<PAGE>
NICHOLAS--APPLEGATE-REGISTERED TRADEMARK-MUTUAL FUNDS
- -------------------------------------------------
INSTITUTIONAL FIXED INCOME PORTFOLIOS
PROSPECTUS
Nicholas-Applegate Mutual Funds is a diversified, open-end management investment
company comprised of a number of diversified investment portfolios, including
the two portfolios ("Portfolios") offered hereby. The Portfolios are generally
offered to institutional investors, high net worth individuals and participants
in certain mutual fund asset allocation programs.
Each Portfolio, unlike many other investment companies which directly acquire
and manage their own portfolios of securities, seeks to achieve its investment
objective by investing all of its assets in a corresponding series ("Fund") of
Nicholas-Applegate Investment Trust, which has the same objective as the
Portfolio. The Funds in turn invest their assets, including those of the
Portfolios, in portfolio securities. Accordingly, the investment experience of
each Portfolio will correspond directly with the investment experience of the
related Fund. Investors should carefully consider this investment approach. See
"Investment Objectives, Policies and Risk Considerations-- Special
Considerations Regarding Master/Feeder Structure" for additional information
regarding this unique structure. There can be no assurance that any Portfolio or
Fund will achieve its investment objective.
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Short-Intermediate Institutional Fixed Income Portfolio seeks primarily to
preserve principal and liquidity, and secondarily to realize a relatively high
level of current income. It invests in the Nicholas-Applegate Short-Intermediate
Fixed Income Fund, which in turn invests primarily in an actively managed
portfolio of investment grade fixed-income securities with a maximum average
dollar-weighted portfolio maturity of five years.
Fully Discretionary Institutional Fixed Income Portfolio seeks to maximize total
return. It invests in the Nicholas-Applegate Fully Discretionary Fixed Income
Fund, which in turn invests primarily in an actively managed portfolio of
investment grade fixed-income securities with an average portfolio duration
between two and eight years.
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Shares of the Portfolios and interests in the Funds are not bank deposits and
are not federally insured by, guaranteed by, obligations of or otherwise
supported by the U.S. Government, the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other governmental agency. Investment in a
Portfolio involves investment risk, including possible loss of the principal
amount invested.
This Prospectus presents information you should know before investing in any
of the Portfolios. It should be retained for future reference. A Statement of
Additional Information for the Portfolios dated August 5, 1996 has been filed
with the Securities and Exchange Commission and is incorporated by reference
into this Prospectus. The Statement may be obtained, without charge, by writing
to the Trust, P.O. Box 82169, San Diego, California 92138-2169, or by calling
(800) 551-8643. Inquiries regarding any of the Portfolios can also be made by
calling (800) 551-8643.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 5, 1996
<PAGE>
NICHOLAS--APPLEGATE MUTUAL FUNDS
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INSTITUTIONAL FIXED INCOME PORTFOLIOS
Short-Intermediate Institutional Fixed Income Portfolio
Fully Discretionary Institutional Fixed Income Portfolio
Table of Contents
Summary of Expenses.................................................3
Prospectus Summary..................................................4
Financial Highlights................................................7
Investment Objectives, Policies and Risk Considerations.............7
Organization and Management........................................12
Purchasing Shares..................................................14
Investor Services..................................................16
Redeeming Shares...................................................18
Dividends, Distributions and Taxes.................................20
General Information................................................21
Appendix:
Investment Policies, Strategies
and Risks.......................................................23
Prior Performance of
Investment Adviser..............................................34
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No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Portfolios or the Distributor. This Prospectus
does not constitute an offer by the Portfolios or the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
2
<PAGE>
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SUMMARY OF EXPENSES
This table is designed to help you understand the costs of investing in each of
the Portfolios. These are based on the estimated expenses of each Portfolio for
its first year of operations, and because each Portfolio invests all of its
assets in a corresponding Fund, each Portfolio's expenses include its
proportionate share of the operating expenses of the corresponding Fund. Actual
expenses may be more or less than those shown.
<TABLE>
<CAPTION>
SHORT- FULLY
INTERMEDIATE DISCRETIONARY
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum sales charge on purchases (as a percentage
of offering price) None None
Sales charge on reinvested dividends None None
Deferred sales charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower) None None
Redemption fee None None
Exchange fee None None
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ANNUAL PORTFOLIO OPERATING EXPENSES AS A
PERCENTAGE OF AVERAGE NET ASSETS:
(after expense deferral)(1)
Management fees 0.30% 0.45%
12b-1 expenses None None
All other expenses (after expense deferral)(1) 0.05% --
Total operating expenses (after expense
deferral)(1) 0.35% 0.45%
</TABLE>
The Board of Trustees of the Trust believes that the aggregate per share
expenses of each Portfolio are no greater than the expenses that the Portfolio
would incur if it retained the services of an investment adviser and the assets
of the Portfolio were invested directly in the types of securities held by the
corresponding Fund. For a detailed description of the expenses of the Portfolios
and the Funds in which they invest, see "Organization and Management."
- ---------------------------
(1)
The Investment Adviser of the Master Trust has agreed to waive or defer its
management fees payable by the Funds, and to absorb other operating expenses
payable by the Funds and the Portfolios, to ensure that the expenses for each
Portfolio (other than interest, taxes, brokerage commissions and other
portfolio transaction expenses, capital expenditures and extraordinary
expenses) will not exceed the following respective percentage of such
Portfolio's average net assets on an annual basis: Short-Intermediate-0.35%;
Fully Discretionary-0.45%. In subsequent years, overall operating expenses for
each Portfolio will not fall below the applicable percentage limitation until
the Investment Adviser has fully recouped fees deferred or expenses paid by the
Investment Adviser under this agreement, as each Portfolio will reimburse the
Investment Adviser when operating expenses (before recoupment) for the
Portfolio are less than the applicable percentage limitation set forth above.
Accordingly, until all such deferred fees or expenses have been recouped by the
Investment Adviser, the Portfolio's expenses will be higher, and their yields
will be lower, than would otherwise be the case. See "Organization and
Management--Expense Limitation." Actual operating expenses for the Portfolios
for the fiscal year ended March 31, 1997 are estimated to be the following
respective percentages of such Portfolios' average net assets (annualized):
Short-Intermediate-1.83%; Fully Discretionary-1.83%. The various operating
expenses of the Portfolios are further described under "Organization and
Management."
Example of Portfolio Expenses. The following table illustrates the expenses that
an investor would pay on a hypothetical $1,000 investment in each of the
Portfolios over various time periods, assuming (1) a 5% annual return and (2)
redemption at the end of each time period. The Portfolios charge no redemption
fees.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
- -----------------------------------------------------------------------------------------
Short-Intermediate Portfolio $ 4 $ 11
Fully Discretionary Portfolio $ 5 $ 14
</TABLE>
- ---------------------------
This Example assumes that all dividends and other distributions are reinvested
and that the percentage amounts listed under the heading "Annual Portfolio
Operating Expenses" in the fee table above remain the same in the years shown.
The Example should not be considered a representation of past or future
expenses, and a Portfolio's actual expenses may be more or less than those
shown. The hypothetical 5% annual return is used for illustrative purposes only
and should not be interpreted as an estimate of a Portfolio's annual return, as
there can be no guarantee of a Portfolio's future performance.
3
<PAGE>
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PROSPECTUS SUMMARY
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end management
investment company comprised of a number of diversified investment portfolios,
including the two Institutional Portfolios ("Portfolios") offered hereby. The
Portfolios are generally offered to institutional investors, high net worth
individuals and participants in certain mutual fund asset allocation programs.
Investment Objectives. The investment objectives of the Portfolios are described
on the front cover of this Prospectus. There can be no assurance that either
Portfolio will achieve its investment objectives. See "Investment Objectives,
Policies and Risk Considerations" and "Appendix: Investment Policies, Strategies
and Risks."
Master/Feeder Structure. The Portfolios seek to achieve their respective
investment objectives by investing all of their assets in corresponding series
("Funds") of Nicholas-Applegate Investment Trust (the "Master Trust"), a
diversified, open-end management investment company. The Funds have the same
investment objectives as the Portfolios which invest in them. The Funds, in
turn, hold investment securities. Although the "master/feeder" structure
employed by the Portfolios to achieve their investment objectives could provide
certain efficiencies and economies of scale, it could also have potential
adverse effects such as those resulting from large-scale redemptions by other
investors of their interests in the Funds, or from the failure by investors of a
Portfolio to approve a change in investment objectives and policies that has
been approved by the investors of the corresponding Fund. There may also be
other investment companies through which you can invest in the Funds which may
have higher or lower fees and expenses than those of the Portfolios. See
"Investment Objectives, Policies and Risk Considerations-Special Considerations
Regarding Master/Feeder Structure."
A Portfolio may cease investing in a corresponding Fund only if the Trust's
Board of Trustees determines that this is in the best interests of the Portfolio
and its investors, and only with the approval of the Portfolio's investors. In
such event the Board of Trustees would consider alternative arrangements such as
investing all of the Portfolio's assets in another investment company with the
same investment objective as the Portfolio or hiring an investment adviser to
manage the Portfolio's assets in accordance with the Portfolio's investment
policies. No assurance exists that satisfactory alternative arrangements would
be available.
Investment Risks and Considerations. Investment risks and other considerations
relevant to the securities in which the Portfolios invest through corresponding
Funds are described under "Investment Objectives, Policies and Risk
Considerations" and in the Appendix-Investment Policies, Strategies and Risks.
They include the following:
Yields on debt obligations depend on a variety of factors, including the general
conditions of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt obligations with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt obligations vary
depending on available yields. An increase in interest rates will generally
reduce the value of such portfolio investments, and a decline in interest rates
will generally increase the value of such portfolio investments. The ability of
a Fund to achieve its investment objective also depends on the continuing
ability of the issuers of the debt securities in which it invests to meet their
obligations for the payment of interest and principal when due.
4
<PAGE>
Each of the Funds is permitted to invest up to 50% of its net assets in zero
coupon securities, which may be subject to greater volatility as a result of
changes in prevailing interest rates than other debt securities.
Investments by the Funds in securities of foreign companies and governments
involve special risks in addition to the usual risks inherent in domestic
investments, including political or economic instability in the country of
issue, the possible imposition of exchange controls or other laws or
restrictions and (in the case of the Fully Discretionary Fund, which may invest
in non-U.S. dollar denominated securities) fluctuations of foreign exchange
rates. Settlement of transactions in foreign markets may be delayed or less
frequent than in the U.S., and foreign governments may withhold taxes from
dividends and interest paid on securities held by the Funds. There is also
likely to be less publicly available information about certain foreign issuers
than is available about U.S. companies, and foreign companies are not generally
subject to uniform financial reporting standards comparable to those applicable
to U.S. companies.
The investment approach of Nicholas-Applegate Capital Management (the
"Investment Adviser") results in above-average portfolio turnover for each Fund.
A high rate of portfolio turnover involves correspondingly greater brokerage
commission expenses, and may also result in the realization and distribution to
shareholders of net capital gains which are taxable to them as ordinary income
for federal tax purposes.
Each of the Funds may effect transactions in futures contracts on securities and
engage in interest rate swap transactions. In addition, the Fully Discretionary
Fund may purchase or write put and call options on securities, effect
transactions in options on futures contracts, and engage in currency hedging
transactions. Although the Funds will generally enter into such transactions for
hedging purposes, they may also enter into such transactions (other than
currency transactions) to enhance potential gain; however, a Fund's net loss
exposure resulting from non-hedging transactions will not exceed 1% of its net
assets at any time. These are derivative instruments, whose value derives from
the value of an underlying security or index. Risks associated with the use of
such instruments include the possibility that the Investment Adviser's forecasts
of interest rates, currency rates of exchange and other factors are not correct;
imperfect correlation between the Fund's hedging technique and the asset or
liability being hedged; default by the other party to the transaction; and
inability to close out a position because of the lack of a liquid market.
Investment in such derivative instruments may not be successful, and may reduce
the returns and increase the volatility of the Funds. See "Appendix: Investment
Policies, Strategies and Risks" in this Prospectus and "Investment Objectives,
Policies and Risks" in the Statement of Additional Information.
Each Fund may invest up to 15% of its net assets in illiquid securities. Each
Fund may enter into repurchase agreements and lend its portfolio securities,
which involve the risk of loss upon the default of the seller or borrower. The
Funds may also borrow money from banks for temporary purposes which, among other
things, may require the Funds to sell portfolio securities to meet interest and
principal payments at an unfavorable time. See "Illiquid Securities,"
"Repurchase Agreements," "Securities Lending," and "Borrowing" in "Appendix:
Investment Policies, Strategies and Risks."
