As filed via EDGAR with the Securities and Exchange Commission on February 28,
1996.
File No. 811-7392
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
TO
FORM N-1A
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
GLOBAL FIXED INCOME PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
125 WEST 55TH STREET
NEW YORK, NEW YORK 10019
(Address of Principal Executive Office) (ZIP Code)
Registrant's Telephone Number, including Area Code: (212) 492-1600
George Martinez, Esq.
BISYS Fund Services, Inc.
3435 Stelzer Road
Columbus, Ohio 43219
(Name and Address of Agent for Service)
Copy to:
Carl Frischling, Esq.
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
919 Third Avenue
New York, NY 10022
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EXPLANATORY NOTE
This Registration Statement of Global Fixed Income Portfolio has been
filed by the Registrant pursuant to Section 8(b) of the Investment Company Act
of 1940, as amended (the "1940 Act"). However, beneficial interests in the
Registrant are not being registered under the Securities Act of 1933, as amended
(the "1933 Act"), since such interests will be offered solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Registrant may only
be made by investment companies, insurance company separate accounts, common or
commingled trust funds or similar organizations or entities which are
"accredited investors" as defined in Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any beneficial interests in the Registrant.
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PART A
Responses to Items 1 through 3 have been omitted pursuant to paragraph
4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Global Fixed Income Portfolio (the "Portfolio") is a non-diversified,
open-end management investment company which was organized in the United States
as a trust under the laws of the State of New York on November 18, 1992. Because
the Portfolio is non-diversified, more of the Portfolio's assets may be
concentrated in the securities of any single issuer than if the Portfolio was
diversified, which may make the value of shares of the Portfolio more
susceptible to certain risks than shares of a diversified mutual fund.
Beneficial interests in the Portfolio are offered solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by investment companies, insurance company separate accounts, common or
commingled trust funds or similar organizations or entities which are
"accredited investors" as defined in Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
The Chase Manhattan Bank, N.A. ("Chase") is the Portfolio's investment
adviser (the "Adviser") , Custodian (the "Custodian") and Administrator (the
"Administrator"). The address of Chase is One Chase Manhattan Plaza, New York,
New York 10081. The Portfolio seeks to provide its investors with a high total
return, i.e., current income and capital appreciation, through investment in a
portfolio of high quality fixed income securities of U.S. and foreign issuers
and through transactions in foreign currencies. The Portfolio will seek to meet
its investment objective by pursuing investment opportunities in foreign and
domestic fixed income securities markets and by engaging in currency
transactions to enhance returns and for the purpose of hedging its portfolio. In
determining the countries and currencies in which the Portfolio will invest, the
Adviser will form an opinion including information relating to factors such as
interest rates, inflation, monetary and fiscal policies, taxation, and political
climate.
Of course, there can be no assurance that the Portfolio will achieve
its investment objective. Prospective investors should consider the risks
associated with an investment in the Portfolio, including the fact that up to
25% of the Portfolio's assets may be invested in issuers based in developing
countries. Further discussion of the risks associated with an investment in the
Portfolio appears below.
The Portfolio could have 100% of its total assets, adjusted to reflect
the Portfolio's net exposure after giving effect to currency transactions and
positions, denominated in U.S. dollars. It is expected that the Portfolio will
use currency transactions both to enhance returns for a given level of risk and
to hedge its exposure to foreign currencies. While the Portfolio will have both
long and short currency positions, neither its net long foreign currency
exposure nor its net short foreign currency exposure will exceed the value of
the Portfolio's total assets. The Portfolio may, for temporary defensive
purposes, invest up to 100% of its total assets in dollar-denominated fixed
income securities or securities of U.S. issuers.
The Portfolio may use various techniques to shorten or lengthen the
dollar weighted average duration of its Portfolio, including the acquisition of
debt obligations at a premium or discount, transactions in options, futures
contracts and options on futures (in accordance with certain regulations of the
Commodity Futures Trading Commission ("CFTC") that permit the principals of a
registered investment company to engage in certain transactions without
registering as commodity pool operators) and interest rate swaps. The
Portfolio's ability to achieve its objective of high total return may be limited
by its investment
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in fixed income securities, since higher returns may be available from equity
securities.
