<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," page 7, for additional
information regarding this unique structure. There can be no assurance that any
Portfolio or Fund will achieve its investment objective.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Shares of the Portfolios 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 March 4, 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.
March 4, 1996
<PAGE>
NICHOLAS--APPLEGATE MUTUAL FUNDS
- -------------------------------------------------
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.................................19
General Information................................................20
Appendix:
Investment Policies, Strategies
and Risks.......................................................22
Prior Performance................................................33
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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
- ---------------------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES AS A
PERCENTAGE OF AVERAGE NET ASSETS:
(after expense reduction)(1)
Management fees 0.30% 0.45%
12b-1 expenses None None
All Other expenses (after expense reduction)(1) 0.05% --
Total operating expenses (after expense
reduction)(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
fees, and to absorb other operating expenses, 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, 1996 are estimated to be the following
respective percentages of such Portfolios' average net assets (annualized):
Short-Intermediate-0.60%; Fully Discretionary-0.72%. 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 over $29 billion of discretionary assets (including more
than
5
<PAGE>
$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.
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 and high net worth individuals. Purchases may only 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 quarterly
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 information is for the period from commencement of operations of
the Portfolio through January 31, 1996, has been prepared by the Trust and is
not audited. The information should be read in conjunction with the Portfolio's
unaudited financial statements for the period and the notes thereto, which are
<TABLE>
<CAPTION>
included in the Trust's 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
1-31-96* 1-31-96*
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $12.50 $12.50
Income from investment operations:
Net investment income (deficit) 0.01 0.17
Net realized and unrealized gains on securities 0.59 0.85
------- -------
Total from investment operations 0.60 1.02
Less distributions:
Dividends from net investment income (0.06 ) (0.23 )
Distributions from capital gains -- (0.03 )
------- -------
Net asset value, end of period $13.04 $13.26
------- -------
------- -------
TOTAL RETURN: 5.84 % 8.72 %
RATIOS/SUPPLEMENTAL DATA:
Net assets ($000), end of period $4,798 $4,029
Ratio of expenses to average net assets**+ 0.33 % 0.45 %
Ratio of net income (deficit) to average net assets**+ 3.40 % 6.06 %
Portfolio turnover*** 64.00 % 20.93 %
</TABLE>
- ---------------------------------------
*The Portfolios commenced operations on August 31, 1995. These Financial
Highlights are not audited.
**Annualized
***Portfolio turnovers are for the corresponding Fund of the Master Trust
+Net of expense reimbursement equivalent to 1.56% and 9.49% of average net
assets, respectively. Includes expense allocated from the Master Trust Short
Intermediate Fixed Income Fund of 0.30% and from the Master Trust Fully
Discretionary Fixed Income Fund of 0.40%, net of expense reimbursement
equivalent to 0.82% and 4.71% of average net assets of the Funds,
respectively.
- --------------------------------------------------------------------------------
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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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 over $29 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 14 other partners manage a
staff of approximately 300 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.
The Funds are managed under the general supervision of Terrence S. Ellis, the
Chief Investment Officer-Fixed Income of the Investment Adviser, and John D.
Wylie, the Chief Investment Officer-Retail of the Investment Adviser. The
Investment Adviser's fixed income management team headed by Fred S. Robertson
III will be primarily responsible for the Investment Adviser's day-to-day
management of the Funds' portfolios. Messrs. Ellis and Robertson have managed
institutional accounts for the Investment Adviser since May 1995; for more than
five years prior to May 1995, each of them 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 relating to certain separate accounts managed by
the Investment Adviser, see "Appendix: Prior Performance."
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 0.02% of the average daily net assets of the Fund.
Expense Limitation. To limit the expenses of each Portfolio, the Investment
Adviser has agreed to defer its fees, and to absorb the other operating expenses
of each Portfolio, 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:
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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 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;
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 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,
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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. 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.
Purchase by Wire. Purchases of shares of the Portfolios can only 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: Mutual Funds Division, Nicholas-Applegate, 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.
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
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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 eleven Institutional Portfolios. Two
fixed-income Institutional Portfolios are offered pursuant to this Prospectus;
eight 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.
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: Mutual Funds Division, Nicholas-Applegate,
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.
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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. 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:
Mutual Funds Division, Nicholas-Applegate, 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.
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 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
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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.
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 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: Mutual Funds
Division, Nicholas-Applegate, 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 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
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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 and 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. Such 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 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 quarterly 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).
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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 "Dividends, Distributions and 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.,
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.
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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 February 2, 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 (97.7%); Fully Discretionary
Institutional Fixed Income Portfolio--Southwestern Public Service Company
Employee Benefit Trust (90.8%).
Master Trust. The Funds are series of Nicholas-Applegate Investment Trust, a
diversified, 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 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 (U.S. dollars) 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. 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 Master Demand Notes. 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 high quality debt 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, high-grade debt
obligations 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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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.
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 and cash equivalents 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.
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
29
<PAGE>
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 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
30
<PAGE>
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.
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
"Dividends, Distributions and 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. 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
31
<PAGE>
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 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 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
32
<PAGE>
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
The following table sets forth historical performance data for the separate
accounts managed by the Investment Adviser in substantially the same manner as
it proposes to manage the Funds, as measured against specified market indices.
Investors should not consider this performance data as an indication of future
performance of the Funds or Portfolios.
All information set forth in the table relies on data supplied by the Investment
Adviser or from statistical services, reports or other sources believed by the
Investment Adviser to be reliable. However, such information has not been
verified and is unaudited.
The Investment Adviser has advised the Trust that its net performance results in
the table with respect to its separate accounts are the annual rates of return
for the equal-weighted and dollar-weighted composite of all fully discretionary
accounts managed by the Investment Adviser for at least one quarter with
substantially the same investment objective and substantially similar policies
as those of the Funds, calculated as set forth above under "General
Information--Performance Information." Prior to 1993, the fully discretionary
separate accounts were not invested in foreign securities. The Investment
Adviser has indicated that such results are net of investment advisory fees
actually charged during the indicated periods, and give effect to transaction
costs as well as reinvestment of income and gains. See "Performance Information"
in the Statement of Additional Information for further information about
calculation of total return.
The composite separate account results presented on the following pages may not
necessarily equate with the return experienced by any one particular account
managed by the Investment Adviser, as a result of differences in brokerage
commissions, the size of positions taken in relation to account size and
diversification of securities. The composite results do not reflect
33
<PAGE>
the effect of the operating expenses of the Portfolios and their proportionate
shares of the operating expenses of the Funds, which effect compounded over time
may be substantial. In addition, the effect of taxes on any shareholder will
depend on shareholder's tax status, and the results have not been reduced to
reflect any income tax which may have been payable on dividends and
distributions (see "Dividends, Distributions and Taxes" above).
<TABLE>
<CAPTION>
Short-Intermediate Performance Fully Discretionary Performance
----------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nicholas-Applegate Composite Merrill Nicholas-Applegate Composite
Lynch 1-3
---------------------------- Yr. ---------------------------- Lehman Bros.
Equal- Dollar- Treasury Equal- Dollar- Aggregate
Year Weighted Weighted Index (1) Weighted Weighted Bond Index(2)
- ---------------------------------- ------------- ------------- ----------- ------------- ------------- -------------
1981(4)........................... 13.4% 13.4% 10.6%
1982(4)........................... 20.3% 20.3% 21.2% 39.4 42.4 32.6
1983.............................. 8.8 8.8 8.9 6.2 6.7 8.3
1984.............................. 13.2 13.2 13.8 15.8 15.4 15.1
1985.............................. 15.5 15.5 14.1 22.2 22.3 22.1
1986.............................. 10.6 10.6 10.4 17.0 16.5 15.3
1987.............................. 5.0 5.0 5.8 3.4 3.0 2.8
1988.............................. 7.9 8.0 6.2 8.2 8.2 7.9
1989.............................. 10.2 10.1 9.4 12.6 12.8 14.5
1990.............................. 9.4 9.7 9.7 8.4 8.5 9.0
1991.............................. 12.5 13.0 11.8 17.5 17.5 16.0
1992.............................. 6.2 6.8 6.4 7.4 7.8 7.4
1993.............................. 7.1 7.0 5.4 12.3 12.5 9.8
1994.............................. 0.5 0.5 1.2 (3.7) (3.5) (2.9)
1995.............................. 10.4 10.7 11.0 17.3 18.4 18.5
Last 5 years...................... 7.3 7.5 7.1 9.7 10.2 9.6
Last 10 years..................... 7.9 8.1 7.7 9.8 10.0 12.9
Since inception................... 9.7 9.8 9.6 13.5 13.8 9.5
<CAPTION>
<S> <C>
Lehman Bros.
Govt/Corp
Year Bond Index(3)
- ---------------------------------- -------------
1981(4)........................... 10.3%
1982(4)........................... 31.1
1983.............................. 8.0
1984.............................. 15.0
1985.............................. 21.3
1986.............................. 15.6
1987.............................. 2.3
1988.............................. 7.6
1989.............................. 14.2
1990.............................. 8.3
1991.............................. 16.1
1992.............................. 7.6
1993.............................. 11.0
1994.............................. (3.5)
1995.............................. 19.2
Last 5 years...................... 9.6
Last 10 years..................... 12.7
Since inception................... 9.8
</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)Inception dates are January 1, 1982 (Short-Intermediate Composite) and
October 1, 1981 (Fully Discretionary Composite).
34
<PAGE>
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<PAGE>
NICHOLAS-APPLEGATE-Registered Trademark- MUTUAL FUNDS
INSTITUTIONAL FIXED INCOME PORTFOLIOS
600 West Broadway, 30th Floor
San Diego, California 92101
(800) 551-8043
STATEMENT OF ADDITIONAL INFORMATION
March 4, 1996
Nicholas-Applegate Mutual Funds (the "Trust") is an open-end
management investment company currently offering a number of separate
diversified portfolios. This Statement of Additional Information contains
information regarding two of these portfolios (each a "Portfolio" and
collectively the "Portfolios"): Nicholas-Applegate Short-Intermediate
Institutional Fixed Income Portfolio (the "Short-Intermediate Portfolio") and
Nicholas-Applegate Fully Discretionary Institutional Fixed Income Portfolio (the
"Fully Discretionary Portfolio").
This Statement of Additional Information is not a prospectus, but
contains information in addition to and more detailed than that set forth in the
Portfolios' Prospectus and should be read in conjunction with each such
Prospectus. Each Portfolio Prospectus may be obtained without charge by calling
or writing the Trust at the address and phone number given above.
TABLE OF CONTENTS
Page
General Information. . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Objectives, Policies and Risks. . . . . . . . . . . . . 2
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . 22
Principal Holders of Securities. . . . . . . . . . . . . . . . . . 25
Trustees and Principal Officers. . . . . . . . . . . . . . . . . . 25
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . 29
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . 32
Purchase and Redemption of Portfolio Shares. . . . . . . . . . . . 33
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . 33
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . 35
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Performance Information. . . . . . . . . . . . . . . . . . . . . . 41
Custodian, Transfer and Dividend Disbursing Agent,
Independent Accountants and Legal Counsel . . . . . . . . . . . 42
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Appendix A - Description of Securities Ratings . . . . . . . . . . A-1
Appendix B - Financial Statements. . . . . . . . . . . . . . . . . A-9
B-1
<PAGE>
GENERAL INFORMATION
The Trust and the Master Trust were organized in December 1992 as
business trusts under the laws of Delaware. The Trust offers shares of numerous
portfolios with differing sales load, shareholder service plan and distribution
plan arrangements, including Series A portfolios, Series B portfolios, Series C
portfolios, Institutional portfolios and Qualified Portfolios. This Statement
of Additional Information contains information regarding two Portfolios, the
Short-Intermediate Institutional Fixed Income Portfolio and the Fully
Discretionary Institutional Fixed Income Portfolio.
The various portfolios of the Trust seek to achieve their respective
investment objectives by investing all of their assets in corresponding series
of the Nicholas-Applegate Investment Trust (the "Master Trust"), an open-end
management investment company organized as a Delaware business trust. The
Master Trust offers shares of fourteen separate series (each a "Fund" and
collectively the "Funds") to the portfolios and other investment companies and
institutional investors, including the Short-Intermediate Fixed Income Fund (the
"Short-Intermediate Fund") in which the Short-Intermediate Portfolio invests,
and the Fully Discretionary Fixed Income Fund (the "Fully Discretionary Fund"),
in which the Fully Discretionary Portfolio invests.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following discussion supplements the discussion of each
Portfolio's investment objective and policies as set forth in the Portfolios'
Prospectus. As each Portfolio seeks to achieve its investment objective by
investing all of its assets in a corresponding Fund with the same investment
objective as the Portfolio, the following discussion describes the various
investment policies and techniques employed by the Funds. There can be no
assurance that the investment objective of any of the Funds or Portfolios can be
achieved.
CORPORATE DEBT SECURITIES
Each Fund invests in non-convertible debt securities of foreign and
domestic companies over a cross-section of industries. The debt securities in
which the Funds may invest will be of varying maturities and may include
corporate bonds, debentures, notes and other similar corporate debt instruments.
RISK OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in
debt securities. Yields on short, intermediate, and long-term securities depend
on a variety of factors, including the general condition of the money and bond
markets, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. Debt securities with longer maturities tend to produce
higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with short maturities and lower
yields. The market prices of debt securities usually vary, depending upon
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 the Funds to
achieve their investment objectives also depends on the continuing ability of
the issuers of the debt securities in which the Funds invest to meet their
obligations for the payment of interest and principal when due.
B-2
<PAGE>
RISKS OF HOLDING LOWER-RATED DEBT SECURITIES
Each Fund may hold up to 5% of its net assets in debt securities rated
below "Baa" by Moody's or "BBB-" by S&P or below investment grade by other
recognized rating agencies, or in unrated securities of comparable quality under
certain circumstances. Securities with ratings below "Baa" and/or "BBB-" are
commonly referred to as "junk bonds." Such bonds are subject to greater market
fluctuations and risk of loss of income and principal than higher rated bonds,
and are considered to be predominantly speculative, for a variety of reasons,
including the following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and
interest rates affect high yield securities differently from other securities.
For example, the prices of high yield bonds have been found to be less sensitive
to interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of
a bond defaults, the Funds may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and the Funds'
asset values.
PAYMENT EXPECTATIONS. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining interest
rate market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If a Fund experiences unexpected net redemptions,
it may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing the Fund's rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds, and this
may impact the Investment Adviser's ability to accurately value high yield bonds
and the Fund's assets and hinder the Fund's ability to dispose of the bonds.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds, especially
in a thinly traded market.
POTENTIAL LEGISLATION. Legislation has been and could be adopted
limiting the use, or tax and other advantages, of junk bonds which could
adversely affect their value. Under the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, for example, federally insured savings
and loan associations were required to divest their investments in non-
investment grade corporate debt securities by July 1, 1994.
CREDIT RATINGS. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. Also, since
credit rating agencies may fail to timely change the credit ratings to reflect
subsequent events, the Investment Adviser must monitor the issuers of high yield
bonds in the Funds' portfolios to determine if the issuers will have sufficient
cash flow and profits to meet required principal and interest payments, and to
assure the bonds' liquidity so the Funds can meet redemption requests. The
Funds will not necessarily dispose of a portfolio security when its rating has
been changed.
SHORT-TERM INVESTMENTS
Each of the Funds invests in any of the following securities and
instruments:
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BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
Each Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Funds will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government.
A Fund holding instruments of foreign banks or financial institutions
may be subject to additional investment risks that are different in some
respects from those incurred by a fund which invests only in debt obligations of
U.S. domestic issuers. See "Foreign Investments" below. Such risks include
future political and economic developments, the possible imposition of
withholding taxes by the particular country in which the issuer is located on
interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that a Fund
may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under their respective investment
objectives and policies stated above and in their Prospectus, the Funds may make
interest-bearing time or other interest-bearing deposits in commercial or
savings banks. Time deposits are non-negotiable deposits maintained at a
banking institution for a specified period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Funds may invest in certificates
of deposit (interest-bearing time deposits) issued by savings banks or savings
and loan associations that have capital, surplus and undivided profits in excess
of $100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS.
The Funds may invest a portion of their assets in commercial paper and
short-term notes. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
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Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-l" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Investment Adviser to be
of comparable quality. These rating symbols are described in Appendix A.
Corporate obligations include bonds and notes issued by corporations
to finance longer-term credit needs than supported by commercial paper. While
such obligations generally have maturities of ten years or more, the Funds may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
MONEY MARKET FUNDS
The Funds may under certain circumstances invest a portion of their
assets in money market funds. The Investment Company Act prohibits the Funds
from investing more than 5% of the value of their total assets in any one
investment company, or more than 10% of the value of their total assets in
investment companies as a group, and also restricts their investment in any
investment company to 3% of the voting securities of such investment company.
The Investment Adviser will not impose an advisory fee on assets of a Fund
invested in a money market mutual fund. However, an investment in a money
market mutual fund will involve payment by a Fund of its pro rata share of
advisory and administrative fees charged by such fund.
