED> 1072
<NET-CHANGE-IN-ASSETS> (112204)
<ACCUMULATED-NII-PRIOR> 15748
<ACCUMULATED-GAINS-PRIOR> 12725
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6524
<AVERAGE-NET-ASSETS> 701926
<PER-SHARE-NAV-BEGIN> 11.43
<PER-SHARE-NII> .17
<PER-SHARE-GAIN-APPREC> .24
<PER-SHARE-DIVIDEND> .25
<PER-SHARE-DISTRIBUTIONS> .20
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.39
<EXPENSE-RATIO> .93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL SUMMARY DATA EXTRACTED FROM THE REPORT
ON FROM N-SAR DATED OCTOBER 31, 1997 FOR THE JPM INSTITUTIONAL EMERGING MARKETS
EQUITY FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 005
<NAME> THE JPM INSTITUTIONAL EMERGING MARKETS EQUITY FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 306678
<RECEIVABLES> 318
<ASSETS-OTHER> 60
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 307056
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 675
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 333851
<SHARES-COMMON-STOCK> 31075
<SHARES-COMMON-PRIOR> 28600
<ACCUMULATED-NII-CURRENT> 1686
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10574
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (39730)
<NET-ASSETS> 306381
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 4104
<EXPENSES-NET> 625
<NET-INVESTMENT-INCOME> 3479
<REALIZED-GAINS-CURRENT> 22299
<APPREC-INCREASE-CURRENT> (37469)
<NET-CHANGE-FROM-OPS> (11691)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2687
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13127
<NUMBER-OF-SHARES-REDEEMED> 10761
<SHARES-REINVESTED> 109
<NET-CHANGE-IN-ASSETS> 2475
<ACCUMULATED-NII-PRIOR> 1502
<ACCUMULATED-GAINS-PRIOR> (12333)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 625
<AVERAGE-NET-ASSETS> 365340
<PER-SHARE-NAV-BEGIN> 10.27
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> (.43)
<PER-SHARE-DIVIDEND> (.09)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.86
<EXPENSE-RATIO> 1.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED JUNE 30, 1997 FOR THE JPM INSTITUTIONAL DIVERSIFIED FUND AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 008
<NAME> THE JPM INSTITUTIONAL DIVERSIFIED FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 237295
<RECEIVABLES> 196
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 237503
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54
<TOTAL-LIABILITIES> 54
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 183264
<SHARES-COMMON-STOCK> 17731
<SHARES-COMMON-PRIOR> 16081
<ACCUMULATED-NII-CURRENT> 3923
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11252
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 39010
<NET-ASSETS> 237449
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 7626
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 7626
<REALIZED-GAINS-CURRENT> 17072
<APPREC-INCREASE-CURRENT> 20498
<NET-CHANGE-FROM-OPS> 45196
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7166
<DISTRIBUTIONS-OF-GAINS> 12353
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9198
<NUMBER-OF-SHARES-REDEEMED> 8978
<SHARES-REINVESTED> 1430
<NET-CHANGE-IN-ASSETS> 44230
<ACCUMULATED-NII-PRIOR> 2938
<ACCUMULATED-GAINS-PRIOR> 7062
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2235
<AVERAGE-NET-ASSETS> 228404
<PER-SHARE-NAV-BEGIN> 12.02
<PER-SHARE-NII> .37
<PER-SHARE-GAIN-APPREC> 1.96
<PER-SHARE-DIVIDEND> .36
<PER-SHARE-DISTRIBUTIONS> .60
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.39
<EXPENSE-RATIO> .65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED SEPTEMBER 30, 1997 FOR THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 008
<NAME> THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 7179
<RECEIVABLES> 4
<ASSETS-OTHER> 11
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7194
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 68
<TOTAL-LIABILITIES> 68
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6537
<SHARES-COMMON-STOCK> 823
<SHARES-COMMON-PRIOR> 1177
<ACCUMULATED-NII-CURRENT> 325
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 274
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (10)
<NET-ASSETS> 7126
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 260
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 260
<REALIZED-GAINS-CURRENT> 807
<APPREC-INCREASE-CURRENT> (307)
<NET-CHANGE-FROM-OPS> 760
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 952
<DISTRIBUTIONS-OF-GAINS> 325
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1035
<NUMBER-OF-SHARES-REDEEMED> 1524
<SHARES-REINVESTED> 134
<NET-CHANGE-IN-ASSETS> (6183)
<ACCUMULATED-NII-PRIOR> 367
<ACCUMULATED-GAINS-PRIOR> 590
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 102
<AVERAGE-NET-ASSETS> 5335
<PER-SHARE-NAV-BEGIN> 11.30
<PER-SHARE-NII> 2.21
<PER-SHARE-GAIN-APPREC> (1.11)
<PER-SHARE-DIVIDEND> 2.78
<PER-SHARE-DISTRIBUTIONS> .97
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.65
<EXPENSE-RATIO> .50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED JUNE 30, 1997 FOR THE JPM INSTITUTIONAL EUROPEAN
EQUITY FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 014
<NAME> THE JPM INSTITUTIONAL EUROPEAN EQUITY FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 10739
<RECEIVABLES> 5
<ASSETS-OTHER> 41