The Portfolio will employ certain active currency and interest rate
management techniques involving risks different from those associated with
investing solely in dollar-denominated fixed income securities of U.S. issuers.
Such active management techniques include transactions in options (including
yield curve options), futures, options on futures, forward foreign currency
exchange contracts, currency options and futures and currency and interest rate
swaps. The aggregate amount of the Portfolio's net currency exposure will not
exceed its total asset value. However, to the extent that the Portfolio is fully
invested in fixed income securities while also maintaining currency positions,
it may be exposed to greater combined risk.
The fixed income securities in which the Portfolio may invest are as
follows: (i) securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government securities") and custodial
receipts therefor, (ii) securities issued or guaranteed by a foreign government
or any of its political subdivisions, authorities, agencies or instrumentalities
or by supranational entities (i.e., international organizations designated or
supported by governmental entities to promote economic reconstruction or
development, such as the World Bank) rated in one of the two highest rating
categories by a recognized rating service such as Standard & Poor's Corporation
or Moody's Investors Service, Inc. ("High Quality Rating") or, if unrated,
determined by the Adviser to be of comparable credit quality; (iii) corporate
debt securities having at least one High Quality Rating or, if unrated,
determined by the Adviser to be of comparable credit quality, (iv) certificates
of deposit and bankers' acceptances issued or guaranteed by, or time deposits
maintained at, banks (including U.S. or foreign branches of U.S. banks or U.S.
or foreign branches of foreign banks) having total assets of more than $1
billion and determined by the Adviser to be of comparable credit quality to
securities with a High Quality Rating; (v) commercial paper rated A-1 or better
by S&P, Prime-1 or better by Moody's, Fitch-1 or better by Fitch Investors
Service, Inc., or Duff-1 or better by Duff & Phelps, Inc. or, if not rated,
issued by U.S. or foreign companies having outstanding debt securities with a
High Quality Rating and determined by the Adviser to be of comparable credit
quality to securities with a High Quality Rating; and (vi) mortgage related
securities having at least one High Quality Rating, or, if unrated, determined
by the Adviser to be of comparable credit quality to securities with a High
Quality Rating. At least 65% of the Portfolio's total assets will be invested in
fixed income securities that meet the High Quality Rating criteria described
herein and will be invested in at least three countries.
Under normal circumstances, the Portfolio will invest in securities of
issuers in at least three countries, including the United States. No more than
25% of the Portfolio's total assets will be invested in securities of issuers
located in a single country other than Canada, Germany, Japan, the United
Kingdom and the United States. Investing the Portfolio's assets in securities of
issuers located outside the United States will subject the Portfolio to the
risks of adverse social, political or economic events which may occur in such
foreign countries. See "Additional Information on Investment Policies and
Techniques--Non-U.S. Securities."
The Portfolio may, for temporary defensive purposes as determined by
the Adviser (such as when instability or unfavorable conditions exist in foreign
countries), invest 100% of its total assets in dollar-denominated securities or
securities of U.S. issuers.
The Portfolio may also invest in debt securities denominated in the
European Currency Unit ("ECU"), which is a "basket" consisting of specified
amounts in the currencies of certain of the twelve member states of the European
Community. The specific amounts of currencies comprising the ECU may be adjusted
by the Council of Ministers of the European Community from time to time to
reflect changes in relative values of the underlying currencies. In addition,
the Portfolio may invest in securities denominated in other currency "baskets."
Currency "baskets" will be of comparable quality, as determined by the Adviser,
to other debt securities purchased by the Portfolio.
