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NICHOLAS--APPLEGATE-REGISTERED TRADEMARK- MUTUAL FUNDS
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GLOBAL GROWTH & INCOME PORTFOLIOS
PROSPECTUS
Nicholas-Applegate Mutual Funds is an open-end management investment company
consisting of a number of diversified investment portfolios, including the
Global Growth & Income A, B, C and Institutional Portfolios ("Portfolios")
offered hereby. The Series A, B and C Portfolios have identical investment
objectives and policies. However, the Series A Portfolio is sold subject to an
initial sales charge and lower operating expenses, and the Series B and C
Portfolios are sold subject to a contingent deferred sales charge and higher
operating expenses. The Institutional Portfolio is generally offered to
institutional investors, high net worth individuals and participants in certain
mutual fund 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 OF THE GLOBAL
GROWTH & INCOME FUND ("FUND") OF NICHOLAS-APPLEGATE INVESTMENT TRUST, WHICH HAS
THE SAME OBJECTIVE AS THE PORTFOLIOS. THE FUND IN TURN INVESTS ITS 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 FUND. INVESTORS SHOULD CAREFULLY CONSIDER THIS
INVESTMENT APPROACH. SEE "INVESTMENT OBJECTIVES, POLICIES AND RISK
CONSIDERATIONS-SPECIAL CONSIDERATIONS REGARDING MASTER/FEEDER STRUCTURE", PAGE
, FOR ADDITIONAL INFORMATION REGARDING THIS UNIQUE STRUCTURE. THERE CAN BE NO
ASSURANCE THAT THE FUND OR ANY PORTFOLIO WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
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GLOBAL GROWTH & INCOME PORTFOLIOS seek long-term capital appreciation while
providing current income. They invest in the Nicholas-Applegate Global Growth &
Income Fund, which in turn invests primarily in a diversified portfolio of
equity securities, bonds and money market instruments of U.S. and foreign
issuers.
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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 August 2, 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, 600 West Broadway, 30th Floor, San Diego, California 92101, or by
calling (800) 551-8045. Inquiries regarding any of the Portfolios can also be
made by calling (800) 551-8043.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August 2, 1996
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NICHOLAS--APPLEGATE MUTUAL FUNDS
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GLOBAL GROWTH & INCOME PORTFOLIOS
GLOBAL GROWTH & INCOME PORTFOLIO A
GLOBAL GROWTH & INCOME PORTFOLIO B
GLOBAL GROWTH & INCOME PORTFOLIO C
GLOBAL GROWTH & INCOME INSTITUTIONAL PORTFOLIO
TABLE OF CONTENTS
Summary of Expenses......................................... 3
Prospectus Summary.......................................... 5
Investment Objectives, Policies and Risk
Considerations............................................ 9
Organization and Management................................. 13
Purchasing Shares........................................... 16
Alternative Purchase Arrangements........................... 19
Shareholder Services........................................ 23
Redeeming Shares............................................ 26
Dividends, Distributions and Taxes.......................... 30
General Information......................................... 31
Appendix:
Investment Policies, Strategies
and Risks............................................... 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.
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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 the Fund, each Portfolio's estimated expenses include its
proportionate share of the operating expenses of the Fund. Actual expenses may
be more or less than those shown.
<TABLE>
<CAPTION>
Global Growth & Income
Portfolio Portfolio Portfolio Institutional
A B C Portfolio
<S> <C> <C> <C> <C>
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SHAREHOLDER TRANSACTION
EXPENSES:
Maximum sales charge on purchases (as a percentage
of offering price)(1) 5.25% None None None
Sales charge on reinvested dividends None None None None
Deferred sales charge (as a percentage of original
purchase price or redemption proceeds, whichever
is lower)(2) None 5.00% 1.00% None
Redemption fee(3) None None None None
Exchange fee None None None None
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ANNUAL PORTFOLIO OPERATING EXPENSES AS A PERCENTAGE OF
AVERAGE NET ASSETS:
(after expense deferral)(5)
Management fees 0.85% 0.85% 0.85% 0.85%
12b-1 expenses 0.25% 0.75% 0.75% --
All other expenses (after expense deferral)(4)
Shareholder service expenses 0.10% 0.25% 0.25% --
Other expenses 0.65% 0.65% 0.65% 0.50%
Total other expenses 0.75% 0.90% 0.90% 0.50%
Total operating expenses (after expense
deferral)(4) 1.85% 2.50% 2.50% 1.35%
</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
Fund. For a detailed description of the expenses of the Portfolios and the Funds
in which they invest, see "Organization and Management."
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(1)Sales charges are reduced for purchases of $50,000 or more of shares of the
Series A Portfolios. There is no initial sales charge on purchases of shares
of the Series B or C Portfolios. The National Association of Securities
Dealers, Inc. limits total annual sales charges (including 12b-1 expenses) to
all purchasers of shares of a Portfolio to 6.25% of new sales plus an
interest factor. However, long-term shareholders may pay more than the
economic equivalent of such maximum sales charges. See "Alternative Purchase
Arrangements."
(2) Although purchases of $1 million or more of shares of a Series A Portfolios
are not subject to an initial sales charge, a contingent deferred sales
charge of 1.00% applies on certain redemptions made less than one year
following such purchases. A contingent deferred sales charge applies on
certain redemptions of shares of the Series B Portfolio, ranging from 5.00%
of redemptions made within 12 months of purchase to zero for redemptions
made more than six years after purchase. A contingent deferred sales charge
of 1.00% also applies on certain redemptions of shares of the Series C
Portfolio made within 12 months following their purchase, but without regard
to the size of the purchase. See "Redeeming Shares."
(3) A $10 charge will be imposed on redemptions requested to be paid by wire
transfer. See "Redeeming Shares-Redemption Payments."
(4) 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
(other than interest, taxes, brokerage commissions and other portfolio
transaction expenses, capital expenditures and extraordinary expenses) for
each Portfolio will not exceed the following respective percentage of such
Portfolio's average net assets on an annual basis through March 31, 1997:
A-1.85%; B-2.50%; C-2.50%; Institutional-1.35%. 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 in subsequent years
when operating expenses (before recoupment) 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
Portfolios' 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 Series A, B, C and
Institutional Portfolios for the first year of operations are estimated to
be the following
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respective annualized percentages of such Portfolios' average net assets:
A- %; B- %; C- %; Institutional- %. 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
a shareholder would pay on a hypothetical $1,000 investment in each of the
Portfolios over various time periods, assuming a 5% annual return. The
Portfolios charge no redemption fees. However, a contingent deferred sales
charge of 1.00% applies on redemptions of shares of a Series A Portfolio made
less than one year after a $1 million purchase of such shares, a contingent
deferred sales charge applies on redemptions of shares of a Series B Portfolio
(ranging from 5.00% of redemptions made within 12 months of purchase to zero for
redemptions made more than six years after purchase), and a contingent deferred
sales charge of 1.00% applies on redemptions of shares of a Series C Portfolio
made less than one year after any purchase of such shares.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
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GLOBAL GROWTH & INCOME PORTFOLIOS
Portfolio A(1) $70 $108
Portfolio B:(2)
Assuming redemption at end of time period $77 $110
Assuming no redemption $25 $ 78
Portfolio C:(2)
Assuming redemption at end of time period $36 $ 78
Assuming no redemption $25 $ 78
Institutional Portfolio
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</TABLE>
(1)Assumes redemption at the end of the time period, and deduction at the time
of purchase of the maximum applicable initial sales charge. The contingent
deferred sales charge on the Series A Portfolio is not applicable to the
hypothetical investment of $1,000; it only applies on redemptions of $1
million purchases.
(2)Assumes deduction at the time of redemption of a contingent deferred sales
charge, if applicable and no exchange of Portfolio B shares for Portfolio A
shares seven or more years after purchase.
This Example assumes that all dividends and other distribution are reinvested
and that the percentage amounts listed under "Annual Portfolio Operating
Expenses" in the fee table on page 3 remain the same in the years shown.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OF 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.
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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 Global Growth & Income A, B, C and Institutional Portfolios
offered hereby.
INVESTMENT OBJECTIVES. The investment objectives of the Portfolios are described
on the front cover of this Prospectus. There can be no assurance that any
Portfolio will achieve its investment objective. 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
("Fund") of Nicholas-Applegate Investment Trust (the "Master Trust"), a
diversified, open-end management investment company. The Fund has the same
investment objectives as the Portfolios which invest in it. The Fund in turn
holds 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 Fund, or from the failure by shareholders of a
Portfolio to approve a change in investment objectives and policies that has
been approved by the shareholders of the Fund. There may also be other
investment companies through which you can invest in the Fund 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 the Fund only if the Trust's Board of
Trustees determines that this is in the best interests of the Portfolio and its
shareholders, and only with the approval of the Portfolio's shareholders. 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:
The Fund is permitted to invest up to 35% 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. In addition, the Fund is
permitted to invest a portion (less than 35%) of its net assets in convertible
and debt securities rated below "Baa" by Moody's Investors Service, Inc.
("Moody's"), "BBB" by Standard & Poor's Corporation ("S&P"), or investment grade
by other recognized rating agencies, or in unrated securities of comparable
quality, if Nicholas-Applegate Capital Management (the "Investment Adviser")
believes that the financial condition of the issuer or the protection afforded
to the particular securities is stronger than would otherwise be indicated by
such low ratings or lack of ratings. Such securities, commonly referred to as
"junk bonds," are speculative and subject to greater market fluctuations and
risk of loss of income and principal than higher rated bonds. The Fund will in
no event purchase debt securities rated below "C" or equivalent by Moody's, S&P
or another rating agency, or
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determined by the Investment Adviser to be of comparable quality. See "Appendix:
Investment Policies, Strategies and Risks" and the Statement of Additional
Information for a description of these securities and ratings.
Investments by the Fund in securities of foreign companies and governments
involve special risks in addition to the usual risks inherent in domestic
investments, including 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. 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 Fund. 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. In addition,
investment in emerging markets involves greater risks than other foreign
investments, including less-developed economic and legal structures; less
stable political systems; illiquid securities markets; possible
expropriations, nationalization or confiscatory taxation; and possible
foreign currency devaluations and fluctuations.
The investment approach of the Investment Adviser results in above-average
portfolio turnover for the 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.
For hedging purposes, the Fund may purchase or write put and call options on
securities and securities indices, effect transactions in futures contracts and
related options on stock indices, and enter into foreign exchange forward
contracts, currency futures or related options. These are derivative
instruments, whose value derives from the value of an underlying security, index
or currency. Risks associated with the use of such instruments include the
possibility that the Investment Adviser's forecasts of market values and
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 Fund. See "Appendix: Investment Policies,
Strategies and Risks" in this Prospectus and "Investment Objectives, Policies
and Risks" in the Statement of Additional Information."