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10785
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58
<TOTAL-LIABILITIES> 58
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8780
<SHARES-COMMON-STOCK> 823
<SHARES-COMMON-PRIOR> 565
<ACCUMULATED-NII-CURRENT> 105
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 426
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1416
<NET-ASSETS> 10727
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 115
<EXPENSES-NET> 6
<NET-INVESTMENT-INCOME> 109
<REALIZED-GAINS-CURRENT> 368
<APPREC-INCREASE-CURRENT> 650
<NET-CHANGE-FROM-OPS> 1127
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 263
<NUMBER-OF-SHARES-REDEEMED> 5
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4195
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 58
<OVERDISTRIB-NII-PRIOR> (4)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 38
<AVERAGE-NET-ASSETS> 8516
<PER-SHARE-NAV-BEGIN> 11.56
<PER-SHARE-NII> .13
<PER-SHARE-GAIN-APPREC> 1.35
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.04
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED JUNE 30, 1997 FOR THE JPM INSTITUTIONAL JAPAN EQUITY
FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 016
<NAME> THE JPM INSTITUTIONAL JAPAN EQUITY FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 5894
<RECEIVABLES> 13
<ASSETS-OTHER> 5
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5912
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 49
<TOTAL-LIABILITIES> 49
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5989
<SHARES-COMMON-STOCK> 632
<SHARES-COMMON-PRIOR> 173
<ACCUMULATED-NII-CURRENT> (4)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (99)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (23)
<NET-ASSETS> 5863
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 8
<EXPENSES-NET> 3
<NET-INVESTMENT-INCOME> 5
<REALIZED-GAINS-CURRENT> 92
<APPREC-INCREASE-CURRENT> 606
<NET-CHANGE-FROM-OPS> 703
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 464
<NUMBER-OF-SHARES-REDEEMED> 6
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4361
<ACCUMULATED-NII-PRIOR> (9)
<ACCUMULATED-GAINS-PRIOR> (192)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 33
<AVERAGE-NET-ASSETS> 3960
<PER-SHARE-NAV-BEGIN> 8.67
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> .56
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.28
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED NOVEMBER 30, 1997 FOR J.P. MORGAN DISCIPLINED EQUITY FUND
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> J.P. MORGAN INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 0
<NAME> J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 169612
<RECEIVABLES> 72
<ASSETS-OTHER> 11
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 169695
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52
<TOTAL-LIABILITIES> 52
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 157927
<SHARES-COMMON-STOCK> 13077
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 701
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1417
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9598
<NET-ASSETS> 169643
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 701
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 701
<REALIZED-GAINS-CURRENT> 1739
<APPREC-INCREASE-CURRENT> 6484
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (192)
<DISTRIBUTIONS-OF-GAINS> (177)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8939
<NUMBER-OF-SHARES-REDEEMED> (227)
<SHARES-REINVESTED> 29
<NET-CHANGE-IN-ASSETS> 119917
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 110
<AVERAGE-NET-ASSETS> 98947
<PER-SHARE-NAV-BEGIN> 11.47
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 1.52
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.97
<EXPENSE-RATIO> 0.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED NOVEMBER 30, 1997 FOR J.P. MORGAN INSTITUTIONAL INTERNATIONAL
OPPORTUNITIES FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> J.P. MORGAN INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 017
<NAME> J.P. MORGAN INSTITUTIONAL INTERNATIONAL OPPORTUNITIES FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 211053
<RECEIVABLES> 49
<ASSETS-OTHER> 269
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 211371
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 142
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 220218
<SHARES-COMMON-STOCK> 21257
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1906
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3579)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7315)
<NET-ASSETS> 211229
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 1699
<EXPENSES-NET> 115
<NET-INVESTMENT-INCOME> 1584
<REALIZED-GAINS-CURRENT> (3259)
<APPREC-INCREASE-CURRENT> (7315)
<NET-CHANGE-FROM-OPS> (8990)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22719
<NUMBER-OF-SHARES-REDEEMED> 1462
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 211229
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 300
<AVERAGE-NET-ASSETS> 154490
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> (0.13)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> .99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED OCTOBER 31, 1997 FOR THE JPM INSTITUTIONAL GLOBAL STRATEGIC