GOVERNMENT OBLIGATIONS
Each Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
Each Fund may also invest in sovereign debt obligations of foreign
countries. A sovereign debtor's willingness or ability to repay principal and
interest in a timely manner may be affected by a number of factors, including
its cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which it
may be subject.
MUNICIPAL SECURITIES
Each Fund may invest in debt obligations issued by state and local
governments, territories and possessions of the U.S., regional government
authorities, and their agencies and instrumentalities
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("municipal securities"). Municipal securities include both notes (which have
maturities of less than one year) and bonds (which have maturities of one year
or more) that bear fixed or variable rates of interest.
In general, "municipal securities" debt obligations are issued to
obtain funds for a variety of public purposes, such as the construction, repair,
or improvement of public facilities including airports, bridges, housing,
hospitals, mass transportation, schools, streets, water and sewer works.
Municipal securities may be issued to refinance outstanding obligations as well
as to raise funds for general operating expenses and lending to other public
institutions and facilities.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit, and taxing power
for the payment of principal and interest. Characteristics and methods of
enforcement of general obligation bonds vary according to the law applicable to
a particular issuer, and the taxes that can be levied for the payment of debt
service may be limited or unlimited as to rates or amounts of special
assessments. Revenue securities are payable only from the revenues derived from
a particular facility, a class of facilities or, in some cases, from the
proceeds of a special excise tax. Revenue bonds are issued to finance a wide
variety of capital projects including: electric, gas, water and sewer systems;
highways, bridges, and tunnels; port and airport facilities; colleges and
universities; and hospitals. Although the principal security behind these bonds
may vary, many provide additional security in the form of a debt service reserve
fund the assets of which may be used to make principal and interest payments on
the issuer's obligations. Housing finance authorities have a wide range of
security, including partially or fully insured mortgages, rent subsidized and
collateralized mortgages, and the net revenues from housing or other public
projects. Some authorities are provided further security in the form of a
state's assurance (although without obligation) to make up deficiencies in the
debt service reserve fund.
Both Funds may purchase insured municipal debt in which scheduled
payments of interest and principal are guaranteed by a private, non-governmental
or governmental insurance company. The insurance does not guarantee the market
value of the municipal debt or the value of the shares of a Fund.
Securities of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore,
as a result of legislation or other conditions, the power or ability of any
issuer to pay, when due, the principal of and interest on its municipal
obligations may be materially affected.
MORAL OBLIGATION SECURITIES. Municipal securities may include "moral
obligation" securities which are usually issued by special purpose public
authorities. If the issuer of moral obligation bonds cannot fulfill its
financial responsibilities from current revenues, it may draw upon a reserve
fund, the restoration of which is moral commitment but not a legal obligation of
the state or municipality which created the issuer.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS. Both Funds may
invest in tax-exempt industrial development bonds and pollution control bonds
which, in most cases, are revenue bonds and generally are not payable from the
unrestricted revenues of an issuer. They are issued by or on behalf of public
authorities to raise money to finance privately operated facilities for
business, manufacturing, housing, sport complexes, and pollution control.
Consequently, the credit quality of these securities is dependent upon the
ability of the user of the facilities financed by the bonds and any guarantor to
meet its financial obligations.
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MUNICIPAL LEASE OBLIGATIONS. Both Funds may invest in lease
obligations or installment purchase contract obligations of municipal
authorities or entities ("municipal lease obligations"). Although lease
obligations do not constitute general obligations of the municipality for which
its taxing power is pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payment due
under the lease obligation. A Fund may also purchase "certifies of
participation," which are securities issued by a particular municipality or
municipal authority to evidence a proportionate interest in base rental or lease
payments relating to a specific project to be made by the municipality, agency
or authority. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in any year unless money is appropriated for such
purpose for such year. Although "non-appropriation" lease obligations are
secured by the leased property, disposition of the property in the event of
default and foreclosure might prove difficult. In addition, these securities
represent a relatively new type of financing, and certain lease obligations may
therefore be considered to be illiquid securities.
Both Funds will attempt to minimize the special risks inherent in
municipal lease obligations and certificates of participation by purchasing only
lease obligations which meet the following criteria: (1) rated A or better by at
least one nationally recognized securities rating organization; (2) secured by
payments from a governmental lessee which has actively traded debt obligations;
(3) determined by the Investment Adviser to be critical to the lessee's ability
to deliver essential services; and (4) contain legal features which the
Investment Adviser deems appropriate, such as covenants to make lease payments
without the right of offset or counterclaim, requirements for insurance
policies, and adequate debt service reserve funds.
SHORT-TERM OBLIGATIONS. Both Funds may invest in short-term municipal
obligations. These securities include the following:
TAX ANTICIPATION NOTES are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
REVENUE ANTICIPATION NOTES are issued in expectation of receipt of
other kinds of revenue, such as federal revenues available under the Federal
Revenue Sharing Program. They also are usually general obligations of the
issuer.
BOND ANTICIPATION NOTES normally are issued to provide interim
financing until long-term financing can be arranged. The long-term bonds then
provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal National Mortgage Association or
the Government National Mortgage Association.
SHORT-TERM DISCOUNT NOTES (tax-exempt commercial paper) are short-term
(365 days or less) promissory notes issued by municipalities to supplement their
cash flow.
ZERO COUPON SECURITIES
Each Fund may invest in zero coupon securities issued by the U.S.
Treasury on up to 50% of its respective net assets. Zero coupon Treasury
securities are U.S. Treasury notes and bonds which have been stripped of their
unmatured interest coupons and receipts, or certificates representing interests
in such stripped debt obligations or coupons. Because a zero coupon security
pays no interest to its holder during
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its life or for a substantial period of time, it usually trades at a deep
discount from its face or par value and will be subject to greater fluctuations
of market value in response to changing interest rates than debt obligations of
comparable maturities which make current distributions of interest.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each of the Funds may acquire variable and floating rate instruments.
Such instruments are frequently not rated by credit rating agencies; however,
unrated variable and floating rate instruments purchased by a Fund will be
determined by the Investment Adviser under guidelines established by the Master
Trust's Board of Trustees to be of comparable quality at the time of the
purchase and rated instruments eligible for purchase by the Fund. In making
such determinations, the Investment Adviser will consider the earning power,
cash flow and other liquidity ratios of the issuers of such instruments (such
issuers include financial, merchandising, bank holding and other companies) and
will monitor their financial condition. An active secondary market may not exist
with respect to particular variable or floating rate instruments purchased by
the Fund. The absence of such an active secondary market could make it
difficult for the Fund to dispose of the variable or floating rate instrument
involved in the event of the issuer of the instrument defaulting on its payment
obligation or during periods in which the Fund is not entitled to exercise its
demand rights, and the Fund could, for these or other reasons, suffer a loss to
the extent of the default. Variable and floating rate instruments may be
secured by bank letters of credit.
MORTGAGE-RELATED SECURITIES
Each of the Funds may invest in mortgage-related securities.
Mortgage-related securities are derivative interests in pools of mortgage loans
made to U.S. residential home buyers, including mortgage loans made by savings
and loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations. The Funds may also
invest in debt securities which are secured with collateral consisting of U.S.
mortgage-related securities, and in other types of U.S. and foreign
mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-throughs." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is the Government National Mortgage Association ("GNMA"). GNMA is a
wholly owned United States Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the United States Government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of mortgages insured by the Federal Housing Agency or
guaranteed by the Veterans Administration.
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Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not
insured or guaranteed by any government agency from a list of approved
seller/services which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. FHLMC is a government-sponsored corporation created to
increase availability of mortgage credit for residential housing and owned
entirely by private stockholders. FHLMC issues participation certificates which
represent interests in conventional mortgages from FHLMC's national portfolio.
Pass-through securities issued by FNMA and participation certificates issued by
FHLMC are guaranteed as to timely payment of principal and interest by FNMA and
FHLMC, respectively, but are not backed by the full faith and credit of the
United States Government.
Although the underlying mortgage loans in a pool may have maturities
of up to 30 years, the actual average life of the pool certificates typically
will be substantially less because the mortgages will be subject to normal
principal amortization and may be prepaid prior to maturity. Prepayment rates
vary widely and may be affected by changes in market interest rates. In periods
of falling interest rates, the rate of prepayment tends to increase, thereby
shortening the actual average life of the pool certificates. Conversely, when
interest rates are rising, the rate of prepayments tends to decrease, thereby
lengthening the actual average life of the certificates. Accordingly, it is not
possible to predict accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A CMO in which the
Funds may invest is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the first class has been retired.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related
securities are interests in pools of mortgage loans made to residential home
buyers domiciled in a foreign country. These include mortgage loans made by
trust and mortgage loan companies, credit unions, chartered banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related, and private organizations (e.g.,
Canada Mortgage and Housing Corporation and First Australian National Mortgage
Acceptance Corporation Limited). The mechanics of these mortgage-related
securities are generally the same as those issued in the United States.
However, foreign mortgage markets may differ materially from the U.S. mortgage
market with respect to matters such as the sizes of loan pools, pre-payment
experience, and maturities of loans.
FOREIGN INVESTMENTS
Each of the Funds may invest in securities of foreign issuers that are
not publicly traded in the United States. The Funds may also invest in
depository receipts.
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DEPOSITORY RECEIPTS. American Depository Receipt ("ADRs") may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR prices are denominated in United States dollars; the underlying
security may be denominated in a foreign currency, although the underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, diversification and balance of
payments position. The internal politics of certain foreign countries may not
be as stable as those of the United States. Governments in certain foreign
countries also continue to participate to a significant degree, through
ownership interest or regulation, in their respective economies. Action by
these governments could include restrictions on foreign investment,
nationalization, expropriation of goods or imposition of taxes, and could have a
significant effect on market prices of securities and payment of interest. The
economies of many foreign countries are heavily dependent upon international
trade and are accordingly affected by the trade policies and economic conditions
of their trading partners. Enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the securities
markets of such countries.
CURRENCY FLUCTUATIONS. The Fully Discretionary Fund may invest in
securities denominated in foreign currencies. Accordingly, a change in the
value of any such currency against the U.S. dollar will result in a
corresponding change in the U.S. dollar value of the Fund's assets denominated
in that currency. Such changes will also affect the Fund's income. The value
of the Fund's assets may also be affected significantly by currency restrictions
and exchange control regulations enacted from time to time.
MARKET CHARACTERISTICS. The Investment Adviser expects that most
foreign securities in which the Funds invest will be purchased in
over-the-counter markets or on exchanges located in the countries in which the
principal offices of the issuers of the various securities are located, if that
is the best available market. Foreign exchanges and markets may be more
volatile than those in the United States. While growing in volume, they usually
have substantially less volume than U.S. markets, and the Funds' portfolio
securities may be less liquid and more volatile than U.S. Government securities.
Moreover, settlement practices for transactions in foreign markets may differ
from those in United States markets, and may include delays beyond periods
customary in the United States. Foreign security trading practices, including
those involving securities settlement where Fund assets may be released prior to
receipt of payment or securities, may expose the Fund to increased risk in the
event of a failed trade or the insolvency of a foreign broker-dealer.
Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions in the United States, and may not involve
clearing mechanisms and related guarantees. The value of such positions also
could be adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. The value of a
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
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TAXES. The interest payable on certain of the Funds' foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Portfolios'
shareholders. A shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a credit or
deduction of U.S. federal income tax purposes for his proportionate share of
such foreign taxes paid by the Funds.
COSTS. To the extent that the Funds invest in foreign securities, the
expense ratios of the Funds are likely to be higher than those of investment
companies investing in domestic securities, since the cost of maintaining the
custody of foreign securities is higher.
In considering whether to invest in the securities of a foreign
company, the Investment Adviser considers such factors as the characteristics of
the particular company, differences between economic trends and the performance
of securities markets within the U.S. and those within other countries, and also
factors relating to the general economic, governmental and social conditions of
the country or countries where the company is located. The extent to which a
Fund will be invested in foreign companies and countries and depository receipts
will fluctuate from time to time within the limitations described in the
Prospectus, depending on the Investment Adviser's assessment of prevailing
market, economic and other conditions.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. The Fully Discretionary Fund is
authorized to purchase covered "put" and "call" options with respect to
securities which are otherwise eligible for purchase by the Fund, subject to
certain restrictions.
If the Fully Discretionary Fund purchases a put option, the Fund
acquires the right to sell the underlying security at a specified price at any
time during the term of the option (for "American-style" options) or on the
option expiration date (for "European-style" options). For example, purchasing
put options may be used as a portfolio investment strategy when the Investment
Adviser perceives significant short-term risk but substantial long-term
appreciation for the underlying security. The put option acts as an insurance
policy, as it protects against significant downward price movement while it
allows full participation in any upward movement. If the Fund is holding a
stock which it feels has strong fundamentals, but for some reason may be weak in
the near term, the Fund may purchase a put option on such security, thereby
giving itself the right to sell such security at a certain strike price
throughout the term of the option. Consequently, the Fund will exercise the put
only if the price of such security falls below the strike price of the put. The
difference between the put's strike price and the market price of the underlying
security on the date the Fund exercises the put, less transaction costs, will be
the amount by which the Fund will be able to hedge against a decline in the
underlying security. If during the period of the option the market price for
the underlying security remains at or above the put's strike price, the put will
expire worthless, representing a loss of the price the Fund paid for the put,
plus transaction costs. If the price of the underlying security increases, the
profit the Fund realizes on the sale of the security will be reduced by the
premium paid for the put option less any amount for which the put may be sold.
If the Fully Discretionary Fund purchases a call option, it acquires
the right to purchase the underlying security at a specified price at any time
during the term of the option. For example, the Fund may purchase a call option
on a Security it intends to buy in the future, to seek to protect the Fund
against an increase in the price of the security. The Fund will exercise a call
option only if the price of the underlying security is above the strike price at
the time of exercise. If during the option period the market price for the
underlying security remains at or below the strike price of the call option, the
option will expire worthless, representing a loss of the price paid for the
option, plus transaction costs. If the call option has been purchased to hedge
against an increase in the price of the underlying security and the price of the
underlying
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security thereafter falls, the price of the security when purchased will be
increased by the premium paid for the call option less any amount for which such
option may be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which the
Investment Adviser believes there is an active secondary market to facilitate
closing transactions.
WRITING PUT AND CALL OPTIONS. The Fully Discretionary Fund may also
write covered put and call options.
A put option is "covered" if the Fund holds cash or liquid high-grade
debt securities in a segregated account with the Custodian in an amount
sufficient to acquire the security, or holds a put option on the same security
or index with the same or a greater exercise price (or with a lesser price and
with the balance maintained as cash or liquid high grade debt securities). The
writer of a put option receives a premium and gives the purchaser the right to
require the writer to buy the security underlying the option at the exercise
price.
A call option is "covered" if the Fund owns the security underlying
the call or has an absolute right to acquire the security without additional
cash consideration (or, if additional cash consideration is required, cash or
cash equivalents in such amount as are held in a segregated account by the
Custodian). The writer of a call option receives a premium and gives the
purchaser the right to buy the security underlying the option at the exercise
price. The writer has the obligation upon exercise of the option to deliver the
underlying security against payment of the exercise price during the option
period.
If the writer of an exchange-traded option wishes to terminate his
obligation, he may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. A writer may not effect a closing purchase transaction after it has
been notified of the exercise of an option.
Effecting a closing transaction in the case of a written put option
will permit the Fund to permit the cash or other segregated collateral for other
investment purposes or to write another put option on the underlying security
with either a different exercise price, expiration date or both. Effecting a
closing transaction in the case of a written call option will permit the Fund to
write another call option on the underlying security with either a different
exercise price, expiration date or both; in addition, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
The Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option. The Fund will realize a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing transaction
are less than the premium paid to purchase the option. However, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss to the Fund resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Fund. Similarly,
because increases in the market price of a put option will generally reflect
decreases in the market price of the underlying
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security, any loss to the Fund resulting from the repurchase of a put option is
likely to be offset in whole or in part by the depreciation of the underlying
security if it were to be purchased by the Fund.
RISKS OF TRANSACTIONS IN OPTIONS. There are several risks associated
with transactions in options on securities and indices. Options may be more
volatile than the underlying instruments and, therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. There are also significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objective. In addition, a liquid secondary market for particular
options may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of option of underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an exchange; the
facilities of an exchange or clearing corporation may not at all times be
adequate to handle current trading volume; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which the Fully Discretionary Fund may enter into options transactions
may be limited by the Internal Revenue Code requirements for qualification of
the corresponding Portfolio as a regulated investment company. See "Dividends,
Distributions and Taxes."
In addition, when trading options on foreign exchanges, many of the
protections afforded to participants in United States option exchanges will not
be available. For example, there may be no daily price fluctuation limits in
such exchanges or markets, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the Fully Discretionary Fund
as an option writer could lose amounts substantially in excess of its initial
investment, due to the margin and collateral requirements typically associated
with such option writing. See "Dealer Options" below.
DEALER OPTIONS. The Fully Discretionary Fund will engage in
transactions involving dealer options as well as exchange-traded options.