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Although the Portfolio generally invests in investment grade fixed
income securities, up to 25% of the total assets of the Portfolio may be
invested in issuers based in developing counties; such securities may not be
investment grade. Investment in securities of issuers based in such countries
entails certain risks which include (i) greater risks of expropriation,
confiscatory taxation, nationalization, and less social, political and economic
stability; (ii) the small current size of markets for securities of issuers
based in developing countries and the currently low or non-existent volume of
trading, resulting in a lack of liquidity and in price volatility; (iii) certain
national policies which may restrict the investment opportunities including
restrictions on investing in issuers or industries deemed sensitive to relevant
national interests; (iv) the absence of developed legal structures governing
private or foreign investment and private property; (v) currency blockage; and
(vi) withholding of interest payments at the source.
In addition to investing in non-dollar denominated securities, the
Portfolio may engage in certain active foreign currency management techniques.
The Portfolio may hold foreign currency received in connection with investments
in foreign securities when it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate.
The Portfolio may purchase or sell without limitation as to a
percentage of its assets forward foreign currency exchange contracts for as
another investment strategy when the Adviser anticipates that the foreign
currency will appreciate or depreciate in value, but securities denominated in
that currency do not present attractive investment opportunities and are not
held by the Portfolio. In addition, the Portfolio may enter into forward foreign
currency exchange contracts in order to protect against adverse changes in
future foreign currency exchange rates. The Portfolio may engage in
cross-hedging by using forward contracts in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
the Adviser determines that there is a pattern of correlation between the two
currencies. See "Additional Information on Investment Policies and
Techniques--Forward Foreign Currency Exchange Contracts."
The Portfolio may enter into contracts to purchase foreign currencies
to protect against an anticipated rise in the U.S. dollar price of securities it
intends to purchase. The Portfolio may enter into contracts to sell foreign
currencies to protect against the decline in value of its non-dollar denominated
securities due to a decline in the value of foreign currencies against the U.S.
dollar. Contracts to sell foreign currency could limit any potential gain which
might be realized by the Portfolio, if the value of the underlying currency
increased.
The Portfolio may purchase and write put and call options on currencies
for the purpose of protecting against declines in the U.S. dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities to be acquired. The Portfolio may use options on currency to
crosshedge, which involves writing or purchasing options on one currency to
hedge against changes in exchange rates for a different currency with a pattern
of correlation.
In addition, the Portfolio may purchase call or put options on currency
for non-hedging purposes when it is anticipated that the currency will
appreciate or depreciate in value, but the securities denominated in that
currency do not present attractive investment opportunities and are not held by
the Portfolio.
Up to 2% of the total assets of the Portfolio may be invested in
warrants to purchase debt or equity securities. See Part B for a description of
warrants.
The Portfolio may enter into interest rate and currency swaps to the
maximum allowed limits under applicable. The Portfolio will typically use
interest rate swaps to shorten the effective duration of its portfolio. Interest
rate swaps involve the exchange by the Portfolio with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
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rate payments for floating rate payments. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
The Portfolio may purchase securities that are not registered or are
offered in an exempt non-public offering ("restricted securities") under the
1933 Act, including securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act.
The Portfolio may invest in zero coupon bonds and deferred interest
bonds.
The Portfolio may enter into repurchase agreements with "primary
dealers" in U.S. Government securities and member banks of the Federal Reserve
System which furnish collateral at least equal in value or market price to the
amount of their repurchase obligation. See "Additional Information on Investment
Policies and Techniques--Repurchase Agreement."
The Portfolio may purchase securities on a when-issued or delayed
delivery basis. See "Additional Information on Investment Policies and
Techniques--When-Issued and Delayed Delivery Securities."
The Portfolio may not borrow money except from banks and only for
temporary or short-term purposes. Temporary or short-term purposes may include:
(i) short-term (i.e., no longer than five business days) credits for clearance
of portfolio transactions; (ii) borrowing in order to meet redemption requests
or to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; and (iii) borrowing in order
to fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets in the near future. The
Portfolio will not borrow for leveraging purposes. See "Investment Restrictions"
in Part B.
The Portfolio may also seek to increase its income by lending portfolio
securities, provided that the value of the securities loaned would not exceed
30% of the value of the total assets of the Portfolio.