Investment Adviser. The Trust has not retained the services of an investment
adviser for the Portfolios, as the Portfolios seek to achieve their investment
objectives by investing all of their assets in corresponding Funds.
Nicholas-Applegate Capital Management serves as investment adviser to the Funds.
The Investment Adviser has been in the investment advisory business since 1984
and currently manages approximately $30 billion of discretionary assets
(including
5
<PAGE>
more than $12 billion of fixed income securities) for numerous clients,
including employee benefit plans of corporations, public retirement systems and
unions, university endowments, foundations and other institutional investors,
and individuals.
The Investment Adviser is compensated for its services to the Funds in the form
of monthly fees at the following annual rates: for the Short-Intermediate Fund,
0.30% of the first $250 million of the Fund's average net assets and 0.25% of
average net assets in excess of $250 million; for the Fully Discretionary Fund,
0.45% of the first $500 million of the Fund's average net assets, 0.40% of the
next $250 million of average net assets, and 0.35% of average net assets in
excess of $750 million. See "Organization and Management."
Distributor. Nicholas-Applegate Securities (the "Distributor"), an affiliate of
the Investment Adviser, serves as distributor of shares of the Portfolios. The
Portfolios pay no distribution or other fees to the Distributor in connection
with services it provides.
Administrator, Transfer Agent and Custodian. Investment Company Administration
Corporation (the "Administrator") is the administrator for the Trust, with
responsibility for managing the daily business operations of the Portfolios,
subject to the supervision of the Trust's Board of Trustees. It also acts as
administrator for the Master Trust. PNC Bank (the "Custodian") is the custodian
for the Trust and the Master Trust, and State Street Bank and Trust Company (the
"Transfer Agent") is the transfer and dividend disbursing agent for the Trust.
Purchase of Shares. Shares of the Portfolios are generally offered to
institutional investors, high net worth individuals, and participants in certain
mutual fund asset allocation programs. Purchases may be made by check or by
wiring federal funds to the Transfer Agent. Shares are purchased at the next
offering price without any sales charge, after an order is received in proper
form by the Transfer Agent. The minimum initial investment is $250,000 and the
minimum subsequent investment is $10,000. The minimum initial and subsequent
investments are waived for individual participants of qualified retirement plans
and for certain others, and may be waived from time to time by the Distributor
for other investors. Shares of a Portfolio may also be purchased with securities
which are otherwise appropriate for investment by the Portfolio. See "Purchasing
Shares."
Investor Services. The following services are provided to investors of a
Portfolio for their convenience and flexibility: an automatic investment plan;
automatic reinvestment and cross-reinvestment of dividends and capital gains
distributions; an exchange privilege; and automatic withdrawals. See "Investor
Services." Individual participants of qualified retirement plans should direct
inquiries to their plan sponsor or administrator.
Redeeming Shares. Shares of the Portfolios may be redeemed by writing to the
Transfer Agent or by telephone if telephone redemption privileges have been
established. Redemption proceeds will be wired to your bank. Participants of
qualified retirement plans must make redemption requests to the plan sponsor or
administrator. The price received for Portfolio shares redeemed is at the next
determined net asset value after the request is received by the Transfer Agent,
which may be more or less than the purchase price. No contingent deferred sales
charge or other fee is imposed on redemptions. See "Redeeming Shares."
Dividends, Distributions and Taxes. The Portfolios declare and pay monthly
dividends. The Portfolios make distributions at least annually of any net
capital gains. All dividends and distributions will be paid in the form of
additional shares at net asset value unless cash payment is requested.
6
<PAGE>
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FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Ernst & Young, L.L.P.,
independent auditors whose reports thereon were unqualified. This information
should be read in conjunction with the financial statements and notes thereto
which appear in the Trust's 1996 Annual Report to Shareholders incorporated by
<TABLE>
<CAPTION>
reference in the Statement of Additional Information.
<S> <C> <C>
FULLY
SHORT DISCRETIONAL
INTERMEDIATE INSTITUTIONAL
INSTITUTIONAL FIXED
FIXED INCOME
INCOME PORTFOLIO PORTFOLIO
<CAPTION>
8-31-95 to 8-31-95 to
3-31-96* 3-31-96*
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $12.50
Income from investment operations:
Net investment income (deficit) 0.37 0.45
Net realized and unrealized gains on securities 0.29 0.47
------- -------
Total from investment operations 0.66 0.92
Less distributions:
Dividends from net investment income (0.37 ) (0.44 )
Distributions from capital gains -- (0.26)
------- -------
Net asset value, end of period $12.79 $12.72
------- -------
------- -------
TOTAL RETURN: 5.33 % 5.49 %
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $4,726 $4,413
Ratio of expenses to average net assets, after expense reimbursement** 0.35 % 0.45 %
Ratio of expenses to average net assets, before expense reimbursement+** 3.17 % 6.45 %
Ratio of net income to average net assets, after expense reimbursement+** 5.81 % 6.39 %
Ratio of net investment income to average net assets, after expense reimbursement** 4.01 % 2.63 %
Portfolio turnover*** 114.38 % 60.06 %
Average commission rate per share*** -- --
</TABLE>
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*The Portfolios commenced operations on August 31, 1995.
**Annualized
***For the corresponding Fund of the Master Trust
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The investment objectives, policies and risks of each Portfolio are discussed
below and in the "Appendix: Investment Policies, Strategies and Risks".
Special Considerations Regarding Master/Feeder Structure. The Portfolios seek to
achieve their investment objectives by investing all of their assets in
corresponding Funds, which have the same objectives as the Portfolios. The
Funds, in turn, hold investment securities. Accordingly, the investment
experience of each Portfolio will correspond directly with the investment
experience of the related Fund. For a description of the Funds' objectives,
policies, restrictions, management and expenses, see "Investment Objectives,
Policies and Risk Considerations" below, the Appendix and "Organization and
Management." There can be no assurance that any Portfolio or Fund will achieve
its investment objective. Each Portfolio's and Fund's investment objective is a
fundamental policy which may not be changed without the approval of the holders
of a majority of the outstanding shares of the Portfolio or Fund, respectively,
as defined in the Investment Company Act of 1940 (the "Investment Company Act").
Upon any such approval, each Portfolio will provide at least 30 days' written
notice to its investors before any change is made to its or the corresponding
Fund's investment objective.
7
<PAGE>
There are certain risks to the Portfolios related to the use of the
"master/feeder" structure. Such risks include, but are not limited to, the
following: Large-scale redemptions by other investment companies of their
interests in the corresponding Funds, could have adverse effects, such as lack
of portfolio diversity and decreased economies of scale, and could result in the
shareholders of a Portfolio, as the remaining investor in the Fund, bearing all
the operating costs of the Fund and thus experiencing higher pro rata operating
expenses and lower returns than would otherwise be the case. In addition, the
total withdrawal by another investment company as an investor in a Fund will
cause the Fund to terminate automatically in 120 days, unless the corresponding
Portfolio and any other investors in the Fund unanimously agree to continue the
business of the Fund. As the Portfolio is required to submit such matters to a
vote of its shareholders, it will be required to incur the expenses of
shareholder meetings in connection with such withdrawals. If unanimous agreement
is not reached to continue the Fund, the Board of Trustees of the Trust would
need to consider alternative arrangements for the Portfolio, including investing
all of the Portfolio's assets in another investment company with the same
investment objective as the Portfolio or hiring an investment adviser to manage
the Portfolio's assets in accordance with the investment policies described
below and in "Appendix: Investment Policies, Strategies and Risks." The absence
of substantial experience with the master/feeder structure could result in
accounting or other difficulties. Failure by investors of a Portfolio to approve
a change in the investment objective and policies of a Portfolio parallel to a
change that has been approved by the investors of the corresponding Fund would
require the Portfolio to redeem its shares of the Fund; this could result in a
distribution in kind to the Portfolio of the portfolio securities of the Fund
(rather than a cash distribution), causing the Portfolio to incur brokerage fees
or other transaction costs in converting such securities to cash, reducing the
diversification of the Portfolio's investments and adversely affecting its
liquidity. Other shareholders in the Funds may have a greater ownership interest
in the Funds than the Portfolios' interest, and could thus have effective voting
control over the operation of the Funds.
The Trust's Board of Trustees believes that the Portfolios will achieve certain
efficiencies and economies of scale through the "master/feeder" structure, and
that the aggregate expenses of the Portfolios will be less than if the
Portfolios invested directly in the securities held by the Funds. However, other
investment companies that offer their shares to the public also may invest all
or substantially all of their assets in the Funds. Accordingly, there may be
other investment companies through which investors can invest indirectly in the
Funds. The fees charged by such other investment companies may be higher or
lower than those charged by the Portfolios, which may reflect, among other
things, differences in the nature and level of the services and features offered
by such companies to their investors. Information about the availability of
other investment companies that invest in the Funds can be obtained by calling
(800) 551-8643.
A Portfolio may cease investing in a corresponding Fund only if the Board of
Trustees of the Trust determines that such action is in the best interests of
the Portfolio and its investors, and only with the approval of the Portfolio's
investors. In that event, the Board of Trustees would consider alternative
arrangements, including investing all of the Portfolio's assets in another
investment company with the same investment objective as the Portfolio or hiring
an investment adviser to manage the Portfolio's assets in accordance with the
investment policies described below and in "Appendix: Investment Policies,
Strategies and Risks."
8
<PAGE>
Short-Intermediate Institutional Fixed Income Portfolio. The Short-Intermediate
Portfolio seeks primarily to preserve principal and liquidity, and secondarily
to realize a high level of current income. It invests all of its assets in the
Nicholas-Applegate Short-Intermediate Fixed Income Fund, which has the same
investment objective as the Short-Intermediate Portfolio.
The Short-Intermediate Fund seeks to provide a return greater than the return of
one to three-year U.S. Treasury obligations over a full market cycle. The Fund
invests primarily in an actively managed portfolio of investment grade
fixed-income securities. The Fund may invest in a broad range of fixed-income
securities, including bonds, notes, mortgage-backed and asset-backed securities,
issued by U.S. and foreign corporations or other entities, and sovereign debt
securities of U.S. or foreign governments or their agencies, authorities,
instrumentalities or sponsored enterprises. The Fund will invest only in
obligations payable in U.S. dollars. The Fund may purchase securities that pay
interest on a fixed, variable, floating or deferred basis. Under normal market
conditions, at least 90% of the Fund's total assets will be invested in such
securities. The Fund may acquire over-the-counter and illiquid securities, and
may utilize techniques such as when-issued securities and firm commitment
agreements, forward roll transactions, swap transactions, futures contracts,
securities lending, and borrowing. See "Appendix: Investment Policies,
Strategies and Risks" and the Statement of Additional Information for a
description of the Fund's investment securities and techniques.
The average dollar weighted maturity of the Short-Intermediate Fund's portfolio
will be adjusted as the Investment Adviser determines market conditions warrant.
The maximum average dollar-weighted portfolio maturity of the Fund's portfolio
will be five years and under normal circumstances the minimum average
dollar-weighted portfolio maturity will be two years. The Fund is not
constrained as to the maximum maturity of its individual portfolio securities.
However, the Fund will normally invest in securities with final maturities,
average lives or interest rate reset frequencies of ten years or less.
The Short-Intermediate Fund may adopt a temporary defensive position during
adverse market conditions by investing principally in high quality money market
instruments, including short-term U.S. Government securities, negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements.
The debt securities in which the Short-Intermediate Fund may invest will be
rated at the time of purchase "Baa" or higher by Moody's Investor Services, Inc.
("Moody's"), "BBB" or higher by Standard & Poor's Corporation ("S&P"), or
equivalent ratings by other recognized rating agencies, or may be unrated if
determined by the Investment Adviser to be of comparable quality. These
securities are of investment grade, which means that their issuers are believed
to have adequate capacity to pay interest and repay principal, although certain
of such securities in the lower grades have speculative characteristics, and
changes in economic conditions or other circumstances may be more likely to lead
to a weakened capacity to pay interest and principal than would be the case with
higher rated securities. The Investment Adviser anticipates that the average
dollar-weighted credit quality of the securities in the Fund's portfolio will be
Aa or AA according to Moody's and S&P's ratings, respectively, or comparable
credit quality as determined by the Investment Adviser. In the case of a
security that is rated differently by one or more rating services, the higher
rating will be used in computing the Fund's average dollar-weighted credit
quality. If the rating of a security held in the Fund's portfolio is downgraded
below investment grade by a rating service (or determined to have fallen below
investment grade by the Investment Adviser in the case of unrated
9
<PAGE>
securities), such action will be considered by the Investment Adviser in its
evaluation of the overall investment merits of the security, but will not
necessarily result in the sale of the security.