The Fund may invest up to 15% of its net assets in illiquid securities. The 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 Fund
may also borrow money from banks for temporary purposes which, among other
risks, may require the Fund 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."
The Fund had not commenced operation as of the date of this Prospectus.
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 the Fund. Nicholas-Applegate
Capital Management serves as Investment Adviser to the Fund. The Investment
Adviser has been in the investment advisory business since 1984 and currently
manages approximately $30 billion of discretionary 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 is compensated for its services to the Fund in the form
of monthly fees at the annual rate of 0.85% of the Fund's net assets. See
"Organization and Management."
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DISTRIBUTOR. Nicholas-Applegate Securities (the "Distributor"), an affiliate of
the Investment Adviser, serves as distributor of shares of the Portfolios. Under
a Distribution Plan, the Distributor receives compensation for providing
distribution services for the Portfolios at the following annual rates: for the
Series A Portfolio-0.25% of the Portfolio's net assets; for the Series B
Portfolio-0.75% of the Portfolio's net assets; and for the Series C
Portfolio-0.75% of the Portfolio's net assets. Under a Shareholder Service Plan,
the Distributor is reimbursed for shareholder services it provides and for
payments made to broker-dealers and others for related support and recordkeeping
services at an annual rate of up to 0.10% of the Series A Portfolio's net
assets, 0.25% of the Series B Portfolio's net assets, and 0.25% of the Series C
Portfolio's net assets. See "Organization and Management." Under a Distribution
Agreement, the Distributor will also retain a portion of the initial sales load
on purchases of shares of the Series A Portfolio and the contingent deferred
sales load on redemptions of shares of the Portfolios. The Institutional
Portfolio pays no distribution or other fees to the Distributor in connection
with services it provides. See "Organization and Management" and "Alternative
Purchase Arrangements."
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 Trusts, 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 may be purchased directly from the
Trust through its Transfer Agent or through selected dealers. Shares are
purchased at the next offering price, less a sales charge if applicable, after
an order is received in proper form by the Transfer Agent. For Series A, B and C
Portfolios, the minimum initial investment is $2,000 and the minimum subsequent
investment is $100, but reduced investment minimums are available in certain
cases.
Shares of the Institutional Portfolio are offered to Institutional investors,
high net worth individuals and participants in other mutual fund asset
allocation programs. 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 limited partners described above, and may be waived from time to time by
the Distributor for other investors. Shares of the Institutional Portfolio may
also be purchased with securities which are otherwise appropriate for investment
by the Institutional Portfolio. See "Purchasing Shares."
ALTERNATIVE PURCHASE ARRANGEMENTS. Shares of the Series A Portfolio are sold
subject to a maximum sales charge of 5.25%. Reduced sales charges are available
for purchases of $50,000 or more of shares of the Series A Portfolio. No initial
sales charge applies on a purchase of $1 million or more of shares of the Series
A Portfolio, but a contingent deferred sales charge of 1.00% is imposed on
redemptions made within 12 months after the $1 million purchase. The Trust
offers a number of ways shareholders in the Series A Portfolio can reduce their
sales charges, including aggregation, concurrent purchases, rights of
accumulation and letters of intent. See "Purchasing Shares."
Although shares of the Series B Portfolio and Series C Portfolio may be
purchased without an initial sales charge, a contingent deferred sales charge is
imposed on redemptions of the Series B Portfolio (ranging from 5.00% of
redemptions made within 12 months of the purchase to zero for redemptions made
more than six years after purchase) and a contingent
7
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deferred sales charge of 1.00% is imposed on redemptions of the Series C
Portfolio made less than one year after purchase. Shares of the Series B
Portfolio may be exchanged for shares of the Series A Portfolio seven years
after purchase. See "Alternative Purchase Arrangements- Series B Portfolio" and
"-Series C Portfolio."
SHAREHOLDER SERVICES. The following services are provided to shareholders of the
Portfolios for their convenience and flexibility: an automatic investment plan;
automatic reinvestment and cross-reinvestment of dividends and capital gains
distributions; an exchange privilege, including automatic exchanges; and
automatic withdrawals. See "Shareholder Services." The Trust also offers various
retirement plans through which you can invest in the Portfolios. See "Purchasing
Shares."
REDEEMING SHARES. Shares of the Series A, B and C Portfolios may be redeemed by
writing to the Transfer Agent, directly or through a selected dealer, or by
telephone if telephone redemption privileges have been established. Proceeds
from the redemption of shares of the Series A, B and C Portfolios of $5,000 or
more may be wired; otherwise proceeds will be sent by check. Proceeds from the
redemption of shares of the Institutional Portfolio will be wired to the bank of
the shareholder; participants of qualified retirement plans must make redemption
requests to the plan sponsor or administrator. The price received for shares
redeemed is at the next determined net asset value after the request is received
in proper form by the Transfer Agent or a sub-transfer agent, which may be more
or less than the purchase price, except that a contingent deferred sales charge
may apply to certain redemptions. See "Redeeming Shares."
DIVIDENDS, DISTRIBUTIONS AND TAXES. The Portfolios declare and pay quarterly
dividends of net investment income. 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.
8
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INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The investment objective and policies 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 the
Fund, which has the same objectives as the Portfolios. The Fund in turn holds
investment securities. Accordingly, the investment experience of each Portfolio
will correspond directly with the investment experience of the Fund. For a
description of the Fund's 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 the Fund will achieve its investment objective. Each
Portfolio's and the 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 the 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
shareholders before any change is made to its or the Fund's investment
objective.
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 Fund could have adverse effects, such as lack of portfolio
diversity and decreased economics 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 the 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 shareholders 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 shareholders of the 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 Fund may have a greater ownership interest
in the Fund than the Portfolios' interest, and could thus have effective voting
control over the operation of the Fund.
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 Fund. However, other
investment companies that offer their shares to the public also may
9
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invest all or substantially all of their assets in the Fund. Accordingly, there
may be other investment companies through which you can invest indirectly in the
Fund. 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 shareholders. Information about the availability of other
investment companies that invest in the Fund can be obtained by calling (800)
551-8045.
A Portfolio may cease investing in the Fund only if the Board of Trustees of the
Trust determines that such action is in the best interests of the Portfolio and
its shareholders, and only with the approval of the Portfolio's shareholders. 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."
GLOBAL GROWTH & INCOME PORTFOLIOS. The Global Growth & Income Portfolios seek
long-term capital appreciation while providing current income. They invest all
of their assets in the Nicholas-Applegate Global Growth & Income Fund, which has
the same investment objective as the Portfolios. Assets of the Fund are invested
primarily in a diversified portfolio of equity securities, bonds and money
market instruments of U.S. and foreign issuers. Although the Fund is not
restricted to investments in companies of any particular size, it currently
intends to invest principally in established companies in the world's leading
industrial nations and in other rapidly growing countries.
Under normal market conditions, as a fundamental policy which cannot be
changed without shareholder approval, at least 65% of the Fund's total assets
will be invested in securities of issuers located in at least three different
countries (one of which may be the United States). With this exception, the
Fund is not driven by allocation considerations with respect to any
particular countries, geographic regions or economic sectors. Although the
Fund is authorized to invest more than 25% of its total assets in the
securities of issuers located in any one country, it does not currently
intend to do so. Countries in which investment opportunities will be sought
include Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom
and the United States. The Fund may also invest in securities issued by
companies based in other countries such as countries of Eastern Europe and
South America, Indonesia, Korea, Mexico, the Philippines, Portugal and
Thailand. The Fund may also invest up to 10% of its total assets in other
registered investment Companies, which may result in duplication of fees. See
"Appendix: Investment Policies, Strategies and Risks" for a discussion on the
risks associated with investment in foreign securities.
Under normal market conditions, at least 60% of the Fund's total assets will be
invested in equity securities (common and preferred stocks), and warrants to
acquire such securities. The remainder of the Fund's assets will be invested in
debt securities of foreign companies and foreign governments and their agencies
and instrumentalities which the Investment Adviser believes present attractive
opportunities for capital growth, as well as in various other securities and
instruments described in "Appendix: Investment Policies, Strategies and Risks".
The Fund's debt securities will generally be investment grade securities
rated "Baa" or higher by Moody's, "BBB" or higher by S&P or equivalent
ratings by other recognized rating agencies, or will be unrated if determined
by the Investment Adviser to be of
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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 may 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. However, a
portion (less than 35%) of the Fund's net assets may be invested in debt
securities rated below investment grade or in unrated securities of comparable
quality if the Investment Adviser believes that the financial condition of the
issuer or the protection afforded to the particular securities is stronger than
would otherwise be indicated by such low ratings or the lack thereof. Debt
securities with ratings below "Baa" or "BBB" or equivalent ratings, commonly
referred to as "junk bonds," are speculative and subject to greater market
fluctuations and risk of loss of income and principal than higher rated bonds.
If the rating of an investment grade security held by the Fund is downgraded,
the Investment Adviser will determine whether it is in the best interests of the
Fund to continue to hold such security in its investment portfolio. However, if
the downgrading of a debt security causes the Fund to retain 35% or more of its
net assets in junk bonds, the Fund will sell sufficient principal amount of junk
bonds as promptly as practicable to ensure that it does not hold 35% or more of
its net assets in such securities. See "Appendix Investment Policies, Strategies
and Risks" for discussion of the risks associated with investment in junk bonds.
The Fund intends to invest principally in securities that are listed on a bona
fide securities exchange or are actively traded in an over-the-counter market
(either within or outside the issuer's domicile country). The 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 significant legal restriction.
The Fund may purchase securities issued by the government of, or a company
located in, one nation but denominated in the currency of another nation (or in
a multinational currency unit).
INVESTMENT TECHNIQUES AND PROCESSES. The focus of the Investment Adviser's
investment program is GROWTH OVER TIME-Registered Trademark-. In making
decisions with respect to equity securities for the Funds, the Investment
Adviser uses a proprietary investment methodology which is designed to capture
positive change at an early stage. It adheres rigorously to this methodology,
and applies it to various segments of the capital markets, domestically and
internationally. This methodology consists of investment techniques and
processes designed to identify companies with attractive earnings and dividend
growth potential and to evaluate their investment prospects. These techniques
and processes include relationships with an extensive network of brokerage and
research firms located throughout the world; computer-assisted fundamental
analysis of thousands of domestic and foreign companies; established criteria
for the purchase and sale of individual securities; portfolio structuring and
rebalancing guidelines; securities trading techniques; and continual monitoring
and reevaluation of all holdings with a view to maintaining the most attractive
mix of investments. The Investment Adviser collects data on approximately 26,000
companies in 35 countries (adjusting for reporting and accounting differences).