INCOME FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 019
<NAME> THE JPM INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 100381
<RECEIVABLES> 5160
<ASSETS-OTHER> 33
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 105574
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 523
<TOTAL-LIABILITIES> 523
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 104474
<SHARES-COMMON-STOCK> 10340
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 185
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 389
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2
<NET-ASSETS> 105051
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 3356
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 3356
<REALIZED-GAINS-CURRENT> 567
<APPREC-INCREASE-CURRENT> 2
<NET-CHANGE-FROM-OPS> 3925
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3349
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 107327
<NUMBER-OF-SHARES-REDEEMED> 1054
<SHARES-REINVESTED> 4007
<NET-CHANGE-IN-ASSETS> 104951
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 180
<AVERAGE-NET-ASSETS> 75421
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> 0.45
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.16
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED OCTOBER 31, 1997 FOR THE JPM INSTITUTIONAL SERVICE TREASURY MONEY
MARKET FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 020
<NAME> THE JPM INSTITUTIONAL SERVICE TREASURY MONEY MARKET FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 36123
<INVESTMENTS-AT-VALUE> 36123
<RECEIVABLES> 18
<ASSETS-OTHER> 11
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 36152
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 169
<OTHER-ITEMS-LIABILITIES> 000
<TOTAL-LIABILITIES> 169
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 35982
<SHARES-COMMON-STOCK> 35982
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 35983
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 471
<OTHER-INCOME> 0
<EXPENSES-NET> 21
<NET-INVESTMENT-INCOME> 450
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 451
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 450
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 69741
<NUMBER-OF-SHARES-REDEEMED> 33813
<SHARES-REINVESTED> 55
<NET-CHANGE-IN-ASSETS> 35983
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 98
<AVERAGE-NET-ASSETS> 26519
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .017
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .017
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED OCTOBER 31, 1997 FOR THE JPM INSTITUTIONAL TREASURY MONEY
MARKET FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> THE JPM INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 021
<NAME> THE JPM INSTITUTIONAL TREASURY MONEY MARKET FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 80981
<INVESTMENTS-AT-VALUE> 80981
<RECEIVABLES> 29
<ASSETS-OTHER> 11
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 81021
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97
<TOTAL-LIABILITIES> 97
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 80922
<SHARES-COMMON-STOCK> 80922
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 80924
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 885
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 885
<REALIZED-GAINS-CURRENT> 2
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 887
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 885
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 85148
<NUMBER-OF-SHARES-REDEEMED> 5062
<SHARES-REINVESTED> 836
<NET-CHANGE-IN-ASSETS> 80924
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 96
<AVERAGE-NET-ASSETS> 50347
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .018
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .018
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON FORM
N-SAR DATED NOVEMBER 30, 1997 FOR J.P. MORGAN INSTITUTIONAL SERVICE PRIME MONEY
MARKET FUND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK> 0000894088
<NAME> J.P. MORGAN INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 22
<NAME> J.P. MORGAN INSTITUTIONAL SERVICE PRIME MONEY MARKET FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 395
<RECEIVABLES> 32
<ASSETS-OTHER> 10
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 438
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 53
<TOTAL-LIABILITIES> 53
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 384
<SHARES-COMMON-STOCK> 384
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 384
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7
<OTHER-INCOME> 0
<EXPENSES-NET> 1
<NET-INVESTMENT-INCOME> 6
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 6
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3952
<NUMBER-OF-SHARES-REDEEMED> 3568
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 384
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 1145
<PER-SHARE-NAV-BEGIN> 1
<PER-SHARE-NII> .006
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .006
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1
<EXPENSE-RATIO> .450
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