The decision to invest assets of the Short-Intermediate Fund in any particular
debt security will be based on such factors as the Investment Adviser's analysis
of the effect of the yield to maturity of the security on the average yield to
maturity of the total debt security portfolio of the Fund, the Investment
Adviser's assessment of the credit quality of the issuer and other factors the
Investment Adviser deems relevant. In order to achieve the Fund's investment
objectives, the Investment Adviser will seek to add value by moving portfolio
investments among market sectors (e.g., U.S. Treasury securities, corporate
securities and mortgage-backed securities), positioning investments in the most
attractive maturities along the yield curve, selecting undervalued investments
in order to take advantage of lower prices and higher yields, and varying the
average maturity of the Fund's portfolio to reflect interest rate forecasts.
There can be no assurance that use of these techniques will be successful.
Fully Discretionary Institutional Fixed Income Portfolio. The Fully
Discretionary Portfolio seeks to maximize total return. It invests all of its
assets in the Nicholas-Applegate Fully Discretionary Income Fund, which has the
same investment objective as the Fully Discretionary Portfolio.
The Fully Discretionary Fund seeks to provide a total return greater than the
return of an index of either government/corporate debt or
government/corporate/mortgage debt over a full market cycle. The Fund invests
primarily in an actively managed portfolio of investment grade fixed-income
securities. The Fund may invest in a broad range of fixed-income securities,
including bonds, notes, and mortgage-backed and asset-backed securities issued
by U.S. and foreign corporations or other entities, and sovereign debt
securities of U.S. or foreign governments or their agencies, authorities,
instrumentalities or sponsored enterprises. The Fund may purchase securities
that pay interest on a fixed, variable, or floating basis. Under normal market
conditions, at least 65% of the Fund's total assets will be invested in such
securities. The Fund may acquire over-the-counter and illiquid securities, and
may utilize techniques such as when-issued securities and firm commitment
agreements, forward roll transactions, put and call options on securities, swap
transactions, futures contracts and options, securities lending, and borrowing.
See "Appendix: Investment Policies, Strategies and Risks" and the Statement of
Additional Information for a description of the Fund's investment securities and
techniques.
Although the Fully Discretionary Fund will invest primarily in obligations
payable in U.S. dollars, up to 30% of the Fund's portfolio assets may be payable
in other currencies. Countries in which non-dollar denominated investments may
be made will include Australia, Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United Kingdom.
The Fund may or may not hedge against the currency risks associated with such
investments.
The average duration of the Fund's portfolio will be adjusted as the Investment
Adviser determines market conditions warrant. The average portfolio duration of
the Fund will range from two to eight years. The Fund is not constrained as to
the maximum maturity of its individual portfolio securities. However, its
duration policy will limit the amount of longer-term investments in its
portfolio. See "Appendix: Investment Policies, Strategies and Risks" for an
explanation of "duration."
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The Fully Discretionary Fund may adopt a temporary defensive position during
adverse market conditions by investing principally in high quality money market
instruments, including short-term U.S. Government securities, negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements.
The debt securities in which the Fully Discretionary Fund may invest will be
rated at the time of purchase investment grade by Moody's, S&P or other
recognized rating agencies, or may be unrated if determined by the Investment
Adviser to be of comparable quality. The Investment Adviser anticipates that the
average dollar-weighted credit quality of the securities in the Fund's portfolio
will be Aa or AA according to Moody's and S&P's ratings, respectively, or
comparable credit quality as determined by the Investment Adviser. The policies
of the Fund regarding determination of ratings and the disposition of downgraded
securities are the same as those of the Short-Intermediate Fund. See
"Short-Intermediate Institutional Fixed Income Portfolio" above.
The decision to invest assets of the Fully Discretionary Fund in any particular
debt security will be based on such factors as the Investment Adviser's analysis
of the effect of the yield to maturity of the security on the average yield to
maturity of the total debt security portfolio of the Fund, the Investment
Adviser's assessment of the credit quality of the issuer and other factors the
Investment Adviser deems relevant. In order to achieve the Fund's investment
objectives, the Investment Adviser will seek to add value by varying the average
duration of the Fund's portfolio to reflect interest rate forecasts, moving
portfolio investments among market sectors (e.g., non-dollar securities, U.S.
Treasury securities, corporate securities and mortgage-backed securities),
positioning investments in the most attractive maturities along the yield curve,
and selecting undervalued investments in order to take advantage of lower prices
and higher yields. There can be no assurance that use of these techniques will
be successful.
Investment Policies, Strategies and Risks. The Appendix and Statement of
Additional Information describe certain investment securities and techniques of
the Funds, and the associated risks. These include short-term investments in
cash and cash equivalents; investment in securities issued or guaranteed by the
U.S. Government or its agencies and instrumentalities; commercial paper of
domestic and foreign entities; municipal securities; zero coupon securities;
floating and variable rate demand notes and bonds; non-convertible corporate
debt securities; Eurodollar and Yankee Dollar instruments; depository receipts;
mortgage-backed securities; asset-backed securities; over-the-counter
securities; when-issued and firm commitment agreements; roll transactions;
foreign exchange contracts; put and call options; futures contracts and related
options; interest rate and currency swaps; repurchase agreements; illiquid
securities; securities lending; and borrowing.
Investment Restrictions. Each Portfolio and Fund is subject to certain
investment restrictions which constitute fundamental policies. Fundamental
policies may not be changed without the approval of the holders of a majority of
the outstanding shares of the affected Portfolio or Fund, respectively, as
defined in the Investment Company Act. An investment policy or restriction which
is not described as fundamental in this Prospectus or the Statement of
Additional Information may be changed or modified by the Board of Trustees of
the Trust or Master Trust, as the case may be, without shareholder approval.
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The investment objective of each Fund and Portfolio is a fundamental policy.
Certain of the investment restrictions which are fundamental policies are set
forth below. Additional investment restrictions are discussed in the Appendix
and Statement of Additional Information.
1. No Portfolio or Fund may invest more than 5% of its total assets in the
securities of any one issuer. However, up to 25% of a Portfolio's or
Fund's total assets may be invested without regard to this limitation, and
this limitation does not apply to investments in securities of the U.S.
Government or its agencies and instrumentalities.
2. No Portfolio or Fund may invest 25% or more of its total assets in any one
particular industry; however, this restriction does not apply to the
securities of the U.S. Government, its agencies and instrumentalities.
3. No Portfolio or Fund may make loans of its portfolio securities in an
aggregate amount exceeding 30% of the value of its total assets, or borrow
money (except from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions and in an aggregate amount
not exceeding 20% of the value of its total assets).
4. No Portfolio or Fund may invest more than 15% of its net assets in
illiquid securities.
The investment restrictions described above do not apply to an investment by a
Portfolio of all of its assets in a corresponding Fund.
Portfolio Turnover. The Investment Adviser's investment approach results in
above-average portfolio turnover for each Fund as the Investment Adviser sells
portfolio securities when it believes the reasons for their initial purchase are
no longer valid or when it believes that the sale of a security owned by a Fund
and the purchase of another security of better value can enhance principal or
increase income. A security may also be sold to avoid a prospective decline in
market value or purchased in anticipation of a market rise. Although it is not
possible to predict future portfolio turnover rates accurately, and such rates
may vary greatly from year to year, the Investment Adviser anticipates that the
annual portfolio turnover rate for each Fund may be up to 200%, which is
substantially greater than that of many other investment companies. A high rate
of portfolio turnover should not result in the Funds paying greater brokerage
commission expenses, as most transactions in debt securities are effected with
dealers on a principal basis. Such securities, however, are subject to a mark-up
by the dealers. High portfolio turnover (100% or more) may also result in the
realization of substantial net capital gains, and any distributions derived from
such gains may be ordinary income for federal tax purposes.
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ORGANIZATION AND MANAGEMENT
Organization. Each Portfolio is a series of Nicholas-Applegate Mutual Funds, a
Delaware business trust. The Board of Trustees of the Trust, in addition to
reviewing the actions of the Trust's Administrator and Distributor, as set forth
below, decides upon matters of general policy with respect to each Portfolio.
See "General Information". The trustees and officers of the Trust and of the
Master Trust are described in the Statement of Additional Information. None of
the disinterested trustees of the Trust are the same individuals as the
disinterested trustees of the Master Trust.
Investment Adviser. The Trust has not retained the services of an investment
adviser for the Portfolios, as the Portfolios seek to achieve their investment
objectives by investing all of their assets in corresponding Funds.
Nicholas-Applegate Capital Management, 600 West Broadway,
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30th Floor, San Diego, California 92101, serves as the Investment Adviser to the
Funds. The Investment Adviser currently manages approximately $30 billion of
discretionary assets (including over $12 billion of fixed income assets) for
numerous clients, including employee benefit plans of corporations, public
retirement systems and unions, university endowments, foundations and other
institutional investors, and individuals. The Investment Adviser was organized
in 1984 as a California limited partnership. Its general partner is
Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership controlled by Arthur E. Nicholas. He and 13 other partners manage a
staff of approximately 325 employees.
As compensation for the services it provides, the Investment Adviser receives a
monthly fee at the following annual rates: for the Short-Intermediate Fund,
0.30% of the first $250 million of the Fund's average net assets and 0.25% of
average net assets in excess of $250 million; for the Fully Discretionary Fund,
0.45% of the first $500 million of the Fund's average net assets, 0.40% of the
next $250 million of average net assets, and 0.35% of average net assets in
excess of $750 million.
For the fiscal year ended March 31, 1996, the Investment Adviser received fees
and expense recoupments from the Funds' and Portfolios equal to the following
percentages for the Portfolios' respective average net assets, after the fee
deferrals and expense reimbursements referred to under "Expense Limitations";
Short-Intermediate Portfolio--(1.47%); Fully Discretionary Portfolio--(3.22%).
The Funds are managed under the general supervision of John D. Wylie, the Chief
Investment Officer-Investor Services Group of the Investment Adviser. The
Investment Adviser's fixed income management team headed by Fred S. Robertson
III, the Chief Investment Officer-Fixed Income of the Investment Adviser, will
be primarily responsible for the Investment Adviser's day-to-day management of
the Funds' portfolios. Mr. Robertson has managed institutional accounts for the
Investment Adviser since May 1995; for more than five years prior to May 1995,
he managed institutional accounts for Criterion Investment Management Company.
Mr. Wylie has managed institutional accounts for the Investment Adviser for more
than the last five years.
For historical performance data regarding institutional private accounts managed
by the Investment Adviser that have investment objectives, policies, strategies
and risks substantially similar to those of the Portfolios, see "Appendix: Prior
Performance of Investment Adviser."
Administrator. Investment Company Administration Corporation, a Delaware
corporation, is the Administrator of each Portfolio. Pursuant to an
Administration Agreement with the Trust, and subject to the supervision of the
Board of Trustees of the Trust, the Administrator supervises the overall
administration of the Trust. Its responsibilities include preparing and filing
all documents required for compliance by the Trust with applicable laws and
regulations, arranging for the maintenance of books and records of the Trust and
supervision of other organizations that provide services to the Trust. Certain
officers of the Trust are also provided by the Administrator. For the services
it provides to the Trust, the Administrator receives an annual fee of between
$5,000 and $35,000 for each of the groups of portfolios of the Trust investing
in the various series of the Master Trust; the fee is allocated among various
series of the Trust, including the Portfolios, in accordance with relative net
asset values. The Administrator provides similar services as the administrator
of the Master Trust, subject to the supervision of its Board of Trustees, and is
compensated separately for the services rendered to each Fund at an annual rate
of approximately 0.015% of the average daily net assets of the Fund.