There can be no assurance that use of this proprietary investment methodology
will be successful.
The decision to invest assets of the 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 managing the Fund's debt security investments, the
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Investment Adviser seeks to capture major moves in interest rates and utilizes a
proprietary model to identify interest rate trends in the bond market. There can
be no assurance that use of these techniques will be successful.
INVESTMENT POLICIES, STRATEGIES AND RISKS. The Appendix and the 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 sovereign debt securities of U.S. and
foreign governments and their agencies and instrumentalities; floating and
variable rate demand notes and bonds; commercial paper; non-convertible
corporate debt securities; convertible securities, synthetic convertible
securities and warrants; closed-end country funds; depository receipts;
over-the-counter securities; when-issued securities and firm commitment
agreements; foreign exchange contracts; put and call options on securities;
stock index futures contracts; repurchase agreements; illiquid securities;
securities lending; and borrowing.
INVESTMENT RESTRICTIONS. Each Portfolio and the 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 the 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.
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. Neither the Fund nor any Portfolio 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 can 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. Neither the Fund nor any Portfolio may purchase more than 10% of the
outstanding voting securities of any one issuer, or purchase the
securities of any issuer for the purpose of exercising control.
3. Neither the Fund nor any Portfolio 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.
4. Neither the Fund nor any Portfolio 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).
5. Neither the Fund nor any Portfolio 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 the Fund.
PORTFOLIO TURNOVER. The Investment Adviser's investment approach results in
above-average portfolio turnover for the Fund as the Investment Adviser sells
portfolio securities when it
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believes the reasons for their initial purchase are no longer valid or when it
believes that the sale of a security owned by the 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 the Fund may be up to 200%, which is substantially
greater than that of many other investment companies. A high rate of portfolio
turnover (100% or more) will result in the Fund paying greater brokerage
commissions on equity securities (other than those effected with dealers on a
principal basis) than would otherwise be the case, which will be borne directly
by the Fund and ultimately by the shareholders of the Portfolios. High portfolio
turnover should not result in the Fund paying greater brokerage commissions on
debt securities, as most transactions in debt securities are effected with
dealers on a principal basis. However, debt securities, as well as equity
securities traded on a principal basis, are subject to mark-ups by the dealers.
High portfolio turnover 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 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, 30th Floor, San Diego,
California 92101, serves as the Investment Adviser to the Funds. The Investment
Adviser currently manages over approximately $30 billion of discretionary assets
for numerous clients, including employee benefit plans of corporations, public
retirement systems and unions, university endowments, foundations and other
institutional investors, and individuals. The Investment Adviser was organized
in 1984 as a California limited partnership. Its general partner is
Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership controlled by Arthur E. Nicholas. He and 13 other partners manage a
staff of approximately 325 employees.
As compensation for the services it provides, the Investment Adviser receives
from the Fund a monthly fee at the annual rate of 0.85% of the Fund's net
assets.
The Fund is managed under the general supervision of Mr. Nicholas, who has been
the Chief Investment Officer of the Investment Adviser since its organization.
John D. Wylie, as Chief Investment Officer-Investor Services Group, is also
responsible for general oversight of the Fund's portfolio. The Investment
Adviser's global management team, headed by Lawrence S. Speidell and Catherine
Somhegyi, is primarily responsible for the Investment Adviser's day-to-day
management of the Fund's portfolio. Mr. Wylie and Ms. Somhegyi have managed
institutional investments for the Investment Adviser for more than the last five
years.
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Mr. Speidell has been a portfolio manager with the Investment Adviser since
March 1994; from 1983 until he joined the Investment Adviser, he was an
institutional portfolio manager with Batterymarch Financial Management.
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 $30,000 for each of the groups of portfolios of the Trust investing
in the various series of the Master Trust; the fee is allocated among the
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 the 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 Fund's similar operating expenses) do not exceed the
following respective percentage of such Portfolio's average net assets on an
annual basis through March 31, 1997: Series A Portfolio-1.85%; Series B
Portfolio-2.50%; Series C Portfolio-2.50%; Institutional Portfolio-1.35%. 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, neither the Fund nor any Portfolio will be required to repay any
unreimbursed amounts to the Investment Adviser upon termination or non-renewal
of its Investment Advisory Agreement with the Master Trust.
DISTRIBUTOR. Nicholas-Applegate Securities, 600 West Broadway, 30th Floor, San
Diego, California 92101, a California limited partnership, serves as the
Distributor of shares of each Portfolio. The general partner of the Distributor
is Nicholas-Applegate Capital Management Holdings, L.P. and its limited partner
is the Investment Adviser.
The Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act with respect to the Series A, B and C Portfolios. Under
the Distribution Plan, each of the Series A, B and C Portfolios compensates the
Distributor for services rendered and costs incurred in connection with
distribution of shares of such Portfolio. The Trust has also adopted a
Shareholder Service Plan under which each of the Series A, B and C Portfolios
reimburses the Distributor for shareholder servicing expenses actually incurred
with respect to shares of such Portfolio.
Under the Distribution Plan and a related distribution agreement (the
"Distribution Agreement"), the Distributor incurs the expenses of distributing
the shares of each of the Series A, B and C Portfolios. These expenses include
advertising and marketing expenses,
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commissions and other payments to broker-dealers and others which have entered
into agreements with the Distributor, the expenses of preparing, printing and
distributing prospectuses for the the Series A, B and C Portfolios, and indirect
and overhead costs associated with the sale of Portfolio shares. The Distributor
recovers the distribution expenses it incurs through the receipt of compensation
payments from each of the Series A, B and C Portfolios under the Distribution
Plan at the following annual rates: for the Series A Portfolio, 0.25% of the
Portfolio's average daily net assets; for the Series B Portfolio, 0.75% of the
Portfolio's average daily net costs; for the Series C Portfolio, 0.75% of the
Portfolio's average daily net assets. Moreover, under the Distribution
Agreement, the Distributor retains a portion of an initial sales charge from
purchases of shares of the Series A Portfolios, and a contingent deferred sales
charge from redemptions of shares of the Series A, B and C Portfolios. The
Distribution Plan is a "compensation" plan, which means that the distribution
fees paid by the Series A, B and C Portfolios under the Distribution Plan are
intended to compensate the Distributor for services rendered and commission fees
borne even if the amounts paid exceed the Distributor's actual expenses (in
which case the Distributor would realize a profit). If in any year the
Distributor's expenses incurred in connection with the distribution of the
shares of any of the Series A, B or C Portfolios exceed the distribution fees
paid by that Portfolio, the Distributor will recover such excess if the
Distribution Plan with respect to such shares continues to be in effect in some
later year when the distribution fees exceed the Distributor's expenses with
respect to that Portfolio. There is no limit on the periods during which
unreimbursed expenses may be carried forward; no Portfolio pays interest,
carrying or other finance charges on any carried forward amounts; and no
Portfolio will be obligated to pay any unreimbursed expenses that may exist at
such time, if any, as the Distribution Plan terminates or is not continued.
Many of the Distributor's sales efforts involve the Trust as a whole, so that
distribution fees paid by one Portfolio may help finance sales efforts relating
to shares of other Portfolios. In reporting its expenses to the Trustees, the
Distributor separately itemizes expenses that relate to the distribution of
shares of a single Portfolio, and allocates other expenses among the Series A, B
and C Portfolios based on their relative net assets.
Under the Shareholder Service Plan, which is a "reimbursement" plan, each of the
Series A, B and C Portfolios, pays the Distributor an annual fee of up to 0.10%,
0.25% and 0.25%, respectively, of the Portfolio's average daily net assets as
reimbursement for certain expenses actually incurred in connection with
shareholder services provided by the Distributor and payments to broker-dealers
and others for the provision of such services. Support services with respect to
the beneficial owners of Portfolio shares include establishing and maintaining
accounts and records relating to clients of the Distributor, broker-dealers and
others who invest in the Portfolio shares, preparing tax reports, assisting
clients in processing exchange and redemption requests and account designations,
and responding to client inquiries concerning their investments. If in any month
the Distributor is due more monies for shareholder services than are immediately
payable because of the expense limitations under the Shareholder Service Plan,
the unpaid amount is carried forward from month to month while the Shareholder
Service Plan is in effect until such time when it may be paid. However, no
carried forward amount will be payable beyond the fiscal year during which the
amounts were incurred, and no interest, carrying or other finance charge is
borne by the Series A, B and C Portfolios with respect to any amount carried
forward.
No fees or commissions will be paid by the Distributor to any broker-dealer or
others until amounts owed to such broker-dealer or others are at least $100. The
Distributor, at its expense, may provide additional promotional incentives to
brokers and dealers. In the case of
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dealers who institute special promotional programs for sales of shares of the
Series A, B and C Portfolios or other series of the Trust, such incentives may
be up to 0.50% of sales during the promotion period. Dealers may obtain further
information by calling (800) 551-8045.
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, Mutual Funds Division, Nicholas-Applegate,
2 Heritage Drive, 7th 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, which may result in the payment of higher commissions than those
charged by other brokers. However, the selection of such brokers will be made in
accordance with Section 28(e) of the Securities Exchange Act of 1934. Section
28(e) requires the Investment Adviser to make a good faith determination that
the commissions paid are reasonable in relation to the value of the brokerage
and research services provided by such broker, viewed in terms of either that
particular transaction or the Investment Adviser's overall responsibilities with
respect to the accounts as to which it exercises investment discretion.
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PURCHASING SHARES
HOW TO PURCHASE SHARES. You may purchase shares of any Portfolio directly from
the Trust through its Transfer Agent, State Street Bank and Trust Company, or
through your dealer which has entered into a selling group agreement with the
Distributor. Account applications can be obtained from the Transfer Agent or
your dealer. The minimum initial investment is generally $2,000 and the minimum
subsequent investment is $100, but reduced investment minimums are available in
certain cases. See "Investment Minimums" below.
Purchases of shares of the Portfolios can be made by check or by wiring federal
funds to the Transfer Agent. Checks should be in U.S. dollars and made payable
to Nicholas-Applegate Mutual Funds or, in the case of a retirement account, the
custodian or trustee. Third party checks will not be accepted. Checks should be
sent to the Transfer Agent, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, Attention: Nicholas-Applegate Mutual Funds.
Please specify the name of the Portfolio, the account number assigned by the
Transfer Agent, and your name. See "Purchase by Wire" below for wiring
instructions.