The investment policies described above or below in "Additional
Information on Investment Policies and Techniques" may be changed without the
approval of the Portfolio's investors.
ADDITIONAL INFORMATION ON INVESTMENT POLICIES AND TECHNIQUES
How the Portfolio Invests Its Assets. The Portfolio expects to achieve
its investment objective by investing in a portfolio of debt securities
denominated either in the U.S. dollar or in a range of foreign currencies.
Accordingly, the Portfolio will seek investment opportunities in foreign, as
well as domestic, securities markets. The Portfolio normally will maintain a
substantial portion of its assets in debt securities denominated in foreign
currencies.
The Portfolio's net asset value will change with market conditions and
will generally rise and fall, in an inverse relationship, in response to changes
in interest rates.
The Adviser will actively manage the Portfolio's investment portfolio
in accordance with a global investment strategy, allocating the Portfolio's
investments among securities denominated either in the U.S. dollar or in the
currencies of a number of foreign countries and supranational entities. The
Adviser may adjust the Portfolio's exposure to each currency based on its
perception of the most favorable markets and issuers. In this regard, the
percentage of assets invested in securities of a particular country or
denominated in a particular currency will vary in accordance with the Adviser's
assessment of the relative yield and appreciation potential of such securities
and the current and anticipated relationship of a country's currency to the U.S.
dollar. Fundamental economic strength, earnings growth, quality of management,
industry growth, credit quality and interest rate trends are some of the
principal factors which may be considered by the Adviser in determining whether
to increase or decrease the emphasis placed upon a particular type of security,
industry sector, country or currency within the Portfolio's investment
portfolio.
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The Portfolio will neither invest more than 25% of its net assets in debt
securities denominated in a single currency other than the U.S. Dollar, British
Pound Sterling, Canadian Dollar, French Franc, German Mark and Japanese Yen, nor
invest more than 25% of its net assets in debt securities issued by a single
foreign government or supranational organization.
The Portfolio invests in fixed income securities of issuers located in
and denominated in the currencies of various countries. In addition to the U.S.
Dollar, such countries' currencies include, among others, the Australian Dollar,
Austrian Schilling, British Pound Sterling, Canadian Dollar, Dutch Dollar,
French Franc, German Mark, Japanese Yen, New Zealand Dollar, Spanish Peseta,
Swedish Krona and Swiss Franc. An issuer of securities purchased by the
Portfolio may be domiciled in a country other than the country in whose currency
the securities are denominated. The Portfolio will, under normal market
conditions, invest in the securities of issuers in at least three countries, one
of which may be the United States. Country selection will vary over time based
on several factors, including economic factors which may affect a particular
country or region of the world and anticipated currency price movements for
specific countries.
U.S. Government Securities. U.S. Government securities include (1) U.S.
Treasury obligations, which differ in their interest rates, maturities and times
of issuance; U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years) and (2) obligations issued or guaranteed
by U.S. Government agencies and instrumentalities which are supported by any of
the following: (a) the full faith and credit of the U.S. Treasury, (b) the right
of the issuer to borrow any amount limited to a specific line of credit from the
U.S. Treasury, (c) discretionary authority of the U.S. Government to purchase
obligations of the U.S. Government agency or instrumentality or (d) the credit
of the agency or instrumentality. The Portfolio may also invest in any other
security or agreement collateralized or otherwise secured by U.S. Government
securities. Agencies and instrumentalities of the U.S. Government include but
are not limited to: Federal Land Banks, Federal Financing Banks, Banks for
Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association, Student Loan Marketing Association, United States Postal Service,
Chrysler Corporate Loan Guarantee Board, Small Business Administration,
Tennessee Valley Authority and any other enterprise established or sponsored by
the U.S. Government.
Certain U.S. Government securities purchased by the Portfolio,
including U.S. Treasury bills, notes and bonds, Government National Mortgage
Association ("GNMA") certificates and Federal Housing Administration debentures,
are supported by the full faith and credit of the United States. Other U.S.