Certain risks are specific to dealer options. While the Fund might look to a
clearing corporation to exercise exchange-traded options, if the Fund were to
purchase a dealer option it would need to rely on the dealer from which it
purchased the option to perform if the option were exercised. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as well
as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market
while dealer options may not. Consequently, the Fund may generally be able to
realize the value of a dealer option it has purchased only by exercising or
reselling the option to the dealer who issued it. Similarly, when the Fund
writes a dealer option, the Fund may generally be able to close out the option
prior to its expiration only by entering into a closing purchase transaction
with the dealer to whom the Fund originally wrote the option. While the Fund
will seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with the
Fund, there can be no assurance that the Fund will at any time be able to
liquidate a dealer option at a favorable price at any time prior to expiration.
Unless the Fund, as a
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covered dealer option writer, is able to effect a closing purchase transaction,
it will not be able to liquidate securities (or other assets) used as cover
until the option expires or is exercised. In the event of insolvency of the
other party, the Fund may be unable to liquidate a dealer option. With respect
to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement
may impair the Portfolio's ability to sell portfolio securities at a time when
such sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities.
The Fully Discretionary Fund may treat the cover used for written dealer options
as liquid if the dealer agrees that the Fund may repurchase the dealer option it
has written for a maximum price to be calculated by a predetermined formula. In
such cases, the dealer option would be considered illiquid only to the extent
the maximum purchase price under the formula exceeds the intrinsic value of the
option. Accordingly, the Fund will treat dealer options as subject to the
Fund's limitation on unmarketable securities. If the Commission changes its
position on the liquidity of dealer options, the Fund will change its treatment
of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The Fully Discretionary Fund may buy or sell put and call options on
foreign currencies. A put or call option on a foreign currency gives the
purchaser of the option to right to sell or purchase a foreign currency at the
exercise price until the option expires. The Fund will use foreign currency
options separately or in combination to control currency volatility. Among the
strategies employed to control currency volatility is an option collar. An
option collar involves the purchase of a put option and the simultaneous sale of
call option on the same currency with the same expiration date but with
different exercise (or "strike") prices. Generally, the put option will have an
out-of-the-money strike price, while the call option will have either an at-the-
money strike price or and in-the-money strike price. Foreign currency options
are derivative securities. Currency options traded on U.S. or other exchanges
may be subject to position limits which may limit the ability of the Fund to
reduce foreign currency risk using such options.
As with other kinds of option transactions, the writing of an option
on foreign currency will constitute only a partial hedge, up to the amount of
the premium received. The Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of an exchange rate
movements adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs.
FORWARD CURRENCY CONTRACTS
The Fully Discretionary Fund may enter into forward currency contracts
in anticipation of changes in currency exchange rates. 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 might 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, it might sell a particular currency on
either a spot or forward basis to hedge against an anticipated decline in the
dollar value of securities it intends to or has contracted to sell. Although
this strategy could minimize the risk of loss due to a decline in the value of
the hedged currency, it could also limit any potential gain from an increase in
the value of the currency.
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FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Funds may invest in futures contracts, and the Fully
Discretionary Fund may invest in options on futures contracts. The Funds will
trade in such derivative securities for bona fide hedging purposes and otherwise
in accordance with the rules of the Commodity Futures Trading Commission
("CFTC"). Each Fund will segregate liquid assets in a separate account with its
Custodian when required to do so by CFTC guidelines in order to cover its
obligation in connection with futures and options transactions.
INTEREST RATE FUTURES CONTRACTS. The Funds may invest in futures
contracts on interest rates. Bond prices are established in both the cash
market and the futures market. In the cash market, bonds are purchased and sold
with payment for the full purchase price of the bond being made in cash,
generally within five business days after the trade. In the futures market, a
contract is made to purchase or sell a bond in the future for a set price on a
certain date. Historically, the prices for bonds established in the futures
markets have generally tended to move in the aggregate in concert with cash
market prices, and the prices have maintained fairly predictable relationships.
The sale of an interest rate futures contract by a Fund would create
an obligation by the Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specific future time for a specified
price. A futures contract purchased by a Fund would create an obligation by the
Fund, as purchaser, to take delivery of the specific type of financial
instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without delivery of securities. Closing
out of a futures contract sale is effected by the Fund's entering into a futures
contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price in the sale
exceeds the price in the offsetting purchase, the Fund is paid the difference
and thus realizes a gain. If the offsetting purchase price exceeds the sale
price, the Fund pays the difference and realizes a loss. Similarly, the closing
out of a futures contract purchase is effected by the Fund's entering into a
futures contract sale. If the offsetting sale price exceeds the purchase price,
the Fund realizes a gain, and if the purchase price exceeds the offsetting sale
price, the Fund realizes a loss.
No price is paid or received by a Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
will be required to deposit in a segregated account with its Custodian an amount
of cash or U.S. Treasury bills equal to approximately 5% of the contract amount.
This amount is known as initial margin. The margin requirements for foreign
futures contracts may be different.
The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying index fluctuates, to
reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when the
Fund has purchased a index futures contract and the price of the underlying
index has risen, that position will have increased in value and the Fund will
receive from the broker a variation margin payment equal to that increase in
value. Conversely, when the Fund has purchased a index futures contract and the
price of the
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underlying index has declined, the position will be less valuable and the Fund
will be required to make a variation margin payment to the broker.
At any time prior to expiration of a futures contract, a Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract. A final determination
of variation margin is made on closing the position. Additional cash is paid by
or released to the Fund, which realizes a loss or gain.
The Funds deal only in standardized contracts on recognized exchanges.
Each exchange guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; Government National Mortgage
Association (GNMA) modified pass-through mortgage-backed securities; three-month
United States Treasury bills; and 90-day commercial paper. A Fund may trade in
any futures contract for which there exists a public market, including, without
limitation, the foregoing instruments. International interest rate futures
contracts are traded on the London International Financial Futures Exchange, the
Singapore International Monetary Exchange, the Sydney Futures Exchange Limited
and the Tokyo Stock Exchange.
FOREIGN CURRENCY FUTURES CONTRACTS. The Fully Discretionary Fund may
use foreign currency futures contracts for hedging purposes. A foreign currency
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a foreign currency at a specified price
and time. A public market exists in futures contracts covering several foreign
currencies, including the Australian dollar, the Canadian dollar, the British
pound, the German mark, the Japanese yen, the Swiss franc, and certain
multinational currencies such the European Currency Unit ("ECU"). Other foreign
currency futures contracts are likely to be developed and traded in the future.
The Fund will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity, or quoted on an automated quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, a Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract, a
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the
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future and also experience a decline in value in its portfolio securities.
However, the Investment Adviser believes that over time the value of a
diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Investment Adviser may still not
result in a successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Funds would continue to be required to make daily cash payments
of variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by a Fund is also subject to the Investment
Adviser's ability to predict correctly movements in the direction of the market.
For example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
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insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which a Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
OPTIONS ON FUTURES CONTRACTS. The Fully Discretionary Fund may
purchase options on the futures contracts they can purchase or sell, as
described above. 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, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder or writer of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. There is no guarantee that such closing transactions can be
effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is limited to the premium paid for the options (plus
transaction costs).
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS.
Except as otherwise described in the Portfolios' Prospectus, a Fund will not
engage in transactions in futures contracts or related options for speculation,
but only as a hedge against changes resulting from market conditions in the
values of securities held in the Fund's portfolio or which it intends to
purchase and where the transactions are economically appropriate to the
reduction of risks inherent in the ongoing management of the Funds. A Fund may
not purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. A Fund also may
not purchase or sell futures or purchase 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.
Upon the purchase of futures contracts by a Fund, an amount of cash
and cash equivalents, equal to the market value of the futures contracts, will
be deposited in a segregated account with the Custodian or in a margin account
with a broker to collateralize the position and thereby insure that the use of
such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and may be changed by the Trustees of the Master
Trust if applicable law permits such a change and the change is consistent with
the overall investment objective and policies of the Fund.
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The extent to which a Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the corresponding Portfolio as a regulated investment company.
See "Dividends, Distributions and Taxes."
INTEREST RATE AND CURRENCY SWAPS
INTEREST RATE SWAPS. As indicated in the Prospectus, an interest rate
swap is a contract between two entities ("counterparties") to exchange interest
payments (of the same currency) between the parties. In the most common
interest rate swap structure, one counterparty agrees to make floating rate
payments to the other counterparty, which in turn makes fixed rate payments to
the first counterparty. Interest payments are determined by applying the
respective interest rates to an agreed upon amount, referred to as the "notional
principal amount." In most such transactions, the floating rate payments are
tied to the London Interbank Offered Rate, which is the offered rate for short-
term Eurodollar deposits between major international banks. As there is no
exchange of principal amounts, an interest rate swap is not an investment or a
borrowing.
CROSS CURRENCY SWAPS. A cross-currency swap is a contract between two
counterparties to exchange interest and principal payments in different
currencies. A cross-currency swap normally has an exchange of principal at
maturity (the final exchange); an exchange of principal at the start of the swap
(the initial exchange) is optional. An initial exchange of notional principal
amounts at the spot exchange rate serves the same function as a spot transaction
in the foreign exchange market (for an immediate exchange of foreign exchange
risk). An exchange at maturity of notional principal amounts at the spot
exchange rate serves the same function as a forward transaction in the foreign
exchange market (for a future transfer of foreign exchange risk). The currency
swap market convention is to use the spot rate rather than the forward rate for
the exchange at maturity. The economic difference is realized through the
coupon exchanges over the life of the swap. In contrast to single currency
interest rate swaps, cross-currency swaps involve both interest rate risk and
foreign exchange risk.
SWAP OPTIONS. Each Fund may invest in swap options. A swap option is
a contract that gives a counterparty the right (but not the obligation) to enter
into a new swap agreement or to shorten, extend, cancel or otherwise change an
existing swap agreement, at some designated future time on specified terms. It
is different from a forward swap, which is a commitment to enter into a swap
that starts a some future date with specified rates. A swap option may be
structured European-style (exercisable on the pre-specified date) or American-
style (exercisable during a designated period). The right pursuant to a swap
option must be exercised by the right holder. The buyer of the right to receive
fixed pursuant to a swap option is said to own a call.
CAPS AND FLOORS. Each Fund may also invest in interest rate caps and
floors. An interest rate cap is a right to receive periodic cash payments over
the life of the cap equal to the difference between any higher actual level of
interest rates in the future and a specified strike (or "cap") level. The cap
buyer purchases protection for a floating rate move above the strike. An
interest rate floor is the right to receive periodic cash payments over the life
of the floor equal to the difference between any lower actual level of interest
rates in the future and a specified strike (or "floor") level. The floor buyer
purchases protection for a floating rate move below the strike. The strikes are
typically based on the three-month LIBOR (although other indices are available)
and are measured quarterly. Rights arising pursuant to both caps and floors are
exercised automatically if the strike is in the money. Caps and floors
eliminate the risk that the buyer fails to exercise an in-the-money option.
RISKS ASSOCIATED WITH SWAPS. The risks associated with interest rate
and currency swaps and interest rate caps and floors are similar to those
described above with respect to dealer options. In connection with such
transactions, a Fund relies on the other party to the transaction to perform its
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obligations pursuant to the underlying agreement. If there were a default by
the other party to the transaction, the Fund would have contractual remedies
pursuant to the agreement, but could incur delays in obtaining the expected
benefit of the transaction or loss of such benefit. In the event of insolvency
of the other party, the Fund might be unable to obtain its expected benefit. In
addition, while each Fund will seek to enter into such transactions only with
parties which are capable of entering into closing transactions with the Fund,
there can be no assurance that a Fund will be able to close out such a
transaction with the other party, or obtain an offsetting position with any
other party, at any time prior to the end of the term of the underlying
agreement. This may impair a Fund's ability to enter into other transactions at
a time when doing so might be advantageous.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Investment Adviser, subject to the seller's agreement to
repurchase and the Fund's agreement to resell such securities at a mutually
agreed upon date and price. The repurchase price generally equals the price
paid by the Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the underlying portfolio
security). Securities subject to repurchase agreements will be held by the
Custodian or in the Federal Reserve/Treasury Book-Entry System or an equivalent
foreign system. The seller under a repurchase agreement will be required to
maintain the value of the underlying securities at not less than 102% of the
repurchase price under the agreement. If the seller defaults on its repurchase
obligation, the Fund holding the repurchase agreement will suffer a loss to the
extent that the proceeds from a sale of the underlying securities is less than
the repurchase price under the agreement. Bankruptcy or insolvency of such a
defaulting seller may cause the Fund's rights with respect to such securities to
be delayed or limited. Repurchase agreements are considered to be loans under
the Investment Company Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
Each of the Funds may purchase securities on a "when-issued," forward
commitment or delayed settlement basis. In this event, the Custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, a Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that the Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash.
The Funds do not intend to engage in these transactions for
speculative purposes but only in furtherance of their investment objectives.
Because a Fund will set aside cash or liquid portfolio securities to satisfy its
purchase commitments in the manner described, the Fund's liquidity and the
ability of the Investment Adviser to manage it may be affected in the event the
Fund's forward commitments, commitments to purchase when-issued securities and
delayed settlements ever exceeded 15% of the value of its net assets.
A Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When a Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to
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consummate the trade. Failure of such party to do so may result in a Fund's
incurring a loss or missing an opportunity to obtain a price credited to be
advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of a Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
BORROWING
Each of the Funds is authorized to borrow money from time to time for
temporary, extraordinary or emergency purposes or for clearance of transactions
in amounts up to 20% of the value of its total assets at the time of such
borrowings. The use of borrowing by a Fund involves special risk considerations
that may not be associated with other funds having similar objectives and
policies. Since substantially all of a Fund's assets fluctuate in value,
whereas the interest obligation resulting from a borrowing will be fixed by the
terms of the Fund's agreement with its lender, the asset value per share of the
Fund will tend to increase more when its portfolio securities increase in value
and to decrease more when its portfolio assets decrease in value than would
otherwise be the case if the Fund did not borrow funds. In addition, interest
costs on borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on borrowed funds. Under adverse
market conditions, the 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.
LENDING PORTFOLIO SECURITIES
Each of the Funds may lend its portfolio securities in an amount not
exceeding 30% of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund
to reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Internal Revenue Code.
ILLIQUID SECURITIES
Neither Fund may invest more than 15% of the value of its net assets
in securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid. The Investment Adviser will
monitor the amount of illiquid securities in the Fund's portfolio, under the
supervision of the Master Trust's Board of Trustees, to ensure compliance with
the Fund's investment restrictions.
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, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary
B-21
<PAGE>
market. Mutual funds do not typically hold a significant amount of these
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 be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, 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 Commission under the Securities
Act, the Master Trust's Board of Trustees may determine that such securities are
not illiquid securities notwithstanding their legal or contractual restrictions
on resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
The Fully Discretionary Fund may invest in foreign securities that are
restricted against transfer within the United States or to United States
persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the same
class that are not subject to such restrictions. Unless these securities are
acquired directly from the issuer or its underwriter, the Fund treats such
foreign securities whose principal market is abroad as not subject to the
investment limitation on securities subject to legal or contractual restrictions
on resale.
INVESTMENT TECHNIQUES AND PROCESSES
The focus of the Investment Adviser's investment program is growth
over time. The Investment Adviser's investment techniques and processes are
described generally in the Portfolios' prospectus under "Investment Objectives
and Policies -- Investment Techniques and Processes."
INVESTMENT RESTRICTIONS
The Trust, on behalf of the Portfolios, and the Master Trust, on
behalf of the corresponding Funds, have adopted the following fundamental
policies that cannot be changed without the affirmative vote of a majority of
the outstanding shares of the appropriate Portfolio or Fund, respectively (as
defined in the Investment Company Act). Whenever a Portfolio is requested to
vote on a change in the investment restrictions of a Fund, the Trust will hold a
meeting of its shareholders and will cast its vote as instructed by the
shareholders. If the investment restrictions of a Fund are changed, the
corresponding Portfolio may withdraw its investment in the Fund if the Trust's
Board of Trustees determines that withdrawal is in the best interests of the
Portfolio and its shareholders, but only upon shareholder approval. Upon such
withdrawal, the Trust's Board would consider alternative investments, including
investing all of the Portfolio's assets in another investment company with the
same investment objective, policies and restrictions as the Portfolio or hiring
an investment adviser to manage the Portfolio's assets in accordance with the
investment objectives, policies and restrictions of the Portfolio described in
the Portfolio's Prospectus and in this Statement of Additional Information.
B-22
<PAGE>
All percentage limitations set forth below apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations will not require elimination of
any security from the relevant portfolio.
No Portfolio or Fund:
1. May invest in securities of any one issuer if more than 5% of the
market value of its total assets would be invested in the securities of such
issuer, except that up to 25% of a Portfolio or Fund's total assets may be
invested without regard to this restriction and a Portfolio will be permitted to
invest all or a portion of its assets in a corresponding Fund or other
diversified, open-end management investment company with substantially the same
investment objective, policies and restrictions as the Portfolio. This
restriction also does not apply to investments by a Portfolio or Fund in
securities of the U.S. Government or any of its agencies and instrumentalities.