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Expense Limitation. To limit the expenses of each Portfolio, the Investment
Adviser has agreed to defer its management fees payable by the Funds, and to
absorb the other operating expenses payable by the Funds and the Portfolios, to
ensure that the expenses of each Portfolio (excluding interest, taxes, brokerage
commissions and other portfolio transaction expenses, capital expenditures and
extraordinary expenses, but including such Portfolio's proportionate share of
the corresponding Fund's similar operating expenses) do not exceed the following
respective percentage of such Portfolio's average net assets on an annual basis
or any lower expense limitation imposed by any state during any fiscal period:
Short-Intermediate Fund-- 0.35%; Fully Discretionary Fund--0.45%. Each Portfolio
will reimburse the Investment Adviser for fees deferred or other expenses paid
by the Investment Adviser pursuant to this agreement in later years in which
operating expenses for the Portfolio are less than the applicable percentage
limitation set forth above for any such year. No interest, carrying or finance
charge will be paid by a Portfolio with respect to any amounts representing fees
deferred or other expenses paid by the Investment Adviser. In addition, no
Portfolio or Fund will be required to repay any unreimbursed amounts to the
Investment Adviser upon termination or non-renewal of its Investment Advisory
Agreement with the Master Trust.
Distributor. Nicholas-Applegate Securities, 600 West Broadway, 30th Floor, San
Diego, California 92101, a California limited partnership, serves as the
Distributor of shares of each Portfolio. The general partner of the Distributor
is Nicholas-Applegate Capital Management Holdings, L.P. and its limited partner
is the Investment Adviser.
Custodian and Transfer and Dividend Disbursing Agent. PNC Bank, Airport Business
Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania, 19113,
serves as Custodian for the Portfolios and the Funds. PFPC Inc., an affiliate of
the Custodian, provides accounting services to the Portfolios and the Funds.
State Street Bank and Trust Company, 2 Heritage Drive, 5th Floor, North Quincy,
Massachusetts 02171, is the Transfer Agent and the Dividend Disbursing Agent for
the Portfolios.
Portfolio Transactions and Brokerage. The Investment Adviser is responsible for
the Funds' portfolio transactions and the allocation of the brokerage business.
In executing such transactions, the Investment Adviser seeks to obtain the best
price and execution for the Funds. Subject to obtaining the best price and
execution, the Investment Adviser may effect transactions through brokers who
sell shares of the Portfolios or provide research services to the Investment
Adviser.
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PURCHASING SHARES
How to Purchase Shares. Shares of the Portfolios are offered to institutional
investors, high net worth individuals and participants in mutual fund asset
allocation programs sponsored by certain broker-dealers. Shares of the
Portfolios are also offered to former limited partners and participants of
certain investment partnerships and pooled trusts previously managed by the
Investment Adviser (the "former partners"); to partners, officers and employees
of the Investment Adviser and Distributor and their immediate family members; to
Trustees and officers of the Trust and the Master Trust and their immediate
family members; and to certain other persons determined from time to time by the
Distributor.
Investments by individual participants of qualified retirement plans are made
through their plan sponsor or administrator, who is responsible for transmitting
all orders for the purchase, redemption and exchange of Portfolio shares. The
availability of an investment by a plan
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participant in the Portfolios, and the procedures for investing, depend upon the
provisions of the qualified retirement plan and whether the plan sponsor or
administrator has contracted with the Trust or the Transfer Agent for special
processing services, including subaccounting. Other institutional investors and
eligible purchasers must arrange for services through the Transfer Agent or
Distributor by calling (800) 551-8043.
Shares of the Portfolios may be purchased at net asset value without a sales
charge. The minimum initial investment is $250,000 and the minimum subsequent
investment is $10,000. The minimum initial and subsequent investments are waived
for individual participants of qualified retirement plans and for the former
partners and trust participants described above, and may be waived from time to
time by the Distributor for other investors (but not below $10,000). Shares of a
Portfolio may also be purchased with securities which are otherwise appropriate
for investment by the Portfolio. Shares will be purchased for a participant of a
qualified retirement plan only upon receipt by the plan's recordkeeper of the
participant's funds accompanied by the information necessary to determine the
proper share allocation for the participant.
An account may be opened by completing and signing an account application and
sending it to the address indicated on the application. Account applications can
be obtained from the Distributor or Transfer Agent. Individual participants of
qualified retirement plans can obtain an account application from their plan
sponsor or administrator. Plan sponsors and administrators will be responsible
for forwarding to the Transfer Agent all relevant information and account
applications for plan participants.
Purchases of shares of the Portfolios can be made by check or by wiring federal
funds to the Transfer Agent. Checks should be in U.S. dollars and made payable
to Nicholas-Applegate Mutual Funds or, in the case of a retirement account, the
custodian or trustee. Third party checks will not be accepted. Checks should be
sent to the Transfer Agent, State Street Bank and Trust Company, P.O. Box 8326,
Boston Massachusetts 02266-8326, Attention: Nicholas-Applegate Mutual Funds.
Please specify the name of the Portfolio, the account number assigned by the
Transfer Agent, and your name. See "Purchase by Wire" below for wiring
instructions.
Purchase by Wire. Purchases of shares of the Portfolios can be made by wiring
federal funds to the Transfer Agent. Before wiring federal funds, you must first
telephone the Transfer Agent at (800) 551-8043 (toll-free) between the hours of
8:00 A.M. and 4:00 P.M. (Eastern time) on a day when the New York Stock Exchange
is open for normal trading to receive an account number. The following
information will be requested: your name, address, tax identification number,
dividend distribution election, amount being wired and wiring bank. Instructions
should then be given by you to your bank to transfer funds by wire to the
Portfolio's Transfer Agent, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts, 02110, ABA No. 011000028, DDA No. 9904-645-0
Attention: Nicholas-Applegate Mutual Funds, specifying on the wire the name of
the Portfolio, the account number assigned by the Transfer Agent and your name.
If you arrange for receipt by the Transfer Agent of federal funds prior to close
of trading (currently 4:00 P.M., Eastern time) of the New York Stock Exchange on
a day when the Exchange is open for normal trading, you may purchase shares of
the Portfolio as of that day. Your bank is likely to charge you a fee for wire
transfers.
Subsequent purchases by wire may be made at any time by calling the Transfer
Agent and wiring federal funds as outlined above.
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Individual participants of qualified retirement plans should purchase Portfolio
shares through their plan sponsor or administrator who is responsible for
forwarding payment to the Transfer Agent.
Share Price. Shares are purchased at the next offering price after the order is
received in proper form by the Transfer Agent or a sub-transfer agent. An order
in proper form must include all correct and complete information, documents and
signatures required to process your purchase, as well as a check or bank wire
payment properly drawn and collectable. For purchases by a qualified retirement
plan, an order in proper form is defined as receipt of funds and the information
necessary to determine the proper share allocation for each participant. The
price per share is its net asset value, which is determined as of the close of
trading of the New York Stock Exchange on each day the Exchange is open for
normal trading. Orders received before 4:00 P.M. (Eastern time) on a day when
the Exchange is open for normal trading will be processed as of the close of
trading on that day. Otherwise, processing will occur on the next business day.
To determine a Portfolio's net asset value per share, the current value of the
Portfolio's total assets, less all liabilities, is divided by the total number
of shares outstanding, and the result is rounded to the nearer cent.
Retirement Plans. You may invest in each Portfolio through various retirement
plans including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans, 457
plans, and all qualified retirement plans (including 401(k) plans). For further
information about any of the plans, agreements, applications and annual fees,
contact the Distributor or your dealer. To determine which retirement plan is
appropriate for you, please consult your tax adviser.
Other Portfolios. Currently, the Trust has thirteen Institutional Portfolios.
Two fixed-income Institutional Portfolios are offered pursuant to this
Prospectus; eleven other domestic and global Institutional Portfolios are
offered pursuant to separate prospectuses which can be obtained by calling (800)
551-8643. The Distributor also offers shares of other portfolios of the Trust
which invest in the same Funds of the Master Trust as the Portfolios. These
other portfolios have different sales charges and other expenses than the
Portfolios, which may affect their performance. Information about these other
portfolios can be obtained from your dealer or by calling (800) 551-8045.
Other Purchase Information. The Portfolios reserve the right to reject any
purchase order or to suspend or modify the continuous offering of their shares.
Purchases of Portfolio shares will be made in full and fractional shares. In the
interest of economy and convenience, certificates for shares will generally not
be issued.
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INVESTOR SERVICES
Automatic Investment Plan. Investors may make regular monthly or quarterly
investments in the Portfolio through automatic withdrawals of specified amounts
from their bank account once an automatic investment plan is established.
Individual participants of qualified retirement plans may make regular
investments in the Portfolio through payroll deductions in accordance with
procedures adopted by the plan sponsor or administrator. Further details about
this service and an application form are available from the Transfer Agent or
from your plan sponsor or administrator.
Automatic Reinvestment. Dividends and capital gain distributions are reinvested
in additional shares at no sales charge unless you indicate otherwise on the
account application. You may elect to have dividends and capital gain
distributions paid in cash.
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Cross-Reinvestment. You may cross-reinvest dividends or dividends and capital
gain distributions paid by one Portfolio into shares of any other Institutional
Portfolio, subject to conditions outlined in the Statement of Additional
Information and the applicable provisions of the qualified retirement plan.
Exchange Privilege. Shares of a Portfolio may be exchanged into shares of any
other Institutional Portfolio by writing to the Transfer Agent, State Street
Bank and Trust Company, Attention: Nicholas-Applegate Mutual Funds, P.O. Box
8326, Boston, Massachusetts 02266-8326. Please specify the name of the
applicable series, the number of shares or dollar amount to be exchanged and
your name and account number. Shares may also be exchanged by telephoning the
Transfer Agent at (800) 551-8043 or by sending the Transfer Agent a facsimile at
(617) 774-2651, between the hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a
day when the New York Stock Exchange is open for normal trading (see "Telephone
Privilege" below). The Trust's exchange privilege is not intended to afford
shareholders a way to speculate on short-term market movements. Accordingly the
Trust reserves the right to limit the number of exchanges an investor or
participant may make in any year, to avoid excessive Portfolio expenses.
Individual participants of qualified retirement plans may exchange shares
(depending upon the provisions of the plan) by written or telephone request
through the plan sponsor or administrator. Such participants may exchange shares
only for shares of other Institutional Portfolios that are included in their
plan. In addition, the exchange privilege may not be available to investors who
are eligible to purchase shares of a Portfolio as a result of agreements between
the Distributor and certain broker-dealers, financial planners and similar
institutions.
Before effecting an exchange, you should obtain the currently effective
prospectus of the series into which the exchange is to be made. All exchanges
will be made on the basis of the relative net asset values of the two series
next determined after a completed request is received. Exchange purchases are
subject to the minimum investment requirements of the series being purchased. An
exchange will be treated as a redemption and purchase for tax purposes.
Telephone Privilege. Investors may exchange or redeem shares by telephone if
they have elected the telephone privilege on their account applications.
Participants in qualified retirement plans may make telephone requests only
through their plan sponsor or administrator and only if such service is offered
under the plan. Investors should realize that by electing the telephone
privilege, they may be giving up a measure of security that they may have if
they were to exchange or redeem their shares in writing. Furthermore, in periods
of severe market or economic conditions, telephone exchanges or redemptions may
be difficult to implement, in which case investors should mail or send by
overnight delivery a written exchange or redemption request to the Transfer
Agent. Overnight deliveries should be sent to the Transfer Agent, Attention:
Nicholas-Applegate Mutual Funds, 2 Heritage Drive, 7th Floor, North Quincy,
Massachusetts 02171. Requests for telephone exchanges or redemptions received
before 4:00 P.M. (Eastern time) on a day when the New York Stock Exchange is
open for normal trading will be processed as of the close of trading on that
day. Otherwise, processing will occur on the next business day. All exchanges or
redemptions will be made on the basis of the relative net asset values of the
two series next determined after a completed request is received.
The Trust will employ procedures designed to provide reasonable assurance that
instructions communicated by telephone are genuine and, if it does not do so, it
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures employed by the Trust
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include requiring personal identification by account number and social security
number, tape recording of telephone instructions, and providing written
confirmation of transactions. The Trust reserves the right to refuse a telephone
exchange or redemption request if it believes, for example, that the person
making the request is neither the record owner of the shares being exchanged or
redeemed nor otherwise authorized by the investor to request the exchange or
redemption. Investors will be promptly notified of any refused request for a
telephone exchange or redemption. No Portfolio or its agents will be liable for
any loss, liability or cost which results from acting upon instructions of a
person reasonably believed to be an investor with respect to the telephone
privilege.
Automatic Withdrawal Plan. An automatic withdrawal plan may be established by an
investor or by a qualified retirement plan sponsor or administrator for its
participants subject to the requirements of the plan and applicable Federal law.
Individual participants of qualified retirement plans must establish automatic
withdrawal plans with the plan sponsor or administrator rather than the Trust.