Government securities are issued or guaranteed by federal agencies or government
sponsored enterprises and are not supported by the full faith and credit of the
United States. These securities include obligations that are supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of
Federal Home Loan Banks, and obligations that are supported by the
creditworthiness of the particular instrumentality, such as obligations of
Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage
Corporation ("FHLMC").
Mortgage-Backed Securities. The Portfolio may purchase mortgage-backed
securities which are securities which represent an ownership interest in a pool
of mortgage loans issued by lenders such as mortgage bankers, commercial banks
and savings and loan associations. Mortgage loans included in the pool may be
insured by GNMA or the Federal Housing Administration or guaranteed by FNMA,
FHLMC or the Veterans Administration. Mortgage-backed securities provide
investors such as the Portfolio with payments consisting of both interest and
principal as the mortgages in the underlying mortgage pools are paid off. The
average life of a mortgage-backed security is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of the principal invested far in
advance of the maturity of the mortgages in the pool. The actual yield of a
mortgage-backed security may be affected by the prepayment of mortgages included
in the
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mortgage pool underlying the security. Principal which is so prepaid will be
invested, although possibly at a lower rate. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
The Portfolio may also invest in securities representing interests in
collateralized mortgage obligations ("CMOs"), real estate mortgage investment
conduits ("REMICs") and in pools of other asset-backed loans, such as automobile
and credit card loans. A CMO is a hybrid between a mortgage-backed bond and a
mortgage pass-through security. Similar to a bond, interest and prepaid
principal are paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by the U.S. Government, or U.S.
Government-related, entities, and their income streams. CMOs are not necessarily
guaranteed and should the CMO collateral prove insufficient to meet payments,
holders may sustain a loss. The Portfolio invests in CMOs rated AA or higher by
Moody's or Aa or higher by S&P or which, if unrated, are determined by the
Adviser pursuant to criteria established by the Board of Trustees of the
Portfolio to be, of comparable quality.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially protected against a sooner than desired return
of principal because of the sequential payments.
REMICs, which were authorized under the Tax Reform Act of 1986, include
governmental and/or private entities that issue a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. REMICs issued by private entities are not
U.S. Government securities and are not directly guaranteed by any government
agency. They are secured by the underlying collateral of the private issuer. The
Portfolio will invest in privately issued REMICs only if they meet the quality
criteria described above for CMOs.
Zero Coupon and Stripped Government Obligations. The Portfolio may
invest in zero coupon bonds, deferred interest bonds, and U.S. Treasury bonds or
notes and their unmatured interest coupons which have been separated or
stripped. Zero coupon and deferred interest bonds are debt obligations which are
issued at a significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest accrual date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. Although this period of delay is different for each deferred interest
bond, a typical period is approximately one-third of the bond's term to
maturity. Such investments experience greater volatility in market value due to
changes in interest rates than debt obligations which provide for regular
payments of interest. The Portfolio will accrue income on such investments for
tax and accounting purposes, as required, which is distributable to investors
and which because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations. Stripped obligations are created when the holder of
U.S. Treasury bonds or notes, typically a custodian bank or investment brokerage
firm, strips their unmatured interest coupons and resells the component
separately. Stripped interest coupons have been marketed in custodial receipt
programs under such names as "TIGRS" and "CATS." The underlying bonds and notes
are sold and either held in book-entry form at a Federal Reserve Bank or, in the
case of bearer securities, in trust on behalf of the owners thereof.
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Non-U.S. Securities. Investing in securities issued by foreign
corporations and governments involves considerations and possible risks not
typically associated with investing in securities issued by domestic
corporations and the U.S. Government. The values of foreign investments are
affected by changes in currency rates or exchange control regulations,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the United States
or other countries) or changed circumstances in dealings between countries.
Costs are incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions are generally higher than in the United
States, and foreign securities markets may be less liquid, more volatile and
less subject to governmental supervision than in the United States. Investments
in foreign countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.