You may make subsequent investments in any of the Series A, B and C Portfolios
by completing the subsequent investments form at the bottom of a recent account
statement, making your check payable to the Trust, writing your account number
on the check and mailing it in the envelope provided with your account
statement. Subsequent investments may also be made by mailing your check
directly to your dealer's address printed on your account statement.
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Shares of the Institutional Portfolio are offered to institutional investors,
high net worth individuals and participants in certain mutual fund asset
allocation programs. Shares of the Institutional Portfolio 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 Institutional Portfolio
shares. The availability of an investment by a plan participant in the
Institutional Portfolio, 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 Institutional Portfolio may be purchased at net asset value
without a sales charge. Shares of the Institutional Portfolio may also be
purchased with securities which are otherwise appropriate for investment by the
Institutional 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.
Each Portfolio reserves the right to reject any purchase order or to suspend or
modify the continuous offering of its shares. Your dealer is responsible for
forwarding payment promptly to the Transfer Agent. The Trust reserves the right
to cancel any purchase order for which payment has not been received by the
third business day following the investment. Transactions in Portfolio shares
made through dealers other than the Transfer Agent may be subject to postage and
handling charges imposed by the dealer.
PURCHASE BY WIRE. Purchases of shares of the Portfolios can be made by wiring
federal funds to the Transfer Agent. Before wiring federal funds, you must first
telephone the Transfer Agent at (800) 551-8043 (toll-free) between the hours of
8:00 A.M. and 4:00 P.M. (Eastern Time) on a day when the New York Stock Exchange
is open for normal trading to receive an account number. The following
information will be requested: your name, address, tax identification number,
dividend distribution election, amount being wired and wiring bank. Instructions
should then be given by you to your bank to transfer funds by wire to the
Portfolio's Transfer Agent, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts, 02110, ABA No. 011000028, DDA No. 9904-645-0
Attention: Nicholas-Applegate Mutual Funds, specifying on the wire the name of
the Portfolio, the account number assigned by the Transfer Agent and your name.
If you arrange for receipt by the Transfer Agent of federal funds prior to close
of trading (currently 4:00 P.M., Eastern time) of the New York Stock Exchange on
a day when the Exchange is open for normal trading, you may purchase shares of
the Portfolio as of that day. Your bank is likely to charge you a fee for wire
transfers.
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Subsequent purchases by wire may be made at any time by calling the Transfer
Agent and wiring federal funds as outlined above. For purchases of shares of
Series A, B and C Portfolios, be sure that the wire specifies the name of the
Portfolio, your name and the account number. In the Series A, B and C
Portfolios, the minimum amount which may be invested by wire is $100, except as
noted below.
SHARE PRICE. Shares are purchased at the next offering price after the order is
received in proper form by the Transfer Agent or, in the case of the purchase of
shares of the Institutional Portfolio, 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 of shares of the Institutional
Portfolio 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.
SHARE CERTIFICATES. Shares are credited to your account and certificates are not
issued unless specifically requested. This eliminates the costly problem of lost
or destroyed certificates. If you would like certificates issued, please request
them by writing to the Transfer Agent. There is usually no charge for issuing
certificates in reasonable denominations, but certificates will be issued only
for full shares.
INVESTMENT MINIMUMS. The minimum initial investment in each of the Series A, B
and C Portfolios is $2,000. For retirement plan investments and custodial
accounts under the Uniform Gifts/Transfers to Minors Act, the minimum is $250.
The minimum is reduced to $50 for purchases through the Automatic Investment
Plan or to $25 for purchases by retirement plans through payroll deductions. The
minimum is $100 for additional investments (except as noted above).
The minimum initial investment in the Institutional Portfolio is $250,000 and
the minimum subsequent investment is $10,000. The minimum initial and subsequent
investments are waived for individual participants of qualified retirement plans
and for the former partners and trust participants described above, and may be
waived from time to time by the Distributor for other investors.
RETIREMENT PLANS. You may invest in each Portfolio through various retirement
plans including IRAs, Simplified Employee Plan (SEP) IRAs, 403(b) plans, 457
plans, and all qualified retirement plans (including 401(k) plans). For further
information about any of the plans, agreements, applications and annual fees,
contact the Distributor or your dealer. To determine which retirement plan is
appropriate for you, please consult your tax adviser.
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ALTERNATIVE PURCHASE ARRANGEMENTS
Purchases of shares of the Series A Portfolio are generally subject to a maximum
initial sales charge of 5.25% and lower distribution and shareholder service
fees than shares of the Series B or C Portfolios. Purchases of the Series B
Portfolio are subject to a contingent deferred sales charge, ranging from 5.00%
on redemptions made within 12 months after the shares were purchased to zero for
redemptions made more than six years after purchase, and higher distribution and
shareholder service fees than shares of the Series A Portfolio. Purchases of
shares of the Series C Portfolio are subject to a contingent deferred sales
charge of 1.00% imposed on redemptions made within 12 months after the shares
were purchased, and higher distribution and shareholder service fees than shares
of the Series A Portfolio. Shares of the Series B Portfolio may be exchanged for
shares of the Series A Portfolio seven years after purchase; an exchange will be
treated as a redemption and purchase for tax purposes.
You may choose the method of purchasing Portfolio shares that is most beneficial
given the amount of your intended purchase, the length of time you expect to
hold the shares, whether you qualify for any reduction or waiver of any
applicable sales charge, and other relevant circumstances. You should consider
which method of purchase best suits your individual circumstances, I.E., whether
it is more advantageous to incur an initial sales charge and lower annual fees
(the Series A Portfolio), to have the entire purchase price invested in
Portfolio shares with the investment thereafter being subject to a contingent
deferred sales charge for a period of six years and higher annual fees for a
period of seven years from date of purchase (the Series B Portfolio), or to have
the entire purchase price invested in Portfolio shares with the investment
thereafter being subject to a contingent deferred sales charge for a period of
one year from date of purchase and higher annual fees (the Series C Portfolio).
The following illustrations are provided to assist you in determining which
method of purchase best suits your individual circumstances, and are based on
current fees and expenses being charged to the Portfolios:
If you intend to hold your investment in a Portfolio for less than seven years
and do not qualify for a reduced sales charge on Series A Portfolio shares, you
should consider purchasing Series C Portfolio shares rather than Series A or B
Portfolio shares, since Series A Portfolio shares are subject to a maximum
initial sales charge of 5.25% and Series B Portfolio shares are subject to a
contingent deferred sales charge of 5% which declines to zero over a six-year
period.
If you intend to hold your investment in a Portfolio for seven years or more and
do not qualify for a reduced sales charge on Series A Portfolio shares, you
should consider purchasing Series B Portfolio shares rather than Series A or C
Portfolio shares, since Series B Portfolio shares may be exchanged for Series A
Portfolio shares in a taxable transaction seven years after purchase and all of
your money would be invested initially in the case of Series B Portfolio shares.
If you qualify for a reduced sales charge on Series A Portfolio shares, it may
be more advantageous for you to purchase Series A Portfolio shares than Series B
or C Portfolio shares regardless of how long you intend to hold your investment.
However, unlike Series B and C Portfolio shares, you would not have all of your
money invested initially because the sales charge on Series A Portfolio shares
is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Series A Portfolio shares
and you purchase Series B or C Portfolio shares, you would have to hold your
investment for approximately eight years in the case of Series B or C Portfolio
shares for the higher cumulative distribution
19
<PAGE>
and shareholder service fees on those shares to exceed the initial sales charge
plus cumulative distribution and shareholder service fees on Series A Portfolio
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Series B or C Portfolio distribution and
shareholder service fees on the investment, fluctuations in net asset value, the
effect of the return on the investment over this period of time or redemptions
at a time when the contingent deferred sales charge is applicable.
Financial advisers and other sales agents who sell shares of the Trust will
receive different compensation for selling shares of the Series A, B and C
Portfolios, and will generally receive more compensation initially for selling
shares of the Series A Portfolios than for selling shares of the Series B or C
Portfolios.
SERIES A PORTFOLIO
The sales charges you pay when purchasing shares of the Series A Portfolio are
set forth below:
<TABLE>
<CAPTION>
Dealer Commission
as Percentage of the
Sales Charges as Percentage of the: Offering Price
Amount of Purchase NET AMOUNT OFFERING
at the Offering Price INVESTED PRICE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Less than $50,000 5.54% 5.25% 4.50%
$50,000 but less than $100,000 4.71% 4.50% 3.75%
$100,000 but less than $250,000 3.63% 3.50% 2.75%
$250,000 but less than $500,000 2.56% 2.50% 2.00%
$500,000 but less than $1,000,000 2.04% 2.00% 1.60%
$1,000,000 or more None None (See below)
</TABLE>
In addition, although no initial sales charge applies on a purchase of $1
million or more of the Series A Portfolio, a contingent deferred sales charge of
1.00% is imposed on certain redemptions within one year of the $1 million
purchase. See "Redeeming Shares-Contingent Deferred Sales Charge on Redemptions
of Portfolio A Shares." Commissions will be paid by the Distributor to dealers
who initiate and are responsible for purchases of $1 million or more and for
purchases made at net asset value by certain retirement plans of organizations
with 50 or more eligible employees as set forth in the Statement of Additional
Information.
NET ASSET VALUE PURCHASES. The Trust may sell shares of the Series A Portfolio
at net asset value to:
(1) current or retired directors, trustees, partners, officers and
employees of the Trust, the Master Trust, the Distributor, the Investment
Adviser and its general partner, certain family members of the above
persons, and trusts or plans primarily for such persons;
(2) current or retired registered representatives or full-time employees
and their spouses and minor children of dealers having selling group
agreements with the Trust and plans for such persons;
(3) former limited partners and participants of certain investment
partnerships and pooled trusts previously managed by the Investment Adviser;
(4) shareholders and former shareholders of another mutual fund which
has a sales charge and is not a series of the Trust, so long as shares of
the Portfolio are purchased with the proceeds of a redemption, made within
60 days of the purchase, of shares of
20
<PAGE>
such other mutual fund (to obtain this benefit, the redemption check,
endorsed to the Trust, or a copy of the confirmation showing the redemption
must be forwarded to the Transfer Agent);
(5) companies or other entities exchanging securities with the Trust or
Master Trust through a merger, acquisition or exchange offer;
(6) trustees or other fiduciaries purchasing shares for certain
retirement plans of organizations with 50 or more eligible employees;
(7) participants in certain pension, profit-sharing or employee benefit
plans that are sponsored by the Distributor and its affiliates;
(8) investment advisers and financial planners who place trades for
their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services;
(9) clients of investment advisers and financial planners referred to in
item (8) who place trades for their own accounts if the accounts are linked
to the master account of the investment adviser or financial planner on the
books and records of a broker, agent, investment adviser or financial
institution;
(10) employee-sponsored benefit plans in connection with redemptions of
shares of Series A or C Portfolios made as a result of participant-directed
exchanges between options in such a plan;
(11) "wrap accounts" for the benefit of clients of broker-dealers,
financial institutions or financial planners having sales or service
agreements with the Distributor or another broker-dealer or financial
institution with respect to sales of shares of the Series A Portfolios; and
(12) such other persons as are determined by the Board of Trustees (or
by the Distributor pursuant to guidelines established by the Board) to have
acquired shares under circumstances not involving any sales expense to the
Trust or the Distributor.