Automatic withdrawals of $250 or more may be made on a monthly, quarterly,
semi-annual or annual basis if you have an account of at least $15,000 when the
automatic withdrawal plan begins. Withdrawal proceeds will normally be received
prior to the end of the period designated. All income dividends and capital gain
distributions on shares under the Automatic Withdrawal Plan must be reinvested
in additional shares of the Portfolio. For the protection of investors and the
Trust, wiring instructions must be on file prior to executing any request for
the wire transfer of automatic withdrawal proceeds.
Account Statements. An account is opened in accordance with applicable
registration instructions. Transactions in the account, such as additional
investments and dividend reinvestments, will be reflected on regular
confirmation statements from the Transfer Agent (for qualified retirement plans,
such statements will be provided by the plan sponsor or administrator).
Reports to Investors. Each Portfolio will send its investors annual and
semi-annual reports. The financial statements appearing in annual reports will
be audited by independent accountants. In order to reduce duplicate mailing and
printing expenses, the Portfolios may provide one annual and semi-annual report
and annual prospectus per household. In addition, quarterly unaudited financial
data are available from the Portfolios upon request.
Investor Inquiries. Investor inquiries should be addressed to the Trust, P.O.
Box 82169, San Diego, California 92138-2169, or by telephone, at (800) 551-8643
(toll free). Individual participants of qualified retirement plans should direct
inquiries to their plan sponsor or administrator.
The services referred to above are available only in states where the Portfolio
to be purchased may be legally offered and may be terminated or modified at any
time upon 60 days' written notice. Investors seeking to add to, change or cancel
their selection of available services should contact their plan administrator or
sponsor, or the Transfer Agent at the address and telephone number provided
above.
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REDEEMING SHARES
How to Redeem Shares. Shares of a Portfolio may be redeemed by writing to the
Transfer Agent, State Street Bank and Trust Company, Attention:
Nicholas-Applegate Mutual Funds , P.O. Box 8326, Boston, Massachusetts
02266-8326. Redemptions by participants in qualified retirement plans must be
made in writing to the plan sponsor or administrator rather than the
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Trust. Please specify the name of the Portfolio, the number of shares or dollar
amount to be sold and your name and account number. The price received for the
shares redeemed is at the next determined net asset value for the Portfolio
shares after the redemption request is received by the Transfer Agent. No charge
will be imposed by the Trust or the Transfer Agent for redemptions.
The signature on a redemption request must be exactly as names appear on the
Portfolio's account records, and the request must be signed by the minimum
number of persons designated on the account application that are required to
effect a redemption. Requests by participants of qualified retirement plans must
include all other signatures required by the plan and applicable Federal law.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. If the proceeds of the redemption exceed
$50,000, are to be paid to a person other than the record owner, are to be sent
to an address other than the address on the Transfer Agent's records, or are to
be paid to a corporation, partnership, trust or fiduciary, the signature(s) on
the redemption request may be required to be guaranteed by an "eligible
guarantor", which includes a bank or savings and loan association that is
federally insured or a member firm of a national securities exchange.
Redemptions by Telephone. If an election is made on the account application (or
subsequently in writing), redemptions of shares may be requested by contacting
the Transfer Agent by telephone at (800) 551-8043 or by facsimile at (617)
774-2651 between the hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading. Investors should
state the name of the Portfolio, the number of shares or dollar amount to be
sold and their name and account number. Participants of qualified retirement
plans may make telephonic or facsimile redemption requests through their plan
sponsor or administrator, provided that such service is offered under the plan
and satisfactory arrangements have been made with the Transfer Agent. Redemption
requests received by the Transfer Agent before 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading will be processed
that day. Otherwise, processing will occur on the next business day. See
"Shareholder Services--Telephone Privilege" above.
Payment for shares presented for redemption will ordinarily be wired to your
bank one business day after redemption is requested, but may take up to seven
days after receipt by the Transfer Agent of a written or telephonic redemption
request except as indicated below. Payment for redemption of recently purchased
shares will be delayed until the Transfer Agent has been advised that the
purchase check has been honored, up to 15 calendar days from the time of receipt
of the purchase check by the Transfer Agent. Such delay may be avoided by
purchasing shares by wire or by certified or official bank checks. Payment may
be postponed or the right of redemption suspended at times when the New York
Stock Exchange is closed for other than customary weekends and holidays, when
trading on such Exchange is restricted, when an emergency exists as a result of
which disposal by a Portfolio of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Portfolio fairly to
determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Involuntary Redemption. In order to reduce expenses of a Portfolio, the Trust
may redeem all of the shares of any investor whose account has a net asset value
of less than $10,000 due to
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redemptions other than a shareholder who is a participant in a qualified
retirement plan. The Trust will give such investors 60 days' prior written
notice in which to purchase sufficient additional shares to avoid such
redemption.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
The Trust intends to qualify each Portfolio as a regulated investment company
under the Internal Revenue Code. Accordingly, the Portfolios will not be subject
to federal income taxes on its net investment income and capital gains, if any,
that they distribute to their investors. All dividends out of net investment
income, together with distributions of short-term capital gains, will be taxable
as ordinary income to the investors whether or not reinvested. Any net long-term
capital gains distributed to investors will be taxable as such to the investors,
whether or not reinvested and regardless of the length of time an investor has
owned his shares.
The Portfolios declare and pay monthly dividends of net investment income. The
Portfolios make distributions at least annually of their net capital gains, if
any. In determining amounts of capital gains to be distributed by a Portfolio,
any capital loss carryovers from prior years will be offset against its capital
gains. Under U.S. Treasury Regulations, the Portfolios are required to withhold
and remit to the U.S. Treasury 31% of the dividends, capital gains and
redemption proceeds on the accounts of those investors who fail to furnish their
correct tax identification numbers on IRS Form W-9 (or IRS Form W-8, in the case
of certain foreign investors) with the required certifications regarding the
investor's status under the federal income tax law or who are subject to backup
withholding for failure to include payments of interest or dividends on their
returns. Notwithstanding the foregoing, dividends of net income and short-term
capital gains to a foreign investor will generally be subject to U.S.
withholding at the rate of 30% (or lower treaty rate).
The Trust may elect to "pass through" to a Portfolio's shareholders the amount
of foreign income taxes paid by the Portfolio. The Trust will make such an
election only if it is deemed to be in the best interests of the shareholders.
If this election is made, shareholders of the Portfolio will be required to
include in their gross income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat their pro rata share of
foreign taxes as either an itemized deduction or a foreign credit against U.S.
income taxes (but not both) on their tax return.
The Funds are not required to pay federal income taxes on their net investment
income and capital gains, as they are treated as partnerships for tax purposes.
Any interest, dividends and gains or losses of a Fund will be deemed to have
been "passed through" to the corresponding Portfolio and other investors in the
Fund, regardless of whether such interest, dividends or gains have been
distributed by the Fund or losses have been realized by the Portfolio and such
other investors.
Investors should consult their own tax advisers regarding specific questions as
to federal, state or local taxes. See "Taxes" in the Statement of Additional
Information.
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GENERAL INFORMATION
Performance Information. From time to time the Trust may advertise each
Portfolio's total return and yield. These figures are based on historical
earnings and are not intended to indicate future performance. Total return shows
how much an investment in the Portfolio would have increased (or decreased) over
a specified period of time (I.E., one, five or ten years or since inception of
the Portfolio) assuming that all distributions and dividends by the Trust to
investors of the Portfolio were reinvested on the reinvestment dates during the
period. Total return does not take into account any federal or state income
taxes which may be payable by the investor. Yield will be calculated on a 30-day
period pursuant to a formula prescribed by the Securities and Exchange
Commission (the "Commission"). The Trust also may include comparative
performance information in advertising or marketing Portfolio shares. Such
performance information may include data from Lipper Analytical Services, Inc.,
Morningstar Inc., other industry publications, business periodicals, rating
services and market indices. See "Appendix: Prior Performance," and "Performance
Information" in the Statement of Additional Information.
Further information about the performance of the Portfolios will be contained in
the Trust's Annual Reports to Shareholders, which may be obtained without charge
by calling (800) 551-8643.
Description of Shares. The Portfolios are series of Nicholas-Applegate Mutual
Funds, a diversified, open-end management investment company. The Trust was
organized in December 1992 as a Delaware business trust. The Trust is authorized
to issue an unlimited number of shares of each Portfolio. Shares of a Portfolio,
when issued, are fully paid, nonassessable, fully transferable and redeemable at
the option of the holder. Shares of a Portfolio are also redeemable at the
option of the Trust under certain circumstances. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of a Portfolio is entitled to its portion of all of the Portfolio's assets after
all debts and expenses of the Portfolio have been paid. Pursuant to the Trust's
Declaration of Trust, the Board of Trustees of the Trust may authorize the
creation of additional series, and classes within series, with such preferences,
privileges, limitations and voting and dividend rights as the Board may
determine.
Investors of the Portfolios are entitled to one vote for each full share held
and fractional votes for fractional shares held, and will vote by series except
as otherwise required by law or when the Board of Trustees of the Trust
determines that a matter to be voted upon affects only the interests of
investors of a particular series. Shares of the Trust do not have cumulative
voting rights for the election of Trustees. The Trust does not intend to hold
annual meetings of its investors unless otherwise required by law. The Trust
will not be required to hold meetings of investors unless the election of
Trustees or any other matter is required to be acted on by investors under the
Investment Company Act. Investors have certain rights, including the right to
call a meeting upon the request of 10% of the outstanding shares of a Portfolio,
for the purpose of voting on the removal of one or more Trustees.
As of June 30, 1996, the following persons held of record more than 25% of the
outstanding shares of the Portfolios: Short-Intermediate Institutional Fixed
Income Portfolio--Community Hospital Foundation (95.01%); Fully Discretionary
Institutional Fixed Income Portfolio-- Southwestern Public Service Company
Employee Benefit Trust (77.46%).
Master Trust. The Funds are series of Nicholas-Applegate Investment Trust, an
open-end management investment company organized as a Delaware business trust in
December 1992. The trustees and officers of the Master Trust are described in
the Statement of Additional
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Information. Whenever a Portfolio is requested to vote on matters pertaining to
the corresponding Fund or the Master Trust in its capacity as a shareholder of
such Fund, the Trust will hold a meeting of its investors and will cast its vote
as instructed by such investors or, in the case of a matter pertaining
exclusively to the corresponding Fund, as instructed particularly by investors
of the Portfolio and other series of the Trust which invest in the Fund. The
Trust will vote shares for which it has received no voting instructions in the
same proportion as the shares for which it does receive voting instructions.
Additional Information. This Prospectus, including the Statement of Additional
Information which has been incorporated by reference herein, does not contain
all the information set forth in the Registration Statement filed by the Trust
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Master Trust has also filed a Registration Statement with the
Commission. Copies of the Trust's and Master Trust's Registration Statement may
be obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
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APPENDIX
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INVESTMENT POLICIES, STRATEGIES AND RISKS
The investment policies and strategies of the Portfolios (as implemented through
their investment in corresponding Funds) encompass the following securities,
techniques and risk considerations.
Short-Term Investments. Each of the Funds may invest in short-term investments
to maintain liquidity for redemptions or during periods when, in the opinion of
the Investment Adviser, attractive investments are temporarily unavailable.
Under normal circumstances, no more than 10% of a Fund's total assets will be
retained in cash and cash equivalents. However, each Fund may invest without
restriction in short-term investments for temporary defensive purposes, such as
when the securities markets or economic conditions are expected to enter a
period of decline. Short-term investments in which the Funds may invest include
U.S. Treasury bills or other U.S. Government or Government agency or
instrumentality obligations; certificates of deposit; bankers' acceptances; time
deposits; high quality commercial paper and other short-term high grade
corporate obligations; shares of money market mutual funds; or repurchase
agreements with respect to such securities. These instruments are described
below. The Funds will only invest in short-term investments which, in the
opinion of the Investment Adviser present minimal credit and interest rate risk.
U.S. Government Obligations. Securities issued or guaranteed by the U.S.
Government or its agencies and instrumentalities in which each of the Funds may
invest include U.S. Treasury securities, which differ only in their interest
rates, maturities and times of issuance. Treasury bills have initial maturities
of one year or less; Treasury notes have initial maturities of one to ten years;
and Treasury bonds generally have initial maturities of more than ten years.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, Government National Mortgage Association
("GNMA") pass-through certificates, are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow money from the Treasury; others, such as those
issued by the Federal National Mortgage Association, by the discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
While the U.S. Government provides financial support to U.S.
