JANUARY 2, 1998 PROSPECTUS
J.P. MORGAN DISCIPLINED EQUITY FUND
------------------------------
Seeking to outperform the
market in which it invests
over the long term through a
disciplined management
approach
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 for anyone to state or suggest
otherwise.
Distributed by Funds Distributor, Inc. JPMORGAN
<PAGE>
CONTENTS
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2
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U.S. EQUITY MANAGEMENT APPROACH
U.S. equity investment process . . . . . . . . . . . . . . . . . . . . . . 2
4
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The fund's goal, investment approach, risks, expenses, and performance
J.P. MORGAN DISCIPLINED EQUITY FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
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Investing in the J.P. Morgan Disciplined Equity Fund
YOUR INVESTMENT
Investing through a financial professional . . . . . . . . . . . . . . . . 6
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
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More about risk and the fund's business operations
FUND DETAILS
Master/feeder structure. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management and administration. . . . . . . . . . . . . . . . . . . . . . . 9
Risk and reward elements . . . . . . . . . . . . . . . . . . . . . . . . . 10
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . back cover
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INTRODUCTION
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J.P. MORGAN DISCIPLINED EQUITY FUND
This fund invests primarily in U.S. stocks by investing through a master
portfolio (another fund with the same goal). As a shareholder, you should
anticipate risks and rewards beyond those of a typical bond fund or a typical
balanced fund.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
- - are pursuing a long-term goal such as retirement
- - want to add an investment with growth potential to further diversify a
portfolio
- - want a fund that seeks to outperform the market in which it invests over the
long term
The fund is NOT designed for investors who:
- - want a fund that pursues market trends or focuses only on particular
industries or sectors
- - require regular income or stability of principal
- - are pursuing a short-term goal or investing emergency reserves
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 $240 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.
1
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U.S. EQUITY MANAGEMENT APPROACH
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The J.P. Morgan Disciplined Equity Fund invests primarily in U.S. stocks.
The fund's investment philosophy, developed by its advisor, focuses on stock
picking while largely avoiding sector or market-timing strategies. Also, under
normal market conditions, the fund will remain fully invested.
U.S. EQUITY INVESTMENT PROCESS
In managing the fund, J.P. Morgan employs a three-step process:
[GRAPHIC]
J.P. Morgan analysts develop proprietary fundamental research
RESEARCH J.P. Morgan takes an in-depth look at company prospects over a
relatively long period -- often as much as five years -- rather than focusing on
near-term expectations. This approach is designed to provide insight into a
company's real growth potential. J.P. Morgan's in-house research is developed by
an extensive worldwide network of over 120 career analysts. The team of analysts
dedicated to U.S. equities includes more than 20 members, with an average of
over ten years of experience.
[GRAPHIC]
Stocks in each industry are ranked with the help of models
VALUATION The research findings allow J.P. Morgan to rank the companies in each
industry group according to their relative value. The greater a company's
estimated worth compared to the current market price of its stock, the more
undervalued the company. The valuation rankings are produced with the help of a
variety of models that quantify the research team's findings.
[GRAPHIC]
Using research and valuations, the fund's management team chooses stocks for its
fund
STOCK SELECTION The fund buys and sells stocks according to its own policies,
using the research and valuation rankings as a basis. In general, the management
team buys stocks that are identified as undervalued and considers selling them
when they appear overvalued. Along with attractive valuation, the fund's
managers often consider a number of other criteria:
- - catalysts that could trigger a rise in a stock's price
- - high potential reward compared to potential risk
- - temporary mispricings caused by market overreactions
2 U.S. EQUITY MANAGEMENT APPROACH
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(THIS PAGE IS INTENTIONALLY LEFT BLANK)
3
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J.P. MORGAN DISCIPLINED EQUITY FUND
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REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN DISCIPLINED EQUITY FUND)
[GRAPHIC]
GOAL
The fund seeks to provide high total return from a broadly diversified portfolio
of equity securities.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests primarily in large- and medium-capitalization U.S. companies.
Industry by industry, the fund's weightings are similar to those of the Standard
& Poor's 500 Stock Index (S&P 500). The fund does not look to overweight or
underweight industries.
Within each industry, the fund modestly overweights stocks that are ranked as
undervalued or fairly valued while modestly underweighting or not holding stocks
that appear overvalued. (The process used to rank stocks according to their
relative valuations is described on page 2.)
[GRAPHIC]
POTENTIAL RISKS AND REWARDS
The value of your investment in the fund will fluctuate in response to movements
in the stock market. Fund performance will also depend on the effectiveness of
J.P. Morgan's research and the management team's stock picking decisions.
By owning a large number of stocks within the S&P 500, with an emphasis on those
that appear undervalued or fairly valued, and by tracking the industry
weightings of that index, the fund seeks returns that modestly exceed those of
the S&P 500 over the long term with virtually the same level of volatility.
The fund's securities are described in more detail on page 10, along with their
main risks, which may cause the fund's share price to decline, and the fund's
strategies to reduce these risks.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $240
billion, including more than $27 billion using the same strategy as the fund.
The portfolio management team is led by James C. Wiess and Timothy J. Devlin,
both vice presidents, who have been on the team since the fund's inception. Mr.
Wiess has been at J.P. Morgan since 1992, Mr. Devlin since July of 1996. Prior
to managing this fund, Mr. Wiess had been managing structured equity portfolios
and Mr. Devlin was an equity portfolio manager at Mitchell Hutchins Asset
Management 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.
ANNUAL FUND OPERATING EXPENSES(1) (%)
Management fees (actual) 0.35
Marketing (12b-1) fees none
Other expenses
(after reimbursement) 0.40
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TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 0.75
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EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
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1 yr. 3 yrs. 5 yrs. 10 yrs.
YOUR COST($) 8 24 42 93
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4 J.P. MORGAN DISCIPLINED EQUITY FUND
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PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for periods ended September 30, 1997
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1 yr. 5 yrs. Since 10/31/89(3)
<S> <C> <C> <C>
J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND(4) (after expenses) N/A N/A N/A
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PRIVATE ACCOUNT COMPOSITE (after expense)(5) 41.29 21.15 17.55
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S&P 500 INDEX(6) (no expenses) 40.45 20.77 17.05
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<CAPTION>
TOTAL RETURNS (%) Shows changes in returns for periods ended September 30, 1997
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3 mos. Since inception(7)
<S> <C> <C>
[GRAPH]
J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND(4) 7.66 22.83
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PRIVATE ACCOUNT COMPOSITE(5) 7.54 22.52
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S&P 500 INDEX(6) 7.49 22.02
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<CAPTION>
YEAR-BY-YEAR TOTAL RETURN (%) Shows changes in returns by calendar year
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1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
[GRAPH]
PRIVATE ACCOUNT COMPOSITE(5) (3.24) 30.01 11.42 9.87 1.90 37.47 22.90
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S&P 500 INDEX(6) (3.11) 30.47 7.62 10.08 1.32 37.58 22.96
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</TABLE>
(1) The fund has a master/feeder structure as described on page 9. This table
shows expenses and its share of master portfolio expenses, expressed as a
percentage of average net assets and reflecting reimbursement for ordinary
expenses over 0.75%.
(2) There is no guarantee that reimbursement will continue beyond 9/30/99.
(3) The inception date of the Private Account Composite is 10/31/89.
(4) As of the date of this prospectus, the fund has not commenced operations so
Performance reflects the performance of J.P. Morgan Institutional
Disciplined Equity Fund (a separate feeder fund investing in the same
master portfolio) from 1/31/97 through 9/30/97. Historical performance
information reflects operating expenses which are 0.30% of net assets lower
than those of the fund. Accordingly, performance returns for the fund would
have been lower if an investment had been made in the fund during the same
time periods.
(5) THE PERFORMANCE OF THE PRIVATE ACCOUNT COMPOSITE DOES NOT REPRESENT THE
FUND'S PERFORMANCE AND SHOULD NOT BE INTERPRETED AS INDICATIVE OF THE
FUND'S FUTURE PERFORMANCE. The Composite reflects the historical
performance of discretionary investment management accounts under the
management of the fund's advisor with substantially similar objectives and
policies as the fund. Historical Composite performance information reflects
the deduction of the fund's total expenses of 0.75%. The performance of
accounts in the Composite might have been lower if they were subject to the
extra restrictions imposed on mutual funds. AIMR performance requirements
went into effect 1/1/93 and prior to that date the Composite may not have
included all discretionary accounts.
(6) The S&P 500 Index is an unmanaged index of U.S. stocks widely used as a
measure of overall stock market performance.
(7) J.P. Morgan Institutional Disciplined Equity Fund commenced operations on
1/3/97 and performance is calculated as of 1/31/97.
J.P. MORGAN DISCIPLINED EQUITY FUND 5
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YOUR INVESTMENT
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For your convenience, the J.P. Morgan Funds offer several ways to start and
maintain fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED 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:
- - Determine the amount you are investing. The minimum amount for initial
investments in the fund is $2,500 and for additional investments $500,
although these minimums may be less for some investors. For more
information on minimum investments, call 1-800-521-5411.
- - 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 1-800-521-5411.
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:
State Street Bank & Trust Company
ROUTING NUMBER: 011-000-028
CREDIT: J.P. Morgan Funds
ACCOUNT NUMBER: 9904-226-9
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 Funds.
- - Mail the check with your completed application to the Transfer 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 Funds.
- - Mail the check with a completed investment slip to the Transfer 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
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SELLING SHARES
BY WIRE
- - 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
- - 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 or J.P. Morgan Institutional 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.
A fund may alter, limit, or suspend its exchange policy at any time.
BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and hours
are the same as those of the New York Stock Exchange. The fund calculates its
net asset value per share (NAV) every business day at 4:15 p.m. eastern time.
TIMING OF ORDERS Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until 4:00
p.m. eastern time every business day and are executed the same day, at that
day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
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TRANSFER AGENT SHAREHOLDER SERVICES AGENT
STATE STREET BANK AND TRUST COMPANY J.P. MORGAN FUNDS SERVICES
P.O. Box 8411 522 Fifth Avenue
Boston, MA 02266-8411 New York, NY 10036
Attention: J.P. Morgan Funds Services 1-800-521-5411
Representatives are available
8:00 a.m. to 5:00 p.m. eastern
time on fund business days.
YOUR INVESTMENT 7
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TIMING OF SETTLEMENTS When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, the proceeds are generally available the day following
execution and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
STATEMENTS AND REPORTS The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
ACCOUNTS WITH BELOW-MINIMUM BALANCES If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically pays income dividends four times a year and makes capital
gains distributions, if any, once per year (usually in August). 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 automatically paid 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 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
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Income dividends Ordinary income
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Short-term capital gains Ordinary income
distributions
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Long-term capital gains Capital gains
distributions
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Sales or exchanges of shares Capital gains or losses
owned for more than one year
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Sales or exchanges of shares Gains are treated as ordinary
owned for one year or less income; losses are subject
to special rules
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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
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FUND DETAILS
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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 1-800-521-5411. Generally, when the master portfolio seeks a vote,
the fund will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
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, 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:
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ADVISORY SERVICES 0.35% of the master
portfolio's average net assets
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ADMINISTRATIVE SERVICES Master portfolio's and fund's pro-rata
(fee shared with Funds portions of 0.09% of the first
Distributor, Inc.) $7 billion in J.P. Morgan-advised
portfolios, plus 0.04% of average net
assets over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.25% of the fund's average net assets
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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
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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>
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POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
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MARKET CONDITIONS
- - The fund's share price and - Stocks have generally - Under normal circumstances the fund plans to remain
performance will fluctuate outperformed more stable fully invested, with at least 65% in stocks; stock
in response to stock market investments (such as bonds investments may include U.S. and foreign common stocks,
movements and cash equivalents) over convertible securities, preferred stocks, trust or
the long term partnership interests, warrants, rights, and investment
company securities
- The fund seeks to limit risk through diversification
- During severe market downturns, the fund has the option
of investing up to 100% of assets in investment-grade
short-term securities
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MANAGEMENT CHOICES
- - The fund could underperform - The fund could outperform - J.P. Morgan focuses its active management on securities
its benchmark due to its its benchmark due to these selection, the area where it believes its commitment to
securities and asset same choices research can most enhance returns
allocation choices
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FOREIGN INVESTMENTS
- - Currency exchange rate - Favorable exchange rate - The fund anticipates that its total foreign investments
movements could reduce gains movements could generate will be similar to the weightings of foreign securities
or create losses gains or reduce losses in the S&P 500 Index
- - The fund could lose money - Foreign investments, which - The fund actively manages the currency exposure of its
because of foreign government represent a major portion of foreign investments relative to its benchmark, and may
actions, political instability, the world's securities, offer hedge into the U.S. dollar from time to time (see also
or lack of adequate and attractive potential "Derivatives")
accurate information performance and opportunities
for diversification
- -------------------------------------------------------------------------------------------------------------------------------
DERIVATIVES
- - Derivatives such as futures, - Hedges that correlate well - The fund uses derivatives for hedging and for risk
options, and foreign currency with underlying positions can management (i.e., to establish or adjust exposure to
forward contracts that are reduce or eliminate losses at particular securities, markets or currencies); risk
used for hedging the portfolio low cost management may include management of the fund's
or specific securities may not exposure relative to its benchmark
fully offset the underlying - The fund could make money and
positions(1) protect against losses if - The fund only establishes hedges that it expects will
management's analysis proves be highly correlated with underlying positions
- - Derivatives used for risk correct
management may not have the - While the fund may use derivatives that incidentally
intended effects and may - Derivatives that involve involve leverage, it does not use them for the
result in losses or missed leverage could generate specific purpose of leveraging the portfolio
opportunities substantial gains at low cost
- - Derivatives that involve
leverage could magnify losses
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</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.
10 FUND DETAILS
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<TABLE>
<CAPTION>
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POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
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ILLIQUID HOLDINGS
- - The fund could have difficulty - These holdings may offer more - The fund may not invest more than 15% of net assets
valuing these holdings attractive yields or potential in illiquid 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 time securities (including repurchase agreements) and,
or price it desires for temporary or extraordinary purposes, may borrow
from banks up to 331/3% of its assets
- ----------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys securities - The fund can take advantage The fund uses segregated accounts to offset
before issue or for delayed of attractive transaction 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 turnover rate of
the fund's brokerage and in a short period of time approximately 100%
related costs
- The fund could protect against - The fund generally avoids short-term trading, except
- - Increased short-term capital losses if a stock is overvalued to take advantage of attractive or unexpected
gains distributions would and its value later falls opportunities or to meet demands generated by
raise shareholders' income shareholder activity
tax liability
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
FUND DETAILS 11
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
12
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
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 SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. MORGAN DISCIPLINED EQUITY FUND
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
TELEPHONE: 1-800-521-5411
HEARING IMPAIRED: 1-888-468-4015
EMAIL: [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 811-07340 and 033-54632.
J.P. MORGAN FUNDS AND THE MORGAN TRADITION
The J.P. Morgan 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 Funds offer a broad array of distinctive opportunities
for mutual fund investors.
JPMORGAN
- --------------------------------------------------------------------------------
J.P. MORGAN 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
1-800-521-5411 1-800-221-7930
PROS216-981
<PAGE>
JANUARY 2, 1998 PROSPECTUS
J.P. MORGAN U.S. EQUITY FUND
------------------------------
Seeking to outperform the
market in which it invests
over the long term through a
disciplined management
approach
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 for anyone to state or suggest
otherwise.
Distributed by Funds Distributor, Inc. JPMORGAN
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
2
- ----
U.S. EQUITY MANAGEMENT APPROACH
U.S. equity investment process . . . . . . . . . . . . . . . . . . . . . . . 2
4
- ----
The fund's goal, investment approach, risks, expenses, performance, and
financial highlights
J.P. MORGAN U.S. EQUITY FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
- ----
Investing in the J.P. Morgan
U.S. Equity Fund
YOUR INVESTMENT
Investing through a financial professional . . . . . . . . . . . . . . . . . 6
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
- ----
More about risk and the fund's
business operations
FUND DETAILS
Master/feeder structure. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management and administration. . . . . . . . . . . . . . . . . . . . . . . . 9
Risk and reward elements . . . . . . . . . . . . . . . . . . . . . . . . . . 10
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . back cover
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
J.P. MORGAN U.S. EQUITY FUND
This fund invests primarily in U.S. stocks by investing through a master
portfolio (another fund with the same goal). As a shareholder, you should
anticipate risks and rewards beyond those of a typical bond fund or a typical
balanced fund.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
- - are pursuing a long-term goal such as retirement
- - want to add an investment with potential growth to further diversify a
portfolio
- - want a fund that seeks to outperform the market in which it invests over the
long term
The fund is NOT designed for investors who:
- - want a fund that pursues market trends or focuses only on particular
industries or sectors
- - require regular income or stability of principal
- - are pursuing a short-term goal or investing emergency reserves
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 $240 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.
1
<PAGE>
U.S. EQUITY MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
The J.P. Morgan U.S. Equity Fund invests primarily in U.S. stocks.
The fund's investment philosophy, developed by its advisor, focuses on stock
picking while largely avoiding sector or market-timing strategies. Also, under
normal market conditions, the fund will remain fully invested.
U.S. EQUITY INVESTMENT PROCESS
In managing the fund, J.P. Morgan employs a three-step process:
[GRAPHIC]
J.P. Morgan analysts develop proprietary fundamental research
RESEARCH J.P. Morgan takes an in-depth look at company prospects over a
relatively long period -- often as much as five years -- rather than focusing on
near-term expectations. This approach is designed to provide insight into a
company's real growth potential. J.P. Morgan's in-house research is developed by
an extensive worldwide network of over 120 career analysts. The team of analysts
dedicated to U.S. equities includes more than 20 members, with an average of
over ten years of experience.
[GRAPHIC]
Stocks in each industry are ranked with the help of models
VALUATION The research findings allow J.P. Morgan to rank the companies in each
industry group according to their relative value. The greater a company's
estimated worth compared to the current market price of its stock, the more
undervalued the company. The valuation rankings are produced with the help of a
variety of models that quantify the research team's findings.
[GRAPHIC]
Using research and valuations, the fund's management team chooses stocks for
its fund
STOCK SELECTION The fund buys and sells stocks according to its own policies,
using the research and valuation rankings as a basis. In general, the management
team buys stocks that are identified as undervalued and considers selling them
when they appear overvalued. Along with attractive valuation, the fund's
managers often consider a number of other criteria:
- - catalysts that could trigger a rise in a stock's price
- - high potential reward compared to potential risk
- - temporary mispricings caused by market overreactions
2 U.S. EQUITY MANAGEMENT APPROACH
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
3
<PAGE>
J.P. MORGAN U.S. EQUITY FUND TICKER SYMBOL: PPEQX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN U.S. EQUITY FUND)
[GRAPHIC]
GOAL
The fund seeks to provide high total return from a portfolio of
selected stocks.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests primarily in large- and medium-capitalization U.S. companies.
Industry by industry, the fund's weightings are similar to those of the Standard
& Poor's 500 Stock Index (S&P 500). The fund can moderately underweight or
overweight industries when it believes it will benefit performance.
Within each industry, the fund focuses on those stocks that are ranked as most
undervalued according to the investment process described on page 2. The fund
generally considers selling stocks that appear overvalued.
[GRAPHIC]
POTENTIAL RISKS AND REWARDS
The value of your investment in the fund will fluctuate in response to movements
in the stock market. Fund performance will also depend on the effectiveness of
J.P. Morgan's research and the management team's stock picking decisions.
By emphasizing undervalued stocks, the fund has the potential to produce returns
that exceed those of the S&P 500. At the same time, by controlling the industry
weightings of the fund so they can differ only moderately from the industry
weightings of the S&P 500, the fund seeks to limit its volatility to that of the
overall market, as represented by this index.
The fund's securities are described in more detail on page 10, along with their
main risks, which may cause the fund's share price to decline, and the fund's
strategies to reduce these risks.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $240
billion, including more than $13 billion using the same strategy as the fund.
The portfolio management team is led by William B. Petersen and William M.
Riegel, Jr. Both are managing directors at J.P. Morgan and both have been on the
team since 1993. Mr. Petersen has been at J.P. Morgan since 1972, Mr. Riegel
since 1979. Both served as managers of U.S. equity portfolios prior to managing
this fund.
- --------------------------------------------------------------------------------
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
ANNUAL FUND OPERATING EXPENSES(1)(%)
Management fees (actual) 0.40
Marketing (12b-1) fees none
Other expenses 0.40
- ------------------------------------------------------
TOTAL OPERATING EXPENSES 0.80
- ------------------------------------------------------
EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
- ------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
YOUR COST($) 8 26 44 99
- ------------------------------------------------------------------------
4 J.P. MORGAN U.S. EQUITY FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for periods ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
J.P. MORGAN U.S. EQUITY FUND (2) (after expenses) 21.06 16.82 13.99 14.75
- -----------------------------------------------------------------------------------------------------------------------------------
S&P 500 INDEX (3) (no expenses) 22.96 19.67 15.22 15.29
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR-BY-YEAR TOTAL RETURN (%) Shows changes in returns by calendar year
- -----------------------------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[GRAPH]
- -----------------------------------------------------------------------------------------------------------------------------------
J.P. MORGAN U.S. EQUITY FUND (2) 0.85 14.12 31.43 1.38 34.12 8.73 11.02 (0.61) 32.48 21.06
- -----------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index(3) 5.22 16.61 31.69 (3.11) 30.47 7.62 10.08 1.32 37.58 22.96
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA For fiscal years ended May 31
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR ($) 14.23 12.04 14.54 16.51 18.21 19.02 19.30 19.38 19.42 22.15
- -----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.42 0.46 0.44 0.44 0.37 0.38 0.27 0.32 0.38 0.25
Net realized and unrealized gain (loss)
on investments ($) (1.53) 2.49 2.20 1.90 2.13 1.35 1.32 2.17 4.23 4.72
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS ($) (1.11) 2.95 2.64 2.34 2.50 1.73 1.59 2.49 4.61 4.97
Less distributions to shareholders from:
Net investment income ($) (0.41) (0.45) (0.44) (0.45) (0.40) (0.36) (0.29) (0.28) (0.29) (0.36)
Net realized gains ($) (0.67) -- (0.23) (0.19) (1.29) (1.09) (1.22) (2.17) (1.59) (2.13)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS ($) (1.08) (0.45) (0.67) (0.64) (1.69) (1.45) (1.51) (2.45) (1.88) (2.49)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR ($) 12.04 14.54 16.51 18.21 19.02 19.30 19.38 19.42 22.15 24.63
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (8.08) 25.12 18.75 14.81 14.60 10.02 8.54 15.11 25.18 25.00
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR ($ thousands) 24,970 27,677 40,032 55,144 109,246 202,474 231,306 259,338 330,014 362,603
- -----------------------------------------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
EXPENSES (%) 1.00 1.00 0.93 0.91 0.90 0.90 0.90 0.90 0.81 0.80
- -----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (%) 3.26 3.52 2.97 2.81 2.16 2.20 1.43 1.74 1.87 1.13
- -----------------------------------------------------------------------------------------------------------------------------------
DECREASE REFLECTED IN EXPENSE RATIO DUE
TO EXPENSE REIMBURSEMENT (%) 0.34 0.45 0.41 0.38 0.19 0.08 0.03 0.01 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER (%) 29 18 23 43 99 60 104 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
(2) The fund commenced operations on 7/18/93. Returns reflect performance of
The Pierpont Equity Fund, the fund's predecessor, prior to that date. The
Pierpont Equity Fund commenced operations on 6/27/85.