Shares are offered at net asset value to these persons and organizations due to
anticipated economies in sales effort and expense. No sales charges are imposed
on Portfolio shares purchased upon the reinvestment of dividends and
distributions, or upon an exchange of shares from other series of the Trust
except as otherwise noted in "Shareholder Services- Exchange Privilege" below.
AGGREGATION. Sales charge discounts on purchases of shares of the Series A
Portfolio are available for certain aggregated investments. Investments which
may be aggregated include those by you, your spouse and your children under the
age of 21, if all parties are purchasing shares for their own accounts, which
may include purchases through employee benefit plans such as an IRA,
individual-type 403(b) plan or single-participant Keogh-type plan or by a
business solely controlled by these individuals (for example, the individuals
own the entire business) or by a trust (or other fiduciary arrangement) solely
for the benefit of these individuals. Individual purchases by trustees or other
fiduciaries may also be aggregated if the investments are (1) for a single trust
estate or fiduciary account, including an employee benefit plan other than those
described above, or (2) made for two or more employee benefit plans of a single
employer or of affiliated employers as defined in the Investment Company Act,
again excluding employee benefit plans described above, or (3) for a common
trust fund or other pooled account not specifically formed for the purpose of
accumulating Portfolio shares. Purchases made for nominee or street name
accounts (securities held in the name of a dealer
21
<PAGE>
or another nominee such as a bank trust department instead of the customer) may
not be aggregated with those made for other accounts and may not be aggregated
with other nominee or street name accounts unless otherwise qualified as
described above.
RIGHT OF ACCUMULATION. The sales charge for your investment may be reduced by
taking into account your existing holdings in the Series A Portfolio. See the
account application for further details.
LETTER OF INTENT. You may reduce sales charges on all investments by meeting the
terms of a letter of intent, a non-binding commitment to invest a certain amount
within a 13-month period. Your existing holdings in the Series A Portfolio may
also be combined with the investment commitment set forth in the letter of
intent to further reduce your sales charge. Up to 5% of the letter amount will
be held in escrow to cover additional sales charges which may be due if your
total investments over the letter period are not sufficient to qualify for a
sales charge reduction. See the account application for further details.
SERIES B PORTFOLIO
You may purchase shares of the Series B Portfolio without an initial sales
charge. However, you will bear your proportionate share of payments pursuant to
the Distribution and Shareholder Service Plans, as described above, which
affects the net asset value of your shares in the Series B Portfolio. In
addition, a contingent deferred sales charge applies to redemptions of shares of
the Series B Portfolio made within six years from date of their purchase. No
such charge is imposed if the shares redeemed have been acquired through the
reinvestment of dividends or capital gains distributions or if the amount
redeemed is derived from increases in the value of the account above the amount
of purchase payments. The contingent deferred sales charge is paid to the
Distributor. The Distributor pays sales commissions of up to 4.00% of the
purchase price to participating broker-dealers and others at the end of the
month during which purchases of shares of the Series B Portfolio are made by
their customers. See "Redeeming Shares-Contingent Deferred Sales Charge or
Redemption of Portfolio B Shares"
Portfolio B shares may be exchanged for the Portfolio A shares seven years after
purchase. Exchanges will be effected at relative net asset value without the
imposition of any additional sales charge, and will be treated as a redemption
and purchase for tax purposes. Since annual distribution-related fees are lower
for Portfolio A shares than Portfolio B shares, the per share net asset value of
the Portfolio A shares may be higher than that of the Portfolio B shares at the
time of conversion. Thus, although the aggregate dollar value will be the same,
you may receive fewer Portfolio A shares than Portfolio B shares converted.
For Portfolio B shares previously exchanged for shares of the Trust's Money
Market Portfolio, the time period during which such shares were held in the
Money Market Portfolio will be excluded in calculating the applicable holding
period. For example, Portfolio B shares held in the Trust's Money Market
Portfolio for one year will not be exchangeable for Portfolio A shares until
eight years from purchase. Portfolio B shares acquired through exchange may be
exchanged for Portfolio A shares after expiration of the exchange period
applicable to the original purchase of such shares.
The Trust currently intends to establish, prior to 2002, an additional class of
the Series B Portfolio with the same distribution and shareholder service fees
as the Series A Portfolio, and to provide for the automatic conversion of the
shares of the current class of Series B Portfolio into the new class seven years
after purchase without any sales charge, if in the opinion of
22
<PAGE>
counsel such conversion would not constitute a taxable event for U.S. income tax
purposes. No assurance exists that the Trust will be able to establish such a
class of the Series B Portfolio in a manner that will provide such benefit.
SERIES C PORTFOLIO
You may purchase shares of any Series C Portfolio without an initial sales
charge. However, you will bear your proportionate share of payments pursuant to
the Distribution and Shareholder Service Plans, as described above, which
affects the net asset value of your shares in the Series C Portfolios. In
addition, a contingent deferred sales charge of 1.00% applies to redemptions of
shares of a Series C Portfolio made within one year from date of their purchase.
Shares of the Series C Portfolios may not be exchanged for shares of the Series
A Portfolios, which may affect their performance for long-term investors. The
Distributor pays sales commissions of up to 1.00% of the purchase price to
participating broker-dealers and others at the end of the month during which
purchases of shares of the Series C Portfolios are made by their customers.
OTHER PORTFOLIOS
Currently, the Trust offers nine Series A Portfolios, nine Series B Portfolios,
nine Series C Portfolios and a Money Market Portfolio. Portfolios other than the
Global Growth & Income Portfolios are covered by separate prospectuses which can
be obtained by calling (800) 551-8045.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN. You may make regular monthly or quarterly investments
in each Portfolio through automatic withdrawals of specified amounts from your
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. See the account application or your plan
sponsor or administrator for further details about this service or call the
Transfer Agent at (800) 551-8043.
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 or 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 another Portfolio within
the same series (A, B, C or Institutional), subject to conditions outlined in
the Statement of Additional Information and the applicable provisions of the
qualified retirement plan, if applicable. Generally, to use this service the
value of your account in the Portfolio which paid the dividend or capital gain
distribution must equal at least $5,000.
EXCHANGE PRIVILEGE. You may exchange shares of any Portfolio into shares of
other Portfolios within the same series (A, B, C or Institutional) 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 Portfolio, the number of shares or
dollar amount to be exchanged and your name and account
23
<PAGE>
number. You may also exchange shares by contacting your dealer or-if you have
authorized telephone exchanges on the account application-by telephoning the
Transfer Agent at (800) 551-8043 or by sending the Transfer Agent a facsimile at
(617) 774-2651, between the hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a
day when the New York Stock Exchange is open for normal trading (see "Telephone
Privilege" below).
The Trust's exchange privilege is not intended to afford shareholders a way to
speculate on short-term market movements. Accordingly the Trust reserves the
right to limit the number of exchanges an investor or participant may make in
any year, to avoid excessive Portfolio expenses.
Individual participants of qualified retirement plans may exchange shares
(depending upon the provisions of the plan) by written or telephone request
through the plan sponsor or administrator. Such participants holding shares of
the Institutional Portfolio may exchange shares only for shares of other
Institutional Series that are included in their plan. In addition, the exchange
privilege may not be available to investors in the Institutional Portfolio who
are eligible to purchase shares of a Portfolio as a result of agreements between
the Distributor and certain broker-dealers, financial planners and similar
institutions.
Before effecting an exchange, you should obtain the currently effective
prospectus of the series into which the exchange is to be made. All exchanges
will be made on the basis of the relative net asset values of the two Series
next determined after a completed request is received. Exchange purchases are
subject to the minimum investment requirements of the series being purchased. An
exchange will be treated as a redemption and purchase for tax purposes.
TELEPHONE PRIVILEGE. Investors may exchange or redeem shares by telephone if
they have elected the telephone privilege on their account applications.
Participants in qualified retirement plans may make telephone requests only
through their plan sponsor or administrator and only if such service is offered
under the plan. Investors should realize that by electing the telephone
privilege, they may be giving up a measure of security that they may have if
they were to exchange or redeem their shares in writing. Furthermore, in periods
of severe market or economic conditions, telephone exchanges or redemptions may
be difficult to implement, in which case investors should mail or send by
overnight delivery a written exchange or redemption request to the Transfer
Agent. Overnight deliveries should be sent to the Transfer Agent, Attention:
Nicholas-Applegate Mutual Funds, 2 Heritage Drive, 7th Floor, North Quincy,
Massachusetts 02171. Requests for telephone exchanges or redemptions received
before 4:00 P.M. (Eastern time) on a day when the New York Stock Exchange is
open for normal trading will be processed as of the close of trading on that
day. Otherwise, processing will occur on the next business day. All exchanges or
redemptions will be made on the basis of the relative net asset values of the
two series next determined after a completed request is received.
The Trust will employ procedures designed to provide reasonable assurance that
instructions communicated by telephone are genuine and, if it does not do so, it
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures employed by the Trust 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
24
<PAGE>
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 EXCHANGES. You may automatically exchange shares (in increments of $50
or more) among any of the Series A, B or C Portfolios within the same series (A,
B or C) on a monthly or quarterly basis. You must either meet the minimum
initial investment requirement for the receiving Portfolio or the originating
Portfolio's balance must be at least $5,000 and the receiving Portfolio's
minimum must be met within one year.
AUTOMATIC WITHDRAWALS. You may make automatic withdrawals from a Series A, B or
C Portfolio of $50 or more on a monthly or quarterly basis if you have an
account of $5,000 or more in the Portfolio. Withdrawal proceeds will normally be
received prior to the end of the month or quarter. See the account application
for further information.
An automatic withdrawal plan may be established for the Institutional Portfolio
by an investor or by a qualified retirement plan sponsor or administrator for
its participants subject to the requirements of the plan and applicable Federal
law. Individual participants of qualified retirement plans must establish
automatic withdrawal plans with the plan sponsor or administrator rather than
the Trust. Automatic withdrawals of $250 or more may be made on a monthly,
quarterly, semi-annual or annual basis if you have an account of at least
$15,000 when the automatic withdrawal plan begins. Withdrawal proceeds will
normally be received prior to the end of the period designated. All income
dividends and capital gain distributions on shares under the Automatic
Withdrawal Plan must be reinvested in additional shares of the Institutional
Portfolio. For the protection of investors and the Trust, wiring instructions
must be on file prior to executing any request for the wire transfer of
automatic withdrawal proceeds.