Government-sponsored agencies and instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Funds will
invest in securities issued or guaranteed by U.S. Government agencies and
instrumentalities only when the Investment Adviser is satisfied that the credit
risk with respect to the issuer is minimal.
Certificates of Deposit, Time Deposits and Bankers' Acceptances. Each of the
Funds may invest in certificates of deposit, time deposits and bankers'
acceptances issued by domestic banks, foreign banks, foreign branches of
domestic banks, domestic and foreign branches of foreign banks, and domestic
savings and loan associations, all of which at the date of investment have
capital, surplus and undivided profits as of the date of their most recent
published financial statements in excess of $100 million, or less than $100
million if the principal amount of such bank obligations is insured by the
Federal Deposit Insurance Corporation. Certificates of deposit are certificates
evidencing the obligation of a bank to repay funds deposited with it for a
specified period of time. Time deposits are non-negotiable deposits maintained
in a banking institution for a specified period of time at a stated interest
rate. Bankers' acceptances are credit
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instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer; these instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity.
Commercial Paper. Each of the Funds may invest in commercial paper of domestic
and foreign entities which is rated (or guaranteed by a corporation the
commercial paper of which is rated) in the two highest rating categories by at
least two nationally recognized statistical rating organizations ("NRSROs"),
including "P-1" or "P-2" by Moody's or "A-1" or "A-2" by S&P, or, if rated by
only one NRSRO, in such NRSRO's two highest grades, or, if not rated, is issued
by an entity which the Investment Adviser, acting pursuant to guidelines
established by the Master Trust's Board of Trustees, has determined to be of
minimal credit risk and comparable quality. Commercial paper consists of
short-term, unsecured promissory notes issued to finance short-term credit
needs.
Municipal Securities. Although the Portfolios are intended primarily for
tax-exempt institutional investors and will be managed without regard to
potential tax considerations, each Fund may invest up to 5% of its net assets in
tax-exempt securities such as state and municipal bonds if the Investment
Adviser believes they will provide competitive returns. Such securities may
include general obligation notes and bonds secured by the issuer's pledge of its
full faith, credit and taxing power for the payment of principal and interest;
revenue notes and bonds payable only from the revenues derived from a particular
facility or only from the proceeds of a special excise tax; lease obligations
issued by state or local government authorities to acquire land, equipment or
facilities; and certificates of participation issued by municipalities or
municipal authorities to evidence a proportionate interest in rental or lease
payments relating to specific projects.
Zero Coupon Securities. Each of the Funds may invest up to 50% of its net assets
in "zero coupon" securities issued or guaranteed by the U.S. Government and its
agencies and instrumentalities. Zero coupon securities may be issued by the U.S.
Treasury or by a U.S. Government agency, authority or instrumentality (such as
the Student Loan Marketing Association or the Resolution Funding Corporation).
Zero coupon securities are sold at a substantial discount from face value and
redeemed at face value at their maturity date without interim cash payments of
interest and principal. This discount is amortized over the life of the security
and such amortization will constitute the income earned on the security for both
accounting and tax purposes. Because of these features, such securities may be
subject to greater volatility as a result of changes in prevailing interest
rates than interest paying investments in which the Fund may invest. Because
income on such securities is accrued on a current basis, even though the Funds
do not receive the income currently in cash, the Funds may have to sell other
portfolio investments to obtain cash needed by the related Portfolios to make
income distributions.
Variable Rate Demand Securities. Each of the Funds may purchase floating and
variable rate demand notes and bonds, which are obligations ordinarily having
stated maturities in excess of one year, but which permit the holder to demand
payment of principal at any time, or at specified intervals not exceeding one
year, in each case upon not more than 30 days' notice. Variable rate demand
notes include master demand notes, which are obligations that permit a Fund to
invest fluctuating amounts, which may change daily without penalty. The interest
rates on these notes are adjusted at designated intervals or whenever there are
changes in the market rates of interest on which the interest rates are based.
The issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number
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of days' notice to the holders of such obligations. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Such obligations frequently are not rated by credit
rating agencies and a Fund may invest in obligations which are not so rated only
if the Investment Adviser determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the Fund
may invest. The Investment Adviser will monitor the creditworthiness of the
issuers of such obligations and their earning power and cash flow, and will also
consider situations in which all holders of such notes would redeem at the same
time. Investment by a Fund in floating or variable rate demand obligations as to
which it cannot exercise the demand feature on not more than seven days' notice
will be subject to the Fund's limit on illiquid securities of 15% of net assets
if there is no secondary market available for these obligations.
Corporate Debt Securities. The non-convertible corporate debt securities in
which the Funds may invest include obligations of varying maturities (such as
debentures, bonds and notes) over a cross-section of industries. The value of a
debt security changes as interest rates fluctuate, with longer-term securities
fluctuating more widely in response to changes in interest rates than those of
shorter-term securities. A decline in interest rates usually produces an
increase in the value of debt securities, while an increase in interest rates
generally reduces their value. The corporate debt securities purchased by the
Funds will be investment grade, but they will not necessarily be sold if their
ratings subsequently decline below investment grade. However, if the downgrading
of an investment grade security causes a Fund to hold 5% or more of its net
assets in securities rated below investment grade or determined by the
Investment Adviser to be of comparable quality, the Fund will sell sufficient
principal amount of such securities as promptly as practicable to make sure that
it holds less than 5% of its net assets in such securities. For short-term
purposes, both Funds may also invest in corporate obligations which mature in
one year or less and which are rated "Aa" or higher by Moody's, "AA" or higher
by S&P, rated in the two highest rating categories by any other NRSRO, or are
unrated but determined by the Investment Adviser to be of minimal credit risk
and comparable quality.
Eurodollar and Yankee Dollar Instruments. Each Fund may invest in Eurodollar and
Yankee Dollar instruments. Eurodollar instruments are bonds that pay interest
and principal in U.S. dollars held in banks outside the United States, primary
in Europe. Eurodollar instruments are usually issued on behalf of multinational
companies and foreign governments by large underwriting groups composed of banks
and issuing houses from many countries. Yankee dollar instruments are U.S.
dollar denominated bonds issued in the U.S. by foreign banks and corporations.
These investments involve risks that are different from investments in
securities issued by U.S. issuers. See "Foreign Investment Considerations."
Depository Receipts. Each of the Funds may invest in American Depository
Receipts ("ADRs"), which are receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs, in registered form, are designed for use in U.S. securities
markets. The Funds may also invest in European and Global Depository Receipts
("EDRs" and "GDRs"), which, in bearer form, are designed for use in European and
foreign securities markets, and in other instruments representing securities of
foreign companies. Such depository receipts may be sponsored by the foreign
issuer or may be unsponsored. Unsponsored depository receipts are organized
independently and without the cooperation of the foreign issuer of the
underlying securities; as a result, available information
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regarding the issuer may not be as current as for sponsored depository receipts,
and the prices of unsponsored depository receipts may be more volatile than if
they were sponsored by the issuers of the underlying securities.
Mortgage-Backed Securities. The Funds may invest in mortgage-backed securities.
Mortgage-backed securities represent direct or indirect participations in or
obligations collateralized by and payable from mortgage loans secured by real
property. Each mortgage pool underlying mortgage-backed securities will consist
of mortgage loans evidenced by promissory notes secured by first mortgages or
first deeds of trust or other similar security instruments creating a first lien
on real property. An investment in mortgage-backed securities includes certain
risks. Mortgage-backed securities are often subject to more rapid repayment than
their stated maturity dates would indicate as a result of the pass-through or
prepayments of principal on the underlying loans, which may increase the
volatility of such investments relative to similarily related debt securities.
During periods of declining interest rates, prepayment of loans underlying
mortgage-backed securities can be expected to accelerate and thus impair a
Fund's ability to reinvest the returns of principal at comparable yields. During
periods of rising interest rates, reduced prepayment rates may extend the
average life of mortgage-backed securities and increase a Fund's exposure to
rising interest rates. Accordingly, the market values of such securities will
vary with changes in market interest rates generally and in yield differentials
among various kinds of U.S. Government securities and other mortgage-backed
securities.
The Funds may invest in mortgage pass-through securities, which are fixed or
adjustable rate mortgage-backed securities that provide for monthly payments
that are a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
The Funds may invest in collateralized mortgage obligations ("CMOs"), which are
multiple class mortgage-backed securities. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other mortgage-backed securities. CMOs are issued in multiple classes, each with
a specified fixed or adjustable interest rate and a final distribution date. In
most cases, payments of principal are applied to the CMO classes in the order of
their respective stated maturities, so that no principal payments will be made
on a CMO class until all other classes leaving an earlier stated maturity date
are paid in full. Sometimes, however, CMO classes are "parallel pay" (i.e.,
payments of principal are made to two or more classes concurrently).
Asset-Backed Securities. The Funds may invest in asset-backed securities, which
represent participations in, or are secured by and payable from, assets such as
motor vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables. Asset-backed
securities may also be collateralized by a portfolio of U.S. Government
securities, but are not direct obligations of the U.S. Government, its agencies
or instrumentalities. Payments or distributions of principal and interest on
asset-backed securities may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or a pool insurance policy issued by a
financial institution, or other credit enhancements may be present; however,
privately issued obligations collateralized by a portfolio of privately issued
asset-backed securities do not involve any government-related guaranty or
insurance.
Asset-backed securities can be structured in several ways, the most common of
which has been a "pass-through" model. A certificate representing a fractional
undivided beneficial interest in a
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trust or corporation created solely for the purpose of holding the trust's
assets is issued to the asset-backed security holder. The certificate entitles
the holder to receive a percentage of the interest and principal payments on the
terms and according to the schedule established by the trust instrument. A
servicing agent collects amounts due on the underlying assets for the account of
the trust, which distributes such amounts to the security holders. As an
alternative structure, the issuer of asset-backed securities effectively
transforms an asset-backed pool into obligations comprised of several different
maturities. Instead of holding an undivided interest in trust assets, the
purchaser of the asset-backed security holds a bond collateralized by the
underlying assets. The bonds are serviced by cash flows from the underlying
assets, a specified fraction of all cash received (less a fixed servicing fee)
being allocated first to pay interest and then to reduce principal.
Asset-backed securities present certain risks similar to and in addition to
those presented by mortgage-backed securities. Asset-backed securities generally
do not have the benefit of a security interest in collateral that is comparable
to mortgage assets and there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities. Asset-backed securities, however, are not generally subject to the
risks associated with prepayments of principal on the underlying loans.
Foreign Investment Considerations. There are special risks associated with
investments in securities of foreign companies and governments, which add to the
usual risks inherent in domestic investments. Such special risks include
fluctuations in foreign exchange rates, political or economic instability in the
country of issue, and the possible imposition of exchange controls or other laws
or restrictions. In addition, securities prices in foreign markets are generally
subject to different economic, financial, political and social factors than are
the prices of securities in United States markets. With respect to some foreign
countries there may be the possibility of expropriation or confiscatory
taxation, limitations on liquidity of securities or political or economic
developments which could affect the foreign investments of a Fund. Moreover,
securities of foreign issuers generally will not be registered with the
Securities and Exchange Commission and such issuers generally will not be
subject to the Commission's reporting requirements. Accordingly, there is likely
to be less publicly available information concerning certain of the foreign
issuers of securities held by a Fund than is available concerning U.S.
companies. Foreign companies are also generally not subject to uniform
accounting, auditing and financial reporting standards or to practices and
requirements comparable to those applicable to U.S. companies. There may also be
less government supervision and regulation of foreign broker-dealers, financial
institutions and listed companies than exists in the United States. A Fund will
not invest in securities denominated in a foreign currency unless, at the time
of investment, such currency is considered by the Investment Adviser to be fully
exchangeable into United States dollars without legal restriction. See
"Investment Objectives, Policies and Risks -- Foreign Investments" in the
Statement of Additional Information.
Over-the-Counter Securities. Securities owned by the Funds may be traded in the
over-the-counter market or on a regional securities exchange and may not be
traded every day or in the volume typical of securities trading on a national
securities exchange. As a result, disposition by the Funds of portfolio
securities to meet redemptions by shareholders or otherwise may require the
Funds to sell these securities at a discount from market prices, to sell during
periods when such disposition is not desirable, or to make many small sales over
a lengthy period of time.