(3) An unmanaged index of U.S. stocks widely used as a measure of overall stock
market performance.
(4) Portfolio turnover reflects the period June 1, 1993 to July 18, 1993 and
has not been annualized. In July, 1993 the Fund's predecessor contributed
all of its investable assets to The U.S. Equity Portfolio.
J.P. MORGAN U.S. EQUITY FUND 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Funds offer several ways to start and
maintain fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED 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:
- - Determine the amount you are investing. The minimum amount for initial
investments in the fund is $2,500 and for additional investments $500,
although these minimums may be less for some investors. For more
information on minimum investments, call 1-800-521-5411.
- - 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 1-800-521-5411.
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:
State Street Bank & Trust Company
ROUTING NUMBER: 011-000-028
CREDIT: J.P. Morgan Funds
ACCOUNT NUMBER: 9904-226-9
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 Funds.
- - Mail the check with your completed application to the Transfer 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 Funds.
- - Mail the check with a completed investment slip to the Transfer 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 WIRE
- - 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
- - 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 or J.P. Morgan Institutional 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.
A fund may alter, limit, or suspend its exchange policy at any time.
BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and hours
are the same as those of the New York Stock Exchange. The fund calculates its
net asset value per share (NAV) every business day at 4:15 p.m. eastern time.
TIMING OF ORDERS Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until 4:00
p.m. eastern time every business day and are executed the same day, at that
day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
TRANSFER AGENT SHAREHOLDER SERVICES AGENT
STATE STREET BANK AND TRUST COMPANY J.P. MORGAN FUNDS SERVICES
P.O. Box 8411 522 Fifth Avenue
Boston, MA 02266-8411 New York, NY 10036
Attention: J.P. Morgan Funds Services 1-800-521-5411
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, the proceeds are generally available the day following
execution and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
STATEMENTS AND REPORTS The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
ACCOUNTS WITH BELOW-MINIMUM BALANCES If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically pays income dividends four times a year and makes capital
gains distributions, if any, once per year (usually in August). 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 automatically reinvested in the fund.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan 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 Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of shares Capital gains or losses
owned for more than one year
- --------------------------------------------------------------------------------
Sales or exchanges of shares Gains are treated as ordinary
owned for one year or less income; losses are subject
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 1-800-521-5411. Generally, when the master portfolio seeks a vote,
the fund will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
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 at cost basis;
costs are shared by all funds governed by these trustees. Funds Distributor,
Inc., as co-administrator, provides fund officers. J.P. Morgan, as
co-administrator, oversees the fund's other service providers.
J.P. Morgan receives the following fees for investment advisory and other
services:
- --------------------------------------------------------------------------------
ADVISORY SERVICES 0.40% of the master portfolio's average
net assets
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES Master portfolio's and fund's
(fee shared with Funds pro-rata portions of 0.09% of
Distributor, Inc.) the first $7 billion in J.P.
Morgan-advised portfolios, plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.25% 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 - Stocks have generally - Under normal circumstances the fund plans to remain
- - The fund's share price and outperformed more stable fully invested, with at least 65% in stocks; stock
performance will fluctuate investments (such as bonds investments may include U.S. and foreign common
in response to stock market and cash equivalents) over stocks, convertible securities, preferred stocks,
movements the long term trust or partnership interests, warrants, rights,
and investment company securities
- The fund seeks to limit risk through diversification
- During severe market downturns, the fund has the
option of investing up to 100% of assets in
investment-grade short-term securities
- -------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
- - The fund could underperform - The fund could outperform - J.P. Morgan focuses its active management on
its benchmark due to its its benchmark due to these securities selection, the area where it believes its
securities and asset same choices commitment to research can most enhance returns
allocation choices
- -------------------------------------------------------------------------------------------------------------------------------
FOREIGN INVESTMENTS
- - Currency exchange rate - Favorable exchange rate - The fund anticipates that its total foreign
movements could reduce gains movements could generate investments will not exceed 5% of assets
or create losses gains or reduce losses
- The fund actively manages the currency exposure of its
- - The fund could lose money - Foreign investments, which foreign investments relative to its benchmark, and may
because of foreign government represent a major portion of hedge into the U.S. dollar from time to time (see also
actions, political instability, the world's securities, offer "Derivatives")
or lack of adequate and attractive potential
accurate information performance and opportunities
for diversification
- -------------------------------------------------------------------------------------------------------------------------------
DERIVATIVES
- - Derivatives such as futures, - Hedges that correlate well - The fund uses derivatives for hedging (i.e., to
options, and foreign currency with underlying positions can establish or adjust exposure to particular securities,
forward contracts that are reduce or eliminate losses at markets or currencies)
used for hedging the portfolio low cost
or specific securities may - The fund only establishes hedges that it expects will
not fully offset the - The fund could make money and be highly correlated with underlying positions
underlying positions1 protect against losses if
management's analysis proves - While the fund may use derivatives that incidentally
correct involve leverage, it does not use them for the
- - Derivatives that involve specific purpose of leveraging the portfolio
leverage could magnify losses
- Derivatives that involve
leverage could generate
substantial gains at low cost
- -------------------------------------------------------------------------------------------------------------------------------
</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.
10 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have - These holdings may offer - The fund may not invest more than 15% of net assets
difficulty valuing these more attractive yields or in illiquid holdings
holdings precisely potential growth than
comparable widely traded - To maintain adequate liquidity to meet redemptions,
- - The fund could be unable securities the fund may hold investment-grade short-term
to sell these holdings securities (including repurchase agreements) and,
at the time or price it for temporary or extraordinary purposes, may borrow
desires from banks up to 10% of its assets
- ------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys - The fund can take advantage - The fund uses segregated accounts to offset leverage
securities before issue or of 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 brokerage in a short period of time approximately 100%
and related costs
- The fund could protect - The fund generally avoids short-term trading, except
- - Increased short-term capital against losses if a stock 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>
FUND DETAILS 11
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
12
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
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 SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. MORGAN U.S. EQUITY FUND
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
TELEPHONE: 1-800-521-5411
HEARING IMPAIRED: 1-888-468-4015
EMAIL: [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 811-07795 and 333-11125.
J.P. MORGAN FUNDS AND THE MORGAN TRADITION
The J.P. Morgan 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 Funds offer a broad array of distinctive opportunities for mutual fund
investors.
JPMORGAN
- --------------------------------------------------------------------------------
J.P. MORGAN 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
1-800-521-5411 1-800-221-7930
PROS295-981
<PAGE>
JANUARY 2, 1998 PROSPECTUS
J.P. MORGAN U.S. SMALL COMPANY FUND
------------------------------
Seeking to outperform the
market in which it invests
over the long term through a
disciplined management
approach
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 for anyone to state or suggest
otherwise.
Distributed by Funds Distributor, Inc. JPMORGAN
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
2
- ----
U.S. EQUITY MANAGEMENT APPROACH
U.S. equity investment process . . . . . . . . . . . . . . . . . . . . . . 2
4
- ----
The fund's goal, investment approach, risks, expenses, performance, and
financial highlights
J.P. MORGAN U.S. SMALL COMPANY FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
- ---
Investing in the J.P. Morgan U.S. Small Company Fund
YOUR INVESTMENT
Investing through a financial professional . . . . . . . . . . . . . . . . 6
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
- ----
More about risk and the fund's business operations
FUND DETAILS
Master/feeder structure. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management and administration. . . . . . . . . . . . . . . . . . . . . . . 9
Risk and reward elements . . . . . . . . . . . . . . . . . . . . . . . . . 10
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . back cover
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
J.P. MORGAN U.S. SMALL COMPANY FUND
This fund invests primarily in U.S. small company stocks by investing through a
master portfolio (another fund with the same goal). As a shareholder, you should
anticipate risks and rewards beyond those of a typical bond, balanced or a
large-cap equity fund.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
- - are pursuing a long-term goal such as retirement
- - want to add an investment with growth potential to further diversify a
portfolio
- - want a fund that seeks to outperform the market in which it invests over
the long term
The fund is NOT designed for investors who:
- - want a fund that pursues market trends or focuses only on particular
industries or sectors
- - require regular income or stability of principal
- - are pursuing a short-term goal or investing emergency reserves
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 $240 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.
1
<PAGE>
U.S. EQUITY MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
The J.P. Morgan U.S. Small Company Fund invests primarily in U.S. small
company stocks.
The fund's investment philosophy, developed by its advisor, focuses on stock
picking while largely avoiding sector or market-timing strategies. Also, under
normal market conditions, the fund will remain fully invested.
U.S. EQUITY INVESTMENT PROCESS
In managing the fund, J.P. Morgan employs a three-step process:
[GRAPHIC]
J.P. Morgan analysts develop proprietary fundamental research
RESEARCH J.P. Morgan takes an in-depth look at company prospects over a
relatively long period -- often as much as five years -- rather than focusing on
near-term expectations. This approach is designed to provide insight into a
company's real growth potential. J.P. Morgan's in-house research is developed by
an extensive worldwide network of over 120 career analysts. The team of analysts
dedicated to U.S. equities includes more than 20 members, with an average of
over ten years of experience.
[GRAPHIC]
Stocks in each industry are ranked with the help of models
VALUATION The research findings allow J.P. Morgan to rank the companies in each
industry group according to their relative value. The greater a company's
estimated worth compared to the current market price of its stock, the more
undervalued the company. The valuation rankings are produced with the help of a
variety of models that quantify the research team's findings.
[GRAPHIC]
Using research and valuations, the fund's management team chooses stocks for its
fund
STOCK SELECTION The fund buys and sells stocks according to its own policies,
using the research and valuation rankings as a basis. In general, the management
team buys stocks that are identified as undervalued and considers selling them
when they appear overvalued. Along with attractive valuation, the fund's
managers often consider a number of other criteria:
- - catalysts that could trigger a rise in a stock's price
- - high potential reward compared to potential risk
- - temporary mispricings caused by market overreactions
2 U.S. EQUITY MANAGEMENT APPROACH
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
3
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND TICKER SYMBOL: PPCAX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN U.S. SMALL COMPANY FUND)
[GRAPHIC]
GOAL
The fund seeks to provide high total return from a portfolio of small
company stocks.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests primarily in small and medium sized U.S. companies whose market
capitalizations are greater than $100 million and less than $3 billion. Industry
by industry, the fund's weightings are similar to those of the Russell 2500
Index. The fund can moderately underweight or overweight industries when it
believes it will benefit performance.
Within each industry, the fund focuses on those stocks that are ranked as
most undervalued according to the process described on page 2. The fund
generally considers selling stocks that appear overvalued or have grown into
large-cap stocks.
[GRAPHIC]
POTENTIAL RISKS AND REWARDS
The value of your investment in the fund will fluctuate in response to movements
in the stock market. Fund performance will also depend on the effectiveness of
J.P. Morgan's research and the management team's stock picking decisions.
Small- and medium-cap stocks have historically offered higher long-term growth
than large-cap stocks, and have also involved higher risks. The fund's small-cap
emphasis means it is likely to be more sensitive to economic news and is likely
to fall further in value during broad market downturns. The fund pursues returns
that exceed those of the Russell 2500 Index while seeking to limit its
volatility relative to this index.
The fund's securities are described in more detail on page 10, along with their
main risks, which may cause the fund's share price to decline, and the fund's
strategies to reduce these risks.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $240
billion, including more than $4.2 billion using the same strategy as the fund.
The portfolio management team is led by James B. Otness, managing director, and
Michael J. Kelly, vice president. Mr. Otness began managing the fund in February
of 1993, has managed small-cap U.S. equity portfolios since 1985, and has been
at J.P. Morgan since 1970. Mr. Kelly joined the team in May of 1996, has managed
other U.S. equity portfolios for J.P. Morgan prior to managing this fund, and
has been at J.P. Morgan since 1985.
- --------------------------------------------------------------------------------
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.
ANNUAL FUND OPERATING EXPENSES(1) (%)
Management fees (actual) 0.60
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.41
- ------------------------------------------------------
TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 1.01
- ------------------------------------------------------
EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
- ------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
YOUR COST($) 10 32 56 124
- ------------------------------------------------------------------------
4 J.P. MORGAN U.S. SMALL COMPANY FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for periods ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
J.P. MORGAN U.S. SMALL COMPANY FUND (3) (AFTER EXPENSES) 20.75 14.43 14.12 12.72
- ----------------------------------------------------------------------------------------------------------------------------------
RUSSELL 2500 INDEX(4) (NO EXPENSES) 19.03 15.76 16.00 13.87
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR-BY-YEAR TOTAL RETURN (%) Shows changes in returns by calendar year
- ----------------------------------------------------------------------------------------------------------------------------------
[GRAPH]
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan U.S. Small
Company Fund (3) (3.38) 13.67 29.01 (24.34) 59.59 18.98 8.58 (5.89) 31.86 20.75
- ----------------------------------------------------------------------------------------------------------------------------------
Russell 2500 Index(4) (4.68) 22.73 19.43 (14.88) 46.70 16.19 16.54 (1.06) 31.70 19.03
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA For fiscal years ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ($) 15.71 12.91 16.83 18.68 17.98 20.03 25.12 21.40 22.02 26.20
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss)(5) ($) (0.02) (0.03) (0.03) (0.02) (0.04) (0.01) 0.20 0.22 0.26 0.18
Net realized and unrealized
gain on investment ($) (2.13) 3.95 1.88 (0.33) 2.09 5.10 0.19 2.13 6.96 2.00
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS ($) (2.15) 3.92 1.85 (0.35) 2.05 5.09 0.39 2.35 7.22 2.18
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) -- -- -- -- -- -- (0.09) (0.21) (0.26) (0.21)
Net realized gain ($) (0.65) -- -- (0.35) -- -- (4.02) (1.52) (2.78) (2.13)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS ($) (0.65) -- -- (0.35) -- -- (4.11) (1.73) (3.04) (2.34)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ($) 12.91 16.83 18.68 17.98 20.03 25.12 21.40 22.02 26.20 26.04
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) (14.25) 30.36 10.99 (1.90) 11.40 25.41 1.14 12.28 35.48 9.49
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($ thousands) 30,866 42,403 47,921 58,859 97,548 186,887 204,445 179,130 220,917 237,985
- ------------------------------------------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES (%) 1.00 1.00 0.93 0.91 0.90 0.90 0.90 0.90 0.90 0.90
- ------------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (%) (0.15) (0.23) (0.18) (0.15) (0.25) (0.06) 0.75 1.02 1.10 0.71
- ------------------------------------------------------------------------------------------------------------------------------------
DECREASE REFLECTED IN EXPENSE RATIO DUE TO
EXPENSE REIMBURSEMENT (%) 0.31 0.36 0.32 0.31 0.13 0.05 0.20 0.22 0.13 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER (%) 78 38 66 56 58 50 14(6) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</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,
expressed as a percentage of the fund's average net assets for the past
fiscal year and reflecting current reimbursement arrangements for ordinary
expenses over 1.01%. This limit does not cover extraordinary expenses and
upon notice to shareholders may be revoked at any time.
(2) Without reimbursement, other expenses and total operating expenses would
have been 0.43% and 1.03%, respectively.
(3) The fund commenced operations on 7/19/93. Returns reflect performance of
The Capital Appreciation Fund, the fund's predecessor, prior to that date.
The Capital Appreciation Fund commenced operations on 6/27/85.
(4) The Russell 2500 Index is an unmanaged index of medium and small U.S.
stocks.
(5) Based on shares outstanding at the beginning and end of each fiscal period
except for the fiscal year ended May 31, 1991, where average shares
outstanding were used.
(6) Portfolio turnover reflects the period June 1, 1993 to July 18, 1993 and
has not been annualized. In July, 1993 the Fund's predecessor contributed
all of its investable assets to The U.S. Small Company Portfolio.
J.P. MORGAN U.S. SMALL COMPANY FUND 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Funds offer several ways to start and
maintain fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED 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:
- - Determine the amount you are investing. The minimum amount for initial
investments in the fund is $2,500 and for additional investments $500,
although these minimums may be less for some investors. For more
information on minimum investments, call 1-800-521-5411.
- - 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 1-800-521-5411.
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:
State Street Bank & Trust Company
ROUTING NUMBER: 011-000-028
CREDIT: J.P. Morgan Funds
ACCOUNT NUMBER: 9904-226-9
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 Funds.
- - Mail the check with your completed application to the Transfer 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 Funds.
- - Mail the check with a completed investment slip to the Transfer 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 WIRE
- - 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
- - 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 or J.P. Morgan Institutional 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.
A fund may alter, limit, or suspend its exchange policy at any time.
BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and hours
are the same as those of the New York Stock Exchange. The fund calculates its
net asset value per share (NAV) every business day at 4:15 p.m. eastern time.
TIMING OF ORDERS Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until
4:00 p.m. eastern time every business day and are executed the same day, at that
day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
TRANSFER AGENT SHAREHOLDER SERVICES AGENT
STATE STREET BANK AND TRUST COMPANY J.P. MORGAN FUNDS SERVICES
P.O. Box 8411 522 Fifth Avenue
Boston, MA 02266-8411 New York, NY 10036
Attention: J.P. Morgan Funds Services 1-800-521-5411
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, the proceeds are generally available the day following
execution and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
STATEMENTS AND REPORTS The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
ACCOUNTS WITH BELOW-MINIMUM BALANCES If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically pays income dividends two times a year and makes capital
gains distributions, if any, once per year (usually in August). 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 automatically reinvested in the fund.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan 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 Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of shares Capital gains or losses
owned for more than one year
- --------------------------------------------------------------------------------
Sales or exchanges of shares Gains are treated as ordinary
owned for one year or less income; losses are subject
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 1-800-521-5411. Generally, when the master portfolio seeks a vote,
the fund will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
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, 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 0.60% of the master
portfolio's average net assets
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES Master portfolio's and fund's
(fee shared with Funds pro-rata portions of 0.09% of
Distributor, Inc.) the first $7 billion in
J.P. Morgan-advised portfolios, plus
0.04% of average
net assets over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.25% 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 and - Stocks have generally - Under normal circumstances the fund plans to remain
performance will fluctuate in outperformed more stable fully invested, with at least 65% in U.S. small
response to stock market investments (such as company stocks; stock investments may include U.S.
movements bonds and cash and foreign common stocks, convertible securities,
equivalents) over the preferred stocks, trust or partnership interests,
long term warrants, rights, and investment company securities
- The fund seeks to limit risk through diversification
- During severe market downturns, the fund has the
option of investing up to 100% of assets in
investment-grade short-term securities
- ------------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
- - The fund could underperform - The fund could outperform - J.P. Morgan focuses its active management on
its benchmark due to its its benchmark due to securities selection, the area where it believes its
securities and asset these same choices commitment to research can most enhance returns
allocation choices
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN INVESTMENTS
- - Currency exchange rate - Favorable exchange rate - The fund anticipates that its total foreign
movements could reduce gains movements could generate investments will not exceed 5% of assets
or create losses gains or reduce losses
- The fund actively manages the currency exposure of
- - The fund could lose money - Foreign investments, its foreign investments relative to its benchmark,
because of foreign government which represent a major and may hedge into the U.S. dollar from time to time
actions, political portion of the world's (see also "Derivatives")
instability, or lack of securities, offer
adequate and accurate attractive potential
information performance and
opportunities for
diversification
- ------------------------------------------------------------------------------------------------------------------------------------
DERIVATIVES
- - Derivatives such as futures, - Hedges that correlate - The fund uses derivatives for hedging (i.e., to
options, and foreign currency well with underlying establish or adjust exposure to particular
forward contracts that are positions can reduce or securities, markets or currencies)
used for hedging the portfolio eliminate losses at low
or specific securities may not cost - The fund only establishes hedges that it expects
fully offset the underlying will be highly correlated with underlying positions
positions(1) - The fund could make money
and protect against - While the fund may use derivatives that incidentally
- - Derivatives that involve losses if management's involve leverage, it does not use them for the
leverage could magnify losses analysis proves correct specific purpose of leveraging the portfolio
- Derivatives that involve
leverage could generate
substantial gains at low
cost
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
10 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have difficulty - These holdings may offer - The fund may not invest more than 15% of net assets
valuing these holdings more attractive yields or in illiquid holdings
precisely potential growth than
comparable widely traded - To maintain adequate liquidity to meet redemptions,
- - The fund could be unable to securities the fund may hold investment-grade short-term
sell these holdings at the securities (including repurchase agreements) and,
time or price it desires for temporary or extraordinary purposes, may borrow
from banks up to 10% of of its assets
- ------------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED DELIVERY
SECURITIES
- - When the fund buys securities - The fund can take - The fund uses segregated accounts to offset leverage
before issue or for delayed advantage of attractive risk
delivery, it could be exposed transaction opportunities
to leverage risk if it does
not use segregated accounts
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
- - Increased trading would raise - The fund could realize - The fund anticipates a portfolio turnover rate of
the fund's brokerage and gains in a short period approximately 100%
related costs of time
- The fund generally avoids short-term trading, except
- - Increased short-term capital - The fund could protect to take advantage of attractive or unexpected
gains distributions would against losses if a stock opportunities or to meet demands generated by
raise shareholders' income tax is overvalued and its shareholder activity
liability value later falls
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FUND DETAILS 11
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
12
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
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 SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. MORGAN U.S. SMALL COMPANY FUND
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
TELEPHONE: 1-800-521-5411
HEARING IMPAIRED: 1-888-468-4015
EMAIL: [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 811-07340 and 033-54632.
J.P. MORGAN FUNDS AND THE MORGAN TRADITION
The J.P. Morgan 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 Funds offer a broad array of distinctive opportunities for mutual fund
investors.