2. May purchase more than 10% of the outstanding voting securities,
or of any class of securities, of any one issuer, or purchase the securities of
any issuer for the purpose of exercising control or management, except that a
Portfolio will be permitted to invest all or a portion of its assets in a
corresponding Fund or other diversified, open-end management investment company
with substantially the same investment objective, policies and restrictions as
the Portfolio.
3. May invest 25% or more of the market value of its total assets in
the securities of issuers in any one particular industry, except that a
Portfolio will be permitted to invest all or a portion of its assets in a
corresponding Fund or other diversified, open-end management investment company
with substantially the same investment objective, policies and restrictions as
the Portfolio. This restriction does not apply to investments by a Portfolio or
Fund in securities of the U.S. Government or its agencies and instrumentalities.
4. May purchase or sell real estate. However, a Portfolio or Fund
may invest in securities secured by, or issued by companies that invest in, real
estate or interests in real estate.
5. May make loans of money, except that a Portfolio or Fund may
purchase publicly distributed debt instruments and certificates of deposit and
enter into repurchase agreements. Each Portfolio and Fund reserves the
authority to make loans of its portfolio securities in an aggregate amount not
exceeding 30% of the value of its total assets.
6. May borrow money on a secured or unsecured basis, except for
temporary, extraordinary or emergency purposes or for the clearance of
transactions in amounts not exceeding 20% of the value of its total assets at
the time of the borrowing, provided that, pursuant to the Investment Company
Act, borrowings will only be made from banks and 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 (including the proposed
borrowing). If such asset coverage of 300% is not maintained, the Portfolio or
Fund will take prompt action to reduce its borrowings as required by applicable
law.
7. May pledge or in any way transfer as security for indebtedness
any securities owned or held by it, except to secure indebtedness permitted by
restriction 6 above. This restriction shall not prohibit the Portfolios or
Funds from engaging in options, futures and foreign currency transactions.
8. May underwrite securities of other issuers, except insofar as it
may be deemed an underwriter under the Securities Act in selling portfolio
securities.
B-23
<PAGE>
9. May invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid.
10. May purchase securities on margin, except for initial and
variation margin on options and futures contracts, and except that a Portfolio
or Fund may obtain such short-term credit as may be necessary for the clearance
of purchases and sales of securities.
11. May engage in short sales, except that a Portfolio or Fund may
use such short-term credits as are necessary for the clearance of transactions.
This restriction does not prohibit the Portfolios or the Funds from engaging in
hedging transactions in futures and currencies.
12. May invest in securities of other investment companies, except
(a) that a Portfolio may invest all or a portion of its assets in a
corresponding Fund or other diversified, open-end management investment company
with the same investment objective policies and restrictions as the Portfolio,
(b) in compliance with the Investment Company Act and applicable state
securities laws, or (c) as part of a merger, consolidation, acquisition or
reorganization involving the Portfolio or Fund.
13. May issue senior securities, except that a Portfolio or Fund may
borrow money as permitted by restrictions 6 and 7 above. This restriction shall
not prohibit the Portfolios or Funds from engaging in options, futures and
foreign currency transactions.
14. May enter into transactions for the purpose of arbitrage, or
invest in commodities and commodities contracts, except that a Fund or Portfolio
may invest in futures contracts and related options in accordance with any rules
of the Commodity Futures Trading Commission.
15. May purchase or write options on securities, unless (i) aggregate
premiums on call options purchased by a Fund do not exceed 5% of its net assets,
(ii) aggregate premiums on put options purchased by a Fund do not exceed 5% of
its net assets, (iii) not more than 25% of a Fund's net assets would be hedged,
and (iv) not more than 25% of a Fund's net assets are used as cover for options
written by the Fund.
OPERATING RESTRICTIONS
As a matter of operating (not fundamental) policy adopted by the
Boards of Trustees of the Trust, no Portfolio or Fund:
1. May invest in interests in oil, gas or other mineral exploration
or development programs or leases, or real estate limited partnerships, although
a Portfolio or a Fund may invest in the securities of companies which invest in
or sponsor such programs.
2. May purchase any security if as a result the Portfolio or Fund
would then have more than 5% of its total assets (taken at current value)
invested in securities of companies (including predecessors) having a record of
less than three years of continuous operation, except (a) that a Portfolio may
invest all or a portion of its assets in a corresponding Fund or other
diversified, open-end management investment company with the same investment
objective, policies and restrictions as the Portfolio in compliance with the
Investment Company Act, or (b) as part of a merger, consolidation, acquisition
or reorganization involving the Portfolio or Fund.
3. May purchase securities of any issuer if any officer or trustee
of the Portfolio or Fund, or of the Administrator, the Distributor, or
Investment Adviser, owning more than 1/2 of 1% of the outstanding securities of
such issuer, own in the aggregate more than 5% of the outstanding securities of
such issuer.
B-24
<PAGE>
4. May lend any securities from its portfolio unless the value of
the collateral received therefor is continuously maintained in an amount not
less than 100% of the value of the loaned securities by marking to market daily.
5. May invest in warrants.
BLUE SKY RESTRICTIONS
In order to permit the sale of shares of a Portfolio in certain
states, the Boards of Trustees of the Trust and the Master Trust may, in its
sole discretion, adopt additional restrictions on investment policies more
restrictive than those described above. Should either of such Boards determine
that any such restrictive policy is no longer in the best interests of such
respective trust or its investors, the Trust may cease offering shares of a
Portfolio in the state involved and the Boards of Trustees may revoke such
restrictive policy. Moreover, if the states involved no longer require any such
restrictive policy, the Board of Trustees may, at their sole discretion, revoke
such policy.
The Master Trust has agreed, in connection with certain undertakings
given by the Trust to the State of South Dakota, that (i) neither Fund will
invest more than 10% of its total assets in interests in real estate investment
trusts, and (ii) the Master Trust will provide adequate notice to the Trust of
changes in certain of the Funds' non-fundamental investment restrictions to
enable the Trust to provide at least 30 days advance notice of such changes to
its shareholders.
The Master Trust has agreed, in connection with certain undertakings
given by the Trust to the State of Ohio, that no Fund will invest more than 50%
of its total assets in the securities of issuers which together with any
predecessors have a record of less than three years continuous operation or
securities of issuers which are restricted as to disposition (including without
limitation securities issued pursuant to Rule 144A under the Securities Act of
1933).
PRINCIPAL HOLDERS OF SECURITIES
As of February 2, 1996, the following persons held of record more than
5% of the outstanding shares of the Portfolios: Short-Intermediate
Institutional Fixed Income Portfolio -- Community Hospital Foundation, P.O. Box
24195, Houston, TX 77228-(97.7%); Fully Discretionary Portfolio -- Southwestern
Public Service Company Employee Benefits Trust, Retiree Group Term Life Fund,
P.O. Box 1261, Amarillo, TX 79170(90.8%); Southwestern Public Service Company
Employee Benefits Trust, Employee Welfare Benefits Fund, P.O. Box 1261,
Amarillo, TX 79170 (5.9%).
TRUSTEES AND PRINCIPAL OFFICERS
TRUST
The names and addresses of the Trustees and principal officers of the
Trust, including their positions and principal occupations during the past five
years, are shown below. Trustees whose names are followed by an asterisk are
"interested persons" of the Trust (as defined by the Investment Company Act).
Unless otherwise indicated, the address of each Trustee and officer is 600 West
Broadway, 30th Floor, San Diego, California 92101.
B-25
<PAGE>
FRED C. APPLEGATE, TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES. 885
La Jolla Corona Court, La Jolla, California. President, Hightower Management
Co., a financial management firm (since January 1992); formerly President,
Nicholas-Applegate Capital Management (from August 1984 to December 1991).
Director of Nicholas-Applegate Fund, Inc. (since 1987). Mr. Applegate's
interests in Nicholas-Applegate Capital Management, Inc., the general partner of
the Investment Adviser, were acquired by Mr. Nicholas in 1991 and 1992.
ARTHUR B. LAFFER, TRUSTEE.*/ 4275 Executive Square, #330, La Jolla,
California. Chairman, A.B. Laffer, V.A. Canto & Associates, an economic
consulting firm (since 1979); Chairman, Laffer Advisors Incorporated, economic
consultants (since 1981); Director, Nicholas-Applegate Fund, Inc. (since 1987);
Director, U.S. Filter Corporation (since March 1991) and MasTec, Inc.
(construction) (since 1994); Chairman, Calport Asset Management, Inc. (since
1992); formerly Distinguished University Professor and Director, Pepperdine
University (from Sept. 1985 to May 1988) and Professor of Business Economics,
University of Southern California (1976 to 1984). Mr. Laffer is considered to
be an "interested person" of the Trust because A.B. Laffer, V.A. Canto &
Associates received $100,000 in 1994 from the Investment Adviser as compensation
for consulting services provided from time to time to the Investment Adviser.
CHARLES E. YOUNG, TRUSTEE. UCLA, 2147 Murphy Hall, Los Angeles,
California. Chancellor, UCLA (since 1968); Director, Nicholas-Applegate Fund,
Inc. (since 1992); Director, Intel Corp. (since 1974), Academy of Television
Arts and Sciences Foundation (since October 1988), Los Angeles World Affairs
Council (since 1977) and Town Hall of California (since 1982).
JOHN D. WYLIE, PRESIDENT. Partner (since January 1994), Chief
Investment Officer - Retail (since December 1995), and Portfolio Manager (since
January 1990), Nicholas-Applegate Capital Management. Mr. Wylie is also the
President of the Master Trust.
THOMAS PINDELSKI, CHIEF FINANCIAL OFFICER. Partner (since
January 1995) and Chief Financial Officer, Nicholas-Applegate Capital Management
(since January 1993), and Chief Financial Officer, Nicholas-Applegate Securities
(since January 1993), formerly Chief Financial Officer, Aurora Capital
Partners/WSGP Partners L.P., an investment partnership (from November 1988 to
January 1993), and Vice President and Controller, Security Pacific Merchant
Banking Group (from November 1986 to November 1988). Mr. Pindelski is also the
Chief Financial Officer of the Master Trust.
PETER J. JOHNSON, VICE PRESIDENT. Partner and Director-Client
Services/Marketing, Nicholas-Applegate Capital Management (since January 1992);
formerly, Marketing Director, Pacific Financial Asset Management Company, an
investment management firm (from July 1989 to December 1991), and Senior
Marketing Representative, Fidelity Investments Institutional Services (from
August 1987 to July 1989). Mr. Johnson is also a Vice President of the Master
Trust.
ASHLEY T. RABUN, VICE PRESIDENT. Partner and Director-Investor
Services Group, Nicholas-Applegate Capital Management (since May 1992) and
Senior Vice President, Nicholas-Applegate Securities (since December 1992);
formerly Vice President - Marketing, Interinvest Corporation, an asset
management firm (from December 1990 to May 1992), and Vice President, Dean
Witter (from 1984 to 1990). Ms. Rabun is also a Vice President of the Master
Trust.
E. BLAKE MOORE, JR., SECRETARY. General Counsel and Secretary,
Nicholas-Applegate Capital Management and Nicholas-Applegate Securities (since
1993); formerly Attorney, Luce, Forward, Hamilton & Scripps (from 1989 to 1993).
Mr. Moore is also the Secretary of the Master Trust.
B-26
<PAGE>
Each Trustee of the Trust who is not an officer or affiliate of the
Trust, the Investment Adviser or the Distributor receives an aggregate annual
fee of $10,000 for services rendered as a Trustee of the Trust, and $1,000 for
each meeting attended. Each Trustee is also reimbursed for out-of-pocket
expenses incurred as a Trustee.
The following table sets forth the aggregate compensation paid by the
Trust for the fiscal year ended March 31, 1995, to the Trustees who are not
affiliated with the Investment Adviser and the aggregate compensation paid to
such Trustees for service on the Trust's board and that of all other funds in
the "Trust complex" (as defined in Schedule 14A under the Securities Exchange
Act of 1934):
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Estimated Total Compensation
Aggregate Accured as Part Annual Benefits from Trust and Trust
Compensation of Trust Upon Complex Paid to
Name from Trust Expenses Retirement Trustee
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred C. Applegate $ 16,000 None N/A $ 30,000 (26*)
Arthur B. Laffer $ 17,000 None N/A $ 34,000 (26*)
Charles E. Young $ 16,000 None N/A $ 32,000 (26*)
</TABLE>
* Indicates number of funds in Trust complex, including the Portfolios.
MASTER TRUST
The names and addresses of the Trustees and principal officers of the
Master Trust, including their positions and principal occupations during the
past five years, are shown below. The positions and principal occupations of
the officers during the past five years, are set forth above. Trustees whose
names are followed by an asterisk are "interested persons" of the Master Trust
(as defined by the Investment Company Act). Unless otherwise indicated, the
address of each Trustee and officer is 600 West Broadway, 30th Floor, San Diego,
California 92101.
ARTHUR E. NICHOLAS, TRUSTEE AND CHAIRMAN OF THE BOARD OF TRUSTEES.*/
Managing Partner and Chief Investment Officer, Nicholas-Applegate Capital
Management, since 1984. Director and Chairman of the Board of Directors of
Nicholas-Applegate Fund, Inc., a registered open-end investment company, since
1987.
DANN V. ANGELOFF, TRUSTEE. 727 West Seventh Street, Los Angeles,
California. President, The Angeloff Company, corporate financial advisers
(since 1976); Director, Nicholas-Applegate Fund, Inc. (since 1987); University
Counselor to the President, University of Southern California (since 1987);
Director, Storage Equities, Inc., a real estate investment trust (since 1980),
Storage Properties, a real estate investment trust (since 1989), Datametrics
Corporation, a producer of computer peripherals and communication products
(since 1993), and SEDA Specialty Packaging, Inc. (since 1993); formerly
Director, Glenfed, Inc., a savings and loan holding company (from 1988 to 1990).
B-27
<PAGE>
WALTER E. AUCH, TRUSTEE. 6001 North 62nd Place, Paradise Valley,
Arizona. Director, Geotech Communications, Inc., a mobile radio communications
company (since 1987); Express America Corporation, a mortgage banking company
(since 1992); Fort Dearborn Fund (since 1987); Brinson Funds (since 1994), Smith
Barney VIP Fund (since 1988), Smith Barney Advisers Fund (since 1981), and Smith
Barney Trak Fund (since 1992), registered investment companies; Thompson
Advisory Group, an investment manager (since 1987); and Banyan Realty Fund
(since 1987), Banyan Strategic Land Fund (since 1987), Banyan Strategic Land
Fund II (since 1988), and Banyan Mortgage Fund (since 1988), real estate
investment trusts. Formerly Chairman and Chief Executive Officer, Chicago Board
Options Exchange (1979 to 1986) and Senior Executive Vice President, Director
and Member of the Executive Committee, PaineWebber, Inc. (until 1979).
THEODORE J. COBURN, TRUSTEE. 17 Cotswold Road, Brookline,
Massachusetts. Partner, Brown Coburn & Co., an investment banking firm (since
1991), and student, Harvard Divinity School and Harvard School of Education
(since September 1991); Director, Nicholas-Applegate Fund, Inc. (since 1987);
formerly Managing Director of Global Equity Transactions Group and member of
Board of Directors, Prudential Securities (from 1986 to June 1991).
DARLENE DEREMER, TRUSTEE.* 155 South Street, Wrentham, Massachusetts.
President and Founder, DeRemer Associates, a marketing consultant for the
financial services industry (since 1987); formerly Vice President and Director,
Asset Management Division, State Street Bank and Trust Company (from 1982 to
1987), and Vice President, T. Rowe Price & Associates (1979 to 1982); Director,
Jurika & Voyles Fund Group (since 1994) and King's Board Montessori School
(Since 1995); Member of Advisory Board, Financial Women's Association (since
1995). Ms. DeRemer is considered to be an "interested person" of the Master
Trust under the 1940 Act because DeRemer Associates received $100,736 in 1995
and $54,247 in 1994 from the Investment Adviser as compensation for consulting
services provided in connection with its institutional business.
GEORGE F. KEANE, TRUSTEE.* 450 Post Road East, Westport, Connecticut.
President Emeritus and Senior Investment Adviser, The Common Fund, a non-profit
investment management organization representing educational institutions (since
1993), after serving as its President (from 1971 to 1992); Member of Investment
Advisory Committee, New York State Common Retirement Fund (since 1982); Director
and Chairman of the Investment Committee, United Negro College Fund (since
1987); Director, Investor Responsibility Research Center (since 1987); Director,
United Educators Risk Retention Group (since 1989); Director, RCB Trust Company
(since 1991); Director, School, College and University Underwriters Ltd. (since
1986); Trustee, Fairfield University (since 1993); Director, The Bramwell Funds,
Inc. (since 1994); Chairman of the Board, Trigen Energy Corporation (since
1994); Director, Universal Stainless & Alloy Products, Inc. (since 1994).
Formerly President, Endowment Advisers, Inc. (from August 1987 to December
1992). Mr. Keane is considered to be an "interested person" of the Master Trust
under the 1940 Act because he is a registered representative of a broker-dealer.
JOHN D. WYLIE, PRESIDENT.