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When-Issued Securities and Firm Commitment Agreements. The Funds may purchase
securities on a delayed delivery or "when-issued" basis and enter into firm
commitment agreements (transactions in which the payment obligation and interest
rate are fixed at the time of the transaction but the settlement is delayed).
Delivery and payment for these securities typically occur 15 to 45 days after
the commitment to purchase. No interest accrues to the purchaser during the
period before delivery. There is a risk in these transactions that the value of
the securities at settlement may be more or less than the agreed upon price, or
that the party with which a Fund enters into such a transaction may not perform
its commitment. The Funds will normally enter into these transactions with the
intention of actually receiving or delivering the securities. The Funds may sell
the securities before the settlement date.
To the extent a Fund engages in any of these transactions it will do so for the
purpose of acquiring securities for its portfolio consistent with its investment
objective and policies and not for the purpose of investment leverage. The Funds
will segregate liquid assets such as cash, U.S. Government securities and other
liquid debt or equity securities in an amount sufficient to meet their payment
obligations with respect to these transactions. A Fund may not purchase
when-issued securities or enter into firm commitments if, as a result, more than
15% of the Fund's net assets would be segregated to cover such contracts.
"Roll" Transactions. The Funds may enter into "roll" transactions, which are the
sale of GNMA certificates and other securities together with a commitment to
purchase similar, but not identical, securities at a later date from the same
party. During the roll period, a Fund forgoes principal and interest paid on the
securities. The Fund is compensated by the difference between the current sales
price and the forward price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. Like when-issued securities or
firm commitment agreements, roll transactions involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is committed to purchase similar securities. Additionally, in the event
the buyer of securities under a roll transaction files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the transaction may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
The Funds will engage in roll transactions for the purpose of acquiring
securities for their portfolios consistent with their investment objectives and
policies and not for investment leverage. Nonetheless, roll transactions are
speculative techniques and are considered borrowings by the Funds for purposes
of the percentage limitations applicable to borrowings. See "Borrowings" below.
Each Fund will establish a segregated account with its Custodian in which it
will maintain cash, U.S. Government securities and other liquid debt or equity
securities in an amount sufficient to meet its payment obligations with respect
to these transactions. A Fund will not enter into roll transactions if, as a
result, more than 15% of the Fund's net assets would be segregated to cover such
contracts.
Foreign Exchange Contracts. Since the Fully Discretionary Fund may invest in
securities denominated in currencies other than the U.S. dollar, changes in
foreign currency exchange rates will affect the values of its portfolio
securities and the unrealized appreciation or depreciation of its investments.
The rate of exchange between the U.S. dollar and other currencies is determined
by forces of supply and demand in the foreign exchange markets. These forces are
affected by the international balance of payments and other economic and
financial conditions, government intervention, speculation and other factors.
The Fully Discretionary Fund may enter into derivative positions such as foreign
exchange forward contracts or currency futures or options contracts for the
purchase or sale of foreign
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currency to "lock in" the U.S. dollar price of the securities denominated in a
foreign currency or the U.S. dollar equivalent of interest to be paid on such
securities, or to hedge against the possibility that the currency of a foreign
country in which the Fund has investments may suffer a decline against the U.S.
dollar. A forward currency contract is an obligation 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 agreed upon by the parties, at a price set at the time
of the contract. For example, the Fund may purchase a particular currency or
enter into a forward currency contract to preserve the U.S. dollar price of
securities it intends to or has contracted to purchase. Alternatively, the Fund
might sell a particular currency on either a spot (cash) basis at the rate then
prevailing in the currency exchange market or on a forward basis by entering
into a forward contract to purchase or sell currency, to hedge against an
anticipated decline in the U.S. dollar value of securities it intends or has
contracted to sell. This method of attempting to hedge the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. The Fund is
not obligated to engage in any such currency hedging operations, and there can
be no assurance as to the success of any hedging operations which the Fund may
implement. Although the strategy of engaging in foreign currency transactions
could reduce the risk of loss due to a decline in the value of the hedged
currency, it could also limit the potential gain from an increase in the value
of the currency.
Options. The Fully Discretionary Fund may purchase exchange-listed and
over-the-counter covered "put" and "call" options with respect to securities
which are otherwise eligible for purchase by such Fund, for hedging purposes,
subject to the following restrictions: the aggregate premiums on call options
purchased by the Fund may not exceed 5% of the market value of net assets of the
Fund as of the date the call options are purchased, and the aggregate premiums
on put options may not exceed 5% of the market value of the net assets of the
Fund as of the date such options are purchased. In addition, the Fund will not
purchase or sell options if, immediately thereafter, more than 25% of its net
assets would be hedged. A "put" gives a holder the right, in return for the
premium paid, to require the writer of the put to purchase from the holder a
security at a specified price. A "call" gives a holder the right, in return for
the premium paid, to require the writer of the call to sell a security to the
holder at a specified price.
Put and call options are derivative securities traded on United States and
foreign exchanges, including the American Stock Exchange, Chicago Board Options
Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange and New York Stock
Exchange. Additionally, the Fully Discretionary Fund may purchase options not
traded on a securities exchange, which may bear a greater risk of nonperformance
than options traded on a securities exchange. Options not traded on an exchange
are considered dealer options and generally lack the liquidity of an exchange
traded option. Accordingly, dealer options may be subject to the Funds'
restriction on investment in illiquid securities, as described below. Dealer
options may also involve the risk that the securities dealers participating in
such transactions will fail to meet their obligations under the terms of the
option.
The Fully Discretionary Fund may also write listed and over-the-counter covered
options on up to 25% of the value of its net assets. Call options written by the
Fund give the holder the right to buy the underlying securities from the Fund at
a stated exercise price; put options written by a Fund give the holder the right
to sell the underlying security to the Fund. A call option is covered if the
Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration upon
conversion or exchange of securities currently held by the Fund. A put option is
covered if the Fund
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<PAGE>
maintains cash or cash equivalents equal to the exercise price in a segregated
amount with its Custodian. If an option written by the Fund expires unexercised,
the Fund realizes a gain equal to the premium received at the time the option
was written. If an option purchased by the Fund expires unexercised, the Fund
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option written by the Fully
Discretionary Fund Fund may be closed out by an offsetting purchase or sale of
an option of the same series. The Fund will realize a gain from a closing
purchase transaction if the cost of the closing transaction is less than the
premium received from writing the option; if it is more, the Fund will realize a
capital loss. If the premium received from a closing sale transaction is more
than the premium paid to purchase the option, the Fund will realize a gain; if
it is less, the Fund will realize a loss. See "Investment Objectives, Policies
and Risks--Options on Securities and Securities Indices" in the Statement of
Additional Information.
Futures Contracts. Each of the Funds may purchase and sell financial futures
contracts as a hedge against changes in interest rates and currency
fluctuations, and the Fully Discretionary Fund may also purchase and sell
related options on futures contracts. A financial or currency futures contract
obligates the seller of the contract to deliver and the purchaser of the
contract to take delivery of the type of financial instrument or currency called
for in the contract at a specified future time (the settlement date) for a
specified price. Although the terms of a contract call for actual delivery or
acceptance of the financial instrument or currency, the contracts normally will
be closed out before the delivery date without delivery or acceptance taking
place. Futures options possess many of the same characteristics as options on
securities and indices. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise of a call option, the holder acquires a long position
in the futures contract and the writer is assigned the opposite short position.
In the case of a put option, the opposite is true. A futures option may be
closed out before exercise or expiration by an offsetting purchase or sale of a
futures option of the same series.
Financial and currency futures contracts are derivative instruments traded on
United States commodities and futures exchanges, including the Chicago
Mercantile Exchange, the New York Futures Exchange, the Kansas City Board of
Trade, the Chicago Board of Trade and the International Monetary Market, as well
as commodity and securities exchanges located outside the United States,
including the London International Financial Futures Exchange, the Singapore
International Monetary Exchange, the Sydney Futures Exchange Limited and the
Tokyo Stock Exchange.
The Fully Discretionary Fund will not engage in transactions in currency futures
contracts for speculation, but only as a hedge against the risk of unexpected
changes in exchange rates. As a general rule, a Fund will not purchase or sell
futures if, immediately thereafter, more than 25% of its net assets would be
hedged. In addition, neither Fund may purchase or sell futures (or, in the case
of the Fully Discretionary Fund, related options) if, immediately thereafter,
the sum of the amount of margin deposits on the Fund's existing futures
positions and premiums paid for such options would exceed 5% of the market value
of the fund's net assets. In instances involving the purchase of futures
contracts by a Fund, an amount of cash or liquid debt or equity securities equal
to the market value of the futures contracts will be deposited in a segregated
account with the Fund's Custodian or with a broker to collateralize the position
and thereby insure that the use of such futures is unleveraged. See "Investment
Objectives, Policies and Risks--Futures Contracts and Related Options" in the
Statement of Additional Information.
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Interest Rate and Currency Swaps. For hedging purposes, each Fund may enter into
interest rate swap transactions and purchase or sell interest rate caps and
floors, and the Fully Discretionary Fund may enter into currency swap cap
transactions. An interest rate or currency swap involves an agreement between a
Fund and another party to exchange payments calculated as if they were interest
on a specified ("notional") principal amount (e.g., an exchange of floating rate
payments by one party for fixed rate payments by the other). An interest rate
cap or floor entitles the purchaser, in exchange for a premium, to receive
payments of interest on a notional principal amount from the seller of the cap
or floor, to the extent that a specified reference rate exceeds or falls below a
predetermined level.
A Fund usually enters into such transactions on a "net" basis, with the Fund
receiving or paying, as the case may be, only the net amount of the two payment
streams. The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each swap is accrued on a daily basis, and an
amount of cash or high-quality liquid securities having an aggregate net asset
value at least equal to the accrued excess is maintained in a segregated account
by the Master Trust's custodian. If a Fund enters into a swap on other than a
net basis, or sells caps or floors, the Fund maintains a segregated account in
the full amount accrued on a daily basis of the Fund's obligations with respect
to the transaction. Such segregated accounts are maintained in accordance with
applicable regulations of the Commission.
A Fund will not enter into any of these derivative transactions unless the
unsecured senior debt or the claims paying ability of the other party to the
transaction is rated at least "high quality" at the time of purchase by at least
one of the established rating agencies (e.g., AAA or AA by S&P). The swap market
has grown substantially in recent years, with a large number of banks and
investment banking firms acting both as principals and agents utilizing standard
swap documentation, and the Investment Adviser has determined that the swap
market has become relatively liquid. Swap transactions do not involve the
delivery of securities or other underlying assets or principal, and the risk of
loss with respect to such transactions is limited to the net amount of payments
that the Fund is contractually obligated to make or receive. Caps and floors are
more recent innovations for which standardized documentation has not yet been
developed; accordingly, they are less liquid than swaps, and caps and floors
purchased by a Fund are considered to be illiquid assets.
Special Hedging Considerations. Special risks are associated with the use of
options, futures contracts and swap transactions as hedging techniques. There
can be no guarantee of a correlation between price movements in the hedging
vehicle and in the portfolio securities being hedged. A lack of correlation
could result in a loss on both the hedged securities in a Fund and the hedging
vehicle, so that the Fund's return might have been better had hedging not been
attempted. In addition, a decision as to whether, when and how to use options,
futures or swaps involves the exercise of skill and judgment which are different
from those needed to select portfolio securities, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior,
currency fluctuations or interest rate trends. If the Investment Adviser is
incorrect in its forecasts regarding interest rate trends, currency fluctuations
or other relevant factors, a Fund may be in a worse position than if the Fund
had not engaged in options, futures or swap transactions. The loss incurred by a
Fund in writing options on futures and entering into futures and swap
transactions is potentially unlimited. The Investment Adviser is experienced in
the use of options, futures and swap transactions as an investment technique.
In the event of a default by the other party to an over-the-counter option
transaction or a futures or swap transaction, a Fund might incur a loss. In
addition, there can be no assurance
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<PAGE>
that a liquid market will exist at a time when a Fund seeks to close out an
option position or futures or swap contract. Most futures exchanges and boards
of trade limit the amount of fluctuation in futures contract prices during a
single day; once the daily limit has been reached on a particular contract, no
trades may be made that day at a price beyond that limit. In addition, certain
of these instruments are relatively new and without a significant trading
history. As a result, there is no assurance that an active secondary market will
develop or continue to exist. Lack of a liquid market for any reason may prevent
a Fund from liquidating an unfavorable position and a Fund would remain
obligated to meet margin requirements until the position is closed. See
"Investment Objectives, Policies and Risks--Options on Securities and Securities
Indices" and "--Futures Contracts and Related Options" in the Statement of
Additional Information.