JPMORGAN
- --------------------------------------------------------------------------------
J.P. MORGAN 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
1-800-521-5411 1-800-221-7930
PROS298-981
<PAGE>
JANUARY 2, 1998 PROSPECTUS
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
-----------------------------
Seeking to outperform the
market in which it invests
over the long term through a
disciplined management
approach
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 for anyone to state or suggest
otherwise.
Distributed by Funds Distributor, Inc. JPMORGAN
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
2
- ----
U.S. EQUITY MANAGEMENT APPROACH
U.S. equity investment process . . . . . . . . . . . . . . . . . . . . . . 2
3
- ----
The fund's goal, investment approach, risks, expenses, performance, and
financial highlights
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
- ----
Investing in the J.P. Morgan U.S. Small Company Opportunities Fund
YOUR INVESTMENT
Investing through a financial professional . . . . . . . . . . . . . . . . 6
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
- ----
More about risk and the fund's business operations
FUND DETAILS
Master/feeder structure. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management and administration. . . . . . . . . . . . . . . . . . . . . . . 9
Risk and reward elements . . . . . . . . . . . . . . . . . . . . . . . . . 10
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . back cover
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
This fund invests primarily in U.S. small company growth stocks by investing
through a master portfolio (another fund with the same goal). As a shareholder,
you should anticipate risks and rewards beyond those of a typical bond, balanced
or large-cap equity fund.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
- - are pursuing a long-term goal such as retirement
- - want to add an investment with growth potential to further diversify a
portfolio
- - want a fund that seeks to outperform the market in which it invests over the
long term
The fund is NOT designed for investors who:
- - want a fund that pursues market trends or focuses only on particular
industries or sectors
- - require regular income or stability of principal
- - are pursuing a short-term goal or investing emergency reserves
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 $240 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.
1
<PAGE>
U.S. EQUITY MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
The J.P. Morgan U.S. Small Company Opportunities Fund invests primarily in U.S.
small company growth stocks.
The fund's investment philosophy, developed by its advisor, focuses on stock
picking while allowing some sector and theme strategies. Also, under normal
market conditions, the fund will remain fully invested.
U.S. EQUITY INVESTMENT PROCESS
In managing the fund, J.P. Morgan begins with a three-step process:
[GRAPHIC]
J.P. Morgan analysts develop proprietary fundamental research
RESEARCH J.P. Morgan takes an in-depth look at company prospects over a
relatively long period -- often as much as five years -- rather than focusing on
near-term expectations. This approach is designed to provide insight into a
company's real growth potential. J.P. Morgan's in-house research is developed by
an extensive worldwide network of over 120 career analysts. The team of analysts
dedicated to U.S. equities includes more than 20 members, with an average of
over ten years of experience.
[GRAPHIC]
Stocks in each industry are ranked with the help of models
VALUATION The research findings allow J.P. Morgan to rank the companies
according to their relative value. The greater a company's estimated worth
compared to the current market price of its stock, the more undervalued the
company. The valuation rankings are produced with the help of a variety of
models that quantify the research team's findings.
[GRAPHIC]
Using research and valuations, the fund's management team chooses stocks for its
fund
STOCK SELECTION The fund buys and sells stocks according to its own policies,
using the research and valuation rankings as a basis. In general, the management
team buys stocks that are identified as undervalued and considers selling them
when they appear overvalued. Along with attractive valuation, the fund's
managers often consider a number of other criteria:
- - catalysts that could trigger a rise in a stock's price
- - high potential reward compared to potential risk
- - temporary mispricings caused by market overreactions
2 U.S. EQUITY MANAGEMENT APPROACH
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN U.S. SMALL COMPANY
OPPORTUNITIES FUND)
[GRAPHIC]
GOAL
The fund seeks to provide long-term growth from a portfolio of small company
growth stocks.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests primarily in stocks of small U.S. companies whose
market capitalization is greater than $150 million and less than $1.25 billion
when purchased. While the fund holds stocks in many industries to reduce the
impact of poor performance in any one sector, it tends to emphasize industries
with higher growth potential and does not track the sector weightings of the
overall small company stock market.
In searching for companies, the fund combines the approach described on page 2
with a growth-oriented approach that focuses on each company's business
strategies and its competitive environment. The fund seeks to buy stocks when
they are undervalued or fairly valued and are poised for long-term growth.
Stocks become candidates for sale when they appear overvalued or when the
company is no longer a small-cap company, but the fund may also continue to hold
them if it believes further substantial growth is possible.
[GRAPHIC]
POTENTIAL RISKS AND REWARDS
The value of your investment in the fund will fluctuate in response to movements
in the stock market. Fund performance will also depend on the effectiveness of
J.P. Morgan's research and the management team's stock picking decisions.
Small-cap stocks have historically offered higher long-term growth than medium-
or large-cap stocks, and have also involved higher risks. The fund's small-cap
emphasis means it is likely to be more sensitive to economic news and is likely
to fall further in value during broad market downturns. Because the fund seeks
to outperform the Russell 2000 Growth Index while not tracking its industry
weightings, investors should expect higher volatility compared to this index or
to more conservatively managed small-cap funds.
The fund's securities are described in more detail on page 10, along with their
main risks, which may cause the fund's share price to decline, and the fund's
strategies to reduce these risks.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $240
billion, including more than $4.2 billion using the same strategy as the fund.
The portfolio management team is led by Marian U. Pardo, managing director, who
has been on the team since the fund's inception in June of 1997 and has been at
J.P. Morgan since 1968. Prior to managing this fund, she managed equity and
convertible funds, large cap equity portfolios, as well as several institutional
portfolios.
- --------------------------------------------------------------------------------
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.
ANNUAL FUND OPERATING EXPENSES(1) (%)
Management fees (actual) 0.60
Marketing (12b-1) fees none
Other expenses(1)
(after reimbursement) 0.60
- ------------------------------------------------------
TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 1.20
- ------------------------------------------------------
EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
- ------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
YOUR COST($) 12 38 66 145
- ------------------------------------------------------------------------
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND 3
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN Shows performance over time, for periods ended September 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
1 yr. 3 yrs. Since 8/31/94(3)
<S> <C> <C> <C>
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND (after expenses) N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
PRIVATE ACCOUNT COMPOSITE(4) (after expenses) 32.55 31.85 30.24
- ------------------------------------------------------------------------------------------------------------------------------------
RUSSELL 2000 GROWTH INDEX(5) (no expenses) 23.26 21.17 20.71
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL RETURNS (%) Shows changes in returns for period ended September 30, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
[GRAPH]
Since inception(6)
<S> <C>
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND 18.97
- ------------------------------------------------------------------------------------------------------------------------------------
PRIVATE ACCOUNT COMPOSITE(4) 17.10
- ------------------------------------------------------------------------------------------------------------------------------------
RUSSELL 2000 GROWTH INDEX(5) 16.92
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR-BY-YEAR TOTAL RETURN (%) Shows changes in returns by calendar year
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1996
<S> <C> <C>
PRIVATE ACCOUNT COMPOSITE(4) 41.61 23.90
- ------------------------------------------------------------------------------------------------------------------------------------
RUSSELL 2000 GROWTH INDEX(6) 31.04 11.26
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund has a master/feeder structure as described on page 9. This table
shows expenses and its share of master portfolio expenses for the fiscal
period ended 10/31/97, expressed as a percentage of average net assets and
reflecting reimbursement for ordinary expenses over 1.20%.
(2) Without reimbursement, other expenses and total operating expenses would
have been 0.78% and 1.38% respectively. There is no guarantee that
reimbursement will continue beyond 9/30/98.
(3) The inception date of the Private Account Composite is 8/31/94.
(4) The performance of the Private Account Composite does not represent the
fund's performance and should not be interpreted as indicative of the
fund's future performance. The Composite reflects the historical
performance of all discretionary investment management accounts under the
management of the fund's advisor with substantially similar objectives and
policies as the fund. Historical Composite performance information reflects
the deduction of the fund's total expenses of 1.20%.The performance of
accounts in the Composite might have been lower if they were subject to the
extra restrictions imposed on mutual funds.
(5) The Russell 2000 Growth Index is an unmanaged index of small, growth-
oriented U.S. stocks.
(6) The fund commenced operations on 6/16/97 and performance is calculated as
of 6/30/97.
4 J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------------------------------------------------------
PER-SHARE DATA For period ended October 31
- --------------------------------------------------------------------------------
1997(1)
NET ASSET VALUE, BEGINNING OF PERIOD ($) 10.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ($) (0.01)
Net realized and unrealized gain
on investment ($) 1.53
- --------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS ($) 1.52
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ($) 11.52
- --------------------------------------------------------------------------------
TOTAL RETURN (%) 15.20(2)
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($ thousands) 90,939
- --------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
EXPENSES (%) 1.19(3)
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (%) (0.34)(3)
- --------------------------------------------------------------------------------
DECREASE REFLECTED IN EXPENSE RATIO DUE TO
EXPENSE REIMBURSEMENT (%) 0.18(3)
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 6/16/97.
(2) Not annualized.
(3) Annualized.
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Funds offer several ways to start and
maintain fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED 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:
- - Determine the amount you are investing. The minimum amount for initial
investments in the fund is $2,500 and for additional investments $500,
although these minimums may be less for some investors. For more
information on minimum investments, call 1-800-521-5411.
- - 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 1-800-521-5411.
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:
State Street Bank & Trust Company
ROUTING NUMBER: 011-000-028
CREDIT: J.P. Morgan Funds
ACCOUNT NUMBER: 9904-226-9
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 Funds.
- - Mail the check with your completed application to the Transfer 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 Funds.
- - Mail the check with a completed investment slip to the Transfer 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 WIRE
- - 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
- - 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 or J.P. Morgan Institutional 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.
A fund may alter, limit, or suspend its exchange policy at any time.
BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and hours
are the same as those of the New York Stock Exchange. The fund calculates its
net asset value per share (NAV) every business day at 4:15 p.m. eastern time.
TIMING OF ORDERS Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until 4:00
p.m. eastern time every business day and are executed the same day, at that
day's NAV. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
TRANSFER AGENT SHAREHOLDER SERVICES AGENT
STATE STREET BANK AND TRUST COMPANY J.P. MORGAN FUNDS SERVICES
P.O. Box 8411 522 Fifth Avenue
Boston, MA 02266-8411 New York, NY 10036
Attention: J.P. Morgan Funds Services 1-800-521-5411
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, the proceeds are generally available the day following
execution and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
STATEMENTS AND REPORTS The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
ACCOUNTS WITH BELOW-MINIMUM BALANCES If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically pays income dividends two times a year and makes capital
gains distributions, if any, once per year (usually in August). 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 automatically paid 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 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 Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of shares Capital gains or losses
owned for more than one year
- --------------------------------------------------------------------------------
Sales or exchanges of shares Gains are treated as ordinary
owned for one year or less income; losses are subject
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 1-800-521-5411. Generally, when the master portfolio seeks a vote,
the fund will hold a shareholder meeting and cast its vote proportionately, as
instructed by its shareholders. Fund shareholders are entitled to one vote per
fund share.
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, 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 0.60% of the master
portfolio's average net assets
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES Master portfolio's and fund's
(fee shared with Funds pro-rata portions of 0.09% of
Distributor, Inc.) the first $7 billion in J.P.
Morgan-advised portfolios,
plus 0.04% of average
net assets over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.25% 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 3). 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 and - Stocks have generally - Under normal circumstances the fund plans to remain
performance will fluctuate outperformed more stable fully invested, with at least 65% in U.S. small
in response to stock market investments (such as bonds company growth stocks; stock investments may include
movements and cash equivalents) over the U.S. and foreign common stocks, convertible
long term securities, preferred stocks, trust or partnership
interests, warrants, rights, and investment company
securities
- The fund seeks to limit risk through diversification
- During severe market downturns, the fund has the
option of investing up to 100% of assets in
investment-grade short-term securities
- ----------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
- - The fund could underperform - The fund could outperform - J.P. Morgan focuses its active management on
its benchmark due to its its benchmark due to these securities selection, the area where it believes its
securities and asset same choices commitment to research can most enhance returns
allocation choices
- ----------------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have - These holdings may offer more - The fund may not invest more than 15% of net
difficulty valuing these attractive yields or potential assets in illiquid holdings
holdings precisely growth than comparable widely
traded securities - To maintain adequate liquidity to meet redemptions,
- - The fund could be unable the fund may hold investment-grade short-term
to sell these holdings at the securities (including repurchase agreements) and,
time or price it desires for temporary or extraordinary purposes, may borrow
from banks up to 33 1/3% of its assets
- ----------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys securities - The fund can take advantage - The fund uses segregated accounts to offset leverage
before issue or for delayed of attractive transaction 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 turnover rate of
the fund's brokerage and in a short period of time approximately 100%
related costs
- - Increased short-term capital - The fund could protect against - The fund generally avoids short-term trading, except
gains distributions would losses if a stock is overvalued to take advantage of attractive or unexpected
raise shareholders' income and its value later falls opportunities or to meet demands generated by
tax liability shareholder activity
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fund is also permitted to enter into foreign investments and use derivates,
however, it has no current intention to do so.
10 FUND DETAILS
<PAGE>
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11
<PAGE>
- --------------------------------------------------------------------------------
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12
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
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 SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
TELEPHONE: 1-800-521-5411
HEARING IMPAIRED: 1-888-468-4015
EMAIL: [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 811-07340 and 033-54632.
J.P. MORGAN FUNDS AND THE MORGAN TRADITION
The J.P. Morgan 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 Funds offer a broad array of distinctive opportunities for mutual fund
investors.
JPMORGAN
- --------------------------------------------------------------------------------
J.P. MORGAN 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
1-800-521-5411 1-800-221-7930
PROS209-981
<PAGE>
J.P. MORGAN FUNDS
J.P. MORGAN DISCIPLINED EQUITY FUND
J.P. MORGAN U.S. EQUITY FUND
J.P. MORGAN U.S. SMALL COMPANY FUND
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 2, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
FOR THE FUND OR FUNDS LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO TIME, WHICH MAY
BE OBTAINED UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: J.P. MORGAN
FUNDS (800) 221-7930.
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<PAGE>
Table of Contents
PAGE
General................................. 1
Investment Objectives and Policies...... 1
Investment Restrictions................. 20
Trustees and Officers................... 26
Investment Advisor...................... 30
Distributor............................. 33
Co-Administrator........................ 34
Services Agent.......................... 35
Custodian and Transfer Agent............ 37
Shareholder Servicing................... 37
Financial Professionals................. 38
Independent Accountants................. 39
Expenses................................ 39
Purchase of Shares...................... 40
Redemption of Shares.................... 40
Exchange of Shares...................... 41
Dividends and Distributions............. 42
Net Asset Value......................... 42
Performance Data........................ 43
Portfolio Transactions.................. 44
Massachusetts Trust..................... 46
Description of Shares................... 48
Special Information Concerning Investment
Structure............................... 50
Taxes................................... 51
Additional Information.................. 55
Financial Statements.................... 56
Appendix A - Description of
Securities Ratings...................... A-1
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<PAGE>
GENERAL
This Statement of Additional Information relates only to J.P. Morgan
Disciplined Equity Fund, J.P. Morgan U.S. Equity Fund, J.P. Morgan U.S. Small
Company Fund and J.P. Morgan U.S. Small Company Opportunities Fund
(collectively, the "Funds"). Each of the Funds is a series of shares of
beneficial interest of J.P. Morgan 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 Fund"). The other J.P. Morgan 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 Funds operate through a two-tier master-feeder investment fund
structure. Formerly, J.P. Morgan U.S. Equity Fund and J.P. Morgan U.S. Small
Company Fund operated as free-standing mutual funds and not through the
master-feeder structure. Where indicated in this Statement of Additional
Information, historical information for each of these Funds includes information
for their respective predecessor entities.
This Statement of Additional Information provides additional
information with respect to the Funds and should be read in conjunction with the
relevant Fund's current Prospectus (the "Prospectus"). The Funds' executive
offices are located at 60 State Street, Suite 1300, Boston, Massachusetts 02109.
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIO OF SECURITIES, THE FUNDS SEEK TO ACHIEVE THEIR INVESTMENT OBJECTIVES
BY INVESTING ALL OF THEIR INVESTABLE ASSETS IN SEPARATE MASTER PORTFOLIOS (EACH
A "PORTFOLIO"), A CORRESPONDING DIVERSIFIED OPEN-END MANAGEMENT INVESTMENT
COMPANY HAVING THE SAME INVESTMENT OBJECTIVE AS THE CORRESPONDING FUND. EACH
FUND INVESTS IN A PORTFOLIO THROUGH A TWO-TIER MASTER-FEEDER INVESTMENT FUND
STRUCTURE. SEE "SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE."
The Portfolios are advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
INVESTMENTS IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, MORGAN OR ANY OTHER BANK. SHARES OF THE FUNDS ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND IS
SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND
WHEN THE INVESTMENT IS REDEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE
AMOUNT ORIGINALLY INVESTED BY THE INVESTOR.
INVESTMENT OBJECTIVES AND POLICIES
The following discussion supplements the information regarding the
investment objective of each Fund and the policies to be employed to achieve
this objective by its corresponding Portfolio as set forth above and in the
Prospectus. The investment objective of each Fund and its corresponding
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1
<PAGE>
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.
J.P. MORGAN DISCIPLINED EQUITY FUND (the "Disciplined Equity Fund") is
designed for investors seeking enhanced total return relative to that of large
and medium sized companies, typically represented by the S&P 500 Index. The
Disciplined Equity Fund's investment objective is to provide high total return
from a broadly diversified portfolio of equity securities. The Fund attempts to
achieve its investment objective by investing all of its investable assets in
The Disciplined Equity Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the
Disciplined Equity Fund.
The Portfolio invests primarily in a diversified portfolio of common
stocks and other equity securities. Under normal circumstances, the Portfolio
expects to invest at least 65% of its total assets in such securities.
INVESTMENT PROCESS FOR THE DISCIPLINED EQUITY PORTFOLIO
Research: Morgan's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, follow
approximately 600 medium and large capitalization U.S. companies. Their research
goal is to forecast intermediate-term earnings and prospective dividend growth
rates for the companies that they cover.
Valuation: The analysts' forecasts are converted into comparable
expected returns using a proprietary dividend discount model, which calculates
the intermediate-term earnings by comparing a company's current stock price with
its forecasted dividends and earnings. Within each sector, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
Stock Selection: A broadly diversified portfolio is constructed using
disciplined buy and sell rules. Purchases are allocated among stocks in the
first three quintiles. Once a stock falls into the fourth and fifth quintiles
either because its price has risen or its fundamentals have deteriorated -- it
generally becomes a candidate for sale. The Portfolio's sector weightings are
matched to those of the S&P 500 Index, the Portfolio's benchmark. Morgan also
controls the Portfolio's exposure to style and theme bets and maintains near-
market security weightings in individual security holdings. This process results
in an investment portfolio containing approximately 300 stocks.
J.P. MORGAN U.S. EQUITY FUND (the "U.S. Equity Fund") is designed for
investors who want an actively managed portfolio of selected equity securities
that seeks to outperform the S&P 500 Index. The U.S. Equity Fund's investment
objective is to provide a high total return from a portfolio of selected stocks.
The Fund attempts to achieve its investment objective by investing all of its
investable assets in The U.S. Equity Portfolio (the "Portfolio"), a diversified
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2
<PAGE>
open-end management investment company having the same investment objective as
the U.S. Equity Fund.
In normal circumstances, at least 65% of the Portfolio's net assets
will be invested in equity securities consisting of U.S. and foreign common
stocks and other securities with equity characteristics comprised of preferred
stock, warrants, rights, convertible securities, trust certifications, limited
partnership interests and investment company securities (collectively, "Equity
Securities"). The Portfolio's primary equity investments are the common stock of
large capitalization U.S. corporations and, to a limited extent, similar
securities of foreign corporations.
INVESTMENT PROCESS FOR THE U.S. EQUITY PORTFOLIO
Research: Morgan's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, follow
approximately 700 predominantly large- and medium-sized U.S. companies --
approximately 500 of which form the universe for the Portfolio's investments.
Their research goal is to forecast normalized, longer term earnings and
dividends for the companies that they cover. In doing this, they may work in
concert with Morgan's international equity analysts in order to gain a broader
perspective for evaluating industries and companies in today's global economy.
Valuation: The analysts' forecasts are converted into comparable
expected returns using a proprietary dividend discount model, which calculates
the long-term earnings by comparing a company's current stock price with its
forecasted dividends and earnings. Within each sector, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
Stock Selection: A diversified portfolio is constructed using
disciplined buy and sell rules. Purchases are concentrated among first-quintile
stocks; the specific names selected reflect the portfolio manager's judgment
concerning the soundness of the underlying forecasts, the likelihood that the
perceived misvaluation will be corrected within a reasonable time frame, and the
magnitude of the risks versus the rewards. Once a stock falls into the third
quintile -- because its price has risen or its fundamentals have deteriorated --
it generally becomes a candidate for sale. The portfolio manager seeks to hold
sector weightings close to those of the S&P 500 Index, the Portfolio's
benchmark.
J.P. MORGAN U.S. SMALL COMPANY FUND (the "U.S. Small Company Fund") is
designed for investors who are willing to assume the somewhat higher risk of
investing in small companies in order to seek a higher return over time than
might be expected from a portfolio of stocks of large companies. The U.S. Small
Company Fund's investment objective is to provide a high total return from a
portfolio of small company stocks. The Fund attempts to achieve its investment
objective by investing all of its investable assets in The U.S. Small Company
Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the U.S. Small Company Fund.
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<PAGE>
The Portfolio attempts to achieve its investment objective by investing
primarily in the common stock of small and medium U.S. companies included in the
Russell 2500 Index, which is composed of 2,500 common stocks of U.S. companies
with market capitalizations ranging from $100 million to $3 billion.
INVESTMENT PROCESS FOR THE U.S. SMALL COMPANY PORTFOLIO
Research: Morgan's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, continuously
monitor the small cap stocks in their respective sectors with the aim of
identifying companies that exhibit superior financial strength and operating
returns. Meetings with management and on-site visits play a key role in shaping
their assessments. Their research goal is to forecast normalized, long-term
earnings and dividends for the most attractive small cap companies among those
they monitor -- a universe that contains a total of approximately 600 names.
Because Morgan's analysts follow both the larger and smaller companies in their
industries -- in essence, covering their industries from top to bottom -- they
are able to bring broad perspective to the research they do on both.