ACCOUNT STATEMENTS. An account is opened in accordance with applicable
registration instructions. Transactions in the account, such as additional
investments and dividend reinvestments, will be reflected on regular
confirmation statements from the Transfer Agent (for qualified retirement plans,
such statements will be provided by the plan sponsor or administrator).
REPORTS TO INVESTORS. Each Portfolio will send its investors annual and
semi-annual reports. The financial statements appearing in annual reports will
be audited by independent accountants. In order to reduce duplicate mailing and
printing expenses, the Portfolios may provide one annual and semi-annual report
and annual prospectus per household. In addition, quarterly unaudited financial
data are available from the Portfolios upon request.
INVESTOR INQUIRIES. Investor inquiries should be addressed to the Trust, P.O.
Box 82169, San Diego, California 92138-2169, or by telephone, at (800) 551-8643
(toll free). Individual participants of qualified retirement plans should direct
inquiries to their plan sponsor or administrator.
The services referred to above are available only in states where the Portfolio
to be purchased may be legally offered and may be terminated or modified at any
time upon 60 days' written notice. Investors seeking to add to, change or cancel
their selection of available services should contact the Transfer Agent at the
address and telephone number provided above.
25
<PAGE>
- --------------------------------------------------------------------------------
REDEEMING SHARES
HOW TO REDEEM SHARES. You may redeem shares of any Portfolio by writing to the
Transfer Agent, State Street Bank and Trust Company, Attention:
Nicholas-Applegate Mutual Funds, P.O. Box 8326, Boston, Massachusetts
02266-8326. 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. You should also enclose any
certificated shares you wish to redeem. Shares may also be redeemed by
contacting your dealer, who may charge you for this service. Shares held in
street name must be redeemed through your dealer.
Except as noted in the discussions of contingent deferred sales charges below,
the price you receive for the Portfolio shares redeemed is at the next
determined net asset value for the shares after a completed redemption request
is received by the Transfer Agent, or, in the case of the Institutional
Portfolio, a sub-transfer agent. No charge will be imposed by the Trust or the
Transfer Agent for redemptions of shares of the Institutional Portfolio.
The signature on a redemption request must be exactly as names appear on the
Portfolio's account records, and the request must be signed by the minimum
number of persons designated on the account application that are required to
effect a redemption. Requests by participants of qualified retirement plans must
include all other signatures required by the plan and applicable Federal law.
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. If the proceeds of the redemption exceed
$50,000, are to be paid to a person other than the record owner, are to be sent
to an address other than the address on the Transfer Agent's records, or are to
be paid to a corporation, partnership, trust or fiduciary, the signature(s) on
the redemption request may be required to be guaranteed by an "eligible
guarantor", which includes a bank or savings and loan association that is
federally insured or a member firm of a national securities exchange.
REDEMPTIONS BY TELEPHONE. If an election is made on the account application (or
subsequently in writing), redemptions of shares may be requested by contacting
the Transfer Agent by telephone at (800) 551-8043 or by facsimile at (617)
774-2651 between the hours of 8:00 A.M. and 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading. Investors should
state the name of the Portfolio, the number of shares or dollar amount to be
sold and their name and account number. Participants of qualified retirement
plans may make telephonic or facsimile redemption requests through their plan
sponsor or administrator, provided that such service is offered under the plan
and satisfactory arrangements have been made with the Transfer Agent. Redemption
requests received by the Transfer Agent before 4:00 P.M. (Eastern time) on a day
when the New York Stock Exchange is open for normal trading will be processed
that day. Otherwise, processing will occur on the next business day. See
"Shareholder Services-Telephone Privilege" above.
REDEMPTION PAYMENTS. Redemption proceeds are generally paid to you by check.
However, at your request, redemption proceeds of $5,000 or more may be wired by
the Transfer Agent to your bank account. Requests for redemption by wire should
include the name, location and ABA or bank routing number (if known) of your
designated bank and your account number. You will be charged a $10 fee for wire
transmissions of redemption proceeds, which will be deducted from such proceeds.
Payment will be made within three days after receipt by the Transfer Agent of
the written or telephonic redemption request and any share certificates,
26
<PAGE>
except as indicated below. When purchases are made by check or periodic account
investment, redemption will not be allowed until the investment being redeemed
has been in the account for 14 calendar days. 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. Payment for redemption of recently purchased
shares will be delayed until the Transfer Agent has been advised that the
purchase check has been honored, up to 15 calendar days from the time of receipt
of the purchase check by the Transfer Agent. Such delay may be avoided by
purchasing shares by wire or by certified or official bank checks.
CONTINGENT DEFERRED SALES CHARGE ON REDEMPTIONS OF PORTFOLIO A SHARES. A
contingent deferred sales charge of 1.00% applies to certain redemptions of
shares of the Series A Portfolio less than one year after investments of $1
million or more. The charge is 1.00% of the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. The charge will be deducted from the redemption
proceeds and will reduce the amount paid to you. The charge is waived for:
(1) exchanges for other Portfolio A Shares (except if shares acquired by
exchange are then redeemed within 12 months of the initial purchase);
(2) redemptions in connection with mergers, acquisitions and exchange
offers involving the Series A Portfolio;
(3) qualifying distributions from qualified retirement plans and other
employee benefit plans;
(4) distributions from custodial accounts under Section 403(b)(7) of the
Internal Revenue Code or from IRAs due to death, disability or attainment of
age 59 1/2;
(5) tax-free returns of excess contributions to IRAs;
(6) any partial or complete redemptions following the death or
disability of a shareholder, provided the redemption is made within one year
of death or initial determination of disability;
(7) redemptions through certain automatic withdrawals; and
(8) redemptions by qualified retirement and employee benefit plans with
50 or more eligible employees.
There is no contingent deferred sales charge on redemptions of shares of the
Money Market Portfolio unless such shares were acquired in an exchange for
shares of the Series A Portfolio and the redemption is made less than one year
after the initial $1 million purchase of such shares.
CONTINGENT DEFERRED SALES CHARGE ON REDEMPTION OF PORTFOLIO B SHARES. A
contingent deferred sales charge ("CDSC") applies to redemptions of shares of
the Series B Portfolio within six years of investment. The charge declines from
5.00% to zero over a six-year period. The CDSC will be deducted from the
redemption proceeds and will reduce the amount paid to you. A CDSC will be
applied to the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
27
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of Portfolio B shares until the time the
shares are redeemed. Solely for purposes of determining the number of years from
the time of any payment for the purchase of shares, all payments during a month
will be aggregated and deemed to have been made on the last day of the month
preceding the purchase and the time shares were held in the Trust's Money Market
Portfolio will be excluded.
The following table sets forth the rates of the CDSC applicable to redemptions
of shares of the Portfolio B series:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEARS SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ----------------------------------------------------------------------- ----------------------------
<S> <C>
First.................................................................. 5.00%
Second................................................................. 4.00%
Third.................................................................. 3.00%
Fourth................................................................. 3.00%
Fifth.................................................................. 2.00%
Sixth.................................................................. 1.00%
Seventh and thereafter................................................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption of shares of the
Series B Portfolio, the calculation will be made in a manner that results in the
lowest possible rate. It will be assumed that the redemption is made first of
amounts representing shares of the Series B Portfolio acquired pursuant to the
reinvestment of dividends and distributions; then of amounts representing the
increase in net asset value of your holdings of the Series B Portfolio above the
total amount of payments for the purchase of the shares of the Series during the
preceding six years; then of amounts representing the cost of shares of the
Series B Portfolio held beyond the applicable CDSC period; and finally, of
amounts representing the cost of shares of the Series B Portfolio held for the
longest period of time.
For example, assume you purchased 100 shares of Portfolio B at $10 per share for
a cost of $1,000. Subsequently, you acquired 5 additional shares of Portfolio B
through dividend reinvestment. During the second year after the purchase, you
decided to redeem $500 of your investment. Assuming at the time of the
redemption the net asset value had appreciated to $12 per share, the value of
your Portfolio B shares would be $1,260 (105 shares at $12 per share). The CDSC
would not be applied to the value of the reinvested dividend shares and the
amount which represents appreciation ($260). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged a CDSC at a rate of 4%
(the applicable rate in the second year after purchase) for a total CDSC of
$9.60.
For Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
The CDSC is waived for redemptions of shares of the Series B Portfolio by: (1)
current or retired directors, trustees, partners, officers and employees of the
Trust, the Master Trust, the Distributor, the Investment Adviser and its general
partner, certain family members of the above persons, and trusts or plans
primarily for such persons; (2) former limited partners and participants of
certain investment partnerships and pooled trusts previously managed by the
Investment Adviser; and (3) participants in certain pension, profit-sharing or
employee benefit plans that are sponsored by the Distributor and its affiliates.
28
<PAGE>
The CDSC is also waived for:
(1) exchanges of shares for other Series B Portfolio shares (however,
the shares acquired by exchange will continue to be subject to a contingent
deferred sales charge on the same basis as the shares exchanged);
(2) redemptions in connection with mergers, acquisitions and exchange
offers involving the Series B Portfolio;
(3) qualifying distributions from qualified retirement plans and other
employee benefit plans;
(4) distributions from custodial accounts under Section 403(b)(7) of the
Internal Revenue Code or IRAs due to death, disability or attainment of age
59 1/2;
(5) tax-free returns of excess contributions to IRAs; and
(6) any partial or complete redemptions following the death or
disability of a shareholder, provided the redemption is made within one year
of death or initial determination of disability.
There is no CDSC on redemptions of shares of the Money Market Portfolio unless
such shares were acquired in an exchange for shares of the Series B Portfolio
and the redemption is made within six years after the initial purchase.
CONTINGENT DEFERRED SALES CHARGE ON REDEMPTION OF PORTFOLIO C SHARES. A
contingent deferred sales charge of 1.00% applies to redemptions of shares of
the Series C Portfolio made less than one year after the date of their purchase.
No such charge is imposed if the shares redeemed have been acquired through the
reinvestment of dividends or capital gains distributions or if the amount
redeemed is derived from increases in the value of the account above the amount
of purchase payments. In determining whether a contingent deferred sales charge
is payable, the same procedures are followed as described above with respect to
redemptions of shares of Series B Portfolio. The contingent deferred sales
charge is paid to the Distributor. The contingent deferred sales charge is
waived for redemptions of shares of the Series C Portfolio, on the same basis as
for redemptions of shares of the Series B Portfolio. See "Contingent Deferred
Sales Charge on Redemption of Portfolio B Shares."