A Fund's ability to enter into options, futures contracts and swap transactions
is limited by the requirements of the Internal Revenue Code with respect to the
corresponding Portfolio's qualification as a regulated investment company. See
"Taxes" in the Statement of Additional Information.
Non-Hedging Strategic Transactions. Each Fund's options, futures and swap
transactions will generally be entered into for hedging purposes--to protect
against possible changes in the market values of securities held in or to be
purchased for the Fund's portfolio resulting from securities markets, currency
or interest rate fluctuations, to protect the Fund's unrealized gains in the
values of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchase or sale of particular securities. However, in
addition to the hedging transactions referred to above, each of the Funds may
enter into options, futures and swap transactions to enhance potential gain in
circumstances where hedging is not involved. A Fund's net loss exposure
resulting from transactions entered into for such purposes will not exceed 1% of
the Fund's net assets at any one time and, to the extent necessary, the Fund
will close out transactions in order to comply with this limitation. Such
transactions are subject to the limitations described above under "Options,"
"Futures Contracts," and "Interest Rate and Currency Swaps," and to the same
types of risks as described above under "Special Hedging Considerations."
Repurchase Agreements. Each Fund may invest up to 25% of its net assets in
repurchase agreements, in which the Fund purchases securities and the seller
agrees to repurchase them from the Fund at a mutually agreed-upon time and
price. The period of maturity is usually overnight or a few days, although it
may extend over a number of months. The resale price is in excess of the
purchase price, reflecting an agreed-upon rate of return effective for the
period of time the Fund's money is invested in the security. Each Fund's
repurchase agreements will at all times be fully collateralized in an amount at
least equal to 102% of the purchase price, including accrued interest earned on
the underlying securities. The instruments held as collateral are valued daily
and, if the value of the instruments declines, the Fund will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the Fund may incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, realization upon the
collateral by a Fund may be delayed or limited. A Fund will only enter into
repurchase agreements involving securities in which it could otherwise invest
and with selected financial institutions and brokers and dealers which meet
certain creditworthiness and other criteria.
Illiquid Securities. Each Fund may invest up to 15% of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid.
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Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 ("restricted securities"),
securities which are otherwise not readily marketable such as over-the-counter,
or dealer traded, options, and repurchase agreements having a maturity of more
than seven days. Mutual funds do not typically hold a significant amount of
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might not be
able to dispose of restricted or other securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions. The Fund
might also have to register such restricted securities in order to dispose of
them, resulting in additional expense and delay.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933, including
repurchase agreements, commercial paper, municipal securities and corporate
bonds and notes. Institutional investors depend on an efficient institutional
market in which the unregistered security can be readily resold or on an
issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such investments. If such
securities are subject to purchase by institutional buyers in accordance with
Rule 144A promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, the Investment Adviser, pursuant to guidelines adopted
by the Master Trust's Board of Trustees, may determine that such securities are
not illiquid securities notwithstanding their legal or contractual restrictions
on resale, based on factors such as the frequency of trades and quotes for the
securities, the number of dealers and others wishing to purchase and sell the
securities, and the nature of the security and the marketplace trades. In all
other cases, however, securities subject to restrictions on resale will be
deemed illiquid. Investing in restricted securities eligible for resale pursuant
to Rule 144A could have the effect of increasing the level of illiquidity in the
Funds to the extent that qualified institutional buyers become for a time
uninterested in purchasing such securities.
Securities Lending. To increase its income, each Fund may lend its portfolio
securities to financial institutions such as banks and brokers if the loan is
collateralized in accordance with applicable regulatory requirements. The Master
Trust's Board of Trustees has adopted an operating policy that limits the amount
of loans made by a Fund to not more than 30% of the value of the total assets of
the Fund. During the time portfolio securities are on loan, the borrower pays
the Fund an amount equivalent to any dividends or interest paid on such
securities, and the Fund may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or secured a letter of credit.
Such loans involve risks of delay in receiving additional collateral or in
recovering the securities loaned or even loss of rights in the collateral should
the borrower of the securities fail financially. However, such securities
lending will be made only when, in the Investment Adviser's judgment, the income
to be earned from the loans justifies the attendant risks. Loans are subject to
termination at the option of the Fund or the borrower.
Borrowing. Each Fund may borrow money from banks in amounts up to 20% of its
total assets (calculated when the loan is made) only for temporary,
extraordinary or emergency purposes or for the clearance of transactions.
Borrowing involves special risk considerations. Interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds (or on the assets that were retained
rather than sold to meet the needs for which funds were borrowed). Under adverse
market
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<PAGE>
conditions, a Fund might have to sell portfolio securities to meet interest or
principal payments at a time when fundamental investment considerations would
not favor such sales. All borrowings by a Fund will be made only to the extent
that the value of the Fund's total assets, less its liabilities other than
borrowings, is equal to at least 300% of all borrowings. If such asset coverage
of 300% is not maintained, the Fund will take prompt action to reduce its
borrowings as required by applicable law.
Duration. Duration is one of the fundamental tools used by the Investment
Adviser in the selection of securities for the Fully Discretionary Fund.
Developed as a more precise alternative to the concept of "term to maturity,"
duration is a measure of the expected life of a debt security on a present value
basis and is an indicator of a security's price movement and risk associated
with changes in interest rates. Duration incorporates a bond's yield, coupon
interest payments, final maturity and call features into one measure. It takes
the length of the time intervals between the present time and the time that
interest and principal payments are scheduled and weights them by the present
values of the cash to be received at each future point in time. For any fixed
income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other things
being the same, the lower the stated or coupon rate of interest of a fixed
income security, the longer the duration of the security; conversely, the higher
the stated or coupon rate of interest of a fixed income security, the shorter
the duration of the security. For example, the maturity of a coupon bond with a
three-year duration is approximately 3.5 years, and the maturity of a coupon
bond with a six-year duration is approximately nine years. In some situations
the standard duration calculation does not properly reflect the interest rate
exposure of a security, such as in the case of mortgage pass-through securities.
In such instances, the Investment Adviser will use more sophisticated analytical
techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
- --------------------------------------------------------------------------------
PRIOR PERFORMANCE OF INVESTMENT ADVISER
The following table sets forth the Investment Adviser's composite performance
data relating to the historical performance of institutional private accounts
managed by the Investment Adviser, since the dates indicated, that have
investment objectives, policies, strategies and risks substantially similar to
those of the Short-Intermediate and Fully Discretionary Institutional
Portfolios. The data is provided to illustrate the past performance of the
Investment Adviser in managing substantially similar accounts as measured
against specified market indices and does not represent the performance of the
Short-Intermediate and Fully Discretionary Portfolios. Investors should not
consider this performance data as an indication of future performance of the
Short-Intermediate and Fully Discretionary Institutional Portfolios or of the
Investment Adviser.
The Investment Adviser's composite performance data shown below were calculated
in accordance with recommended standards of the Association for Investment
Management and Research ("AIMR"*), retroactively applied to all time periods.
All returns presented were
- ------------------------
*AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisers of their performance results, and (ii)
ensure uniformity in reporting so that performance results of investment
advisers are directly comparable.
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calculated on a total return basis and include all dividends and interest,
accrued income and realized and unrealized gains and losses. All returns reflect
the deduction of investment advisory fees, brokerage commissions and execution
costs paid by the Investment Adviser's institutional private accounts, without
provision for federal or state income taxes. Custodial fees, if any, were not
included in the calculation. The Investment Adviser's composites include all
actual, fee-paying, discretionary institutional private accounts managed by the
Investment Adviser that have investment objectives, policies, strategies and
risks substantially similar to those of the Short-Intermediate and Fully
Discretionary Portfolios. Securities transactions are accounted for on the trade
date and accrual accounting is utilized. Cash and equivalents are included in
performance returns. The monthly returns of each Investment Adviser's composite
combine the individual accounts' returns (calculated on a time-weighted rate of
return that is revalued whenever cash flows exceed $500) by asset-weighing each
individual account's asset value as of the beginning of the month. Quarterly and
yearly returns are calculated by geometrically linking the monthly and quarterly
returns, respectively. The yearly returns are computed by geometrically linking
the returns of each quarter within the calendar year.
The institutional private accounts that are included in the Investment Adviser's
composites are not subject to the same types of expenses to which the
Short-Intermediate and Fully Discretionary Portfolios are subject nor to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Short-Intermediate and Fully Discretionary Portfolios
by the Investment Company Act or Subchapter M of the Internal Revenue Code.
Consequently, the performance results for each Investment Adviser's composite
could have been adversely affected if the institutional private accounts
included in the composite had been regulated as investment companies under the
federal securities laws.
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The investment results of the Investment Adviser's composites presented below
are unaudited and are not intended to predict or suggest the returns that might
be experienced by the Short-Intermediate or Fully Discretionary Institutional
Portfolios or an individual investor investing in such Portfolios. Investors
should also be aware that the use of a methodology different from that used
below to calculated performance could result in different performance data.
<TABLE>
<CAPTION>
Short-Intermediate Performance
Fully Discretionary Performance
------------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C>
Merrill Lynch
Investment 1-3 Yr. Investment Lehman Bros. Lehman Bros.
Adviser's Treasury Adviser's Aggregate Bond Govt./Corp.
Year Composite Index (1) Composite Index (2) Bond Index (3)
- --------------------------------------------- ------------- --------------- ------------- --------------- ---------------
1984......................................... 13.28% 13.78% 15.72% 15.14% 15.00%
1985......................................... 15.66 13.96 21.98 22.11 21.30
1986......................................... 10.71 10.35 16.13 15.29 15.59
1987......................................... 5.09 5.65 2.60 2.75 2.31
1988......................................... 7.93 6.22 7.87 7.89 7.52
1989......................................... 10.16 10.87 12.53 14.53 14.23
1990......................................... 9.43 9.72 8.37 8.95 8.29
1991......................................... 12.56 11.68 17.38 16.00 16.13
1992......................................... 6.20 6.30 7.38 7.40 7.53
1993......................................... 7.19 5.41 12.32 9.75 11.06
1994......................................... 0.39 0.57 (3.75) (2.92) (3.51)
1995......................................... 10.40 10.99 16.91 18.48 19.24
1996 (4)..................................... 1.24 1.35 (2.45) (1.22) (1.88)
Last year (4)................................ 5.39 5.45 4.26 5.01 4.66
Last 5 years (4)............................. 6.57 6.32 8.43 8.26 8.48
Last 10 years (4)............................ 7.44 7.27 8.25 8.53 8.40
Since inception (4).......................... 8.75 8.48 10.39 10.50 10.38
</TABLE>
- ------------------------
(1) The Merrill Lynch 1-3 Year Treasury Index is an index consisting of all
public U.S. Treasury obligations having maturities from one to 2.99 years.
The Index includes income and distributions but does not reflect fees,
brokerage commissions or other expenses of investing.
(2) The Lehman Brothers Aggregate Bond Index is an index consisting of the
Lehman Brothers Government/Corporate Bond Index, the Lehman Brothers
Mortgage-Backed Securities Index, and the Lehman-Brothers Assets-Backed
Securities Index. See note 4 for a description of the Government/Corporate
Bond Index. The Mortgage-Backed Securities Index consists of 15 and 30-year
fixed rate securities backed by mortgage pools of GNMA, the Federal Home
Loan Mortgage Corporation and the Federal National Mortgage Association
(excluding buydowns, manufactured homes and graduated equity mortgages). The
Asset-Backed Securities Index consists of credit card, auto and home equity
loans (excluding subordinated tranches) with an average life of one year.
Each Index includes income and distributions but does not reflect fees,
brokerage commissions or other expenses of investing.
(3) The Lehman Brothers Government/Corporate Bond Index is an index consisting
of the Lehman Brothers Government Bond Index and the Lehman Brothers
Corporate Bond Index. The Government Bond Index includes all public
obligations of the U.S. Treasury (excluding flower bonds and
foreign-targeted issues), its agencies and quasi-federal corporations, and
corporate debt guaranteed by the U.S. Government. The Corporate Bond Index
includes all publicly issued, fixed rate, non-convertible investment grade
U.S. dollar denominated corporate debt registered with the Securities and
Exchange Commission; it also includes debt issued or guaranteed by foreign
sovereign governments, municipalities, and governmental or international
agencies. The Index includes income and distributions but does not reflect
fees, brokerage commissions or other expenses of investing.
(4) Through June 30, 1996.
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INSTFIXPRO896