Valuation: The analysts' forecasts are converted into comparable
expected returns using a proprietary dividend discount model, which calculates
the long-term earnings by comparing a company's current stock price with the its
forecasted dividends and earnings. Within each industry, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
Stock Selection: A diversified portfolio is constructed using
disciplined buy and sell rules. Purchases are concentrated among the stocks in
the top two quintiles of the rankings; the specific names selected reflect the
portfolio manager's judgment concerning the soundness of the underlying
forecasts, the likelihood that the perceived misvaluation will soon be
corrected, and the magnitude of the risks versus the rewards. Once a stock falls
into the third quintile -- because its price has risen or its fundamentals have
deteriorated -- it generally becomes a candidate for sale. The portfolio manager
seeks to hold sector weightings close to those of the Russell 2500 Index, the
Portfolio's benchmark.
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND (the "U.S. Small
Company Opportunities Fund") is designed for investors seeking an actively
managed portfolio of equity securities of companies with high growth potential,
emphasizing growth sectors of the market without undue emphasis on a specific
sector and encompassing a higher degree of risk than some small company stock
portfolios. The U.S. Small Company Opportunities Fund's investment objective is
long-term growth from a portfolio of small cap growth stocks. The U.S. Small
Company Opportunities Fund attempts to achieve its investment objective by
investing all of its investable assets in The U.S. Small Company Opportunities
Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the U.S. Small Company
Opportunities Fund.
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The Portfolio attempts to achieve its investment objective by investing
in a diversified portfolio of common stocks issued by small companies with above
average long-term earnings growth potential that are included in the Russell
2000 Growth Index, an index composed of 2000 equity securities of companies with
a market capitalization ranging from $150 billion to $2 billion. The Portfolio
emphasizes stocks of U.S. small companies with a market capitalization of less
than $1.25 billion when purchased.
INVESTMENT PROCESS FOR THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
Research: Morgan's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, continuously
monitor stocks in the small company universe with the aim of identifying
companies that participate in expanding markets or have a competitive advantage
that is sustainable over the long term, exhibit superior potential, sound
financial and operating characteristics and can be purchased at a reasonable
price. Frequent reviews of individual companies focus on the forecasted growth
and profitability inputs to the proprietary valuation analyses. The research
goal is to forecast normalized, long-term earnings and dividends for the most
attractive small cap growth companies among those they monitor.
Valuation: The analysts' forecasts are converted into comparable
expected returns using a proprietary dividend discount model, which calculates
the long-term earnings by comparing a company's current stock price with its
forecasted dividends and earnings. Within each industry, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
Stock Selection: A diversified portfolio is constructed using
disciplined buy and sell rules. Purchases are concentrated among the stocks in
the top two quintiles of the rankings; the specific names selected reflect the
portfolio manager's judgment concerning the soundness of the underlying
forecasts, the likelihood that the perceived misevaluation will soon be
corrected, and the magnitude of the risks versus the rewards. Once a stock falls
into the third quintile -- because its price has risen or its fundamentals have
deteriorated -- it generally becomes a candidate for sale. While the Portfolio
holds stocks in many industries to reduce the impact of poor performance in any
one sector, it tends to emphasize industries with higher growth potential and
does not track the sector weightings of the overall small company stock market.
The various types of securities in which the Funds may invest are
described below.
MONEY MARKET INSTRUMENTS
Although the Funds intend, under normal circumstances and to the extent
practicable, to be fully invested in equity securities, each Fund may invest in
money market instruments to the extent consistent with its investment objective
and policies. The Funds may make money market investments pending other
investment or settlement, for liquidity or in adverse market conditions. A
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description of the various types of money market instruments that may be
purchased by the Funds appears below. Also see "Quality and Diversification
Requirements."
U.S. TREASURY SECURITIES. Each of the Funds may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Funds may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, each Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which each Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
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). 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).
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COMMERCIAL PAPER. Each of the Funds may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan Guaranty Trust Company of New York
acting as agent, for no additional fee, in its capacity as investment advisor to
the Portfolios and as fiduciary for other clients for whom it exercises
investment discretion. The monies loaned to the borrower come from accounts
managed by the Advisor or its affiliates, pursuant to arrangements with such
accounts. Interest and principal payments are credited to such accounts. The
Advisor, acting as a fiduciary on behalf of its clients, has the right to
increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by the Advisor. Since master demand obligations typically
are not rated by credit rating agencies, the Funds may invest in such unrated
obligations only if at the time of an investment the obligation is determined by
the Advisor to have a credit quality which satisfies the Fund's quality
restrictions. See "Quality and Diversification Requirements." Although there is
no secondary market for master demand obligations, such obligations are
considered by the Funds to be liquid because they are payable upon demand. The
Funds do not have any specific percentage limitation on investments in master
demand obligations. It is possible that the issuer of a master demand obligation
could be a client of Morgan to whom Morgan, in its capacity as a commercial
bank, has made a loan.
REPURCHASE AGREEMENTS. Each of the Funds may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Funds' Trustees. In a repurchase agreement, a Fund buys a
security from a seller that has agreed to repurchase the same security at a
mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Fund is invested in the agreement and is
not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by a Fund
to the seller. The period of these repurchase agreements will usually be short,
from overnight to one week, and at no time will the Funds invest in repurchase
agreements for more than thirteen months. The securities which are subject to
repurchase agreements, however, may have maturity dates in excess of thirteen
months from the effective date of the repurchase agreement. The Funds will
always receive securities as collateral whose market value is, and during the
entire term of the agreement remains, at least equal to 100% of the dollar
amount invested by the Funds in each agreement plus accrued interest, and the
Funds will make payment for such securities only upon physical delivery or upon
evidence of book entry transfer to the account of the Custodian. If the seller
defaults, a Fund might incur a loss if the value of the collateral securing the
repurchase agreement declines and might incur disposition costs in connection
with
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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.
EQUITY INVESTMENTS
The Portfolios for each of the Funds invest primarily in Equity
Securities. The Equity Securities in which the Funds invest include those listed
on any domestic or foreign securities exchange or traded in the over-the-counter
(OTC) market as well as certain restricted or unlisted securities.
EQUITY SECURITIES. The Equity Securities in which the Funds may invest may
or may not pay dividends and may or may not carry voting rights. Common stock
occupies the most junior position in a company's capital structure.
The convertible securities in which the Funds may invest include any
debt securities or preferred stock which may be converted into common stock or
which carry the right to purchase common stock. Convertible securities entitle
the holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
COMMON STOCK WARRANTS
The Funds may invest in common stock warrants that entitle the holder
to buy common stock from the issuer of the warrant at a specific price (the
strike price) for a specific period of time. The market price of warrants may be
substantially lower than the current market price of the underlying common
stock, yet warrants are subject to similar price fluctuations. As a result,
warrants may be more volatile investments than the underlying common stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying common stock and do not represent any
rights in the assets of the issuer company. A warrant will expire worthless if
it is not exercised on or prior to the expiration date.
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FOREIGN INVESTMENTS
The Funds may invest in certain foreign securities. The U.S. Equity
Fund may invest in equity securities of foreign corporations included in the S&P
500 Index or listed on a national securities exchange. The U.S. Small Company
Fund and The U.S. Small Company Opportunities Fund may invest in equity
securities of foreign issuers that are listed on a national securities exchange
or denominated or principally traded in the U.S. dollar. The Funds do not expect
to invest more than 5%, respectively, of their total assets at the time of
purchase in securities of foreign issuers.
Investors should realize that the value of the Funds' investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Funds' operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investments made by the Funds must be made in compliance
with U.S. and foreign currency restrictions and tax laws restricting the amounts
and types of foreign investments.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, a Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. companies. Moreover, the settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. In buying and selling
securities on foreign exchanges, purchasers normally pay fixed commissions that
are generally higher than the negotiated commissions charged in the United
States. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers located in foreign
countries than in the United States.
Foreign investments may be made directly in securities of foreign
issuers or in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other
similar securities of foreign issuers. ADRs are securities, typically issued by
a U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited
with the depositary. ADRs include American Depositary Shares and New York
Shares. EDRs are receipts issued by a European financial institution. GDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S.
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or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for investment
through "sponsored" or "unsponsored" facilities. A sponsored facility is
established jointly by the issuer of the security underlying the receipt and a
depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all costs
of the unsponsored facility. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through to the
holders of the receipts voting rights with respect to the deposited securities.
Since investments in foreign securities may involve foreign currencies,
the value of a Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Funds may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
the settlement of foreign securities transactions or to manage the Funds'
currency exposure related to foreign investments.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because each Portfolio may buy and sell securities and receive interest
and dividends in currencies other than the U.S. dollar, the Portfolio may enter
from time to time into foreign currency exchange transactions. Each 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 foreign currency forward 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. Foreign currency forward
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 foreign currency forward exchange contract
generally has no deposit requirement and is traded at a net price without
commission. Neither spot transactions nor foreign currency forward 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.
Each 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. Each 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
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into a forward contract to sell the foreign currency in which the investment is
denominated or principally traded in exchange for U.S. dollars or in exchange
for another foreign currency. The Portfolio will only enter into forward
contracts to sell a foreign currency in exchange for another foreign currency if
the Advisor expects the foreign currency purchased to appreciate against the
U.S. dollar.
Although these transactions are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
limit any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause a Portfolio to assume the risk
of fluctuations in the value of the currency purchased vis a vis the hedged
currency and the U.S. dollar. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market movements in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and for money market instruments and other
fixed income securities no interest accrues to a Portfolio until settlement
takes place. At the time a Portfolio makes the commitment to purchase securities
on a when-issued or delayed delivery basis, it will record the transaction,
reflect the value each day of such securities in determining its net asset
value, and calculate the maturity for the purposes of average maturity from that
date. At the time of settlement a when-issued security may be valued at less
than the purchase price. To facilitate such acquisitions, each Portfolio will
maintain with the Custodian a segregated account with liquid assets, consisting
of cash, U.S. Government securities or other appropriate securities, in an
amount at least equal to such commitments. On delivery dates for such
transactions, each Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If a
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, incur a gain or loss due to market fluctuation. It is the
current policy of each Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies may
be acquired by each of the Funds and their corresponding Portfolios to the
extent permitted under the 1940 Act. These limits require that, as determined
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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. The Funds and the Portfolios have applied for exemptive relief
from the SEC to permit the Portfolios to invest in affiliated investment
companies. If the requested relief is granted, the Portfolios would then be
permitted to invest in affiliated Funds, subject to certain conditions specified
in the applicable order.
REVERSE REPURCHASE AGREEMENTS. Each of the Portfolios may enter into
reverse repurchase agreements. In a reverse repurchase agreement, a Portfolio
sells a security and agrees to repurchase the same security at a mutually agreed
upon date and price. For purposes of the 1940 Act a reverse repurchase agreement
is also considered as the borrowing of money by the Portfolio and, therefore, a
form of leverage. The Portfolios will invest the proceeds of borrowings under
reverse repurchase agreements. In addition, a Portfolio will enter into a
reverse repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. A Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. Each Portfolio will establish and maintain with the Custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to its purchase obligations under its reverse repurchase agreements. See
"Investment Restrictions" for each Portfolio's limitations on reverse repurchase
agreements and bank borrowings.
LOANS OF PORTFOLIO SECURITIES. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolios in the normal settlement time, generally three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to a
Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a Portfolio
will consider all facts and circumstances before entering into such an
agreement, including the creditworthiness of the borrowing financial
institution, and no Portfolio will make any loans in excess of one year. The
Portfolios will not lend their securities to any officer, Trustee, Director,
employee or other
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affiliate of the Portfolios, the Advisor or the Distributor, unless otherwise
permitted by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. A Portfolio may
not acquire any illiquid holdings if, as a result thereof, more than 15% of the
Portfolio's net assets would be in illiquid investments. Subject to this
non-fundamental policy limitation, the Portfolios may acquire investments that
are illiquid or have limited liquidity, such as private placements or
investments that are not registered under the 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 a Portfolio. The
price a Portfolio pays for illiquid holdings or receives upon resale may be
lower than the price paid or received for similar holdings with a more liquid
market. Accordingly the valuation of these holdings will reflect any limitations
on their liquidity.
The Portfolios may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor and approved by the Trustees. The Trustees will
monitor the Advisor's implementation of these guidelines on a periodic basis.
As to illiquid investments, a Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the Securities Act of 1933, as amended (the "1933
Act"), before it may be sold, a Portfolio may be obligated to pay all or part of
the registration expenses, and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
holding under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Each of the Funds intends to meet the diversification requirements of
the 1940 Act. To meet these requirements, 75% of the assets of the Funds is
subject to the following fundamental limitations: (1) the Fund may not invest
more than 5% of its total assets in the securities of any one issuer, except
obligations of the U.S. Government, its agencies and instrumentalities, and (2)
the Fund may not own more than 10% of the outstanding voting securities of any
one issuer. As for the other 25% of the Fund's assets not subject to the
limitation described above, there is no limitation on investment of these assets
under the 1940 Act, so that all of such assets may be invested in securities of
any one issuer. 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.
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The Funds will also comply with the diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
a regulated investment company. See "Taxes."
The Funds may invest in convertible debt securities, for which there
are no specific quality requirements. In addition, at the time a Fund invests in
any commercial paper, bank obligation or repurchase agreement, the issuer must
have outstanding debt rated A or higher by Moody's or Standard & Poor's, the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no such ratings are
available, the investment must be of comparable quality in the Advisor's
opinion. At the time a Fund invests in any other short-term debt securities,
they must be rated A or higher by Moody's or Standard & Poor's, or if unrated,
the investment must be of comparable quality in the Advisor's opinion.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
OPTIONS AND FUTURES TRANSACTIONS
Each of the Portfolios may (a) purchase and sell exchange traded and
over-the-counter (OTC) put and call options on equity securities or indexes of
equity securities, (b) purchase and sell futures contracts on indexes of equity
securities and (c) purchase and sell put and call options on futures contracts
on indexes of equity securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.
Each Portfolio may use futures contracts and options for hedging. The
Disciplined Equity and U.S. Small Company Opportunities Portfolios may also use
futures contracts and options for risk management purposes. See "Risk
Management" below.
Each Portfolio may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of the Portfolio's overall strategy in a manner deemed
appropriate to the Advisor and consistent with the Portfolio's objective and
policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase a Portfolio's return. While the use of these instruments
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by the Portfolio may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If the
Advisor applies a strategy at an inappropriate time or judges market conditions
or trends incorrectly, options and futures strategies may lower the Portfolio's
return. Certain strategies limit the Portfolio's possibilities to realize gains
as well as limiting its exposure to losses. A Portfolio could also experience
losses if the prices of its options and futures positions were poorly correlated
with its other investments, or if it could not close out its positions because
of an illiquid secondary market. In addition, the Portfolio will incur
transaction costs, including trading commissions and option premiums, in
connection with its futures and options transactions and these transactions
could significantly increase the Portfolio's turnover rate.
Each Portfolio may purchase put and call options on securities, indexes
of securities and futures contracts, or purchase and sell futures contracts,
only if such options are written by other persons and if (i) the aggregate
premiums paid on all such options which are held at any time do not exceed 20%
of the Portfolio's net assets, and (ii) the aggregate margin deposits required
on all such futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
OPTIONS
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a
Portfolio obtains the right (but not the obligation) to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
Portfolio pays the current market price for the option (known as the option
premium). Options have various types of underlying instruments, including
specific securities, indexes of securities, indexes of securities prices, and
futures contracts. A Portfolio may terminate its position in a put option it has
purchased by allowing it to expire or by exercising the option. A Portfolio may
also close out a put option position by entering into an offsetting transaction,
if a liquid market exists. If the option is allowed to expire, the Portfolio
will lose the entire premium it paid. If a Portfolio exercises a put option on a
security, it will sell the instrument underlying the option at the strike price.
If a Portfolio exercises an option on an index, settlement is in cash and does
not involve the actual sale of securities. If an option is American style, it
may be exercised on any day up to its expiration date. A European style option
may be exercised only on its expiration date.
The buyer of a typical put option can expect to realize a gain if the
price of the underlying instrument falls substantially. However, if the price of
the instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather 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
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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 Portfolio writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Portfolio assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. A Portfolio may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. If the market is not
liquid for a put option the Portfolio has written, however, the Portfolio must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as discussed
below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates a Portfolio to sell or deliver the
option's underlying instrument in return for the strike price upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
OPTIONS ON INDEXES. Options on securities indexes are similar to
options on securities, except that the exercise of securities index options is
settled by cash payment and does not involve the actual purchase or sale of
securities. In addition, these options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. A Portfolio, in purchasing or
selling index options, is subject to the risk that the value of its portfolio
securities may not change as much as an index because the Portfolio's
investments generally will not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus a
Portfolio may not be able to close out an option position that it has previously
entered into. When a Portfolio purchases an OTC option, it will be relying on
its
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counterparty to perform its obligations, and the Portfolio may incur additional
losses if the counterparty is unable to perform.
EXCHANGE TRADED AND OTC OPTIONS. All options purchased or sold by the
Portfolios will be traded on a securities exchange or will be purchased or sold
by securities dealers (OTC options) that meet creditworthiness standards
approved by the Portfolios' Board of Trustees. While exchange-traded options are
obligations of the Options Clearing Corporation, in the case of OTC options, a
Portfolio relies on the dealer from which it purchased the option to perform if
the option is exercised. Thus, when a Portfolio purchases an OTC option, it
relies on the dealer from which it purchased the option to make or take delivery
of the underlying securities. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction.
Provided that a Portfolio has arrangements with certain qualified
dealers who agree that the Portfolio may repurchase any option it writes for a
maximum price to be calculated by a predetermined formula, a Portfolio may treat
the underlying securities used to cover written OTC options as liquid. In these
cases, the OTC option itself would only be considered illiquid to the extent
that the maximum repurchase price under the formula exceeds the intrinsic value
of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolios may
purchase or sell (write) futures contracts and purchase or sell 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 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 Portfolio are paid by the Portfolio into a segregated
account, in the name of the Futures Commission Merchant, as required by the 1940
Act and the SEC's interpretations thereunder.
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COMBINED POSITIONS. The Portfolios are 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, a Portfolio may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a
Portfolio's current or anticipated investments exactly. A Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in a Portfolio's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for a
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require a Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired.
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(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, a Portfolio or the Advisor may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The
Portfolios intend to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which a Portfolio can commit
assets to initial margin deposits and option premiums. In addition, the
Portfolios will comply with guidelines established by the SEC with respect to
coverage of options and futures contracts by mutual funds, and if the guidelines
so require, will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account cannot
be sold while the futures contract or option is outstanding, unless they are
replaced with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of a Portfolio's assets could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
RISK MANAGEMENT
The Portfolios for the Disciplined Equity and U.S. Small Company
Opportunities Funds may employ non-hedging risk management techniques. Risk
management strategies are used to keep the Fund fully invested and to reduce the
transaction costs associated with cash flows into and out of the Fund. The
objective where equity futures are used to "equitize" cash is to match the
notional value of all futures contracts to the Fund's cash balance. The notional
value of futures and of the cash is monitored daily. As the cash is invested in
securities and/or paid out to participants in redemptions, the Advisor
simultaneously adjusts the futures positions. Through such procedures, the
Portfolio not only gains equity exposure from the use of futures, but also
benefits from increased flexibility in responding to client cash flow needs.
Additionally, because it can be less expensive to trade a list of securities as
a package or program trade rather than as a group of individual orders, futures
provide a means through which transaction costs can be reduced. 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
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distributions resulting from such gains are considered ordinary income for
federal income tax purposes. See "Taxes" below.
THE DISCIPLINED EQUITY PORTFOLIO (DISCIPLINED EQUITY FUND) -- For the period
December 30, 1996 (commencement of operations) through May 31, 1997: 20%.
THE U.S. EQUITY PORTFOLIO (U.S. EQUITY FUND) -- For the fiscal year ended May
31, 1996: 85%. For the fiscal year ended May 31, 1997: 99%.
THE U.S. SMALL COMPANY PORTFOLIO (U.S. SMALL COMPANY FUND) -- For the fiscal
year ended May 31, 1996: 93%. For the fiscal year ended May 31, 1997: 98%.
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO (U.S. SMALL COMPANY OPPORTUNITIES
FUND) -- For the period June 16, 1997 (commencement of operations) through
October 31, 1997: 26% (unaudited).
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.
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 DISCIPLINED EQUITY
FUND and its corresponding PORTFOLIO may not:
1. Purchase any security if, as a result, more than 25% its total assets would
be invested in securities of issuers in any single industry. This limitation
shall not apply to securities issued or guaranteed as to principal or interest
by the U.S. Government, its agencies or instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing money in
accordance with paragraph 3 below, making loans in accordance with paragraph 7
below, the issuance of shares of beneficial interest in multiple classes or
series, the purchase or sale of options, futures contracts, forward commitments,
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swaps and transactions in repurchase agreements are not deemed to be senior
securities.
3. Borrow money, except in amounts not to exceed one third of the Fund's total
assets (including the amount borrowed) (i) from banks for temporary or
short-term purposes or for the clearance of transactions, (ii) in connection
with the redemption of Fund shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other assets,
(iii) in order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets and (iv)
pursuant to reverse repurchase agreements entered into by the Fund.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be deemed
to be an underwriter under the 1933 Act.
5. Purchase or sell real estate except that the Fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that invest
in real estate or interests therein, (iii) invest in securities that are secured
by real estate or interests therein, (iv) purchase and sell mortgage-related
securities and (v) hold and sell real estate acquired by the Fund as a result of
the ownership of securities.
6. Purchase or sell commodities or commodity contracts, except the Fund may
purchase and sell financial futures contracts, options on financial futures
contracts and warrants and may enter into swap and forward commitment
transactions.
7. Make loans, except that the Fund (1) may lend portfolio securities with a
value not exceeding one-third of the Fund's net assets, (2) enter into
repurchase agreements, and (3) purchase all or a portion of an issue of debt
securities (including privately issued debt securities), bank loan participation
interests, bank certificates of deposit, bankers' acceptances, debentures or
other securities, whether or not the purchase is made upon the original issuance
of the securities.
8. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or authorities
or repurchase agreements collateralized by U.S. Government securities), if:
a. such purchase would cause more than 5% of the Fund's total assets to
be invested in the securities of such issuer; or
b. such purchase would cause the Fund to hold more than 10% of the
outstanding voting securities of such issuer.
(Although permitted to do so by restriction No. 3 above, the Fund has no
current intention to engage in borrowing for financial leverage.)