THOMAS PINDELSKI, CHIEF FINANCIAL OFFICER.
PETER J. JOHNSON, VICE PRESIDENT.
ASHLEY T. RABUN, VICE PRESIDENT.
E. BLAKE MOORE, JR., SECRETARY.
B-28
<PAGE>
Each Trustee of the Master Trust who is not an officer or affiliate of the
Master Trust, the Investment Adviser or the Distributor receives an aggregate
annual fee of $10,000 for services rendered as a Trustee of the Master Trust,
and $1,000 for each meeting attended. Each Trustee is also reimbursed for
out-of-pocket expenses incurred as a Trustee.
The following table sets for the aggregate compensation paid by the
Master Trust for the fiscal year ended March 31, 1995, to the Trustees who are
not affiliated with the Investment Adviser and the aggregate compensation paid
to such Trustees for service on the Master Trust's board and that all other
funds in the "Master Trust complex" (as defined in Schedule 14A under the
Securities Exchange Act of 1934):
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Benefits Estimated from Master Trust
Compensation Accured as Part Annual Benefits and Master Trust
from Master of Master Trust Upon Complex Paid to
Name Trust Expenses Retirement Trustee
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dann V. Angeloff $ 17,000 None N/A $ 34,000 (10*)
Walter E. Auch $ 11,500 None N/A $ 11,500 ( 9*)
Theodore J. Coburn $ 16,000 None N/A $ 30,000 (10*)
Darlene DeRemer $ 16,000 None N/A $ 16,000 ( 9*)
George F. Keane $ 16,000 None N/A $ 16,000 ( 9*)
</TABLE>
* Indicates total number of funds in Master Trust complex, including the Funds.
INVESTMENT ADVISER
The Trust has not engaged the services of an investment adviser with
respect to the Portfolios because the Portfolios invest all of their assets in
corresponding Funds. The Investment Adviser to the Master Trust is
Nicholas-Applegate Capital Management, a California limited partnership, with
offices at 600 West Broadway, 30th Floor, San Diego, California 92101.
The Investment Adviser was organized in 1984 to manage discretionary
accounts investing in publicly traded securities for a variety of investors.
Its general partner is Nicholas-Applegate Capital Management Holdings, L.P., a
California limited partnership, the general partner of which is Nicholas-
Applegate Capital Management Holdings, Inc., a California corporation owned by
Mr. Nicholas. The Investment Adviser currently has fifteen partners (including
Mr. Nicholas) who manage a staff of approximately 300 employees, including 28
portfolio managers.
Under the Investment Advisory Agreement between the Master Trust and
the Investment Adviser with respect to the Funds, the Master Trust retains the
Investment Adviser to manage the Funds' investment portfolios, subject to the
direction of the Master Trust's Board of Trustees. The Investment Adviser is
authorized to determine which securities are to be bought or sold by the Funds
and in what amounts.
B-29
<PAGE>
The Investment Advisory Agreement provides that the Investment Adviser
will not be liable for any error of judgment or for any loss suffered by a Fund
or the Master Trust in connection with the matters to which the Investment
Advisory Agreement relates, except for liability resulting from willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of the Investment Adviser's reckless disregard of its duties and
obligations under the Investment Advisory Agreement. The Master Trust has
agreed to indemnify the Investment Adviser against liabilities, costs and
expenses that the Investment Adviser may incur in connection with any action,
suit, investigation or other proceeding arising out of or otherwise based on any
action actually or allegedly taken or omitted to be taken by the Investment
Adviser in connection with the performance of its duties or obligations under
the Investment Advisory Agreement or otherwise as an investment adviser of the
Master Trust. The Investment Adviser is not entitled to indemnification with
respect to any liability to the Master Trust or its shareholders by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or of its reckless disregard of its duties and obligations under the
Investment Advisory Agreement.
The Investment Advisory Agreement provides that it will terminate in
the event of its assignment (as defined in the Investment Company Act). The
Investment Advisory Agreement may be terminated with respect to any Fund by the
Master Trust (by the Board of Trustees of the Master Trust or vote of a majority
of the outstanding voting securities of the Fund, as defined in the Investment
Company Act) or the Investment Adviser upon not more than 60 days' written
notice, without payment of any penalty. The Investment Advisory Agreement
provides that it will continue in effect with respect to each Fund for a period
of more than two years from its execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act.
EXPENSE LIMITATION
Under the Investment Advisory Agreement, the Investment Adviser has
agreed to reduce its fees, and to absorb other expenses of each Portfolio
(including administrative fees and distribution expenses for the Portfolio, and
the Portfolio's allocable share of the operating expenses of the corresponding
Fund, but excluding interest, taxes, brokerage commissions and other costs
incurred in connection with portfolio securities transactions, organizational
expenses and other capitalized expenditures and extraordinary expenses), to
ensure that the operating expenses for the Portfolios do not exceed the amounts
specified in the Portfolios' prospectus.
In addition, each of the Portfolios is subject to certain limitations
on expenses imposed by state securities laws. At present, the only expense
limitation in effect is in California. Under California law, each Portfolio
will be subject to an annual expense limitation equal to the sum of 2.5% of the
first $30 million of the Portfolio's average net assets, 2.0% of the next $70
million of average net assets, and 1.5% of the remaining average net assets. If
a Portfolio's expenses (excluding interest, brokerage commissions litigation
expenses and certain other items), including its allocable share of the expenses
incurred by the corresponding Fund, were to exceed such limit in any fiscal
year, the Investment Adviser has agreed to bear the amount of such excess to the
extent required by such limitations.
ADMINISTRATOR
The Administrator of the Trust is Investment Company Administration
Corporation, 4455 East Camelback Road, Suite 261-E, Phoenix, Arizona 85018.
Pursuant to an Administration Agreement with the Trust, the
Administrator is responsible for performing all administrative services required
for the daily business operations of the Trust, subject to the
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supervision of the Board of Trustees of the Trust. The Administrator has no
supervisory responsibility over the investment operations of the Portfolios.
The management or administrative services of the Administrator for the Trust are
not exclusive under the terms of the Administration Agreement and the
Administrator is free to, and does, render management and administrative
services to others. Investment Company Administration Corporation also serves
as the Administrator for the Master Trust.
For its services, the Administrator receives under the Administration
Agreement $35,000 for each grouping of five similar portfolios (e.g., Core
Growth Portfolio A, Portfolio B, Portfolio C, Institutional and Qualified
Portfolios), $20,000 for each grouping of four similar portfolios, $25,000 for
each grouping of three similar portfolios, $20,000 for a grouping of two similar
portfolios and $5,000 for one portfolio, except as follows: The Administrator
receives $15,000 for its services with respect to the Emerging Growth
Portfolios. Such fees will be allocated among the series in each grouping based
on relative net asset values. For its services to the Master Trust, the
Administrator receives, pursuant to an Administration Agreement, a monthly fee
at the following annual rates: 0.05% on the first $100 million of aggregate net
assets of the Funds, 0.04% on the next $150 million, 0.03% on the next $300
million, 0.02% on the next $300 million, and 0.01% on the portion of aggregate
net assets of the Funds in excess of $850 million. The Administrator will
receive a minimum of $150,000 per year allocated among the Funds based on
average net assets.
In connection with its management of the affairs of the Trust, the
Administrator pays the salaries and expenses of all its personnel and pays all
expenses incurred in connection with managing the ordinary course of the
business of the Trust, other than expenses assumed by the Trust as described
below.
Under the terms of the Administration Agreement, the Trust is
responsible for the payment of the following expenses: (a) the fees and
expenses incurred by the Trust in connection with the management of the
investment and reinvestment of their assets, (b) the fees and expenses of
Trustees and officers of the Trust who are not affiliated with the
Administrator, the Investment Adviser, (c) out-of-pocket travel expenses for the
officers and Trustees of the Trust and other expenses of Board of Trustees'
meetings, (d) the fees and certain expenses of the Custodian, (e) the fees and
expenses of the Transfer and Dividend Disbursing Agent that relate to the
maintenance of each shareholder account, (f) the charges and expenses of the
Trust's legal counsel and independent accountants, (g) brokerage commissions and
any issue or transfer taxes chargeable to Trustees and officers of the Trust in
connection with securities transactions, (h) all taxes and corporate fees
payable by the Trust to federal, state and other governmental agencies, (i) the
fees of any trade association of which the Trust may be a member, (j) the cost
of maintaining the Trust's existence, taxes and interest, (k) the cost of
fidelity and liability insurance, (l) the fees and expenses involved in
registering and maintaining the registration of the Trust and of its shares with
the Commission and registering the Trust as a broker or dealer and qualifying
their shares under state securities laws, including the preparation and printing
of the Trust's registration statement, prospectuses and statements of additional
information, (m) allocable communication expenses with respect to investor
services and all expenses of shareholders' and Board of Trustees' meetings and
of preparing, printing and mailing prospectuses and reports to shareholders, (n)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the business of the Trust, and (o) expenses
assumed by the Trust pursuant to any plan of distribution adopted in conformity
with Rule 12b-1 under the Investment Company Act.
The Administration Agreement provides that the Administrator will not
be liable for any error of judgment or for any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from the Administrator's willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties. The Administration
Agreement will terminate automatically if assigned, and may be terminated
without penalty by either the Administrator or the Trust (by the Board of
Trustees of the Trust or vote of a majority of the outstanding voting securities
of the Trust, as defined in the Investment Company Act), upon 60 days' written
notice. The Administration Agreement will continue in effect
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only so long as such continuance is specifically approved at least annually in
conformity with the Investment Company Act.
DISTRIBUTOR
Nicholas-Applegate Securities (the "Distributor"), 600 West Broadway,
30th Floor, San Diego, California 92101, is the principal underwriter and
distributor for the Trust and, in such capacity, is responsible for distributing
shares of the Portfolios. The Distributor is a California limited partnership
organized in 1992 to distribute shares of registered investment companies. Its
general partner is Nicholas-Applegate Capital Management, Holdings, L.P., the
general partner of the Investment Adviser.
Pursuant to its Distribution Agreement with the Trust, the Distributor
has agreed to use its best efforts to effect sales of shares of the Portfolios,
but is not obligated to sell any specified number of shares. The Distribution
Agreement contains provisions with respect to renewal and termination similar to
those in the Investment Advisory Agreement discussed above. Pursuant to the
Distribution Agreement, the Trust has agreed to indemnify the Distributor to the
extent permitted by applicable law against certain liabilities under the
Securities Act.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Master Trust's Board of
Trustees, the Investment Adviser is primarily responsible for the execution of
the Funds' portfolio transactions and the allocation of the brokerage business.
In executing such transactions, the Investment Adviser will seek to obtain the
best price and execution for the Funds, taking into account such factors as
price, size of order, difficulty and risk of execution and operational
facilities of the firm involved. Fixed income securities in which the Funds
invest are generally traded in the over-the-counter markets, and the Funds deal
directly with the dealers who make markets in such securities except in those
circumstances where better prices and execution are available elsewhere. The
allocation of orders among dealers are reviewed periodically by the Board of
Trustees of the Master Trust.
The Funds have no obligation to deal with any dealer or group of
dealers in executing transactions in portfolio securities. Subject to obtaining
the best price and execution, broker-dealers who sell shares of the Portfolios
or provide supplemental research, market and statistical information and other
research services and products to the Investment Adviser may receive orders for
transactions by the Funds. Such information, services and products are those
which brokerage houses customarily provide to institutional investors, and
include items such as statistical and economic data, research reports on
particular companies and industries, and computer software used for research
with respect to investment decisions. Information, services and products so
received are in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Investment Advisory Agreement, and
the expenses of the Investment Adviser are not necessarily reduced as a result
of the receipt of such supplemental information, services and products. Such
information, services and products may be useful to the Investment Adviser in
providing services to clients other than the Master Trust, and not all such
information, services and products are used by the Investment Adviser in
connection with the Funds. Similarly, such information, services and products
provided to the Investment Adviser by brokers and dealers through whom other
clients of the Investment Adviser effect securities transactions may be useful
to the Investment Adviser in providing services to the Funds. The Investment
Adviser is authorized to pay higher commission on brokerage transactions for the
Funds to
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brokers in order to secure the information, services and products listed above,
subject to review by the Board of Trustees of the Master Trust from time to time
as to the extent and continuation of this practice.
Although investment decisions for the Master Trust are made
independently from those of the other accounts managed by the Investment
Adviser, investments of the kind made by the Funds may often also be made by
such other accounts. When a purchase or sale of the same security is made at
substantially the same time on behalf of the Funds and one or more other
accounts managed by the Investment Adviser, available investments are allocated
in the discretion of the Investment Adviser by such means as, in its judgment,
result in fair treatment. The Investment Adviser aggregates orders for
purchases and sales of securities of the same issuer on the same day among the
Funds and its other managed accounts, and the price paid to or received by the
Funds and those accounts is the average obtained in those orders. In some
cases, such aggregation and allocation procedures may affect adversely the price
paid or received by the Funds or the size of the position purchased or sold by
the Funds.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's commission or discount. On occasion, certain
money market instruments and agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid.
PURCHASE AND REDEMPTION OF PORTFOLIO SHARES
Shares of the Portfolios may be purchased and redeemed at their net
asset value without any initial or deferred sales charge by former partners of
Whitehall Partners and Coventry Partners, California limited partnerships, who
received shares of the Core Growth Institutional Portfolio and Income & Growth
Institutional Portfolio, respectively, in the reorganization and conversion of
such partnerships into such Institutional Portfolios. Similarly, shares of the
Portfolios may be purchased and redeemed at their net asset value without any
initial or deferred sales charge by former partners and participants of
Stratford Partners and Nicholas-Applegate Emerging Growth Pooled Trust who
received shares of the Emerging Growth Institutional Portfolio in the
reorganization and conversion of such partnerships and pooled trust into such
Institutional Portfolio.
With respect to purchases, the price paid for shares of the Portfolios
is based on the net asset value per share, which is calculated once daily at the
close of trading (normally 4:00 P.M. New York time) each day the New York Stock
Exchange is open. The New York Stock Exchange is currently closed on weekends
and on the following holidays: New Year's Day, Washington's Birthday, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas
Day. The offering price is effective for orders received by the Transfer Agent
prior to the time of determination of net asset value. Dealers are responsible
for promptly transmitting purchase orders to the Transfer Agent. The Trust
reserves the right in its sole discretion to suspend the continued offering of
the Portfolios' shares and to reject purchase orders in whole or in part when
such rejection is in the best interests of the Trust and the affected
Portfolios.
SHAREHOLDER SERVICES
The services offered by the Trust to shareholders of the Portfolios
can vary, depending on the needs of the qualified retirement plan or other
institutional investor, and should be arranged by contacting the Trust, the
Distributor, the Administrator or the Transfer Agent.
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SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of a Portfolio, a Shareholder
Investment Account is established for each investor under which the shares are
held for the investor by the Transfer Agent. Whenever a transaction takes place
in the Shareholder Investment Account, the shareholder will be mailed a
statement showing the transaction and the status of the Account. No
certificates will be issued for shares of the Portfolios.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the applicable
Portfolio at net asset value. An investor may direct the Transfer Agent in
writing not less than five full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
In the case of recently purchased shares for which registration instructions
have not been received on the record date, cash payment will be made directly to
the dealer. Any shareholder who receives a cash payment representing a dividend
or distribution may reinvest such distribution at net asset value by returning
the check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, an investor may arrange to have a
fixed amount automatically invested in shares of a Portfolio on a monthly or
quarterly basis on any day of the month or quarter by authorizing his or her
bank account to be debited to invest specified dollar amounts in shares of the
Portfolio. The investor's bank must be a member of the Automatic Clearing House
System. Stock certificates are not issued to participants of the Automatic
Investment Plan. Participation in the Plan will begin within 30 days after
receipt of the account application. If the investor's bank account cannot be
charged due to insufficient funds, a stop-payment order or closing of the
account, the investor's Plan may be terminated and the related investment
reversed. The investor may change the amount of the investment or discontinue
the Plan at any time by writing to the Transfer Agent. Further information
about this program and an application form can be obtained from the Transfer
Agent or the Distributor.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
A shareholder in a Portfolio may elect to cross-reinvest dividends or
dividends and capital gain distributions paid by that Portfolio (the "paying
Portfolio") into any other Institutional Portfolio (the "receiving Portfolio")
subject to the following conditions: (i) the aggregate value of the
shareholder's account(s) in the paying Portfolio(s) must equal or exceed $5,000
(this condition is waived if the value of the account in the receiving Portfolio
equals or exceeds that Portfolio's minimum initial investment requirement), (ii)
as long as the value of the account in the receiving Portfolio is below that
Portfolio's minimum initial investment requirement, dividends and capital gain
distributions paid by the receiving Portfolio must be automatically reinvested
in the receiving Portfolio, (iii) there is no cross-reinvestment from a
Portfolio to a portfolio of any series other than the Institutional Portfolios,
and (iv) if this privilege is discontinued with respect to a particular
receiving Portfolio, the value of the account in that Portfolio must equal or
exceed the Fund's minimum initial investment requirement or the Portfolio will
have the right, if the shareholder fails to increase the value of the account to
such minimum within 90 days after being notified of the deficiency,
automatically to redeem the account and send the proceeds to the shareholder.