REINSTATEMENT PRIVILEGE. You may reinvest proceeds from a redemption of
Portfolio shares, or proceeds of a dividend or capital gain distribution paid to
you with respect to Portfolio shares, without a sales charge in any of the
Portfolios. Upon such a reinvestment, the Distributor will credit to your
account any contingent deferred sales charge imposed on the redeemed shares.
Send a written request and a check to the Transfer Agent within 90 days after
the date of the redemption, dividend or distribution. Reinvestment will be at
the next calculated net asset value after receipt. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege, but a loss may be nullified if you reinvest in the same series within
30 days.
INVOLUNTARY REDEMPTION. In order to reduce expenses of a Portfolio, the Trust
may redeem all of the shares of any shareholder of the Series A, B or C
Portfolios whose account has a net asset value of less than $500, or any
shareholder of the Institutional Portfolio whose account has a net asset value
of less than $10,000, other than a shareholder which is an IRA or other
tax-deferred retirement plan, due to redemptions. The Trust will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
is imposed on such redemptions.
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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 their net investment income and capital gains, if
any, that they distribute to their shareholders. All dividends out of net
investment income, together with distributions of short-term capital gains, will
be taxable as ordinary income to the shareholders whether or not reinvested. Any
net long-term capital gains distributed to shareholders will be taxable as such
to the shareholders, whether or not reinvested and regardless of the length of
time a shareholder has owned his shares.
The Portfolios declare and pay quarterly dividends of net investment income.
Each Portfolio makes distributions at least annually of its 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 gain income and
redemption proceeds on the accounts of those shareholders 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 shareholders) with the required certifications
regarding the shareholder'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 shareholder will generally be
subject to U.S. withholding at the rate of 30% (or lower treaty rate).
The Trust may elect to "pass through" to a Portfolio's shareholders the amount
of foreign income taxes paid by the Portfolio. The Trust will make such an
election only if it is deemed to be in the best interests of the shareholders.
If this election is made, shareholders of the Portfolio will be required to
include in their gross income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat their pro rata share of
foreign taxes as either an itemized deduction or a foreign credit against U.S.
income taxes (but not both) on their tax return.
The Master Trust's 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 other investors.
You should consult your own tax adviser regarding specific questions as to
federal, state or local taxes. See "Taxes" in the Statement of Additional
Information.
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GENERAL INFORMATION
PERFORMANCE INFORMATION. From time to time the Trust may advertise each
Portfolio's total return and, if applicable, its 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 shareholders of the Portfolio were reinvested on the
reinvestment dates during the period. Total return takes into account any
applicable sales charges, but does not take into account any federal or state
income taxes which may be payable by the investor. The Trust also may include
comparative performance information in advertising or marketing Portfolio
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Inc., other industry publications, business
periodicals, rating services and market indices. See "Performance Information"
in the Statement of Additional Information.
Further information about the performance of the Portfolios will be contained in
the Trust's 1996 Annual Report to Shareholders, which may be obtained without
charge by calling (800) 551-8043.
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.
Shareholders 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 or
class 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
shareholders of a particular series or class. 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 shareholders unless otherwise required by law.
The Trust will not be required to hold meetings of shareholders unless the
election of Trustees or any other matter is required to be acted on by
shareholders under the Investment Company Act. Shareholders 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.
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 shareholders and will cast its vote as instructed by such
shareholders or, in the case of a matter pertaining exclusively to the
corresponding Fund, as
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instructed particularly by shareholders 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 the Fund) encompass the following securities, techniques and
risk considerations.
SHORT-TERM INVESTMENTS. The Fund 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 the Fund's total assets will be
retained in cash (U.S. dollars, foreign currencies or multinational currency
units) and cash equivalents. In addition, the 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 Fund may invest include
U.S. Treasury bills or other U.S. Government or Government agency or
instrumentality obligations; certificates of deposit; bankers' acceptances; time
deposits; high quality commercial paper and other short-term high grade
corporate obligations; shares of money market mutual funds; or repurchase
agreements with respect to such securities. These instruments are described
below. The Fund will only invest in short-term investments which, in the opinion
of the Investment Adviser present minimal credit and interest rate risk.
GOVERNMENT OBLIGATIONS. Securities issued or guaranteed by the U.S. Government
or its agencies and instrumentalities in which the Fund 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 Fund 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.
The Fund may invest in sovereign debt securities of emerging market governments
and their agencies and instrumentalities. Investments in such securities involve
special risks. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to pay principal or
interest when due in accordance with the terms of the debt. Periods of economic
uncertainty may result in the volatility of market prices of sovereign debt, and
in turn the Fund's net asset value, to a greater extent than the volatility
inherent in domestic fixed income securities.
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ZERO COUPON SECURITIES. The Fund may invest up to 35% 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 Fund
does not receive the income currently in cash, the Fund may have to sell other
portfolio investments to obtain cash needed by the Institutional Portfolio to
make income distributions.
CERTIFICATES OF DEPOSIT, TIME DEPOSITS AND BANKERS' ACCEPTANCES. The Fund 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 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. The Fund 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.
VARIABLE RATE DEMAND SECURITIES. The Fund 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 the 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 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
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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 the 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 the 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 Fund 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. For short-term purposes, the Fund may invest in
corporate obligations issued by domestic and foreign issuers 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 which are
unrated but determined by the Investment Adviser to be of minimal credit risk
and comparable quality.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in securities which may
be exchanged for, converted into, or exercised to acquire a predetermined number
of shares of the issuer's common stock at the option of the holder during a
specified time period (such as convertible preferred stocks, convertible
debentures and warrants). Convertible securities generally pay interest or
dividends and provide for participation in the appreciation of the underlying
common stock but at a lower level of risk because the yield is higher and the
security is senior to common stock. Convertible securities may also include
warrants which give the holder the right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price but which do not pay a fixed dividend. Investments in warrants involve
certain risks, including the possible lack of a liquid market for resale,
potential price fluctuations as a result of speculation or other factors, and
the failure of the price of the underlying security to reach or have reasonable
prospects of reaching a level at which the warrant can be prudently exercised,
in which event the warrant may expire without being exercised, resulting in a
loss of the Fund's entire investment therein. As a matter of operating policy,
the Fund will not invest more than 5% of its net assets in warrants.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The credit standing of the issuer and other factors
may also affect the investment value of a convertible security. The conversion
value of a convertible security is determined by the market price of the
underlying common stock. If the conversion value is low relative to the
investment value, the price of the convertible security is governed principally
by its investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value.
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Like other debt securities, the market value of convertible securities tends to
vary inversely with the level of interest rates. The value of the security
declines as interest rates increase and increases as interest rates decline.
Although under normal market conditions longer term securities have greater
yields than do shorter term securities of similar quality, they are subject to
greater price fluctuations. Fluctuations in the value of the Fund's investments
will be reflected in its and the corresponding Portfolio's net asset value per
share. A convertible security may be subject to redemption at the option of the
issuer at a price established in the instrument governing the convertible
security. If a convertible security held by the Fund is called for redemption,
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party.
Convertible debt securities purchased by the Fund, which are acquired in
substantial part for their equity characteristics, are not subject to certain
minimum rating requirements (see "Junk Bond Considerations" below).
EURODOLLAR CONVERTIBLE SECURITIES. The Fund may invest in Eurodollar convertible
securities, which are fixed-income securities of a U.S. issuer or a foreign
issuer that are issued outside the United States and are convertible into or
exchangeable for equity securities of the same or a different issuer. Interest
and dividends on Eurodollar securities are payable in U.S. dollars outside of
the United States. The Fund may invest without limitation in Eurodollar
convertible securities that are convertible into or exchangeable for foreign
equity securities listed, or represented by ADRs listed, on the New York Stock
Exchange or the American Stock Exchange or convertible into or exchangeable for
publicly traded common stock of U.S. companies. The Fund may also invest up to
15% of its total assets invested in convertible securities, taken at market
value, in Eurodollar convertible securities that are convertible into or
exchangeable for foreign equity securities which are not listed, or represented
by ADRs listed, on such exchanges.
JUNK BOND CONSIDERATIONS. The Fund may invest a portion (less than 35%) of
its net assets in debt securities rated below "Baa" by Moody's, "BBB" by S&P
or investment grade by other recognized rating agencies, or in unrated
securities determined by the Investment Adviser to be of comparable quality
if the Investment Adviser believes that the financial condition of the issuer
or the protection afforded to the particular securities is stronger than
would otherwise be indicated by such low ratings or the lack thereof.
Securities rated below "Baa" or "BBB" or equivalent ratings, commonly
referred to as "junk bonds," are subject to greater risk of loss of income
and principal than higher rated bonds and are considered to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal, which may in any case decline during sustained periods of
deteriorating economic conditions or rising interest rates. Junk bonds are
also generally considered to be subject to greater market risk in times of
deteriorating economic conditions and to wider market and yield fluctuations
than higher-rated securities. Junk bonds may also be more susceptible to real
or perceived adverse economic and competitive industry conditions than
investment grade securities. The market for such securities may be thinner
and less active than that for higher-rated securities, which can adversely
affect the prices at which these securities can be sold. To the extent that
there is no established secondary market for lower-rated securities, the Fund
may experience difficulty in valuing such securities and, in turn, its
assets. In addition, adverse publicity and investor perceptions about junk
bonds, whether or not based on fundamental analysis, may tend to decrease the
market value and liquidity of such securities.
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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. Such divestiture could have a material adverse effect on the market for,
and prices of, such securities. Other pending Congressional proposals could, if
enacted, have a similar adverse effect.
The Investment Adviser will try to reduce the risk inherent in the Fund's
investment in such securities through credit analysis, diversification and
attention to current developments and trends in interest rates and economic
conditions. However, there can be no assurance that losses will not occur. Since
the risk of default is higher for lower-rated bonds, the Investment Adviser's
research and credit analysis are a correspondingly more important aspect of its
program for managing the Fund's investments in such debt securities. The
Investment Adviser will attempt to identify those issuers of high-yielding
securities whose financial condition is adequate to meet future obligations, or
has improved or is expected to improve in the future.
The Fund will in no event purchase securities rated below "C" or equivalent by
Moody's, S&P or another rating agency, or determined by the Investment Adviser
to be of comparable quality. Debt securities with such ratings are predominantly
speculative with respect to the capacity of the issuer to pay interest and repay
principal. Non-rated securities will also be considered for investment when the
Investment Adviser believes that the financial condition of the issuers of such
securities, or the protection afforded by the terms of the securities
themselves, limit the risk to the Fund to a degree comparable to that of rated
securities which are consistent with the Fund's investment objective and
policies. See the Statement of Additional Information for a description of
credit ratings.