Each of the U.S. EQUITY FUND and the U.S. SMALL COMPANY FUND and their
corresponding PORTFOLIOS may not:
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1. Purchase the securities or other obligations of issuers conducting their
principal business activity in the same industry if, immediately after such
purchase the value of its investments in such industry would exceed 25% of the
value of the Fund's total assets; provided, however, that the Fund may invest
all or part of its investable assets in an open-end management investment
company with the same investment objective and restrictions as the Fund's. For
purposes of industry concentration, there is no percentage limitation with
respect to investments in U.S. Government securities;
2. Borrow money, except from banks for extraordinary or emergency purposes and
then only in amounts not to exceed 10% of the value of the Fund's total assets,
taken at cost, at the time of such borrowing. Mortgage, pledge, or hypothecate
any assets except in connection with any such borrowing and in amounts not to
exceed 10% of the value of the Fund's net assets at the time of such borrowing.
The Fund will not purchase securities while borrowings exceed 5% of the Fund's
total assets; provided, however, that the Fund may increase its interest in an
open-end management investment company with the same investment objective and
restrictions as the Fund's while such borrowings are outstanding. This borrowing
provision is included to facilitate the orderly sale of portfolio securities,
for example, in the event of abnormally heavy redemption requests, and is not
for investment purposes. Collateral arrangements for premium and margin payments
in connection with the Fund's hedging activities are not deemed to be a pledge
of assets;
3. Purchase the securities or other obligations of any one issuer if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in securities or other obligations of any one such
issuer; provided, however, that the Fund may invest all or part of its
investable assets in an open-end management investment company with the same
investment objective and restrictions as the Fund's. This limitation shall not
apply to issues of the U.S. Government, its agencies or instrumentalities and to
permitted investments of up to 25% of the Fund's total assets;
4. Purchase the securities of an issuer if, immediately after such purchase, the
Fund owns more than 10% of the outstanding voting securities of such issuer;
provided, however, that the Fund may invest all or part of its investable assets
in an open-end management investment company with the same investment objective
and restrictions as the Fund's;
5. Make loans, except through the purchase or holding of debt obligations
(including privately placed securities), or the entering into of repurchase
agreements, or loans of portfolio securities in accordance with the Fund's
investment objective and policies (see "Investment Objectives and Policies");
6. Purchase or sell puts, calls, straddles, spreads, or any combination thereof,
real estate, commodities, or commodity contracts, except for the Fund's
interests in hedging activities as described under "Investment Objectives and
Policies"; or interests in oil, gas, or mineral exploration or development
programs. However, the Fund may purchase securities or commercial paper issued
by companies which invest in real estate or interests therein, including real
estate investment trusts;
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7. Purchase securities on margin, make short sales of securities, or maintain a
short position, except in the course of the Fund's hedging activities, provided
that this restriction shall not be deemed to be applicable to the purchase or
sale of when-issued securities or delayed delivery securities;
8. Acquire securities of other investment companies, except as permitted by the
1940 Act;
9. Act as an underwriter of securities;
10. Issue any senior security, except as appropriate to evidence indebtedness
which the Fund is permitted to incur pursuant to Investment Restriction No. 2.
The Fund's arrangements in connection with its hedging activities as described
in "Investment Objectives and Policies" shall not be considered senior
securities for purposes hereof; or
11. Purchase any equity security if, as a result, the Fund would then have more
than 5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for fewer than three years.
The U.S. SMALL COMPANY OPPORTUNITIES FUND and its corresponding
PORTFOLIO may not:
1. Purchase any security if, as a result, more than 25% its total assets would
be invested in securities of issuers in any single industry. This limitation
shall not apply to securities issued or guaranteed as to principal or interest
by the U.S. Government, its agencies or instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing money in
accordance with paragraph 3 below, making loans in accordance with paragraph 7
below, the issuance of beneficial interests 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 Portfolio's
total assets (including the amount borrowed) (i) from banks for temporary or
short-term purposes or for the clearance of transactions, (ii) in connection
with redemptions or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets, (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) pursuant to
reverse repurchase agreements entered into by the Portfolio.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio may be
deemed to be an underwriter under the 1933 Act.
5. Purchase or sell real estate except that the Portfolio may (i) acquire or
lease office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities that are
secured by real estate or interests therein, (iv) purchase and sell
mortgage-related securities and (v) hold and sell real estate acquired by the
Portfolio as a result of the ownership of securities.
6. Purchase or sell commodities or commodity contracts, except the Portfolio may
purchase and sell financial futures contracts, options on financial futures
contracts and warrants and may enter into swap and forward commitment
transactions.
7. Make loans, except that the Portfolio (1) may lend portfolio securities with
a value not exceeding one-third of the Portfolio's net assets, (2) enter into
repurchase agreements, and (3) purchase all or a portion of an issue of debt
securities (including privately issued debt securities), bank loan participation
interests, bank certificates of deposit, bankers' acceptances, debentures or
other securities, whether or not the purchase is made upon the original issuance
of the securities.
8. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or authorities
or repurchase agreements collateralized by U.S. Government securities), if:
a. such purchase would cause more than 5% of the Portfolio's total
assets to be invested in the securities of such issuer; or
b. such purchase would cause the Portfolio to hold more than 10% of the
outstanding voting securities of such issuer.
(Although permitted to do so by Restriction No. 3 above, the Portfolio has
no current intention to engage in borrowing for financial leverage.)
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS - DISCIPLINED EQUITY FUND. The
investment restrictions described below are not fundamental policies of the Fund
and its corresponding Portfolio and may be changed by its respective Trustees.
These non-fundamental investment policies require that the Fund may not:
(i) Acquire securities of other investment companies, except as permitted by the
1940 Act or any rule, order or interpretation thereunder, or in connection with
a merger, consolidation, reorganization, acquisition of assets or an offer of
exchange;
(ii) Acquire any illiquid securities, such as repurchase agreements with more
than seven days to maturity or fixed time deposits with a duration of over seven
calendar days, if as a result thereof, more than 15% of the market value of the
Fund's net assets would be in investments that are illiquid;
(iii) Sell any security short, except to the extent permitted by the 1940 Act.
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.
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NON-FUNDAMENTAL INVESTMENT RESTRICTION - U.S. EQUITY FUND AND U.S.
SMALL COMPANY 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 - U.S. SMALL COMPANY OPPORTUNITIES
FUND: The investment restrictions described below are not fundamental policies
of the Portfolio and may be changed by its Trustees. These non-fundamental
investment policies require that the 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 Portfolio's total 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; or
(iv) Purchase securities on margin, but the Portfolio 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, 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.
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TRUSTEES AND OFFICERS
TRUSTEES
The Trustees of the Trust, who are also the Trustees of each of the
Portfolios, and the other Master Portfolios, as defined below, their business
addresses, principal occupations during the past five years and dates of birth
are set forth below.
FREDERICK S. ADDY--Trustee; Retired; Prior to April 1994, Executive Vice
President and Chief Financial Officer, Amoco Corporation. His address is 5300
Arbutus Cove, Austin, TX 78746, and his date of birth is January 1, 1932.
WILLIAM G. BURNS--Trustee; Retired, Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, FL 32779,
and his date of birth is November 2, 1932.
ARTHUR C. ESCHENLAUER--Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His address is 14 Alta Vista Drive,
RD #2, Princeton, NJ 08540, and his date of birth is May 23, 1934.
MATTHEW HEALEY (*)--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since prior to 1992. His address is Pine Tree
Club Estates, 10286 Saint Andrews Road, Boynton Beach, FL 33436, and his date of
birth is August 23, 1937.
MICHAEL P. MALLARDI--Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, NY 10910, and his date of birth is March 17,
1934.
The Trustees of the Trust are the same as the Trustees of each of the
Portfolios. A majority of the disinterested Trustees have adopted written
procedures reasonably appropriate to deal with potential conflicts of interest
arising from the fact that the same individuals are Trustees of the Trust, each
of the Portfolios and the J.P. Morgan 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 (as defined below), J.P. Morgan Institutional Funds and J.P. Morgan
Series Trust and is reimbursed for expenses incurred in connection with service
as a Trustee. The Trustees may hold various other directorships unrelated to
these funds.
- ------------------------
(*) Mr. Healey is an "interested person" of the Trust, the Advisor and each
Portfolio as that term is defined in the 1940 Act.
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Trustee compensation expenses accrued by the Trust for the calendar
year ended December 31, 1996 are set forth below.
<TABLE>
<CAPTION>
TOTAL TRUSTEE
COMPENSATION ACCRUED
AGGREGATE BY THE MASTER
TRUSTEE PORTFOLIOS (*), J.P.
COMPENSATION MORGAN INSTITUTIONAL
ACCRUED BY THE FUNDS, J.P. MORGAN
TRUST DURING SERIES TRUST AND THE
NAME OF TRUSTEE 1996 TRUST DURING 1996***)
<S> <C> <C>
Frederick S. Addy, Trustee $15,808 $65,000
William G. Burns, Trustee $15,808 $65,000
Arthur C. Eschenlauer, Trustee $15,808 $65,000
Matthew Healey, Trustee (**) $15,808 $65,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $15,808 $65,000
</TABLE>
(*) Includes the Portfolios, The Prime Money Market Portfolio, The Federal Money
Market Portfolio, The Tax Exempt Money Market Portfolio, The Short Term Bond
Portfolio, The U.S. Fixed Income Portfolio, The Tax Exempt Bond Portfolio, The
New York Total Return Bond Portfolio, The International Equity Portfolio, The
Emerging Markets Equity Portfolio, The Diversified Portfolio, The Non-U.S. Fixed
Income Portfolio, The Series Portfolio and Series Portfolio II (collectively the
"Master Portfolios").
(**) During 1996, Pierpont Group, Inc. paid Mr. Healey, in his role as Chairman
of Pierpont Group, Inc., compensation in the amount of $140,000, contributed
$21,000 to a defined contribution plan on his behalf and paid $21,500 in
insurance premiums for his benefit.
(***)No investment company within the fund complex has a pension or retirement
plan. Currently there are 18 investment companies (15 investment companies
comprising the Master Portfolios, the Trust, J.P. Morgan Institutional Funds and
J.P. Morgan Series Trust) in the fund complex.
The Trustees, in addition to reviewing actions of the Trust's and the
Portfolios' various service providers, decide upon matters of general policy.
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
Group, Inc. a fee in an amount representing its reasonable costs in performing
these services to the Trust, the Portfolios and certain other registered
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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:
DISCIPLINED EQUITY PORTFOLIO -- For the period December 30, 1996 (commencement
of operations) through May 31, 1997: $607.
U.S. EQUITY FUND -- For the fiscal year ended May 31, 1995: $25,316. For the
fiscal year ended May 31, 1996: $20,190. For the fiscal year ended May 31, 1997:
$11,747.
THE U.S. EQUITY PORTFOLIO -- For the fiscal year ended May 31, 1995:
$52,948. For the fiscal year ended May 31, 1996: $46,626. For the fiscal year
ended May 31, 1997: $26,486.
U.S. SMALL COMPANY FUND -- For the fiscal year ended May 31, 1995: $19,612. For
the fiscal year ended May 31, 1996: $13,451. For the fiscal year ended May 31,
1997: $7,545.
THE U.S. SMALL COMPANY PORTFOLIO -- For the fiscal year ended May 31, 1995:
$62,256. For the fiscal year ended May 31, 1996: $48,688. For the
fiscal year ended May 31, 1997: $31,320.
U.S. SMALL COMPANY OPPORTUNITIES FUND -- For the period June 16, 1997
(commencement of operations) through October 31, 1997: $510 (unaudited).
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO -- For the period June 16, 1997
(commencement of operations) through October 31, 1997: $510 (unaudited).
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,
each Portfolio and the other Master Portfolios. The business address of each of
the officers unless otherwise noted is Funds Distributor, Inc., 60 State Street,
Suite 1300, Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1992. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, FL 33436. His date of birth is August 23, 1937.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President, Chief
Executive Officer, Chief Compliance Officer and Director of FDI, Premier Mutual
Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an officer of
certain investment companies advised or administered by the Dreyfus Corporation
("Dreyfus") or its affiliates. From December 1991 to July 1994, she
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<PAGE>
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. Managing Director, State Street Cayman Trust Company, Ltd.
since October 1994. Prior to October 1994, Mrs. Henning was head of mutual funds
at Morgan Grenfell in Cayman and for five years was Managing Director of Bank
of Nova Scotia Trust Company (Cayman) Limited from September 1988 to September
1993. Address: P.O. Box 2508 GT, Elizabethan Square, 2nd Floor, Shedden Road,
George Town, Grand Cayman, Cayman Islands. Her date of birth is March 24, 1942.
RICHARD W. INGRAM; President and Treasurer. Executive Vice President
and Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director - Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant Vice
President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity Funds,
Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 to May 1994,
Ms. Jacoppo-Wood was a senior paralegal at The Boston Company Advisors, Inc.
("TBCA"). Her date of birth is December 29, 1966.
ELIZABETH A. KEELEY; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and Premier Mutual and an officer of RCM Capital
Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash Management Fund,
Inc. and certain investment companies advised or administered by Dreyfus or
Harris or their respective affiliates. Prior to August 1996, Ms. Keeley was
Assistant Vice President and Counsel of FDI and Premier Mutual. Prior to
September 1995, Ms. Keeley was enrolled at Fordham University School of Law and
received her JD in May 1995. Address: 200 Park Avenue, New York, New York 10166.
Her date of birth is September 14, 1969.
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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
Portfolios only. Assistant Vice President, State Street Bank and Trust Company
since November 1994. Assigned as Operations Manager, State Street Cayman Trust
Company, Ltd. since February 1995. Prior to November, 1994, employed by Boston
Financial Data Services, Inc. as Control Group Manager. Address: P.O. Box 2508
GT, Elizabethan Square, 2nd Floor, Shedden Road, George Town, Grand Cayman,
Cayman Islands. Her date of birth is May 31, 1961.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors
Cash Management Fund, Inc. and certain investment companies advised or
administered by Dreyfus or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Executive Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director Of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
INVESTMENT ADVISOR
The Funds have not retained the services of an investment adviser
because each Fund seeks to achieve its investment objective by investing all of
its investable assets in a corresponding Portfolio. Subject to the supervision
of the Portfolio's Trustees, Morgan makes each Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Portfolio's investments. Morgan is a wholly owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan"), a bank holding company organized
under
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<PAGE>
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 more than $240 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 conclusions of the equity analysts' fundamental research is quantified into
a set of projected returns for individual companies through the use of a
dividend discount model. These returns are projected for 2 to 5 years to enable
analysts to take a longer term view. These returns, or normalized earnings, are
used to establish relative values among stocks in each industrial sector. These
values may not be the same as the markets' current valuations of these
companies. This provides the basis for ranking the attractiveness of the
companies in an industry according to five distinct quintiles or rankings. This
ranking is one of the factors considered in determining the stocks purchased and
sold in each sector.
The investment advisory services the Advisor provides to the Portfolios
are not exclusive under the terms of the Advisory Agreements. The Advisor is
free to and does render similar investment advisory services to others. The
Advisor serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolios. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolios. See
"Portfolio Transactions."
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<PAGE>
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 Disciplined Equity Portfolio and The U.S. Equity Portfolio-- S&P
500 Index; The U.S. Small Company Portfolio--Russell 2500 Index; The U.S. Small
Company Opportunities Portfolio -- Russell 2000 Growth 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.
DISCIPLINED EQUITY: 0.35%
U.S. EQUITY: 0.40%
U.S. SMALL COMPANY: 0.60%
U.S. SMALL COMPANY OPPORTUNITIES : 0.60%
The table below sets forth for each Fund listed the advisory fees paid
by its corresponding Portfolio to the Advisor for the fiscal period indicated.
See also the Fund's financial statements which are incorporated herein by
reference.
THE DISCIPLINED EQUITY PORTFOLIO (Disciplined Equity Fund) -- For the period
December 30, 1996 (commencement of operations) through May 31, 1997: $73,985.
THE U.S. EQUITY PORTFOLIO (U.S. Equity Fund) -- For the fiscal year ended May
31, 1995: $2,025,936. For the fiscal year ended May 31, 1996: $2,744,054. For
the fiscal year ended May 31, 1997: $3,049,388.
THE U.S. SMALL COMPANY PORTFOLIO (U.S. Small Company Fund) -- For the fiscal
year ended May 31, 1995: $3,514,331. For the fiscal year ended May 31, 1996:
$4,286,311. For the fiscal year ended May 31, 1997: $5,424,514.
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THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO (U.S. Small Company Opportunities
Fund) -- For the period June 16, 1997 (commencement of operations) through
October 31, 1997: $93,167 (unaudited).
The Investment Advisory Agreements provide that they will continue in
effect for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Distributor" below. Each of the Investment Advisory Agreements will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Portfolio's Trustees, or by a vote of the holders of a
majority of the Portfolio's outstanding voting securities, on 60 days' written
notice to the Advisor and by the Advisor on 90 days' written notice to the
Portfolio. See "Additional Information."
The Glass-Steagall Act and other applicable laws generally prohibit
banks such as the Advisor from engaging in the business of underwriting or
distributing securities, and the Board of Governors of the Federal Reserve
System has issued an interpretation to the effect that under these laws a bank
holding company registered under the federal Bank Holding Company Act or certain
subsidiaries thereof may not sponsor, organize, or control a registered open-end
investment company continuously engaged in the issuance of its shares, such as
the Trust. The interpretation does not prohibit a holding company or a
subsidiary thereof from acting as investment advisor and custodian to such an
investment company. The Advisor believes that it may perform the services for
the Portfolios contemplated by the Advisory Agreements without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State laws
on this issue may differ from the interpretation of relevant federal law, and
banks and financial institutions may be required to register as dealers pursuant
to state securities laws. However, it is possible that future changes in either
federal or state statutes and regulations concerning the permissible activities
of banks or trust companies, as well as further judicial or administrative
decisions and interpretations of present and future statutes and regulations,
might prevent the Advisor from continuing to perform such services for the
Portfolios.
If the Advisor were prohibited from acting as investment advisor to any
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Under separate agreements, Morgan also provides certain financial, fund
accounting 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
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Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Trust's distributor. FDI is a wholly owned indirect
subsidiary of Boston Institutional Group, Inc. FDI also serves as exclusive
placement agent for the Portfolio. FDI currently provides administration and
distribution services for a number of other investment companies.
The Distribution Agreement shall continue in effect with respect to
each of the Funds for a period of two years after execution only if it is
approved at least annually thereafter (i) by a vote of the holders of a majority
of the Fund's outstanding shares or by its Trustees and (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Distribution Agreement, cast in
person at a meeting called for the purpose of voting on such approval (see
"Trustees and Officers"). The Distribution Agreement will terminate
automatically if assigned by either party thereto and is terminable at any time
without penalty by a vote of a majority of the Trustees of the Trust, a vote of
a majority of the Trustees who are not "interested persons" of the Trust, or by
a vote of the holders of a majority of the Fund's outstanding shares as defined
under "Additional Information," in any case without payment of any penalty on 60
days' written notice to the other party. The principal offices of FDI are
located at 60 State Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under Co-Administration Agreements with the Trust and the Portfolios
dated August 1, 1996, FDI also serves as the Trust's and the Portfolios'
Co-Administrator. The Co-Administration Agreements may be renewed or amended by
the respective Trustees without a shareholder vote. The Co-Administration
Agreements are terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust or the Portfolios, as applicable, on not more than 60
days' written notice nor less than 30 days' written notice to the other party.
The Co-Administrator may subcontract for the performance of its obligations,
provided, however, that unless the Trust or the Portfolios, as applicable,
expressly agrees in writing, the Co-Administrator shall be fully responsible for
the acts and omissions of any subcontractor as it would for its own acts or
omissions. See "Services Agent" below.
FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Trust and the
Portfolio; (ii) provides officers for the Trust and the Portfolio; (iii)
prepares and files documents required for notification of state securities
administrators; (iv) reviews and files marketing and sales literature; (v) files
Portfolio regulatory documents and mails Portfolio communications to Trustees
and investors; and (vi) maintains related books and records.
For its services under the Co-Administration Agreements, each Fund and
Portfolio has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to each Fund or Portfolio is based on the ratio of its net assets to
the aggregate net assets of the Trust, the Master Portfolios and other
investment companies subject to similar agreements with FDI.
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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" below for applicable expense limitations.
THE DISCIPLINED EQUITY PORTFOLIO -- For the period December 30, 1996
(commencement of operations) through May 31, 1997: $520.
THE U.S. EQUITY PORTFOLIO -- For the period August 1, 1996 through May 31, 1997:
$16,536.
U.S. EQUITY FUND -- For the period August 1, 1996 through May 31, 1997: $9,811.
THE U.S. SMALL COMPANY PORTFOLIO -- For the period August 1, 1996 through May
31, 1997: $19,652.
U.S. SMALL COMPANY FUND -- For the period August 1, 1996 through May 31,
1997: $6,272.
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO -- For the period June 16, 1997
(commencement of operations) through October 31, 1997: $345 (unaudited).
U.S. SMALL COMPANY OPPORTUNITIES FUND -- For the period June 16,
1997 (commencement of operations) through October 31, 1997: $433 (unaudited).
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.
THE U.S. EQUITY PORTFOLIO -- For the fiscal year ended May 31, 1995: $32,670.
For the fiscal year ended May 31, 1996: $62,404. For the period June 1, 1996
through July 31, 1996: $14,675.
U.S. EQUITY FUND -- For the fiscal year ended May 31, 1995: $61,903. For the
fiscal year ended May 31, 1996: $59,656. For the period June 1, 1996 through
July 31, 1996: $6,776.
THE U.S. SMALL COMPANY PORTFOLIO -- For the fiscal year ended May 31, 1995:
$38,215. For the fiscal year ended May 31, 1996: $65,079. For the period June
1, 1996 through July 31, 1996: $17,162.
U.S. SMALL COMPANY FUND -- For the fiscal year ended May 31, 1995: $51,087. For
the fiscal year ended May 31, 1996: $39,053. For the period June 1, 1996 through
July 31, 1996: $4,383.
SERVICES AGENT
The Trust, on behalf of each Fund, and the Portfolios have entered into
Administrative Services Agreements (the "Services Agreements") with Morgan
effective December 29, 1995, as amended effective August 1, 1996, pursuant to
which Morgan is responsible for certain administrative and related services
provided to 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.
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Under the Services Agreements, Morgan provides certain administrative
and related services to the Fund and the Portfolio, including services related
to tax compliance, preparation of financial statements, calculation of
performance data, oversight of service providers and certain regulatory and
Board of Trustee matters.
Under the amended Services Agreements, the Funds and the Portfolios
have agreed to pay Morgan fees equal to its allocable share of an annual
complex-wide charge. This charge is calculated daily based on the aggregate net
assets of the Master Portfolios and J.P. Morgan Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their aggregate
average daily net assets and 0.04% of their average daily net assets in excess
of $7 billion, less the complex-wide fees payable to FDI. The portion of this
charge payable by each Fund and Portfolio is determined by the proportionate
share that its net assets bear to the total net assets of the Trust, the Master
Portfolios, the other investors in the Master Portfolios for which Morgan
provides similar services and J.P. Morgan Series Trust.