These cross-reinvestments of dividends and capital gain distributions will be at
net asset value (without a sales charge).
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AUTOMATIC WITHDRAWAL
The Transfer Agent arranges for the redemption by the Portfolio of
sufficient shares, deposited by the shareholder with the Transfer Agent, to
provide the withdrawal payment specified. Withdrawal payments should not be
considered as dividends, yield or income. Automatic investments may not be made
into a shareholder account from which there are automatic withdrawals.
Withdrawals of amounts exceeding reinvested dividends and distributions and
increases in share value will reduce the aggregate value of the shareholder's
account.
REDEMPTION IN KIND
The Trust intends to pay in cash for all shares of a Portfolio
redeemed, but when the Master Trust makes payment to a Portfolio in readily
marketable investment securities, the Trust reserves the right to make payment
wholly or partly in shares of such securities. In such cases, a shareholder may
incur brokerage costs in converting such securities to cash. However, the Trust
has elected to be governed by the provisions of Rule 18f-1 under the Investment
Company Act, pursuant to which it is obligated to pay in cash all requests for
redemptions by any shareholder of record, limited in amount with respect to each
shareholder during any 90-day period to the lesser of $250,000 or 1% of the net
asset value of the Trust at the beginning of such period.
NET ASSET VALUE
The net asset value of a share of a Portfolio is calculated by
dividing (i) the value of the securities held by the Portfolio (I.E., the value
of its investments in a Fund), plus any cash or other assets, minus all
liabilities (including accrued estimated expenses on an annual basis), by (ii)
the total number of shares of the Portfolio outstanding. The net asset value of
an interest in a Fund is calculated in the same manner. The value of the
investments and assets of the Portfolio or a Fund is determined each business
day. Investment securities, including ADRs and EDRs, that are traded on a stock
exchange or on the NASDAQ National Market System are valued at the last sale
price as of the close of business on the New York Stock Exchange (normally 4:00
P.M. New York time) on the day the securities are being valued, or lacking any
sales, at the mean between the closing bid and asked prices. Other
over-the-counter securities are valued at the mean between the closing bid and
asked prices.
In the event that the New York Stock Exchange or the national
securities exchange on which stock or stock options are traded adopt different
trading hours on either a permanent or temporary basis, the Boards of Trustees
of the Trust and the Master Trust will reconsider the time at which net asset
value is computed. In addition, the asset value of the Portfolio or the Fund
may be computed as of any time permitted pursuant to any exemption, order or
statement of the Commission or its staff.
Long-term debt obligations are valued at quoted bid prices for such
securities or, if such prices are not available, at prices for securities of
comparable maturity, quality and type; however, when the Investment Adviser
deems it appropriate, prices obtained for the day of valuation from a bond
pricing service will be used, as discussed below. Debt securities with
maturities of 60 days or less are valued at amortized cost if their term to
maturity from date of purchase is less than 60 days, or by amortizing, from the
sixty-first day prior to maturity, their value on the sixty-first day prior to
maturity if their term to maturity from date of purchase by the Portfolio or the
Fund is more than 60 days, unless this is determined by the Board of Trustees of
the Master Trust not to represent fair value. Repurchase agreements are valued
at cost plus accrued interest.
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U.S. Government securities are traded in the over-the-counter market
and are valued at the last available bid and asked prices, except that
securities with a demand feature exercisable within one to seven days are valued
at par. Such valuations are based on quotations of one or more dealers that
make markets in the securities as obtained from such dealers, or on the
evaluation of a pricing service.
Options, futures contracts and options thereon, which are traded on
exchanges, are valued at their last sale or settlement price as of the close of
such exchanges or, if no sales are reported, at the mean between the last
reported bid and asked prices. If an options or futures exchange closes later
than 4:00 p.m. New York time, the options or futures traded on it are valued
based on the sale price, or on the mean between the bid and ask prices, as the
case may be, as of 4:00 p.m. New York time.
Trading in securities on foreign securities exchanges and
over-the-counter markets is normally completed well before the close of business
day in New York. In addition, foreign securities trading may not take place on
all business days in New York, and may occur in various foreign markets on days
which are not business days in New York and on which net asset value is not
calculated. The calculation of net asset value may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the close of the New
York Stock Exchange will not be reflected in the calculation of net asset value
unless the Board of Trustees of the Master Trust deems that the particular event
would materially affect net asset value, in which case an adjustment will be
made. Assets or liabilities initially expressed in terms of foreign currencies
are translated prior to the next determination of the net asset value into U.S.
dollars at the spot exchange rates at 1:00 p.m. New York time or at such other
rates as the Investment Adviser may determine to be appropriate in computing net
asset value.
Securities and assets for which market quotations are not readily
available, or for which the Master Trust's Board of Trustees or persons
designated by the Board determine that the foregoing methods do not accurately
reflect current market value, are valued at fair value as determined in good
faith by or under the direction of the Master Trust's Board of Trustees. Such
valuations and procedures will be reviewed periodically by the Board of
Trustees.
The Master Trust may use a pricing service approved by its Board of
Trustees. Prices provided by such a service represent evaluations of the mean
between current bid and asked market prices, may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, individual trading characteristics, indications
of values from dealers and other market data. Such services may use electronic
data processing techniques and/or a matrix system to determine valuations. The
procedures of such services are reviewed periodically by the officers of the
Master Trust under the general supervision and responsibility of its Board of
Trustees, which may replace a service at any time if it determines that it is in
the best interests of the Funds to do so.
TAXES
MASTER TRUST'S TAX STATUS
Each Fund of the Master Trust will be treated as a partnership rather
than as a regulated investment company or a corporation under the Internal
Revenue Code (the "Code"). As a partnership under the Code, any interest,
dividends and gains or losses of the Master Trust attributable to each Fund will
be deemed to have been "passed through" to the Trust and other investors in such
Fund, regardless of whether such interest, dividends or gains have been
distributed by the Fund or such losses have been realized and
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recognized by the Trust and other investors. Therefore, to the extent a Fund
were to accrue but not distribute any interest, dividends or gains, the Trust
and other investors in the Fund would be deemed to have realized and recognized
their proportionate shares of interest, dividends, gains or losses realized and
recognized by the Fund without receipt of any corresponding distribution.
However, the Master Trust will seek to minimize recognition by investors in the
Funds of interest, dividends, gains or losses allocable to the Funds without a
corresponding distribution.
REGULATED INVESTMENT COMPANY
The Trust has elected to qualify each Portfolio as a regulated
investment company under Subchapter M of the Code, and intends that each
Portfolio will remain so qualified.
As a regulated investment company, a Portfolio will not be liable for
federal income tax on its income and gains provided it distributes all of its
income and gains currently. Qualification as a regulated investment company
under the Code requires, among other things, that each Portfolio (a) derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of securities or
foreign currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, certain foreign currencies and certain options,
futures, and forward contracts on foreign currencies held less than three
months; (c) diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Portfolio's assets is represented by
cash, U.S. Government securities and securities of other regulated investment
companies, and other securities (for purposes of this calculation generally
limited, in respect of any one issuer, to an amount not greater than 5% of the
market value of the Portfolio's assets and 10% of the outstanding voting
securities of such issuer) and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government or
foreign government securities or the securities of other regulated investment
companies), or two or more issuers which the Trust controls and which are
determined to be engaged in the same or similar trades or businesses; and
(d) distribute at least 90% of its investment company taxable income (which
includes dividends, interest, and net short-term capital gains in excess of net
long-term capital losses) each taxable year.
A Portfolio generally will be subject to a nondeductible excise tax of
4% to the extent that it does not meet certain minimum distribution requirements
as of the end of each calendar year. To avoid the tax, a Portfolio must
distribute during each calendar year an amount equal to the sum of (1) at least
98% of its ordinary income and net capital gain (not taking into account any
capital gains or losses as an exception) for the calendar year, (2) at least 98%
of its capital gains in excess of its capital losses (and adjusted for certain
ordinary losses) for the twelve month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. A distribution will be treated as
paid on December 31 of the calendar year if it is declared by the Portfolio in
October, November, or December of that year to shareholders of record on a date
in such a month and paid by the Portfolio during January of the following year.
Such distributions will be taxable to shareholders (other than those not subject
to federal income tax) in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To avoid the excise tax, the Portfolios intend to make timely distributions of
their income in compliance with these requirements and anticipate that they will
not be subject to the excise tax.
Dividends paid by a Portfolio from ordinary income, and distributions
of the Portfolio's net realized short-term capital gains, are taxable to its
shareholders as ordinary income. Distributions to corporate shareholders will
be eligible for the 70% dividends received deduction to the extent that the
income of the
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Portfolios is derived from dividends on common or preferred stock of domestic
corporations. Dividend income earned by a Portfolio will be eligible for the
dividends received deduction only if the Portfolio and corresponding Fund have
satisfied a 46-day holding period requirement with respect to the underlying
portfolio security (91 days in the case of dividends derived from preferred
stock). In addition, a corporate shareholder must have held its shares in the
Portfolio for not less than 46 days (91 days in the case of dividends derived
from preferred stock) in order to claim the dividend received deduction. Not
later than 60 days after the end of its taxable year, the Portfolio will send to
its shareholders a written notice designating the amount of any distributions
made during such year which may be taken into account by its shareholders for
purposes of such deduction provisions of the Code. Net capital gain
distributions are not eligible for the dividends received deduction.
Under the Code, any distributions designated as being made from net
capital gains are taxable to a Portfolio's shareholders as long-term capital
gains, regardless of the holding period of such shareholders. Such
distributions of net capital gains will be designated by the Portfolio as a
capital gains distribution in a written notice to its shareholders which
accompanies the distribution payment. Any loss on the sale of shares held for
less than six months will be treated as a long-term capital loss for federal tax
purposes to the extent a shareholder receives net capital gain distributions on
such shares. The maximum federal income tax rate applicable to long-term
capital gains is currently 28% for individual shareholders and 35% for corporate
shareholders. Dividends and distributions are taxable as such whether received
in cash or reinvested in additional shares of a Portfolio.
Any loss realized on a sale, redemption or exchange of shares of a
Portfolio by a shareholder will be disallowed to the extent the shares are
replaced within a 61-day period (beginning 30 days before the disposition of
shares). Shares purchased pursuant to the reinvestment of a dividend will
constitute a replacement of shares.
A shareholder who acquires shares of a Portfolio and sells or
otherwise disposes of such shares within 90 days of acquisition may not be
allowed to include certain sales charges incurred in acquiring such shares for
purposes of calculating gain or loss realized upon a sale or exchange of shares
of the Portfolio if the shareholder acquires shares in a Portfolio of the Trust
pursuant to a reinvestment right that reduces the sales charges in the
subsequent acquisition of shares.
SPECIAL TAX CONSIDERATIONS
U.S. GOVERNMENT OBLIGATIONS. Income received on direct U.S.
Government obligations is exempt from tax at the state level when received
directly and may be exempt, depending on the state, when received by a
shareholder from a Portfolio provided that certain conditions are satisfied.
Interest received on repurchase agreements collateralized by U.S. Government
obligations normally is not exempt from state taxation. The Trust will inform
shareholders annually of the percentage of income and distributions derived from
direct U.S. Government obligations. Shareholders should consult their tax
advisers to determine whether any portion of the income dividends received from
the Portfolio is considered tax exempt in their particular states.
With respect to investments that are sold at original issue discount
and thus do not make periodic cash interest payments, a Fund and the
corresponding Portfolio will be required to include as part of their current
income the imputed interest on such obligations even though the Fund and the
Portfolio have not received any interest payment on such obligations during that
period. The Fund may have to sell portfolio securities to distribute such
imputed income, which may occur at a time when the Investment Adviser would not
have chosen to sell such securities and which may result in a taxable gain or
loss.
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SECTION 1256 CONTRACTS. Many of the options, futures contracts and
forward contracts used by the Funds are "section 1256 contracts." Any gains or
losses on section 1256 contracts are generally credited 60% long-term and 40%
short-term capital gains or losses ("60/40") although gains and losses from
hedging transactions, certain mixed straddles and certain foreign currency
transactions from such contracts may be treated as ordinary in character. Also,
section 1256 contracts held by the Funds at the end of each taxable year (and,
for purposes of the 4% excise tax, on certain other dates as prescribed under
the Code) are "marked to market" with the result that unrealized gains or losses
are treated as though they were realized and the resulting gain or loss is
treated as ordinary or 60/40 gain or loss, depending on the circumstances.
STRADDLE RULES. Generally, the hedging transactions and certain other
transactions in options, futures and forward contracts undertaken by the Funds
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Portfolios.
In addition, losses realized by the Portfolio on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken into
account in calculating the taxable income for the taxable year in which such
losses are realized. Because only a few regulations implementing the straddle
rules have been promulgated, the tax consequences of transactions in options,
futures and forward contracts to the Portfolio are not entirely clear. The
transactions may increase the amount of short-term capital gain realized by the
Portfolio which is taxed as ordinary income when distributed to shareholders.
The Portfolios may make one or more of the elections available under
the Code which are applicable to straddles. If the Portfolios make any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to the election(s) made. The rules applicable under certain of
the elections operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because applications of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to the shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The 30% limit on gains from the disposition of certain options,
futures, and forward contracts held less than three months and the qualifying
income and diversification requirements applicable to the Portfolios' and the
Funds' assets may limit the extent to which the Funds will be able to engage in
transactions in options, futures contracts or forward contracts.
SECTION 988 GAINS AND LOSSES. Under the Code, gains or losses
attributable to fluctuations in exchange rates which occur between the time a
Fund accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or loss. Similarly, gains or losses on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures attributable to fluctuations in the value of the foreign currency
between the date of disposition also are treated as ordinary gain or loss.
These gains and losses, referred to under the Code as "section 988" gains or
losses, may increase or decrease the amount of the Portfolio's investment
company taxable income to be distributed to the shareholders.
SWAPS. No definitive guidance currently exists with respect to the
classification of interest rate swaps and cross-currency swaps as securities or
foreign currencies for purposes of certain of the tests described above.
Accordingly, to avoid the possibility of disqualification as a regulated
investment company, each Fund will limit its positions in swaps to transactions
for the purpose of hedging against interest rate or
B-39
<PAGE>
currency fluctuation risks, and will treat swaps as excluded assets for purposes
of determining compliance with the diversification test.
FOREIGN TAX. Income received by a Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. In addition, the Investment Adviser intends to manage the
Funds with the intention of minimizing foreign taxation in cases where it is
deemed prudent to do so. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consists of securities of foreign corporations,
the Fund will be eligible to elect to "pass-through" to the Portfolio's
shareholders the amount of foreign income and similar taxes paid by the Fund.
Each shareholder will be notified within 60 days after the close of the
Portfolio's taxable year whether the foreign taxes paid by the Fund will be
"pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the pass-through
election is made, the source of the Fund's income will flow through to
shareholders of the Portfolio. With respect to such election, gains from the
sale of securities will be treated as derived from U.S. sources and certain
currency fluctuation gains, including fluctuation gains from foreign currency
denominated debt securities, receivables and payables will be treated as
ordinary income derived from U.S. sources. The limitation on the foreign tax
credit is applied separately to foreign source passive income, and to certain
other types of income. Shareholders may be unable to claim a credit for the
full amount of their proportion at share of the foreign taxes paid by the Fund.
The foreign tax credit is modified for purposes of the federal alternative
minimum tax and can be used to offset only 90% of the alternative minimum tax
imposed on corporations and individuals and foreign taxes generally are not
deductible in computing alternative minimum taxable income.
ORIGINAL ISSUE DISCOUNT. Some of the debt securities (with a fixed
maturity date of more than one year from the date of issuance) that may be
acquired by the Funds may be treated as debt securities that are issued
originally at a discount. Generally, the amount of the original issue discount
("OID") is treated as interest income and is included in income over the term of
the debt security, even though payment of that amount is not received until a
later time, usually when the debt security matures. A portion of the OID
includable in income with respect to certain high-yield corporation debt
securities may be treated as a dividend for federal income tax purposes.
Some of the debt securities (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the Funds in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Funds may make one or more of the elections applicable to
debt securities having market discount, which could affect the character and
timing the recognition of income.
Some of the debt securities (with a fixed maturity date of one year or
less from the date of issuance) that may be acquired by the Funds may be treated
as having an acquisition discount, or OID in the case of certain types of debt
securities. Generally, a Fund will be required to include the acquisition
discount, or OID, in income over the term of the debt security, even though
payment of that amount is not received until a later time, usually when the debt
security matures. The Fund may make one or more of the elections applicable to
the debt securities having acquisition discount, or OID, which could affect the
character and timing of recognition of income.
B-40
<PAGE>
The Portfolios generally will be required to distribute dividends to
shareholders representing discount on debt securities that is currently
includable in income, even though cash representing such income may not have
been received by the Funds. Cash to pay such dividends may be obtained from
sales proceeds of securities held by the Funds.