Credit ratings evaluate the safety of principal and interest payments of
securities, not their market value. The rating of an issuer is also heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. As credit rating agencies may fail to timely change
credit ratings of securities to reflect subsequent events, the Investment
Adviser will also monitor issuers of such securities to determine if such
issuers will have sufficient cash flow and profits to meet required principal
and interest payments and to assure their liquidity. If the rating of a debt
security held by the Fund is downgraded below "C" or an equivalent rating, or if
the Investment Adviser determines that an unrated security is of a comparable
quality, the Investment Adviser will determine whether it is in the best
interests of the Fund to continue to hold such security in its investment
portfolio. However, if the downgrading of an investment grade security causes
the Fund to hold 35% 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 35% of its net
assets in such securities.
SYNTHETIC CONVERTIBLE SECURITIES. The Fund may invest in "synthetic" convertible
securities, which are derivative positions composed of two or more different
securities whose investment characteristics, taken together, resemble those of
convertible securities. For example, the Fund may purchase a non-convertible
debt security and a warrant or option, which enables the Fund to have a
convertible-like position with respect to a company, group of companies or stock
index. Synthetic convertible securities are typically offered by financial
institutions and investment banks in private placement transactions. Upon
conversion, the Fund generally receives an amount in cash equal to the
difference between the conversion price and the then
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current value of the underlying security. Unlike a true convertible security, a
synthetic convertible comprises two or more separate securities, each with its
own market value. Therefore, the market value of a synthetic convertible is the
sum of the values of its fixed-income component and its convertible component.
For this reason, the values of a synthetic convertible and a true convertible
security may respond differently to market fluctuations. The Fund only invests
in synthetic convertibles with respect to companies whose corporate debt
securities are rated "A" or higher by Moody's or "A" or higher by S&P, and will
not invest more than 15% of its net assets in such synthetic securities and
other illiquid securities. See "Illiquid Securities" below.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES. The Fund may invest in
certificates issued by the Government National Mortgage Association ("GNMA") as
a short-term investment. GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans, which are issued by
lenders such as mortgage bankers, commercial banks and savings associations, and
are either insured by the Federal Housing Administration or the Veterans
Administration. A pool of these mortgages is assembled and, after being approved
by GNMA, is offered to investors through securities dealers. The timely payment
of interest and principal on each mortgage is guaranteed by GNMA and backed by
the full faith and credit of the U.S. Government. Principal is paid back monthly
by the borrower over the term of the loan rather than returned in a lump sum at
maturity. Due to the prepayment feature and the need to reinvest prepayments of
principal at current market rates, GNMA certificates can be less effective than
typical bonds of similar maturities at "locking in" yields during periods of
declining interest rates.
COUNTRY FUNDS. Country funds in which the Fund may invest are registered
closed-end and open-end investment companies which hold portfolio securities of
issuers operated or located in a single country or geographical region. The
extent to which the Fund may invest in closed-end and open-end country funds is
limited by the Investment Company Act and various state securities or "blue sky"
laws. Accordingly, as a fundamental policy, the Fund will not own more than 3%
of the outstanding voting stock of any investment company, will not invest more
than 10% of its total assets in securities issued by investment companies nor,
together with other investment companies managed by the Investment Adviser, will
own more than 10% of any investment company. Assets of the Fund invested in
closed-end and open-end country funds are subject to advisory and other fees
imposed by the closed-end or open-end country fund, as well as to fees imposed
by the Fund.
DEPOSITORY RECEIPTS. The Fund 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 Fund
may also invest in European and Global Depository Receipts ("EDRs" and "GDRs"),
which, in bearer form, are designed for use in European and other 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 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.
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EQUITY SECURITIES. The Fund may invest in equity securities, including common
stocks, convertible securities and warrants. Common stocks, the most familiar
type of equity securities, represent an equity (ownership) interest in a
corporation. See "Convertible Securities and Warrants" for a description of
convertible securities and warrants.
The Fund may invest in equity securities of companies of any size. These may
include equity securities of growth companies, cyclical companies, companies
with smaller market capitalizations (i.e., $500 million or less at the time of
purchase) or companies believed to be undergoing a basic change in operations or
markets which could result in a significant improvement in earnings. Small
companies and new companies often have limited product lines, markets or
financial resources, and may be dependent upon one or few key persons for
management. The securities of such companies may be subject to more volatile
market movements than securities of larger, more established companies, both
because the securities typically are traded in lower volume and because the
issuers typically are more subject to changes in earnings and prospects. To the
extent of such investments, a Portfolio's net asset value can be expected to
experience above-average fluctuations, as above-average risk is assumed by the
Fund in investing in such growth companies in seeking higher than average growth
in capital.
FOREIGN INVESTMENT CONSIDERATIONS. There are special risks associated with the
Fund's 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 the 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 the 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. The Funds
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 significant legal
restriction. See "Investment Objectives, Policies and Risks-Foreign Investments"
in the Statement of Additional Information.
SPECIAL CONSIDERATIONS REGARDING EMERGING MARKETS INVESTMENTS. Investments by
the Fund in securities issued by the governments of emerging or developing
countries, and of companies within those countries, involves greater risks than
other foreign investments. Investments in emerging or developing markets involve
exposure to economic and legal structures that are generally less diverse and
mature (and in some cases the absence of developed legal structures governing
private and foreign investments and private property), and to political systems
which can be expected to have less stability, than those of more developed
countries. The risks of investment in such countries may include matters such as
relatively unstable governments, higher degrees of government involvement in the
economy, the absence until recently of
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capital market structures or market-oriented economies, economies based on only
a few industries, securities markets which trade only a small number of
securities, restrictions on foreign investment in stocks, and significant
foreign currency devaluations and fluctuations.
Emerging markets can be substantially more volatile than both U.S. and more
developed foreign markets. Such volatility may be exacerbated by illiquidity.
The average daily trading volume in all of the emerging markets combined is a
small fraction of the average daily volume of the U.S. market. Small trading
volumes may result in the Fund being forced to purchase securities at
substantially higher prices than the current market, or to sell securities at
much lower prices than the current market.
OVER-THE-COUNTER SECURITIES. Securities owned by the Fund 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 Fund of portfolio
securities to meet redemptions by shareholders or otherwise may require the Fund
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.
WHEN-ISSUED SECURITIES AND FIRM COMMITMENT AGREEMENTS. The Fund 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 the Fund enters into such a transaction may not
perform its commitment. The Fund will normally enter into these transactions
with the intention of actually receiving or delivering the securities. The Fund
may sell the securities before the settlement date.
To the extent the 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 Fund 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.
The 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.
FOREIGN EXCHANGE CONTRACTS. Since the Fund may invest primarily 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 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 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 and
dividends 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
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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. The Fund does not intend to maintain a
net exposure to such contracts where the fulfillment of the Fund's obligations
under such contracts would obligate the Fund to deliver an amount of foreign
currency in excess of the value of the Fund's portfolio securities or other
assets denominated in that currency.
OPTIONS. The Fund may purchase listed covered "put" and "call" options with
respect to securities which are otherwise eligible for purchase by the Fund and
with respect to various stock indices, 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. An option on a securities index (such as a stock index) gives
the holder the right, in return for the premium paid, to require the writer to
pay cash equal to the difference between the closing price of the index and the
exercise price of the option, expressed in dollars, times a specified
multiplier.
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 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 Fund's 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 Fund may also write listed covered options on up to 25% of the value of
their respective 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 the 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
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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
maintains cash or cash equivalents equal to the exercise price in a segregated
amount with its Custodian. If an option written by a 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 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. The Fund may purchase and sell stock index futures contracts
as a hedge against changes in market conditions. A stock index futures contract
is a bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the underlying stocks in the index is made.
The Fund may also purchase and sell financial futures contracts as a hedge
against changes in interest rates. Additionally, the Fund may purchase and sell
currency futures contracts to hedge against foreign currency fluctuations, and
the Fund may 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 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, currency and stock index 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 Fund will not engage in transactions in futures contracts for speculation,
but only as a hedge against the risk of unexpected changes in the values of
securities held or intended to be held by the Fund. As a general rule, the Fund
will not purchase or sell futures if, immediately thereafter, more than 25% of
its net assets would be hedged. In addition, the Fund may not purchase or sell
futures or 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
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would exceed 5% of the market value of the Fund's net assets. In instances
involving the purchase of futures contracts by the 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. See "Investment Objectives, Policies and Risks-Futures Contracts
and Related Options" in the Statement of Additional Information.
SPECIAL HEDGING CONSIDERATIONS. Special risks are associated with the use of
options and futures contracts as hedging techniques. There can be no guaranty 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 the 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 or futures
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 market values, currency fluctuations, interest rate trends or other
relevant factors, the Fund may be in a worse position than if the Fund had not
engaged in options or futures transactions. The potential loss incurred by the
Fund in writing options on futures and engaging in futures transactions is
unlimited. The Investment Adviser is experienced in the use of options and
futures contracts as an investment technique.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out an option position or futures contract. Most futures
exchanges and boards of trade limit the amount of fluctuation in futures
contract prices during a single day; once the daily limit has been reached on a
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain of these instruments are relatively new and without
a significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Fund from liquidating an unfavorable position and the
Fund would remain obligated to meet margin requirements until the position is
closed. See "Investment Objectives, Policies and Risks-Options on Securities and
Securities Indices" and "-Futures Contracts and Related Options" in the
Statement of Additional Information.
The Fund's ability to enter into options and futures contracts is limited by the
requirements of the Internal Revenue Code with respect to the corresponding
Portfolio's qualification as a regulated investment company. See "Taxes" in the
Statement of Additional Information.
REPURCHASE AGREEMENTS. The Fund may on occasion enter into 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. The 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 the Fund may be
delayed or
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limited. The 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. The 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 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, 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 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 under Rule 144A could
have the effect of increasing the level of illiquidity in the Fund to the extent
that qualified institutional buyers become uninterested in purchasing such
securities.
SECURITIES LENDING. To increase its income, the 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 the 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.
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BORROWING. The 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, 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. All borrowings by the Fund will be
made only to the extent that the value of the Fund's total assets, less its
liabilities other than borrowings, is equal to at least 300% of all borrowings.
If such asset coverage of 300% is not maintained, the Fund will take prompt
action to reduce its borrowings as required by applicable law. Short sales "not
against the box" and roll transactions are considered borrowings for purposes of
the percentage limitations applicable to borrowings.
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