Under Administrative Services Agreements in effect from December 29,
1995 through July 31, 1996, with Morgan, each Fund and its corresponding
Portfolio paid Morgan a fee equal to its proportionate share of an annual
complex-wide charge. This charge was calculated daily based on the aggregate net
assets of the Master Portfolios in accordance with the following schedule: 0.06%
of the first $7 billion of the Master Portfolios' aggregate average daily net
assets, and 0.03% of the Master Portfolios' average daily net assets in excess
of $7 billion.
Prior to December 29, 1995, the Trust and each Portfolio had entered
into Financial and Fund Accounting Services Agreements with Morgan, the
provisions of which included certain of the activities described above and,
prior to September 1, 1995, also included reimbursement of usual and customary
expenses. The table below sets forth for each Fund listed and its corresponding
Portfolio the fees paid to Morgan, net of fee waivers and reimbursements, as
Services Agent. See "Expenses" below for applicable expense limitations.
THE DISCIPLINED EQUITY PORTFOLIO -- For the period December 30, 1996
(commencement of operations) through May 31, 1997: $6,614.
THE U.S. EQUITY PORTFOLIO -- For the fiscal year ended May 31, 1995: $236,537.
For the fiscal year ended May 31, 1996: $138,134. For the fiscal year ended May
31, 1997: $232,617.
U.S. EQUITY FUND -- For the fiscal year ended May 31, 1995: $126,738. For the
fiscal year ended May 31, 1996: $76,406. For the fiscal year ended May 31,
1997: $102,534.
THE U.S. SMALL COMPANY PORTFOLIO -- For the fiscal year ended May 31, 1995:
$241,373. For the fiscal year ended May 31, 1996: $144,277. For the fiscal
year ended May 31, 1997: $275,962.
U.S. SMALL COMPANY FUND -- For the fiscal year ended May 31, 1995: $108,015. For
the fiscal year ended May 31, 1996: $46,662. For the fiscal year ended May 31,
1997: $65,674.
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THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO -- For the period June 16, 1997
(commencement of operations) through October 31, 1997: $4,701 (unaudited).
U.S. SMALL COMPANY OPPORTUNITIES FUND -- For the period June 16,
1997 (commencement of operations) through October 31, 1997: $4,700 (unaudited).
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
regulations of the SEC. The Custodian maintains portfolio transaction records.
As Transfer Agent and Dividend Disbursing Agent, State Street is responsible for
maintaining account records detailing the ownership of Fund shares and for
crediting income, capital gains and other changes in share ownership to
shareholder accounts.
SHAREHOLDER SERVICING
The Trust on behalf of each of the Funds has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for its customers and for other Fund investors who are customers
of a financial professional. Under this agreement, Morgan is responsible for
performing shareholder account, administrative and servicing functions, which
include but are not limited to, answering inquiries regarding account status and
history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to a Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Funds' transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; and providing other related services.
Under the Shareholder Servicing Agreement, each Fund has agreed to pay
Morgan for these services a fee at the following annual 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): 0.25%.
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" below for
applicable expense limitations.
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U.S. EQUITY FUND -- For the fiscal year ended May 31, 1995: $598,644. For the
fiscal year ended May 31, 1996: $742,283. For the fiscal year ended May 31,
1997: $843,099.
U.S. SMALL COMPANY FUND -- For the fiscal year ended May 31, 1995: $456,271. For
the fiscal year ended May 31, 1996: $488,236. For the fiscal year ended May 31,
1997: $540,244.
U.S. SMALL COMPANY OPPORTUNITIES FUND -- For the period June 16, 1997
(commencement of operations) through October 31, 1997: $38,814 (unaudited).
As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing administrative services to the Funds and the Portfolios under the
Services Agreements and in acting as Advisor to the Portfolios under the
Investment Advisory Agreements, may raise issues under these laws. However,
Morgan believes that it may properly perform these services and the other
activities described herein without violation of the Glass-Steagall Act or other
applicable banking laws or regulations.
If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreements, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Funds or the Portfolios might occur and a shareholder might no
longer be able to avail himself or herself of any services then being provided
to shareholders by Morgan.
The 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
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
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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 a Fund's behalf. A
Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. These orders will be priced at the Fund's net asset value next calculated
after they are so accepted.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust and the Portfolios are Price
Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036. Price
Waterhouse LLP conducts an annual audit of the financial statements of each of
the Funds and the Portfolios, assists in the preparation and/or review of each
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. Under fee arrangements prior to September 1, 1995, Morgan as Services
Agent was responsible for reimbursements to the Trust and certain Portfolios and
the usual and customary expenses described above (excluding organization and
extraordinary expenses, custodian fees and brokerage expenses).
PURCHASE OF SHARES
METHOD OF PURCHASE. Investors may open accounts with a Fund only through
the Distributor. All purchase transactions in Fund accounts are processed by
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Morgan as shareholder servicing agent and the Fund is authorized to accept any
instructions relating to a Fund account from Morgan as shareholder servicing
agent for the customer. All purchase orders must be accepted by the Distributor.
Prospective investors who are not already customers of Morgan may apply to
become customers of Morgan for the sole purpose of Fund transactions. There are
no charges associated with becoming a Morgan customer for this purpose. Morgan
reserves the right to determine the customers that it will accept, and the Trust
reserves the right to determine the purchase orders that it will accept.
References in the Prospectus and this Statement of Additional
Information to customers of Morgan or a financial professional include customers
of their affiliates and references to transactions by customers with Morgan or a
financial professional include transactions with their affiliates. Only Fund
investors who are using the services of a financial institution acting as
shareholder servicing agent pursuant to an agreement with the Trust on behalf of
a Fund may make transactions in shares of a Fund.
Each Fund may, at its own option, accept securities in payment for
shares. The securities delivered in such a transaction are valued by the method
described in "Net Asset Value" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of Morgan, appropriate
investments for the Fund's corresponding Portfolio. In addition, securities
accepted in payment for shares must: (i) meet the investment objective and
policies of the acquiring Fund's corresponding Portfolio; (ii) be acquired by
the applicable Fund for investment and not for resale (other than for resale to
the Fund's corresponding Portfolio); (iii) be liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (iv) if
stock, have a value which is readily ascertainable as evidenced by a listing on
a stock exchange, OTC market or by readily available market quotations from a
dealer in such securities. Each Fund reserves the right to accept or reject at
its own option any and all securities offered in payment for its shares.
Prospective investors may purchase shares with the assistance of a
financial professional, and the financial professional may establish its own
minimums and charge the investor a fee for this service and other services it
provides to its customers. Morgan may pay fees to financial professionals for
services in connection with fund investments. See "Financial Professionals"
above.
REDEMPTION OF SHARES
If the Trust on behalf of a Fund and its corresponding Portfolio
determine that it would be detrimental to the best interest of the remaining
shareholders of a Fund to make payment wholly or partly in cash, payment of the
redemption price may be made in whole or in part by a distribution in kind of
securities from the Portfolio, in lieu of cash, in conformity with the
applicable rule of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur transaction costs in converting the assets into cash.
The method of valuing portfolio securities is described under "Net Asset Value,"
and such valuation will be made as of the same time the redemption price is
determined. The Trust on behalf of all of the Funds and their corresponding
Portfolios have elected to
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be governed by Rule 18f-1 under the 1940 Act pursuant to which the Funds and
their corresponding Portfolios are obligated to redeem shares solely in cash up
to the lesser of $250,000 or one percent of the net asset value of the Fund
during any 90 day period for any one shareholder. The Trust will redeem Fund
shares in kind only if it has received a redemption in kind from the
corresponding Portfolio and therefore shareholders of the Fund that receive
redemptions in kind will receive securities of the Portfolio. The Portfolios
have advised the Trust that the Portfolios will not redeem in kind except in
circumstances in which a Fund is permitted to redeem in kind.
FURTHER REDEMPTION INFORMATION. Investors should be aware that
redemptions from the Fund may not be processed if a redemption request is not
submitted in proper form. To be in proper form, the Fund must have received the
shareholder's taxpayer identification number and address. In addition, if a
shareholder sends a check for the purchase of fund shares and shares are
purchased before the check has cleared, the transmittal of redemption proceeds
from the shares will occur upon clearance of the check which may take up to 15
days. The Trust, on behalf of a Fund, and the Portfolios reserve the right to
suspend the right of redemption and to postpone the date of payment upon
redemption as follows: (i) for up to seven days, (ii) during periods when the
New York Stock Exchange is closed for other than weekends and holidays or when
trading on such Exchange is restricted as determined by the SEC by rule or
regulation, (iii) during periods in which an emergency, as determined by the
SEC, exists that causes disposal by the Portfolio of, or evaluation of the net
asset value of, its portfolio securities to be unreasonable or impracticable, or
(iv) for such other periods as the SEC may permit.
For information regarding redemption orders placed through a financial
professional, please see "Financial Professionals" above.
EXCHANGE OF SHARES
An investor may exchange shares from any J.P. Morgan Fund into any
other J.P. Morgan Fund or J.P. Morgan Institutional Fund without charge. An
exchange may be made so long as after the exchange the investor has shares, in
each fund in which he or she remains an investor, with a value of at least that
fund's minimum investment amount. Shareholders should read the prospectus of the
fund into which they are exchanging and may only exchange between fund accounts
that are registered in the same name, address and taxpayer identification
number. Shares are exchanged on the basis of relative net asset value per share.
Exchanges are in effect redemptions from one fund and purchases of another fund
and the usual purchase and redemption procedures and requirements are applicable
to exchanges. Shareholders subject to federal income tax who exchange shares in
one fund for shares in another fund may recognize capital gain or loss for
federal income tax purposes. Shares of the Fund to be acquired are purchased for
settlement when the proceeds from redemption become available. In the case of
investors in certain states, state securities laws may restrict the availability
of the exchange privilege. The Trust reserves the right to discontinue, alter or
limit the exchange privilege at any time.
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DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the Prospectus.
Dividends and capital gains distributions paid by the Fund are
automatically reinvested in additional shares of the Fund unless the shareholder
has elected to have them paid in cash. Dividends and distributions to be paid in
cash are credited to the shareholder's account at Morgan or at his financial
professional or, in the case of certain Morgan customers, are mailed by check in
accordance with the customer's instructions. The Fund reserves the right to
discontinue, alter or limit the automatic reinvestment privilege at any time.
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 below. 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.
In the case of the Equity Portfolios, the value of investments listed
on a domestic securities exchange, other than options on stock indexes, is based
on the last sale prices on such exchange at 4:00 P.M. or, in the absence of
recorded sales, at the average of readily available closing bid and asked prices
on such exchange. Securities listed on a foreign exchange are valued at the last
quoted sale price available before the time when net assets are valued. Unlisted
securities are valued at the average of the quoted bid and asked prices in the
OTC market. The value of each security for which readily available market
quotations exist is based on a decision as to the broadest and most
representative market for such security. For purposes of calculating net asset
value all assets and liabilities initially expressed in foreign currencies will
be converted into U.S. dollars at the prevailing market rates available at the
time of valuation.
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Options on stock indexes traded on national securities exchanges are
valued at the close of options trading on such exchanges which is currently 4:10
P.M., New York time. Stock index futures and related options, which are traded
on commodities exchanges, are valued at their last sales price as of the close
of such commodities exchanges which is currently 4:15 P.M., New York time.
Securities or other assets for which market quotations are not readily available
(including certain restricted and illiquid securities) are valued at fair value
in accordance with procedures established by and under the general supervision
and responsibility of the Trustees. Such procedures include the use of
independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. 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 the New York Stock Exchange and may also
take place on days on which the New York Stock Exchange is closed. If events
materially affecting the value of securities occur between the time when the
exchange on which they are traded closes and the time when a Portfolio's net
asset value is calculated, such securities will be valued at fair value in
accordance with procedures established by and under the general supervision of
the Trustees.
PERFORMANCE DATA
From time to time, the Funds may quote performance in terms of actual
distributions, total return or capital appreciation in reports, sales literature
and advertisements published by the Trust. Shareholders may obtain current
performance information by calling Morgan at (800) 521-5411.
The Fund may make historical performance information available and may
compare its performance to other investments or relevant indexes, including the
benchmark indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal Inc., Morningstar Inc., Ibbotson Associates,
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, the Frank Russell Index and other industry publications.
Composite performance information shown in the prospectus has been
calculated in accordance with Performance Presentation Standards of the
Association for Investment Management and Research ("AIMR").
TOTAL RETURN QUOTATIONS. As required by regulations of the SEC, the
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
required for the initial payment to grow to the amount which would have been
received upon redemption.
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Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Historical performance information for periods prior to the
establishment of the U.S. Equity and U.S. Small Company Funds will be that of
the respective predecessor free-standing fund and will be presented in
accordance with applicable SEC staff interpretations.
Below is set forth historical return information for the Funds or their
predecessors for the periods indicated:
U.S. EQUITY FUND (11/30/97): Average annual total return, 1 year: 24.31%;
average annual total return, 5 years: 17.91%; average annual total return, 10
years: 18.05%; aggregate total return, 1 year: 24.31%; aggregate total return, 5
years: 127.92%; aggregate total return, 10 years: 425.51%.
U.S. SMALL COMPANY FUND (11/30/97): Average annual total return, 1 year: 24.82%;
average annual total return, 5 years: 15.83%; average annual total return, 10
years: 17.09%; aggregate total return, 1 year: 24.82%; aggregate total return,
5 years: 108.53%; aggregate total return, 10 years: 384.46%.
U.S. SMALL COMPANY OPPORTUNITIES FUND (11/30/97): Average annual total return,
1 year: N/A; average annual total return, 5 years: N/A; average annual total
return, commencement of operations (1) to period end: 10.60%.
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.
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,
- --------
1 J.P. Morgan U.S. Small Company Opportunities Fund commenced operations on
June 16, 1997.
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certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In connection with portfolio transactions, the overriding objective is
to obtain the best execution of purchase and sale orders.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition; as well as the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
the Advisor decides that the broker chosen will provide the best execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of each Portfolio review regularly the
reasonableness of commissions and other transaction costs incurred by the
Portfolios in light of facts and circumstances deemed relevant from time to
time, and, in that connection, will receive reports from the Advisor and
published data concerning transaction costs incurred by institutional investors
generally. Research services provided by brokers to which the Advisor has
allocated brokerage business in the past include economic statistics and
forecasting services, industry and company analyses, portfolio strategy
services, quantitative data, and consulting services from economists and
political analysts. Research services furnished by brokers are used for the
benefit of all the Advisor's clients and not solely or necessarily for the
benefit of an individual Portfolio. The Advisor believes that the value of
research services received is not determinable and does not significantly reduce
its expenses. The Portfolios do not reduce their fee to the Advisor by any
amount that might be attributable to the value of such services.
The Portfolios corresponding to the Funds paid the following
approximate brokerage commissions for the indicated fiscal periods:
DISCIPLINED EQUITY (for the period December 30, 1996 (commencement of
operations) through May 31, 1997): $25,351.
U.S. EQUITY (May 31): 1997: $1,614,293; 1996: $1,375,696; 1995: $1,179,132.
U.S. SMALL COMPANY (May 31): 1997: $2,174,321; 1996: $1,554,459; 1995:
$1,217,016.
U.S. SMALL COMPANY OPPORTUNITIES (for the period June 16, 1997 (commencement of
operations) through October 31,1997): $31,543 (unaudited).
The increases in brokerage commissions reflected above were due to
increased portfolio activity and an increase in net investments by investors in
a Portfolio or its predecessor.
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of a Portfolio's brokerage
transactions to affiliates of the Advisor. In order for affiliates of the
Advisor to effect any portfolio transactions for a Portfolio, the commissions,
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fees or other remuneration received by such affiliates must be reasonable and
fair compared to the commissions, fees, or other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. Furthermore, the Trustees of each Portfolio, including a majority of the
Trustees who are not "interested persons," have adopted procedures which are
reasonably designed to provide that any commissions, fees, or other remuneration
paid to such affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through or sold to
or through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Portfolios will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of a Portfolio as well as other customers
including other Portfolios, the Advisor to the extent permitted by applicable
laws and regulations, may, but is not obligated to, aggregate the securities to
be sold or purchased for a Portfolio with those to be sold or purchased for
other customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
consistent with its fiduciary obligations to a Portfolio. In some instances,
this procedure might adversely affect a Portfolio.
If a Portfolio that writes options effects a closing purchase
transaction with respect to an option written by it, normally such transaction
will be executed by the same broker-dealer who executed the sale of the option.
The writing of options by a Portfolio will be subject to limitations established
by each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. The number of options which a Portfolio may write may be affected by
options written by the Advisor for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which each Fund is a separate and distinct
series. A copy of the Declaration of Trust for the Trust is on file in the
office of the Secretary of The Commonwealth of Massachusetts. The Declaration of
Trust and the By-Laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.
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Effective October 10, 1996, the name of the Trust was changed from "The
Pierpont Funds" to "The JPM Pierpont Funds," and each Fund's name changed
accordingly. Effective May 12, 1997, the name of the U.S. Equity Fund was
changed from "The JPM Pierpont Equity Fund" to "The JPM Pierpont U.S. Equity
Fund", and the Fund's corresponding portfolio changed its name accordingly.
Effective May 12, 1997, the name of the U.S. Small Company Fund was changed from
"The JPM Pierpont Capital Appreciation Fund" to "The JPM Pierpont U.S. Small
Company Fund". Effective January 1, 1998, the name of the Trust was changed from
"The JPM Pierpont Funds" to "J.P. Morgan Funds", and each 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 any Fund and that every
written agreement, obligation, instrument or undertaking made on behalf of any
Fund shall contain a provision to the effect that the shareholders are not
personally liable thereunder.
No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. 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.
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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 18 series have been authorized and are available for sale to the
public. Each share represents an equal proportional interest in a Fund with each
other share. Upon liquidation of a Fund, holders are entitled to share pro rata
in the net assets of a Fund available for distribution to such shareholders. See
"Massachusetts Trust." Shares of a Fund have no preemptive or conversion rights
and are fully paid and nonassessable. The rights of redemption and 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
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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 18 series of the Trust. The Trustees have no current intention to
create any classes within the initial series or any subsequent series. The
Trustees may, however, authorize the issuance of shares of additional series and
the creation of classes of shares within any series with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine. The proceeds from the issuance of any additional series would be
invested in separate, independently managed portfolios with distinct investment
objectives, policies and restrictions, and share purchase, redemption and net
asset valuation procedures. Any additional classes would be used to distinguish
among the rights of different categories of shareholders, as might be required
by future regulations or other unforeseen circumstances. All consideration
received by the Trust for shares of any additional series or class, and all
assets in which such consideration is invested, would belong to that series or
class, subject only to the rights of creditors of the Trust and would be subject
to the liabilities related thereto. Shareholders of any additional series or
class will approve the adoption of any management contract or distribution plan
relating to such series or class and of any changes in the investment policies
related thereto, to the extent required by the 1940 Act.
For information relating to mandatory redemption of Fund shares or
their redemption at the option of the Trust under certain circumstances, see
"Redemption of Shares".
As of December 5, 1997, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of:
U.S. Equity Fund--Forest Laboratories, Inc. (5.46%);
U.S. Small Company Fund--Forest Laboratories, Inc. (6.62%); and
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U.S. Small Company Opportunities Fund--J.P. Morgan Investment Management
as Agent for Carnegie Corporation of New York (7.73%).
The address of each owner listed above is c/o Morgan, 522 Fifth Avenue,
New York, New York 10036. As of the date of this Statement of Additional
Information, the officers and Trustees as a group owned less than 1% of the
shares of each Fund.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund is an open-end management investment company
which seeks to achieve its investment objective by investing all of its
investable assets in a corresponding Portfolio, a separate registered investment
company with the same investment objective as the Fund. The investment objective
of the Funds or Portfolios may be changed only with the approval of the holders
of the outstanding shares of each Fund and each Portfolio.
In addition to selling a beneficial interest to a Fund, a Portfolio may
sell beneficial interests to other mutual funds or institutional investors. Such
investors will invest in the Portfolio on the same terms and conditions and will
bear a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio may sell shares of their own fund using a
different pricing structure than the Fund. Such different pricing structures may
result in differences in returns experienced by investors in other funds that
invest in the Portfolio. Such differences in returns are not uncommon and are
present in other mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from Morgan at (800) 521-5411.
The Trust may withdraw the investment of a Fund from a Portfolio at any
time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same
investment objective and restrictions as the Fund or the retaining of an
investment adviser to manage the Fund's assets in accordance with the investment
policies described below with respect to the Portfolio.
Certain changes in a Portfolio's investment objective, policies or
restrictions, or a failure by a Fund's shareholders to approve a change in the
Portfolio's investment objective or restrictions, may require withdrawal of the
Fund's interest in the Portfolio. Any such withdrawal could result in a
distribution in kind of portfolio securities (as opposed to a cash distribution)
from the Portfolio which may or may not be readily marketable. The distribution
in kind may result in the Fund having a less diversified portfolio of
investments or adversely affect the Fund's liquidity, and the Fund could incur
brokerage, tax or other charges in converting the securities to cash.
Notwithstanding the above, there are other means for meeting shareholder
redemption requests, such as borrowing.
Smaller funds investing in a Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
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withdraws from the Portfolio, the remaining funds may subsequently experience
higher pro rata operating expenses, thereby producing lower returns.
Additionally, because a Portfolio would become smaller, it may become
less diversified, resulting in potentially increased portfolio risk (however,
these possibilities also exist for traditionally structured funds which have
large or institutional investors who may withdraw from a fund). Also, funds with
a greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. Whenever the Fund is requested to
vote on matters pertaining to the Portfolio (other than a vote by the Fund to
continue the operation of the Portfolio upon the withdrawal of another investor
in the Portfolio), the Trust will hold a meeting of shareholders of the Fund and
will cast all of its votes proportionately as instructed by the Fund's
shareholders. The Trust will vote the shares held by Fund shareholders who do
not give voting instructions in the same proportion as the shares of Fund
shareholders who do give voting instructions. Shareholders of the Fund who do
not vote will have no effect on the outcome of such matters.
TAXES
Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, a
Fund must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock, securities or foreign
currency and other income (including but not limited to gains from options,
futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; (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 a Fund's
principal business of investing in stocks or securities (or options and futures
with respect to stocks or securities); and (c) diversify its holdings so that,
at the end of each 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). Effective as
of June 1, 1998, the 30% of gross income test described in (b) above will no
longer apply to the Funds.