OTHER TAX INFORMATION
The Portfolios may be required to withhold for U.S. federal income
taxes 31% of all taxable distributions payable to shareholders who fail to
provide the Portfolios with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal tax liability.
The Trust may also be subject to state or local taxes in certain other
states where it is deemed to be doing business. Further, in those states which
have income tax laws, the tax treatment of the Trust and of shareholders of a
Portfolio with respect to distributions by the Portfolio may differ from federal
tax treatment. Distributions to shareholders may be subject to additional state
and local taxes. Shareholders should consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
The Trust may from time to time advertise total returns and yields for
the Portfolios, compare Portfolio performance to various indices, and publish
rankings of the Portfolios prepared by various ranking services. Any
performance information should be considered in light of the Portfolio's and
Fund's investment objectives and policies, characteristics and quality of the
its portfolio, and the market conditions during the given time period, and
should not be considered to be representative of what may be achieved in the
future.
TOTAL RETURN
The total return for a Portfolio is computed by assuming a
hypothetical initial payment of $1,000. It is assumed that all investments are
made at net asset value (as opposed to market price) and that all of the
dividends and distributions by the Portfolio over the relevant time periods are
invested at net asset value. It is then assumed that, at the end of each
period, the entire amount is redeemed without regard to any redemption fees or
costs. The average annual total return is then determined by calculating the
annual rate required for the initial payment to grow to the amount which would
have been received upon redemption. Total return does not take into account any
federal or state income taxes.
Total return is computed according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period (or fractional
portion thereof) of a hypothetical $1,000 payment made at the
beginning of the period.
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<PAGE>
Annualized total returns for the Portfolios for the period from
commencement of operations on August 31, 1995 through January 31, 1996 were as
follows: Short-Intermediate Portfolio- 5.84%; Fully Discretionary Portfolio-
8.72%.
YIELD
The yield for a Portfolio (other than the Money Market Portfolios) is
calculated based on a 30-day or one-month period, according to the following
formula:
6
Yield = 2[{a - b + 1) -1]
{c x d }
For purposes of this formula, "a" is total dividends and interest
earned during the period; "b" is total expenses accrued for the period (net of
reimbursements); "c" is the average daily number of shares outstanding during
the period that were entitled to receive dividends; and "d" is the maximum
offering price per share on the last day of the period.
Yields for the Portfolios for the 30 days ended January 31, 1996 were
as follows: Short-Intermediate Portfolio- 5.5806%; Fully Discretionary
Portfolio- 5.4092%.
COMPARISON TO INDICES AND RANKINGS
Performance information for a Portfolio may be compared to various
unmanaged indices, such as: the Lehman Brothers Government/Corporate Bond Index,
the Lehman Brothers Aggregate Bond Index, and the Salomon Brothers Broad Index
(for the Fully Discretionary Portfolio); the Merrill Lynch 1 to 3-Year Treasury
Index (for the Short-Intermediate Portfolio); and indices prepared by Lipper
Analytical Services. Unmanaged indices (I.E., other than Lipper) generally do
not reflect deductions for administrative and management costs and expenses.
Performance rankings are prepared by a number of mutual fund ranking
entities that are independent of the Trust and its affiliates. These entities
categorize and rank funds by various criteria, including fund type, performance
over a given period of years, total return, standardized yield, variations in
sales charges and risk\reward considerations.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL
PNC Bank, Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, serves as Custodian for the portfolio
securities and cash of the Portfolios and Funds and in that capacity maintains
certain financial and accounting books and records pursuant to agreements with
the Trust and Master Trust. PFPC Inc., 103 Bellevue Parkway, Wilmington,
Delaware, an affiliate of the Custodian, provides additional accounting services
to the Portfolios and Funds.
State Street Bank and Trust Company, 2 Heritage Drive, 5th Floor,
North Quincy, Massachusetts, 02171, serves as the Dividend Disbursing Agent and
as the Transfer Agent for the Portfolios and Funds. The Transfer Agent provides
customary transfer agency services to the Trust, including the handling of
shareholder communications, the processing of shareholder transactions, the
maintenance of shareholder account records, and related functions. The Dividend
Disbursing Agent provides customary dividend disbursing services to the Trust,
including payment of dividends and distributions and related functions.
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<PAGE>
The following act as sub-transfer agents for the Portfolios:
Financial Data Services, Inc., 4800 Deer Lake Drive, 2nd Floor, Jacksonville,
Florida 32246; and William M. Mercer Plan Participant Services, Inc., 1417 Lake
Cook Road, Deerfield, Illinois 60015.
Ernst & Young, L.L.P., 515 South Flower Street, Los Angeles,
California 90071, serves as the independent accountants for the Trust and Master
Trust, and in that capacity examines the annual financial statements of the
Trust and Master Trust.
Paul, Hastings, Janofsky & Walker, 555 South Flower Street, Los
Angeles, California 90071, is legal counsel for the Trust and Master Trust. It
also acts as legal counsel for the Investment Adviser and Distributor.
MISCELLANEOUS
SHARES OF BENEFICIAL INTEREST
The Trust is currently comprised of 44 series of shares -- eight A
Portfolios, eight B Portfolios, eight C Portfolios, eleven Institutional
Portfolios, one Money Market Portfolio and eight Qualified Portfolios.
On any matter submitted to a vote of shareholders of the Trust, all
shares then entitled to vote will be voted by the affected series unless
otherwise required by the Investment Company Act, in which case all shares of
the Trust will be voted in the aggregate. For example, a change in a Portfolio's
fundamental investment policies would be voted upon only by shareholders of that
Portfolio, as would the approval of any advisory or distribution contract for
the Portfolio. However, all shares of the Trust may vote together in the
election or selection of Trustees, principal underwriters and accountants for
the Trust.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding shares of the series of
the Trust affected by the matter. Under Rule 18f-2, a series is presumed to be
affected by a matter, unless the interests of each series in the matter are
identical or the matter does not affect any interest of such class or series.
Under Rule 18f-2 the approval of an investment advisory agreement or any change
in a fundamental investment policy would be effectively acted upon with respect
to a Portfolio only if approved by a majority of its outstanding shares.
However, the rule also provides that the ratification of independent public
accountants, the approval of principal underwriting contracts and the election
of directors may be effectively acted upon by the shareholders of the Trust
voting without regard to Portfolio.
As used in the Portfolios' Prospectus and in this Statement of
Additional Information, the term "majority," when referring to approvals to be
obtained from shareholders of a Portfolio, means the vote of the lesser of (i)
67% of the shares of the Portfolio represented at a meeting if the holders of
more than 50% of the outstanding shares of the Portfolio are present in person
or by proxy, or (ii) more than 50% of the outstanding shares of the Portfolio.
The term "majority," when referring to the approvals to be obtained from
shareholders of the Trust, means the vote of the lesser of (i) 67% of the
Trust's shares represented at a meeting if the holders of more than 50% of the
Trust's outstanding shares are present in person or by proxy, or (ii) more than
50% of the Trust's outstanding shares. Shareholders are entitled to one vote
for each full share held and fractional votes for fractional shares held.
Unless otherwise provided by law (for example, by Rule 18f-2 discussed above) or
by the Trust's Declaration of Trust or Bylaws, the Trust may take or authorize
any action upon the favorable vote of the holders of more than 50% of the
outstanding shares of the Trust.
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<PAGE>
Whenever a Portfolio or the Trust is requested to vote on a matter
with respect to the Master Trust, the Trust will hold a meeting of its
shareholders and will cast its votes as instructed by such shareholders and, in
the case of a matter affecting only a Fund, as instructed by the shareholders of
the corresponding Portfolio(s).
The Trust will dispense with annual meetings of shareholders in any
year in which it is not required to elect Trustees under the Investment Company
Act. However, the Trust undertakes to hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the Investment Company Act.
Each share of a Portfolio represents an equal proportional interest in
the Portfolio with each other share and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Portfolio
as are declared in the discretion of the Trustees. In the event of the
liquidation or dissolution of the Trust, shareholders of a Portfolio are
entitled to receive the assets attributable to the Portfolio that are available
for distribution, and a distribution of any general assets not attributable to a
particular Portfolio that are available for distribution in such manner and on
such basis as the Trustees in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares,
when issued, will be fully paid and nonassessable by the Trust.
DECLARATIONS OF TRUST
In accordance with Delaware law and in connection with the tax
treatment sought by the Master Trust, the Master Trust's Declaration of Trust
provides that its investors will be personally and jointly and severally
responsible (with rights of contribution INTER SE in proportion to their
respective ownership interests in the Master Trust) for the Master Trust's
liabilities and obligations in the event that the Master Trust fails to satisfy
such liabilities and obligations. However, to the extent assets are available
from the Master Trust, the Master Trust will indemnify each investor from any
claim or liability to which the investor may become subject solely by reason of
his or her having been an investor, and will reimburse the investor for all
legal and other expenses reasonably incurred by him or her in connection with
any such claim or liability.
The Declarations of Trust of both the Trust and Master Trust provide
that obligations of the Trust and the Master Trust are not binding upon their
respective Trustees, officers, employees and agents individually and that the
Trustees, officers, employees and agents will not be liable to the trusts or
their respective investors for any action or failure to act, but nothing in the
Declarations of Trust protect a Trustee, officer, employee or agent against any
liability to the trusts or their respective investors to which the Trustee,
officer, employee or agent would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of his or her
duties. The Declarations of Trust also provide that the debts, liabilities,
obligations and expenses incurred, contracted for or existing with respect to a
designated Portfolio or Fund shall be enforceable against the assets and
property of such Portfolio or Fund only (and, in the case of a Fund, its
investors), and not against the assets or property of any other Portfolio or
Fund (or in the case of a Portfolio, the investors therein).
FINANCIAL STATEMENTS
The Trust's unaudited Financial Statements as of January 31, 1996 are
included in Appendix B.
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<PAGE>
REGISTRATION STATEMENT
The Registration Statement of the Trust and the Master Trust,
including the Portfolios' Prospectuses, the Statements of Additional Information
and the exhibits filed therewith, may be examined at the office of the
Commission in Washington, D.C. Statements contained in the Portfolios'
Prospectuses or the Statements of Additional Information as to the contents of
any contract or other document referred to herein or in the Prospectuses are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to these Registration
Statements, each such statement being qualified in all respects by such
reference.
B-45
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The following paragraphs summarize the descriptions for the rating symbols
of securities.
COMMERCIAL PAPER
The following paragraphs summarize the description for the rating
symbols of commercial paper.
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings, which are also applicable to
commercial paper investments permitted to be made by the Master Trust, are
opinions of the ability of issuers to repay punctually their senior debt
obligations which have an original maturity not exceeding one year. Moody's
employs the following designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
PRIME 1: Issuers (or related supporting institutions) rated PRIME-1
have a superior ability for repayment of short-term promissory obligations.
PRIME-1 repayment ability will often be evidenced by the following
characteristics: (a) leading market positions in well-established industries;
(b) high rates of return on funds employed; (c) conservative capitalization
structures with moderate reliance on debt and ample asset protection; (d) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (e) well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated PRIME-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above in the
PRIME-1 category but to a lesser degree. Earning trends and coverage ratios,
while sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME 3: Issuers rated PRIME-3 (or related supporting institutions)
have an acceptable ability for repayment of short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION
Standard & Poor's ratings are a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
The ratings are based on current information furnished to Standard & Poor's by
the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues within the "A"
category are delineated with the numbers 1, 2, and 3 to indicate the relative
degree of safety, as follows:
A-1
<PAGE>
A-1: This designation indicates the degree of safety regarding timely
payment is overwhelming or very strong. Those issuers determined to possess
overwhelming safety characteristics are denoted with a "PLUS" (+) designation.
A-2: Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C: Issues rated "C" are regarded as having a doubtful capacity for
payment.
FITCH INVESTORS SERVICE, INC.
F-1+: Exceptionally strong credit quality. Commercial paper assigned
this rating is regarded as having the strongest degree of assurance for timely
payment.
F-1: Very strong credit quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated F-
1+.
F-2: Good credit quality. Commercial paper assigned this rating has
a satisfactory degree of assurance for timely payment but the margin of safety
is not as great as for issuers assigned F-1+ and F-1 ratings.
F-3: Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate, however, near term adverse changes could cause these securities to be
rated below investment grade.
DUFF & PHELPS
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
DUFF 1+ - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
DUFF 1 - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
DUFF 1- - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
A-2
<PAGE>
DUFF 2 - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
DUFF 3 - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
DUFF 4 - Debt possesses speculative investment characteristics.
DUFF 5 - Issuer has failed to meet scheduled principal and/or interest
payments.
THOMSON BANKWATCH
Thomson BankWatch commercial paper ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity of one year
or less which is issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the ratings used by Thomson BankWatch:
TBW-1 - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
TBW-3 - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
IBCA
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
A1+ - Obligations are supported by the highest capacity for timely
repayment.
A1 - Obligations are supported by a strong capacity for timely
repayment.
A2 - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
A3 - Obligations are supported by an adequate capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic, or financial conditions than for obligations in higher categories.
A-3
<PAGE>
CORPORATE BONDS
MOODY'S
Moody's corporate bond ratings are opinions of the relative investment
qualities of bonds. Moody's employs nine designations to indicate such relative
qualities, ranging from "Aaa" for the highest quality obligations to "C" for the
lowest. Issues are further refined with the designation 1,2, and 3 to indicate
the relative ranking within designations. Bonds with the following Moody's
ratings have the following investment qualities:
Aaa: Bonds in this category are judged to be of the highest quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds in this category are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds in this category possess many favorable investment
attributes and are considered to be as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds in this category are considered medium-grade obligations,
(I.E., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds in this category are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds in this category generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds in this category are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds in this category represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcoming.
C: Bonds in this category are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-4
<PAGE>
STANDARD & POOR'S
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
Ratings are graded into ten categories, ranging from "AAA" for the highest
quality obligation to "D" for debt in default. Issues are further refined with
a "PLUS" or "MINUS" sign to show relative standing within the categories. Bonds
with the following Standard & Poor's ratings have the following investment
qualities:
AAA: Bonds in this category have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA: Bonds in this category have a very strong capacity to pay
interest and repay principal and differ from the higher rated issues only in
small degree.
A: Bonds in this category have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB: Bonds in this category have an adequate capacity to pay interest
and repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB: Bonds in this category have less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB-" rating.
B: Bonds in this category have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating is also used
for debt subordinated to senior debt that is assigned an actual or implied "BB"
or "BB-" rating.
CCC: Bonds in this category have currently identifiable vulnerability
to default, and are dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, they are not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
C: This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
DUFF & PHELPS
The following summarizes the ratings used by Duff & Phelps for
corporate and municipal long-term debt:
AAA - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
A-5
<PAGE>
AA - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
BB, B, CCC, DD, AND DP - Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
FITCH INVESTORS SERVICE, INC.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
AAA - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB, B, CCC, CC, C, DDD, DD, AND D - Bonds that possess one of these
ratings are considered by Fitch to be speculative investments. The ratings "BB"
to "C" represent Fitch's assessment of the likelihood of timely payment of
principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
A-6
<PAGE>
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
ICBA
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
AAA - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
AA - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
BB, B, CCC, CC, AND C - Obligations are assigned one of these ratings
where it is considered that speculative characteristics are present. "BB"
represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation
and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
THOMSON BANKWATCH
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
AAA - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
AA - This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues rated
in the highest category.
A - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
A-7
<PAGE>
BBB - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
BB, B, CCC, AND CC, - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
D - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
A-8
<PAGE>
APPENDIX B
FINANCIAL HIGHLIGHTS
FIXED INCOME INSTITUTIONAL PORTFOLIOS
<TABLE>
<CAPTION>
FULLY SHORT -
DISCRETIONARY INTERMEDIATE
FIXED INCOME FIXED INCOME
INSTITUTIONAL INSTITUTIONAL
PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------
8-31-95 to 8-31-95 to
1-31-96* 1-31-96*
-------------------------------------------------
<S> <C> <C>
PER SHARE DATA: #
Net asset value, beginning of period $12.50 $12.50
Income from investment operations
Net investment income 0.17 0.01
Net realized and unrealized gains 0.85 0.59
-------------------------------------------------
Total from investment operations 1.02 0.60
Less distributions
Dividends from net investment income (0.23) (0.06)
Distributions from capital gains (0.03) --
-------------------------------------------------
Net asset value, end of period $13.26 $13.04
- ------------------------------------------------------------------------------------------------
TOTAL RETURN: 8.72% 5.84%
Ratio/Supplemental Data:
Net assets ($000), end of period $4,029 $4,798
Ratio of expenses to average net assets **+ ++ 0.45% 0.33%
Ratio of net income to average net assets **+ ++ 6.06% 3.40%
Portfolio turnover 20.93% 64.00%
</TABLE>
- --------------------------------------------------------
* Commenced operations on August 31, 1995.
** Annualized.
+ Net of expense reimbursement equivalent to 9.49% and 1.56% of average net
assets, respectively.
++ Including the expenses allocated from the Master Trust Fully Discretionary
Fixed Income Fund and Short-Intermediate Fixed Income Fund 0.40%, and 0.30%,
net of expense reimbursement equivalent to 4.71%, and 0.82% of average net
assets of the Funds, respectively.