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.
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Under the Code, a Fund will be subject to a 4% excise tax on a portion
of its undistributed taxable income and capital gains if it fails to meet
certain distribution requirements by the end of the calendar year. Each Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by a Fund
in October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends will be taxable to a
shareholder in the year declared rather than the year paid.
Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital loss
(other than exempt interest dividends) are generally taxable to shareholders of
the Funds as ordinary income whether such distributions are taken in cash or
reinvested in additional shares. The Funds expect that a portion of these
distributions to corporate shareholders will be eligible for the
dividends-received deduction, subject to applicable limitations under the Code.
If dividend payments exceed income earned by a Fund, the over distribution would
be considered a return of capital rather than a dividend payment. The Funds
intend to pay dividends in such a manner so as to minimize the possibility of a
return of capital. Distributions of net long-term capital gain (i.e., net
long-term capital gain in excess of net short-term capital loss) are taxable to
shareholders of a Fund as long-term capital gain, regardless of whether such
distributions are taken in cash or reinvested in additional shares and
regardless of how long a shareholder has held shares in the Fund. As a result of
the enactment of the Taxpayer Relief Act of 1997 (the "Act"), long-term capital
gain of an individual is generally subject to a maximum rate of 28% in respect
of a capital asset held directly by such individual for more than one year but
not more than eighteen months, and the maximum rate is reduced to 20% in respect
of a capital asset held in excess of 18 months. The Act authorizes the Treasury
department to promulgate regulations that would apply these rules in the case of
long-term capital gain distributions made by a Fund. In addition, no loss will
be allowed on the redemption or exchange of shares of a Fund if, within a period
beginning 30 days before the date of such redemption or exchange and ending 30
days after such date, the shareholder acquires (such as through dividend
reinvestment) securities that are substantially identical to shares of the Fund.
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,
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the Portfolio will subtract the premium received from its cost basis in the
securities purchased.
Any distribution of net investment income or capital gains will have
the effect of reducing the net asset value of Fund shares held by a shareholder
by the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above.
Any gain or loss realized on the redemption or exchange of Fund shares
by a shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. 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 straddles treated as short sales for tax purposes
may also result in the loss of the holding period of underlying securities for
purposes of the 30% of gross income test described above, and therefore, a
Portfolio's ability to enter into forward currency contracts, options and
futures contracts may be limited, under current law. Effective as of June 1,
1998, the 30% of gross income test will no longer apply to the Funds.
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
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or loss, and the remainder will be treated as short-term capital gain or loss
regardless of how long the Portfolio has held such options or futures. However,
gain or loss recognized on certain foreign currency contracts will be treated as
ordinary income or loss.
The Funds may invest in Equity Securities of foreign issuers. If a
Portfolio purchases shares in certain foreign corporations (referred to as
passive foreign investment companies ("PFICs") under the Code), the
corresponding fund may be subject to federal income tax on a portion of an
"excess distribution" from such foreign corporation, including any gain from the
disposition of such shares, even though a portion of such income may have to be
distributed as a taxable dividend by the Fund to its shareholders. In addition,
certain interest charges may be imposed on a Fund as a result of such
distributions. Alternatively, a Fund may in some cases be permitted to include
each year in its income and distribute to shareholders a pro rata portion of the
foreign investment fund's income, whether or not distributed to the Fund.
For taxable years of the Portfolios beginning after 1997, the
Portfolios will be permitted to "mark to market" any marketable stock held by a
Portfolio in a PFIC. If a Portfolio made such an election, the corresponding
Fund would include in income each year an amount equal to its share of the
excess, if any, of the fair market value of the PFIC stock as of the close of
the taxable year over the adjusted basis of such stock. The Fund would be
allowed a deduction for its share of the excess, if any, of the adjusted basis
of the PFIC stock over its fair market value as of the close of the taxable
year, but only to the extent of any net mark-to-market gains with respect to the
stock included by the Fund for prior taxable years.
FOREIGN SHAREHOLDERS. Dividends of net investment income and
distributions of realized net short-term gain in excess of net long-term loss to
a shareholder who, as to the United States, is a nonresident alien individual,
fiduciary of a foreign trust or estate, foreign corporation or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax at
the rate of 30% (or lower treaty rate) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions treated
as long term capital gains to foreign shareholders will not be subject to U.S.
tax unless the distributions are effectively connected with the shareholder's
trade or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder was present in the United States
for more than 182 days during the taxable year and certain other conditions are
met.
If a correct and certified taxpayer identification number is not on
file, the Fund is required, subject to certain exemptions, to withhold 31% of
certain payments made or distributions declared to non-corporate shareholders.
In the case of a foreign shareholder who is a nonresident alien
individual or foreign entity, a Fund may be required to withhold U.S. federal
income tax as "backup withholding" at the rate of 31% from distributions treated
as long-term capital gains and from the proceeds of redemptions, exchanges or
other dispositions of Fund shares unless IRS Form W-8 is provided. Transfers by
gift
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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 Funds 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.
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
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.
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No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in 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 the U.S. Equity and U.S. Small Company Funds and The
Disciplined Equity Portfolio are incorporated herein by reference from their
respective annual report filings made with the SEC pursuant to Section 30(b) of
the 1940 Act and Rule 30b2-1 thereunder. Unaudited financial statements as of
October 31, 1997 for each of the U.S. Small Company Opportunities Fund and the
U.S. Small Company Opportunities Portfolio are attached hereto. Any of the
following financial reports are available without charge upon request by calling
JP Morgan Funds Services at (800) 521-5411. Each Fund's financial statements
include the financial statements of the Fund's corresponding Portfolio.
<TABLE>
<CAPTION>
Date of Semi-Annual Date of Annual
Report; Date Semi- Report; Date Annual
Annual Report Filed; Report Filed; and
Name of Fund/Portfolio and Accession Number Accession Number
- ------------------------------------------------ --------------------------------- --------------------------------
<S> <C> <C>
The Disciplined Equity N/A 05/31/97
Portfolio 08/04/97
0000912057-97-025987
J.P. Morgan U.S. Equity Fund N/A 05/31/97
08/05/97
0000912057-97-026058
J.P. Morgan U.S. Small Company N/A 05/31/97
Fund 08/05/97
0000912057-97-026024
- ------------------------------------------------ --------------------------------- --------------------------------
</TABLE>
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APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA has the highest ratings assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small
degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
BB - Debt rated BB is regarded as having less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
B - An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
i:\dsfndlgl\pierpont\010298.pea\eqsai.wpf
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\pierpont\010298.pea\eqsai.wpf
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\pierpont\010298.pea\eqsai.wpf
A-3
<PAGE>
THE JPM PIERPONT U.S. SMALL COMPANY OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
OCTOBER 31, 1997
- -------------------------------------------------------------------
ASSETS
Investment in The U.S. Small Company Opportunities
Portfolio ("Portfolio"), at value $83,350,729
Receivable for Shares of Beneficial Interest Sold 7,641,500
Deferred Organization Expenses 12,949
Receivable for Expense Reimbursements 4,613
Prepaid Trustees' Fees 79
Prepaid Expenses and Other Assets 280
-----------
Total Assets 91,010,150
-----------
LIABILITIES
Payable for Shares of Beneficial Interest Redeemed 17,338
Shareholder Servicing Fee Payable 16,518
Organization Expenses Payable 13,892
Administrative Services Fee Payable 1,989
Administration Fee Payable 209
Fund Services Fee Payable 99
Accrued Expenses 21,415
-----------
Total Liabilities 71,460
-----------
NET ASSETS
Applicable to 7,892,321 Shares of Beneficial Interest
Outstanding (par value $0.001, unlimited shares
authorized) $90,938,690
===========
Net Asset Value, Offering and Redemption Price Per Share $11.52
===========
ANALYSIS OF NET ASSETS
Paid-in Capital $88,856,237
Accumulated Net Investment Loss (52,899)
Accumulated Net Realized Loss on Investment (41,775)
Net Unrealized Appreciation of Investment 2,177,127
-----------
Net Assets $90,938,690
===========
The Accompanying Notes are an Integral Part of the Financial Statements.
<PAGE>
THE JPM PIERPONT U.S. SMALL COMPANY OPPORTUNITIES FUND
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD FROM JUNE 16, 1997 (COMMENCEMENT OF OPERATIONS) TO
OCTOBER 31, 1997
- -------------------------------------------------------------------
INVESTMENT LOSS ALLOCATED FROM PORTFOLIO
Allocated Interest Income $101,844
Allocated Dividend Income (Net
of Foreign Withholding Tax of $34) 30,657
Allocated Portfolio Expenses (Net
of Reimbursement of $3,597) (139,381)
------------
Net Investment Loss Allocated from Portfolio (6,880)
FUND EXPENSES
Shareholder Servicing Fee $38,814
Registration Fees 9,256
Transfer Agent Fees 8,423
Printing Expenses 5,287
Administrative Services Fee 4,700
Professional Fees 4,447
Amortization of Organization Expenses 1,051
Fund Services Fee 510
Administration Fee 433
Trustees' Fees and Expenses 29
Insurance Expense 29
Miscellaneous 1,229
-------
Total Fund Expenses 74,208
Less: Reimbursement of Expenses (28,189)
-------
NET FUND EXPENSES 46,019
------------
NET INVESTMENT LOSS (52,899)
NET REALIZED LOSS ON INVESTMENT
ALLOCATED FROM PORTFOLIO (41,775)
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO 2,177,127
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,082,453
============
The Accompanying Notes are an Integral Part of the Financial Statements.
<PAGE>
THE JPM PIERPONT U.S. SMALL COMPANY OPPORTUNITIES FUND
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------
FOR THE PERIOD FROM
JUNE 16, 1997
(COMMENCEMENT OF
OPERATIONS) TO
OCTOBER 31, 1997
(UNAUDITED)
-----------
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Loss ($52,899)
Net Realized Loss on Investment Allocated from Portfolio (41,775)
Net Change in Unrealized Appreciation of Investment
Allocated from Portfolio 2,177,127
-----------
Net Increase in Net Assets Resulting from Operations 2,082,453
-----------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 90,562,341
Cost of Shares of Beneficial Interest Redeemed (1,706,104)
Net Increase from Transactions in Shares of -----------
Beneficial Interest 88,856,237
-----------
Total Increase in Net Assets 90,938,690
NET ASSETS
Beginning of Period -
-----------
End of Period (including accumulated net investment
loss of $52,899) $90,938,690
===========
The Accompanying Notes are an Integral Part of the Financial Statements.
<PAGE>
THE JPM PIERPONT U.S. SMALL COMPANY OPPORTUNITIES FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------
Selected data for a share outstanding throughout the period is as follows:
FOR THE PERIOD FROM
JUNE 16, 1997
(COMMENCEMENT OF
OPERATIONS) TO
OCTOBER 31, 1997
(UNAUDITED)
-----------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
------------
Income from Investment Operations
Net Investment Loss (0.01)
Net Realized and Unrealized Gain on Investment 1.53
------------
Total from Investment Operations 1.52
------------
NET ASSET VALUE, END OF PERIOD $ 11.52
============
Total Return 15.20%
============
Ratios and Supplemental Data
Net Assets, End of Period (in thousands) $ 90,939
Ratios to Average Net Assets
Expenses 1.19%(a)
Net Investment Loss (0.34%)a)
Decrease Reflected in Expense Ratio due
to Expense Reimbursement 0.18%(a)
- -------------------------
(a) Annualized
<PAGE>
THE JPM PIERPONT U.S. SMALL COMPANY OPPORTUNITIES FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 1997
- -------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The JPM Pierpont U.S. Small Company Opportunities Fund (the "Fund") is a
separate series of The JPM Pierpont Funds, a Massachusetts business trust
(the "Trust") which was organized on November 4, 1992. The Trust is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations on June 16, 1997.
The Fund invests all of its investable assets in The U.S. Small Company
Opportunities Portfolio (the "Portfolio"), a diversified open-end management
investment company having the same investment objective as the Fund. The value
of such investment included in the Statement of Assets and Liabilities reflects
the Fund's proportionate interest in the net assets of the Portfolio (100% at
October 31, 1997). The performance of the Fund is directly affected by the
performance of the Portfolio. The financial statements of the Portfolio,
including the Schedule of Investments, are included elsewhere in this report and
should be read in conjunction with the Fund's financial statements.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Fund:
a) Valuation of securities by the Portfolio is discussed in Note 1 of the
Portfolio's Notes to Financial Statements which are included elsewhere in this
report.
b) The Fund records its share of net investment income, realized and
unrealized gain and loss and adjusts its investment in the Portfolio
each day.
c) Substantially all the Fund's net investment income is declared as
dividends and paid semi-annually. Distributions to shareholders of net
realized capital gains, if any, are declared and paid annually.
d) The Fund incurred organization expenses in the amount of
$14,000. Morgan Guaranty Trust Company of New York ("Morgan")
has agreed to pay the organization expenses of the Fund. The
Fund has agreed to reimburse Morgan for these costs which are
being deferred and will be amortized on a straight-line basis
over a period not to exceed five-years beginning with the
commencement of operations of the Fund.
e) The Fund is treated as a separate entity for federal income
tax purposes. The Fund intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended, applicable to
regulated investment companies and to distribute substantially
all of its income, including net realized capital gains, if
any, within the prescribed time periods. Accordingly, no
provision for federal income or excise tax is necessary.
<PAGE>
THE JPM PIERPONT U.S. SMALL COMPANY OPPORTUNITIES FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
OCTOBER 31, 1997
- ------------------------------------------------------------------
f) Expenses incurred by the Trust with respect to any two or more funds in
the Trust are allocated in proportion to the net assets of each fund in
the Trust, except where allocations of direct expenses to each fund can
otherwise be made fairly. Expenses directly attributable to a fund are
charged to that fund.
2. TRANSACTIONS WITH AFFILIATES
a) The Trust, on behalf of the Fund, has retained Funds Distributor, Inc.
("FDI"), a registered broker-dealer, to serve as co-administrator and
distributor. Under a Co- Administration Agreement between FDI and the Trust on
behalf of the Fund, FDI provides administrative services necessary for the
operations of the Fund, furnishes office space and facilities required for
conducting the business of the Fund and pays the compensation of the Fund's
officers affiliated with FDI. The Fund has agreed to pay FDI fees equal to its
allocable share of an annual complex-wide charge of $425,000 plus FDI's
out-of-pocket expenses. The amount allocable to the Fund is based on the ratio
of the Fund's net assets to the aggregate net assets of the Trust and certain
other investment companies subject to similar agreements with FDI. For the
period from June 16, 1997 (commencement of operations) to October 31, 1997, the
fee for these services amounted to $433.
b) The Trust, on behalf of the Fund, has an Administrative Services
Agreement (the "Services Agreement") with Morgan under which Morgan is
responsible for overseeing certain aspects of the administration and operation
of the Fund. Under the Services Agreement, the Fund has agreed to pay Morgan a
fee equal to its allocable share of an annual complex-wide charge. This charge
is calculated daily based on the aggregate net assets of the Portfolio and the
other Portfolios in which the Trust and The JPM Institutional Funds invest (the
"Master Portfolios") and JPM Series Trust in accordance with the following
annual schedule: 0.09% on the first $7 billion of their aggregate average daily
net assets and 0.04% of their 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 is determined by the proportionate share that its net assets
bear to the net assets of the Trust, the Master Portfolios, other investors in
the Master Portfolios for which Morgan provides similar services, and JPM Series
Trust. For the period from June 16, 1997 (commencement of operations) to October
31, 1997, the fee for these services amounted to $4,700.
In addition, Morgan has agreed to reimburse the Fund to the extent
necessary to maintain the total operating expenses of the Fund, including the
expenses allocated to the Fund from the Portfolio, at no more than 1.20% of the
average daily net assets of the Fund through September 30, 1998. For the period
from June 16, 1997 (commencement of operations) to October 31, 1997, Morgan has
agreed to reimburse the Fund $28,189 for expenses under this agreement.
<PAGE>
THE JPM PIERPONT U.S. SMALL COMPANY OPPORTUNITIES FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
OCTOBER 31, 1997
- -------------------------------------------------------------------
c) The Trust, on behalf of the Fund, has a Shareholder Servicing Agreement
with Morgan. The agreement provides for the Fund to pay Morgan a fee
for these services which is computed daily and paid monthly at an
annual rate of 0.25% of the average daily net assets of the Fund. For
the period from June 16, 1997 (commencement of operations) to October
31, 1997, the fee for these services amounted to $38,814.
Morgan, Charles Schwab & Co. ("Schwab") and the Trust are parties to
separate services and operating agreements (the "Schwab Agreements") whereby
Schwab makes Fund shares available to customers of investment advisors and other
financial intermediaries who are Schwab's clients. The Fund is not responsible
for payments to Schwab under the Schwab Agreements; however, in the event the
Services Agreement with Schwab is terminated for reasons other than a breach by
Schwab and the relationship between the Trust and Morgan is terminated, the Fund
would be responsible for the ongoing payments to Schwab with respect to
pre-termination shares.
d) The Trust, on behalf of the Fund, has a Fund Services Agreement with
Pierpont Group, Inc. ("Group") to assist the Trustees in exercising
their overall supervisory responsibilities for the Trust's affairs. The
Trustees of the Trust represent all the existing shareholders of Group.
The Fund's allocated portion of Group's costs in performing its
services amounted to $510 for the period from June 16, 1997
(commencement of operations) to October 31, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving
as a Trustee of the Trust, The JPM Institutional Funds, the Master Portfolios
and JPM Series Trust. The Trustees' Fees and Expenses shown in the financial
statements represents the Fund's allocated portion of these total fees and
expenses. The Trust's Chairman and Chief Executive Officer also serves as
Chairman of Group and receives compensation and employee benefits from Group in
his role as Group's Chairman. The allocated portion of such compensation and
benefits included in the Fund Services Fee shown in the financial statements was
$100.
3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest of one or more series.
Transactions in shares of beneficial interest of the Fund were as follows:
FOR THE PERIOD FROM
JUNE 16, 1997
(COMMENCEMENT OF
OPERATIONS) TO
OCTOBER 31, 1997
(UNAUDITED)
-----------
Shares sold 8,034,821
Shares redeemed (142,500)
-----------
Net Increase 7,892,321
-----------
4. CREDIT AGREEMENT
The Trust, on behalf of the Fund, together with other affiliated investment
companies (the "Funds"), entered into a revolving line of credit agreeement (the
"Agreement") on May 28, 1997, with unaffiliated lenders. Additionally, since all
of the investable assets of the Fund are in the Portfolio, the Portfolio is
party to certain covenants of the Agreement. The maximum commitment borrowing
under the Agreement is $150,000,000. The Agreement expires on May 27, 1998,
however, the Fund as party to the Agreement will have the ability to extend the
Agreement and continue its participation therein for an additional 364 days. The
purpose of the Agreement is to provide another alternative for settling large
fund shareholder redemptions. Interest on any such borrowings outstanding will
approximate market rates. The Funds pay a commitment fee at an annual rate of
0.065% on the unused portion of the committed amount which is allocated to the
Funds in accordance with procedures established by their respective Trustees or
Directors. The Fund has not borrowed pursuant to the Agreement as of October 31,
1997.
<PAGE>
The U.S. Small Company Opportunities Portfolio
Schedule of Investments (unaudited)
"October 31, 1997"
Security Description Shares Value
COMMON STOCKS (96.7%)
Basic Industries (1.4%)
Agriculture (0.9%)
Dekalb Genetics Corp. - Class B 9,800 $ 351,575
Delta & Pine Land Co. 10,600 394,850
__________
746,425
__________
Forest Products & Paper (0.2%)
Universal Forest Products, Inc. + 10,600 156,350
__________
Metals & Mining (0.3%)
Mueller Industries, Inc. + 6,000 265,125
__________
Total Basic Industries 1,167,900
Consumer Goods & Services (24.6%)
Apparels & Textiles (1.4%)
Ashworth, Inc + 26,400 263,175
Genesco, Inc. + 49,700 630,569
Nautica Enterprises, Inc. + 8,200 218,069
Tropical Sportswear International Corp.+ 4,300 51,869
__________
1,163,682
__________
Automotive (0.2%)
Hayes Wheels International, Inc. + 3,900 130,650
Broadcasting & Publishing (1.4%)
Journal Register Co. + 30,000 523,125
Univision Communications, Inc. + 10,500 651,000
__________
1,174,125
Education (4.4%)
Advantage Learning Systems, Inc. + 8,600 219,300
CBT Group PLC (ADR) + 8,200 631,400
Children's Comprehensive Services, Inc.+ 33,400 601,200
Computer Learning Centers, Inc. + 2,100 95,550
CorporateFamily Solutions, Inc. + 6,700 100,081
DeVry, Inc. + 18,400 485,300
Education Management Corp. + 19,300 496,975
EduTrek International, Inc. + 4,000 97,750
ITT Educational Services, Inc. 20,000 482,500
Youth Services International, Inc. + 34,600 490,887
__________
3,700,943
__________
Entertainment, Leisure & Media (6.5%)
Action Performance Companies, Inc. + 27,000 688,500
Ballantyne of Omaha, Inc. + 29,000 485,750
Cinar Films, Inc. - Class B + 19,500 760,500
Florida Panthers Holdings, Inc. + 6,600 132,825
<PAGE>
Imax Corp. + 19,500 493,594
Metromedia International Group, Inc. + 38,900 447,350
Premier Parks, Inc. + 12,000 484,500
Steiner Leisure Ltd. * + 22,700 605,806
Ticketmaster Group, Inc. + 35,000 802,812
Travel Services International, Inc. + 22,200 488,400
__________
5,390,037
__________
Food, Beverages & Tobacco (0.5%)
American Italian Pasta Co.- Class A + 3,000 63,000
Beringer Wine Estates Holdings, Inc. + 1,900 58,781
Suiza Foods Corp. + 6,500 327,437
__________
449,218
__________
Health & Personal Care (1.4%)
Bally Total Fitness Holding Corp. + 40,600 728,262
Enamelon, Inc. + 30,000 465,000
__________
1,193,262
__________
Personal Care (0.4%)
French Fragrances, Inc. + 31,900 343,922
__________
Restaurants & Hotels (1.8%)
Famous Dave's of America, Inc. + 16,900 292,581
Papa John's International, Inc. + 9,800 288,794
PJ America Inc. + 16,600 234,475
Sun International Hotels Ltd. *+ 12,000 432,000
Vail Resorts, Inc. + 8,300 230,844
__________
1,478,694
__________
Retail (6.6%)
A.C. Moore Arts & Crafts, Inc. + 14,100 215,906
CHS Electronics, Inc. 30,200 735,181
DM Management Co. + 15,800 238,481
Gymboree Corp. + 12,200 295,087
Insight Enterprises, Inc. + 18,700 735,144
N2K, Inc. + 3,500 92,313
ONSALE, Inc. + 17,600 404,800
Party City Corp. + 32,100 878,737
Peapod, Inc. + 10,300 98,494
Petco Animal Supplies, Inc. + 25,700 788,669
RDO Equipment Co. + 21,000 455,437
United Natural Foods, Inc. + 17,300 361,137
USA Floral Products, Inc. + 10,800 191,025
__________
5,490,411
__________
Total Consumer Goods & Services 20,514,944
__________
Energy (3.2%)
Gas Exploration (1.7%)
Devon Energy Corp. 9,700 434,075
FX Energy, Inc. + 19,100 127,731
Patterson Energy, Inc. + 14,800 828,800
__________
1,390,606
__________
<PAGE>
Oil-Services (1.5%)
Dril-Quip, Inc. + 1,800 64,575
Eagle Geophysical, Inc. + 3,800 66,975
National-Oilwell, Inc. + 8,000 612,500
Transmontaigne Oil Co. + 22,700 391,575
UTI Energy Corp. + 3,400 151,725
__________
1,287,350
__________
Total Energy 2,677,956
__________
Finance (12.8%)
Banking (3.3%)
Bank United Corp. , Class A 19,500 823,875
National Commerce Bancorporation 28,100 825,437
Ocwen Financial Corp. + 9,100 499,931
Prime Bancshares, Inc. + 4,000 75,500
Silicon Valley Bancshares + 5,400 294,300
Webster Financial Corp. 4,100 253,431
__________
2,772,474
__________
Financial Services (4.3%)
Ameritrade Holding Corp. - Class A + 22,000 570,625
Central Financial Acceptance Corp. + 12,000 129,000
E*TRADE Group, Inc. + 10,400 320,450
Federal Agricultural Mortgage Corp.
- Class C + 13,000 671,125
Financial Federal Corp. 28,000 532,000
Medallion Financial Corp. 28,900 605,094
Newcourt Credit Group, Inc. 22,000 765,875
__________
3,594,169
__________
Insurance (3.0%)
Capital Re Corp. 3,600 212,175
CMAC Investment Corp. 7,000 382,812
Inspire Insurance Solutions, Inc. + 11,400 215,175
Nationwide Financial Services, Inc. 12,800 389,600
Penn Treaty American Corp. + 24,900 796,800
RenaissanceRe Holdings, Ltd. * 5,000 217,500
Triad Guaranty, Inc. + 8,600 249,400
__________
2,463,462
__________
Real Estate Investment Trusts (2.2%)
Boston Properties, Inc. 4,000 128,000
CCA Prison Realty Trust 10,800 372,600
Equity Office Properties Trust 8,400 256,725
IMH Commercial Holdings, Inc. 25,000 450,000
Innkeepers USA Trust 35,900 599,081
__________
1,806,406
__________
Total Finance 10,636,511
__________
Health Care (20.3%)
Biotechnology (7.5%)
<PAGE>
Affymetrix, Inc. + 9,100 331,012
Applied Analytical Industries, Inc. + 19,500 304,687
ArQule, Inc. + 22,300 476,662
Arris Pharmaceutical Corp. + 14,800 174,825
AutoCyte, Inc. + 29,000 313,562
BioReliance Corp. + 10,400 224,900
Closure Medical Corp. + 35,000 918,750
Cor Therapeutics, Inc. + 8,600 191,081
Human Genome Sciences, Inc. + 11,100 454,406
IDEC Pharmaceuticals Corp. + 16,200 618,637
Incyte Pharmaceuticals, Inc. + 8,600 681,550
Inhale Therapeutics Systems + 8,400 210,750
Millennium Pharmaceuticals, Inc. + 18,400 365,700
SangStat Medical Corp. + 23,800 733,337
Synaptic Pharmaceutical Corp. + 8,000 103,528
Transkaryotic Therapies, Inc. + 3,600 122,400
__________
6,225,787
__________
Health Services (5.9%)
Alternative Living Services, Inc. + 12,120 296,940
Assisted Living Concepts, Inc. + 6,400 131,200
Curative Health Services, Inc. + 14,100 423,000
Diagnostic Health Services, Inc. + 33,800 409,825
Healthcare Recoveries, Inc. + 46,500 851,531
INMET Systems, Inc. + 31,300 571,225
Kendle International, Inc. + 27,500 414,219
MedQuist, Inc. + 28,500 696,469
Orthodontic Centers of America, Inc. + 21,900 379,144
Transition Systems, Inc. + 37,800 763,087
__________
4,936,640
__________
Medical Supplies (2.2%)
Arterial Vascular Energy, Inc. + 7,000 371,438
Computer Motion, Inc. + 7,200 84,825
Gynecare, Inc. + 12,900 106,022
Intelligent Medical Imaging, Inc. + 16,200 63,281
Sabratek Corp. + 23,800 752,675
Ventana Medical Systems, Inc. + 28,000 437,500
__________
1,815,741
__________
Pharmaceuticals (4.7%)
Algos Pharmaceutical Corp. + 16,800 410,550
Andrx Corp. + 21,600 819,450
Ascent Pediatrics, Inc. + 25,900 233,100
Cell Therapeutics, Inc. + 15,500 247,031
Columbia Laboratories, Inc. + 28,500 456,000
Kos Pharmaceuticals, Inc. + 16,200 578,138
PathoGenesis Corp. + 23,400 835,088
Zonagen, Inc. + 10,000 326,250
__________
3,905,607
__________
Total Health Care 16,883,775
__________
Industrial Products & Services (16.0%)
<PAGE>
Commercial Services (11.5%)
ABR Information Services, Inc. + 37,800 883,575
Administaff, Inc. + 24,000 519,000
Applied Graphics Technologies, Inc. + 12,800 684,800
Aris Corp. + 13,000 308,750
BDM International, Inc. + 34,400 758,950
Diamond Technology Partners, Inc. + 1,000 15,750
Hospitality Worldwide Services + 10,800 125,550
Mac-Gray Corp. + 7,800 115,050
National Data Corp. 22,000 812,625
National Research Corp. + 2,100 42,788
NCO Group, Inc. + 17,000 612,000
Network Solutions, Inc.- Class A + 25,000 477,344
On Assignment, Inc. + 28,100 676,156
Pegasus Systems, Inc. + 27,400 419,563
Profit Recovery Group International, Inc.+ 32,600 505,300
Snyder Communication, Inc. + 27,000 796,500
Staffmark, Inc. + 18,700 576,194
USCS International, Inc. + 37,800 737,100
Vincam Group, Inc. + 17,900 560,494
__________
9,627,489
__________
Diversified Manufacturing (0.9%)
Brady (W.H.) Co.- Class A 23,000 747,500
__________
Manufacturing (2.5%)
Alyn Corp. + 17,100 221,231
Miller Industries, Inc. + 70,000 708,750
Monaco Coach Corp. + 14,900 357,600
Movado Group, Inc. 8,700 186,506
National R.V. Holdings, Inc. + 26,100 619,875
Rock of Ages Corp. + 1,300 24,619
__________
2,118,581
__________
Packaging & Containers (0.5%)
Ivex Packaging Corp. + 20,000 422,500
__________
Pollution Control (0.6%)
Culligan Water Technologies, Inc. + 10,000 426,250
Ionics, Inc. + 2,700 103,444
__________
529,694
__________
Total Industrial Products & Services 13,445,764
__________
Technology (11.1%)
Computer Peripherals (0.7%)
HMT Technology Corp. + 10,800 180,900
JetFax, Inc. + 35,700 292,294
SCM Microsystems, Inc. + 4,000 94,000
__________
567,194
__________
Computer Software (4.6%)
Aspen Technologies, Inc. + 19,800 741,263
<PAGE>
Cognicase, Inc. + 1,700 21,356
Concord Communications, Inc. + 2,000 36,250
Datastream Systems, Inc. + 21,100 648,825
FARO Technologies, Inc. + 15,000 205,313
Harbinger Corp. + 11,000 323,813
HNC Software, Inc. + 18,400 676,200
Iona Technologies PLC + 29,000 461,281
Lycos Inc. + 9,200 239,200
MAPICS, Inc. + 32,000 362,000
OrCAD, Inc. + 11,400 100,463
__________
3,815,964
__________
Computer Systems (0.4%)
Radiant Systems, Inc. + 17,300 316,806
__________
Electrical Equipment (1.5%)
Advanced Lighting Technologies, Inc. + 49,300 989,081
Chicago Miniature Lamp, Inc. + 9,200 292,675
__________
1,281,756
__________
Electronics (0.4%)
ParkerVision, Inc. + 1,700 42,075
Power-One, Inc. + 2,800 51,975
Tracor, Inc. + 8,000 212,500
__________
306,550
__________
Information Processing (1.0%)
Computer Horizons Corp. + 16,200 491,063
Excite, Inc. + 8,100 201,994
PRI Automation, Inc. + 4,800 183,000
__________
876,057
__________
Semiconductors (2.5%)
C.P. Clare Corp. + 11,700 199,631
Electroglas, Inc. + 3,700 69,375
Etec Systems, Inc. + 3,400 152,363
Galileo Technology Ltd. * + 7,100 243,619
International Rectifier Corp. + 16,200 221,738
Parlex Corp. + 9,500 166,250
Sawtek, Inc. + 7,100 239,625
SIPEX Corp. + 23,800 801,763
__________
2,094,364
__________
Total Technology 9,258,691
__________
Telecommunications (3.3%)
Telecommunication Services (1.1%)
At Home Corp. - Series A + 9,700 234,619
Concentric Network Corp. + 1,000 11,563
MMC Networks, Inc. + 1,200 26,400
MRV Communications, Inc. + 3,000 87,375
Premiere Technologies, Inc. + 20,000 677,500
__________
1,037,457
__________
Telecommunications (1.0%)
<PAGE>
Omnipoint Corp. + 34,300 794,259
Telecommunications-Equipment (1.2%)
AmeriLink Corp. + 8,800 232,650
Globecomm Systems, Inc. + 7,100 119,369
NICE - Systems Ltd. + 8,600 403,125
World Access, Inc. + 8,000 210,500
__________
965,644
__________
Total Telecommunications 2,797,360
__________
Transportation (1.0%)
Airlines (0.8%)
ASA Holdings, Inc. 22,700 628,506
__________
Transport & Services (0.2%)
C.H. Robinson Worldwide, Inc. 7,000 156,188
__________
Total Transportation 784,694
__________
Utilities (3.0%)
Natural Gas (0.3%)
MarkWest Hydrocarbon, Inc. + 10,800 216,675
__________
Telephone (2.7%)
ICG Communications, Inc. + 15,300 349,031
Intermedia Communications, Inc. + 32,500 1,470,625
ITC DeltaCom, Inc. + 1,500 29,063
NEXTLINK Communications, Inc. -
Class A + 11,000 249,563
STARTEC Global Communications Corp. + 10,800 164,025
__________
2,262,307
__________
Total Utilities 2,478,982
__________
TOTAL COMMON STOCKS (cost $78,469,852) 80,646,577
__________
Security Description Shares Value
CONVERTIBLE PREFERRED STOCKS (0.20%)
Consumer Goods & Services (0.20%)
Entertainment, Leisure & Media (0.20%)
Metromedia International Group, Inc. + 4,100 210,125
__________
(cost $205,000)
Principal
Security Description Amount Value
CONVERTIBLE BONDS (1.1%)
Consumer Goods & Services (0.9%)
Entertainment, Leisure & Media (0.9%)
Family Golf Centers, Inc., 5.75% due
10/15/04, 144A 750,000 736,875
__________
<PAGE>
Telecommunications (0.2%)
Telecommunications (0.2%)
Tel-Save Holdings, Inc., 4.50% due
09/15/02, 144A + 134,000 143,045
__________
TOTAL CONVERTIBLE BONDS (cost $884,643) 879,920
__________
Principal
Security Description Amount Value
SHORT-TERM INVESTMENTS (10.9%)
Other Investment Companies (4.8%)
Seven Seas Money Market Fund, 5.28%
due 07/01/97 4,009,819 4,009,819
__________
U.S. Treasury Obligations (6.1%)
U.S. Treasury Bills, 4.79% due
11/28/97 2,620,000 2,610,588
U.S. Treasury Bills, 4.60%-4.85% due
11/13/97 2,440,000 2,436,196
__________
Total U.S. Treasury Obligations 5,046,784
__________
TOTAL SHORT-TERM INVESTMENTS (cost $9,056,603) 9,056,603
__________
TOTAL INVESTMENTS (cost $88,616,098) (108.9%) 90,793,225
LIABILITIES IN EXCESS OF OTHER ASSETS (-8.9%) (7,442,496)
__________
NET ASSETS (100.0%) $83,350,729
==========
Note: For Federal Income Tax purposes, the cost of securities at October 31,
1997, was substantially the same as the cost for financial statement purposes.
+ Non-income producing security.
* Foreign security.
(ADR) - American Depositary Receipt.
144A - Securities restricted for resale to Qualified Institutional Buyers.
The Accompanying Notes are an Integral Part of the Financial Statements.
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
OCTOBER 31, 1997
- -----------------------------------------------------------------
ASSETS
Investments at Value (Cost $88,616,098) $90,793,225
Cash 13,018
Receivable for Investments Sold 106,943
Interest Receivable 12,601
Deferred Organization Expenses 8,324
Dividends Receivable 4,692
Prepaid Expenses and Other Assets 5,561
-----------
Total Assets 90,944,364
-----------
LIABILITIES
Payable for Investments Purchased 7,539,534
Advisory Fee Payable 39,646
Organization Expenses Payable 9,000
Administrative Services Fee Payable 1,989
Custody Fee Payable 491
Administration Fee Payable 176
Fund Servies Fee Payable 99
Accrued Expenses 2,700
-----------
Total Liabilities 7,593,635
-----------
NET ASSETS
Applicable to Investors' Beneficial Interests $83,350,729
===========
The Accompanying Notes are an Integral Part of the Financial Statements.
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD FROM JUNE 16, 1997 (COMMENCEMENT OF OPERATIONS) TO
OCTOBER 31, 1997
- -----------------------------------------------------------------
INVESTMENT INCOME
Dividend Income (Net of Foreign Withholding Tax of $34) $ 30,657
Interest Income 87,184
-----------
Investment Income 117,841
EXPENSES
Advisory Fee 93,167
Custodian Fees and Expenses 26,128
Professional Fees and Expenses 14,708
Administrative Services Fee 4,701
Printing Expenses 2,153
Amortization of Organization Expense 676
Fund Services Fee 510
Administration Fee 345
Registration Fees 238
Trustees' Fees and Expenses 30
Insurance 29
Miscellaneous 293
---------
Total Expenses 142,978
Less: Reimbursement of Expenses (3,597)
---------
Net Expenses 139,381
----------
NET INVESTMENT LOSS (21,540)
NET REALIZED LOSS ON INVESTMENTS (41,775)
NET CHANGE IN UNREALIZED APPRECIATION OF INVESTMENTS 2,177,127
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,113,812
==========
The Accompanying Notes are an Integral Part of the Financial Statements.
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------
FOR THE PERIOD FROM
JUNE 16, 1997
(COMMENCEMENT OF
OPERATIONS) TO
OCTOBER 31, 1997
(UNAUDITED)
-----------
INCREASE IN NET ASSETS
From Operations
Net Investment Loss ($21,540)
Net Realized Loss on Investments (41,775)
Net Change in Unrealized Appreciation of Investments 2,177,127
-----------
Net Increase in Net Assets Resulting from Operations 2,113,812
-----------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 82,920,841
Withdrawals (1,683,924)
-----------
Net Increase from Investors' Transactions 81,236,917
-----------
Total Increase in Net Assets 83,350,729
NET ASSETS
Beginning of Period -
-----------
End of Period $83,350,729
===========
SUPPLEMENTARY DATA
FOR THE PERIOD FROM
JUNE 16, 1997
(COMMENCEMENT OF
OPERATIONS) TO
OCTOBER 31, 1997
(UNAUDITED)
-----------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.90%(a)
Net Investment Loss (0.14%)(a)
Decrease Reflected in Expense Ratio
due to Expense Reimbursement 0.02%(a)
Portfolio Turnover 26%
Average Broker Commissions $0.0333
- ----------------------
(a) Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 1997
- -----------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The U.S. Small Company Opportunities Portfolio (the "Portfolio") is one of
eight subtrusts (portfolios) comprising The Series Portfolio (the "Series
Portfolio"). The Portfolio is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company which
was organized as a trust under the laws of the State of New York on June 24,
1994. The Portfolio commenced operations on June 16, 1997. The Portfolio's
investment objective is to provide a long term capital appreciation from a
portfolio of equity securities of small companies. The Declaration of Trust
permits the Trustees to issue an unlimited number of beneficial interests in the
Portfolio.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Portfolio:
a) The value of each security for which readily available market quotations
exists is based on a decision as to the broadest and most representative market
for such security. The value of such security will be based either on the last
sale price on a national securities exchange, or, in the absence of recorded
sales, at the average of readily available closing bid and asked prices on such
exchange. Securities listed on a foreign exchange are valued at the last quoted
sale price available before the time when net assets are valued. Unlisted
securities are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Securities or other assets for which market quotations
are not readily available are valued at fair value in accordance with procedures
established by the Portfolio's 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. All portfolio securities
with a remaining maturity of less than 60 days are valued at amortized cost.
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31, 1997
b) Securities transactions are recorded on a trade date basis. Dividend
income is recorded on the ex-dividend date or the time that the
relevant ex-dividend date and amount becomes known. Interest income,
which includes the amortization of premiums and discounts, if any, is
recorded on an accrual basis. For financial and tax reporting purposes,
realized gains and losses are determined on the basis of specific lot
identification.
c) The Portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the Portfolio will be taxed
on its share of the Portfolio's ordinary income and capital
gains. It is intended that the Portfolio's assets will be managed in
such a way that an investor in the Portfolio will be able to satisfy
the requirements of Subchapter M of the Internal Revenue Code. The
cost of securities is substantially the same for book and tax purposes.
d) The Portfolio's custodian takes possession of the collateral pledged
for investments in repurchase agreements on behalf of the Portfolio. It
is the policy of the Portfolio to value the underlying collateral daily
on a mark-to-market basis to determine that the value, including
accrued interest, is at least equal to the repurchase price plus
accrued
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31,1997
- -----------------------------------------------------------------
interest. In the event of default of the obligation to repurchase, the
Portfolio has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain
circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral or
proceeds may be subject to legal proceedings.
e) The Portfolio incurred organization expenses in the amount of $9,000.
Morgan Guaranty Trust Company of New York ("Morgan") has agreed to pay
organization expenses of the Portfolio. The Portfolio has agreed to
reimburse Morgan for these costs which are being deferred and
amortized on a straight-line basis over a period not to exceed
five-years beginning with the commencement of operations of the
Portfolio.
f) Expenses incurred by the Series Portfolio with respect to any two or
more portfolios in the Series Portfolio are allocated in proportion to
the net assets of each portfolio in the Series Portfolio, except where
allocations of direct expenses to each portfolio can otherwise be made
fairly. Expenses directly attributable to a portfolio are charged to
that portfolio.
2. TRANSACTIONS WITH AFFILIATES
a) The Portfolio has an Investment Advisory Agreement with Morgan. Under
the terms of the agreement, the Portfolio pays Morgan at an annual rate
of 0.60% of the Portfolio's average daily net assets. For the period
from June 16, 1997 (commencement of operations) to October 31, 1997,
such fee amounted to $93,167.
b) The Portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as co-administrator and exclusive placement agent. Under
a Co-Administration Agreement between FDI and the Portfolio, FDI provides
administrative services necessary for the operations of the Portfolio, furnishes
office space and facilities required for conducting the business of the
Portfolio and pays the compensation of the officers affiliated with FDI. The
Portfolio has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Portfolio is based on the ratio of the Portfolio's net assets
to the aggregate net assets of the Portfolio and certain other investment
companies subject to similar agreements with FDI. For the period from June 16,
1997 (commencement of operations) to October 31, 1997, the fee for these
services amounted to $345.
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31,1997
- -----------------------------------------------------------------
c) The Portfolio has an Administrative Services Agreement (the "Services
Agreement") with Morgan under which Morgan is responsible for overseeing certain
aspects of the administration and operation of the Portfolio. Under the Services
Agreement, the Portfolio has agreed to pay Morgan a fee equal to its allocable
share of an annual complex-wide charge. This charge is calculated daily based on
the aggregate average net assets of the Portfolio and certain other portfolios
for which Morgan acts as investment advisor (the "Master Portfolios") and JPM
Series Trust in accordance with the following annual schedule: 0.09% on the
first $7 billion of the 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 Portfolio is
determined by the proportionate share that its net assets bear to the net assets
of the Master Portfolios, other investors in the Master Portfolios for which
Morgan provides similar services and JPM Series Trust. For the period from June
16, 1997 (commencement of operations) to October 31, 1997, the fee for these
services amounted to $4,701.
In addition, Morgan has agreed to reimburse the Portfolio to the extent
necessary to maintain the total operating expenses of the Portfolio at no more
than 1.20% of the average daily net assets of the Portfolio through September
30,1998. For the period from June 16, 1997 (commencement of operations) to
October 31,1997, Morgan has agreed to reimburse the Portfolio $3,597 for
expenses under this agreement.
d) The Portfolio has a Fund Services Agreement with Pierpont Group, Inc.
("Group") to assist the Trustees in exercising their overall
supervisory responsibilities for the Portfolio's affairs. The Trustees
of the Portfolio represent all the existing shareholders of Group. The
Portfolio's allocated portion of Group's costs in performing its
services amounted to $510 for the period from June 16, 1997
(commencement of operations) to October 31, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving
as a Trustee of The JPM Pierpont Funds, The JPM Institutional Funds, the Master
Portfolios and JPM Series Trust. The Trustees' Fees and Expenses shown in the
financial statements represents the Portfolio's allocated portion of the total
fees and expenses. The Portfolio's Chairman and Chief Executive Officer also
serves as Chairman of Group and receives compensation and employee benefits from
Group in his role as Group's Chairman. The allocated portion of such
compensation and benefits included in the Fund Services Fee shown in the
financial statements was $100.
<PAGE>
THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
OCTOBER 31,1997
- -----------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the period from
June 16, 1997 (commencement of operations) to October 31, 1997 were as
follows:
COST OF PROCEEDS
PURCHASES FROM SALES
$88,248,564 $9,532,629