# Unaudited.
See notes to financial statements.
A-9
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
JANUARY 31, 1996
FIXED INCOME INSTITUTIONAL SERIES PORTFOLIOS
(UNAUDITED)
<TABLE>
<CAPTION>
FULLY DISCRETIONARY SHORT-INTERMEDIATE
FIXED INCOME FIXED INCOME
----------------------------------------------
<S> <C> <C>
ASSETS
Investment in Master, at value $4,001,790 $4,771,963
Receivable:
Due from advisor 4,166 4,133
Deferred organizational costs 2,035 2,035
Expense payment reserve 12,790 --
Prepaid expenses 3,812 3,811
----------------------------------------------
TOTAL ASSETS 4,024,593 4,781,942
----------------------------------------------
LIABILITIES
Payable:
Accrued expenses 22,786 23,121
----------------------------------------------
TOTAL LIABILITIES 22,786 23,121
----------------------------------------------
NET ASSETS 4001807 4758821
----------------------------------------------
----------------------------------------------
COMPOSITION OF NET ASSETS
Paid in capital 3,983,378 4,696,613
Accumulated net investment income (deficit) 9,244 19,431
Accumulated net realized gain (loss) 1,804 254
Unrealized appreciation on foreign exchange 913 --
Unrealized appreciation on investments 6,468 42,523
----------------------------------------------
NET ASSETS 4001807 4758821
----------------------------------------------
----------------------------------------------
Shares of beneficial interest, no par value, issued and
outstanding (unlimited shares authorized) 301,762 365,172
----------------------------------------------
----------------------------------------------
COMPUTATION OF
Net asset value per share of beneficial interest (Net
Assets/Outstanding Shares of Beneficial Interest) $13.26 $13.03
----------------------------------------------
----------------------------------------------
</TABLE>
See notes to financial statements.
A-10
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED JANUARY 31, 1996
FIXED INCOME INSTITUTIONAL SERIES PORTFOLIOS
(UNAUDITED)
<TABLE>
<CAPTION>
FULLY DISCRETIONARY SHORT-INTERMEDIATE
FIXED INCOME* FIXED INCOME*
-----------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Net investment income from
Master Trust Fund 11841 67899
-----------------------------------------------
EXPENSES
Accounting fees 1,560 1,560
Administration fees 2,087 2,087
Audit fees 3,071 3,071
Insurance 3 18
Legal fees 63 392
Miscellaneous 4 22
Organization costs 205 205
Registration fees - state 9,723 9,723
Shareholder reporting 66 67
Transfer agent 986 986
Trustees' fees 737 737
-----------------------------------------------
Total expenses 18,505 18,868
Less: Reimbursement from advisor (18,407) (18,281)
-----------------------------------------------
NET EXPENSES 98 587
-----------------------------------------------
NET INVESTMENT INCOME (DEFICIT) 11,743 67,312
-----------------------------------------------
NET REALIZED & UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on security transactions 2,024 254
Change in unrealized appreciation on investments 7,381 42,523
-----------------------------------------------
Net gain (loss) on investments 9,405 42,777
-----------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 21148 110089
-----------------------------------------------
-----------------------------------------------
</TABLE>
- ------------
* Commencement of operations on August 31, 1995.
See notes to financial statements.
A-11
<PAGE>
NICHOLAS- APPLEGATE MUTUAL FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED JANUARY 31, 1996
FIXED INCOME INSTITUTIONAL SERIES PORTFOLIOS
(UNAUDITED)
<TABLE>
<CAPTION>
FULLY DISCRETIONARY SHORT-INTERMEDIATE
FIXED INCOME* FIXED INCOME*
------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (deficit) $ 11,743 $ 67,312
Net realized and unrealized gain on investments 9,405 42,777
------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 21,148 110,089
------------------------------------------
DISTRIBUTIONS TO SHARES OF
BENEFICIAL INTEREST
Net income (2,499) (47,881)
Capital gains (220) --
------------------------------------------
Total distributions (2,719) (47,881)
------------------------------------------
TRANSACTIONS IN SHARES OF BENEFICIAL
INTEREST
Proceeds from sales 3,980,661 4,664,235
Value of shares issued in reinvestment 2,718 47,880
Cost of shares repurchased (1) (15,502)
------------------------------------------
Increase (decrease) in net assets from
transactions in shares of beneficial
interest 3,983,378 4,696,613
------------------------------------------
Total increase (decrease) in net assets 4,001,807 4,758,821
NET ASSETS:
BEGINNING OF PERIOD -- --
------------------------------------------
END OF PERIOD 4001807 4758821
------------------------------------------
------------------------------------------
CHANGES IN SHARES OF
BENEFICIAL INTEREST
Beginning balance -- --
Shares sold 301,554 362,642
Shares issued for distributions reinvested 208 3,727
Shares repurchased -- (1,197)
------------------------------------------
Ending Balance 301,762 365,172
------------------------------------------
------------------------------------------
</TABLE>
* Commencement of operations on August 31, 1995.
See notes to financial statements.
A-12
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nicholas-Applegate Mutual Funds (the "Trust") is organized as a
diversified, open-end management investment company which offers 43 separate
series comprised of Portfolios A, with an initial sales charge, B, with a
back-end sales charge, C, with a level asset based sales charge, Institutional,
with no load, and Qualified, with no load (each a "Portfolio" and collectively
the "Portfolios"). The Portfolios of the Trust seek to achieve their respective
investment objectives by investing all of their assets in corresponding series
of Nicholas-Applegate Investment Trust (the "Master Trust"), a diversified
open-end management investment company offering twelve investment vehicles (the
"Funds").
Pursuant to Rule 24f-2 under the Investment Company Act, the Trust has
elected to register an indefinite number of shares. The Trust commenced
operations on April 19, 1993.
INVESTMENT INCOME
Each Portfolio accrues income, net of expenses, daily on its investment in
the applicable Fund. All of the net investment income (deficit) and realized
and unrealized gains and losses from the security transactions and foreign
currency of the Fund are allocated pro rata among the investors in the Fund at
the time of such determination.
FEDERAL INCOME TAXES
It is the Portfolios' policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of their taxable income to their shareholders.
Accordingly, no federal income tax provisions are required if the Portfolios
continue to comply with such requirements.
The Funds are treated as partnerships for federal income tax purposes. Any
interest, dividends and gains or losses of the Funds will be deemed to have been
"passed through" to the Portfolios.
Net investment income and net realized gains for the year, (or period where
appropriate), differ for financial statement and tax purposes primarily because
of one or all of the following: deferral of wash-sale losses, passive foreign
investments, unrealized appreciation/depreciation, and capital loss
carryforwards.
The character of distributions made during the year (or period where
appropriate), from net investment income or net realized gains may differ from
their ultimate characterization for federal income tax purposes due to book/tax
differences in the character of income and expense recognition.
DEFERRED ORGANIZATION COSTS
Organization Costs incurred by the Trust have been allocated to certain
Portfolios based upon management's best estimate of the costs applicable to each
Portfolio. These costs have been deferred and will be amortized over a period
of 60 months from the date the Portfolios commenced operations.
In the event that any of the initial shares are redeemed by the holder
during the period of amortization of the Portfolios' organization costs, the
redemption proceeds will be reduced by any such unamortized organization costs
in the same proportion as the number of initial shares being redeemed bears to
the number of those shares outstanding at the time of redemption.
A-13
<PAGE>
NICHOLAS-APPLEGATE MUTUAL FUNDS
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
ADVISORY AGREEMENTS
The investment adviser to the Master Trust is Nicholas-Applegate Capital
Management ("Nicholas-Applegate" or "Investment Adviser"). The advisory fee is
computed daily for the Funds based upon the percentage of each Fund's average
daily net assets.
EXPENSE LIMITATIONS
Nicholas-Applegate and the Trust have undertaken to limit the Portfolio's
expenses to the following annual levels through March 31, 1996. In subsequent
years, overall operating expenses for each Portfolio will not fall below the
applicable percentage limitation until the Investment Adviser has been fully
reimbursed for fees foregone or expenses paid by the Investment Adviser under
this agreement, as each Portfolio will reimburse the Investment Adviser in
subsequent years when operating expenses (before reimbursement) are less than
the applicable percentage limitation.
<TABLE>
FUND
----
<S> <C>
Fully Discretionary Institutional Fixed Income Portfolio . . . . 0.45%
Short-Intermediate Institutional Fixed Income Portfolio. . . . . 0.35%
</TABLE>
These percentages are based on the average net assets of the Portfolios,
exclusive of interest, taxes, brokerage commissions and other costs incurred in
connection with portfolio securities transactions, capital expenditures, and
extraordinary expenses.
Nicholas-Applegate advanced certain organization costs discussed in Note 1. As
of January 31, 1996, the following Portfolios have amounts due to
Nicholas-Applegate for organizational costs advanced.:
<TABLE>
<S> <C>
Fully Discretionary Institutional Fixed Income Portfolio . . . . . $ 2,240
Short-Intermediate Institutional Fixed Income Portfolio. . . . . . $ 2,240
</TABLE>
3. INVESTMENT TRANSACTIONS
Additions and reductions in the investments in the respective Master Trust
Funds for the period ended January 31, 1996, were as follows:
<TABLE>
<CAPTION>
Additions Reductions
(000s) (000s)
<S> <C> <C>
Fully Discretionary Institutional Fixed Income Portfolio . . . . . . $3,981 ---
Short-Intermediate Institutional Fixed Income Portfolio. . . . . . . 4,678 17
</TABLE>
A-14
<PAGE>
NICHOLAS- APPLEGATE INVESTMENT TRUST
STATEMENTS OF ASSETS AND LIABILITIES
JANUARY 31, 1996
FIXED INCOME INSTITUTIONAL SERIES PORTFOLIOS
<TABLE>
<CAPTION>
FULLY DISCRETIONARY SHORT-INTERMEDIATE
FIXED INCOME FIXED INCOME
------------------------------------------
<S> <C> <C>
ASSETS
Investments, at value * $4,453,392 $4,735,760
Value of currency forward contracts 919
Cash 656 1,837
Receivable:
Interest 58,022 58,464
Due from advisor 2,779 2,100
Investment securities sold 79,046
Principal paydown 116 6,554
Deferred organizational costs 2,035 2,035
------------------------------------------
TOTAL ASSETS 4,596,965 4,806,750
------------------------------------------
LIABILITIES
Payable for investments securities purchased 557,689 --
Accrued expenses 10,298 8,281
------------------------------------------
TOTAL LIABILITIES 567,987 8,281
------------------------------------------
NET ASSETS $4,028,978 $4,798,469
------------------------------------------
------------------------------------------
COMPOSITION OF NET ASSETS
Paid in capital 4,005,544 4,686,287
Accumulated net investment income (deficit) 12,591 68,608
Accumulated net realized gain (loss) 2,639 608
Unrealized appreciation on investments 8,204 42,966
------------------------------------------
NET ASSETS $4,028,978 $4,798,469
------------------------------------------
------------------------------------------
* Cost of investments 4,446,107 4,692,794
------------------------------------------
</TABLE>
See notes to financial statements.
A-15
<PAGE>
NICHOLAS- APPLEGATE INVESTMENT TRUST
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED JANUARY 31, 1996
FIXED INCOME INSTITUTIONAL SERIES PORTFOLIOS
<TABLE>
<CAPTION>
FULLY DISCRETIONARY SHORT-INTERMEDIATE
FIXED INCOME* FIXED INCOME*
------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income
Interest $ 13,411 $ 72,164
EXPENSES
Advisory fees 922 3,557
Administration fees 69 407
Accounting fees 3,750 3,750
Audit fees 62 370
Custodian fees 1,985 1,307
Insurance 6 37
Legal fees 3 16
Miscellaneous 22 126
Organization costs 205 205
Trustees' fees 3,456 3,456
Reimbursement due to (from) advisor (9,660) (9,675)
------------------------------------------
Total expenses 820 3,556
------------------------------------------
NET INVESTMENT INCOME (DEFICIT) 12,591 68,608
------------------------------------------
NET REALIZED & UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on security transactions 2,639 608
Change in unrealized appreciation on foreign exchange 919 --
Change in unrealized appreciation on investments 7,285 42,966
------------------------------------------
Net gain (loss) on investments 10,843 43,574
------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 23,434 $112,182
------------------------------------------
------------------------------------------
</TABLE>
* Commencement of operations on August 31, 1995.
See notes to financial statements.
A-16
<PAGE>
NICHOLAS- APPLEGATE INVESTMENT TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED JANUARY 31, 1996
FIXED INCOME INSTITUTIONAL SERIES PORTFOLIOS
<TABLE>
<CAPTION>
FULLY DISCRETIONARY SHORT-INTERMEDIATE
FIXED INCOME* FIXED INCOME*
------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income (deficit) $ 12,591 $ 68,608
Net realized and unrealized gain on investments 10,843 43,574
------------------------------------------
Net increase (decrease) in net assets
resulting from operations 23,434 112,182
------------------------------------------
TRANSACTION IN SHARES OF
BENEFICIAL INTEREST:
Contributions by partners 4,005,661 4,703,383
Withdrawals by partners (117) (17,096)
------------------------------------------
Increase (decrease) in
net assets derived from
transactions in shares of
beneficial interest 4,005,544 4,686,287
------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 4,028,978 4,798,469
NET ASSETS:
BEGINNING OF PERIOD -- --
------------------------------------------
END OF PERIOD $4,028,978 $4,798,469
------------------------------------------
------------------------------------------
</TABLE>
* Commencement of operations on August 31, 1995.
See notes to financial statements.
A-17
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nicholas-Applegate Investment Trust (the "Master Trust"), a diversified,
open-end management investment company organized as a Delaware business trust,
is comprised of twelve investment vehicles (each a "Fund" and collectively the
"Funds") as of January 31, 1996. Each Fund has up to five Portfolios which have
invested in the respective series of the Master Trust to achieve their
investment objective.
Pursuant to Rule 24f-2 under the Investment Company Act, the Trust has
elected to register an indefinite number of shares. The Trust commenced
operations on April 19, 1993.
SECURITIES TRANSACTIONS
Equity securities are valued at the last sale price (for exchange-listed
securities) or the mean between the last bid and asked price (if lacking any
sales and for over-the-counter securities). Debt securities generally are
valued at the mean between the last bid and asked prices. Securities with 60
days or less remaining to maturity are valued on an amortized cost basis which
approximates market value.
Securities for which market quotations are not readily available are valued
at fair value determined in good faith by or under the direction of the Master
Trust's Board of Trustees.
Securities transactions are recognized on the trade date. Realized gains
and losses from securities transactions are calculated using the first-in,
first-out method. Dividend income is recognized on the ex-dividend date, and
interest income is recorded on the accrual basis. Discounts and premiums on
securities purchased are amortized over the life of the respective securities.
The prospectus for the Nicholas-Applegate Mutual Funds describes each Fund's
policies with respect to declaration and payment of dividends and distribution
of capital gains.
FEDERAL INCOME TAXES
The Funds are treated as partnerships for federal income tax purposes. Any
interest, dividends and gains or losses of a Fund will be deemed to have been
"passed through" to the Portfolios.
DEFERRED ORGANIZATION COSTS
Organization costs incurred by the Master Trust have been allocated to the
various Funds based upon management's best estimate of the costs applicable to
each Fund. These costs have been deferred and will be amortized over a period
of 60 months from the date the Funds commenced operations.
B. TRANSACTIONS WITH AFFILIATES
ADVISORY AGREEMENTS
The investment adviser to the Master Trust is Nicholas-Applegate Capital
Management ("Nicholas-Applegate"). Nicholas Applegate 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.
A-18
<PAGE>
NICHOLAS-APPLEGATE INVESTMENT TRUST
NOTES TO THE FUND'S FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
Nicholas-Applegate advanced certain organization costs discussed in Note 1.
As of January 31, 1996, the following Funds have amounts due to
Nicholas-Applegate for organizational costs advanced:
<TABLE>
<CAPTION>
<S> <C>
Fully Discretionary Institutional Fixed Income Fund. . . . . . $ 2,240
Short-Intermediate Institutional Fixed Income Fund . . . . . . $ 2,240
</TABLE>
C. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investment securities, other than
short-term obligations, for the period ended January 31, 1996, were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---- --------- -----
<S> <C> <C>
Fully Discretionary Institutional Fixed Income Fund. . . . . $4,005 $ 182
Short-Intermediate Institutional Fixed Income Fund . . . . . $6,339 $1,811
</TABLE>
At January 31, 1996, the net unrealized appreciation (depreciation) based on the
cost of investments for Federal income tax purposes was as follows (in 000's):
<TABLE>
<CAPTION>
Tax Gross Gross Net
Cost of Unrealized Unrealized Unrealized
Fund Investments Appreciation Depreciation Appreciation
- ---- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fully Discretionary Institutional Fixed Income Fund. . . $ 4,446 $ 13 6 $ 7
Short-Intermediate Institutional Fixed Income Fund . . . 4,693 43 --- 43
</TABLE>
A-19