The Portfolio may invest up to 25% of its total assets in securities
issued by supranational organizations such as: the World Bank, which was
chartered to finance development projects in developing member countries; the
European Community, which is a twelve-nation organization engaged in cooperative
economic activities; the European Coal and Steel Community, which is an economic
union of various European nations' steel and coal industries; and the Asian
Development Bank, which is an international development bank established to lend
funds, promote investment and provide technical assistance to member nations of
the Asian and Pacific regions.
Indexed Investments. The Portfolio may invest in instruments which are
indexed to certain specific foreign currency exchange rates. The terms of such
instruments may provide that their principal amounts or just their coupon
interest rates are adjusted upwards or downwards (but not below zero) at
maturity or on established coupon payment dates to reflect changes in the
exchange rate between two or more currencies while the obligation is
outstanding. While such indexed investments entail the risk of loss of principal
and/or interest payments from currency movements in addition to principal risk,
the potential for realizing gains as a result of changes in foreign currency
exchange rates enables the Portfolio to hedge against a decline in the U.S.
dollar value of investments denominated in foreign currencies while providing an
attractive current return. The Portfolio will purchase such indexed investments
for hedging purposes only, not for speculation.
Futures Contracts and Options on Futures Contracts. The Portfolio may
invest its assets in derivative and related instruments subject only to the
Portfolio's investment objective and policies and the requirement that, to avoid
leveraging the Portfolio, the Portfolio maintain segregated accounts consisting
of liquid assets, such as cash, U.S. Government securities, or other high-grade
debt obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset.
The value of some derivative or related instruments in which the
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates or other economic factors, and -- like other investments of the
Portfolio -- the ability of the Portfolio to successfully utilize these
instruments may depend in part upon the ability of the Adviser to forecast
interest rates and other economic factors correctly. If the Adviser incorrectly
forecasts such factors and has taken positions in derivative or related
instruments contrary to prevailing market trends, the Portfolio could be exposed
to the risk of a loss. The Portfolio might not employ any or all of the
instruments described herein, and no assurance can be given that any strategy
used will succeed.
To the extent permitted by the investment objectives and policies of
the Portfolio, and as described more fully in Part B below, the Portfolio may:
purchase, write and exercise call and put options on securities, securities
indexes and foreign currencies (including using options in combination with
securities, other options or derivative instruments); enter into futures
contracts and options on futures contracts; employ forward currency and
interest-
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rate contracts; purchase and sell mortgage-backed and asset-backed securities;
and purchase and sell structured products.
Risk Factors. As explained more fully in Part B below, there are a
number of risks associated with the use of derivatives and related instruments,
including: there can be no guarantee that there will be a correlation between
price movements in a hedging vehicle and in the portfolio assets being hedged.
Incorrect correlation could result in a loss on both the hedged assets in the
Portfolio and the hedging vehicle so that the portfolio return might have been
greater had hedging not been attempted. This risk is particularly acute in the
case of "cross-hedges" between currencies. The Adviser may incorrectly forecast
interest rates, market values or other economic factors in utilizing a
derivatives strategy. In such a case, the Portfolio may have been in a better
position had it not entered into such strategy. Hedging strategies, while
reducing risk of loss, can also reduce the opportunity for gain. In other words,
hedging usually limits both potential losses as well as potential gains.
Strategies not involving hedging may increase the risk to the Portfolio. Certain
strategies, such as yield enhancement, can have speculative characteristics and
may result in more risk to the Portfolio than hedging strategies using the same
instruments. There can be no assurance that a liquid market will exist at a time
when the Portfolio seeks to close out an option, futures contract or other
derivative or related position. Many exchanges and boards of trade limit the
amount of fluctuation permitted in option or futures contract prices during a
single day, once the daily limit has been reached on particular contract, no
trades may be made that day at a price beyond that limit. In addition, certain
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. Activities of large traders in the futures and securities
markets involving arbitrage, "program trading," and other investment strategies
may cause price distortions in these markets. In certain instances, particularly
those involving over-the-counter transactions, forward contracts, foreign
exchanges or foreign boards of trade, there is a greater potential that a
counterparty or broker may default or be unable to perform on its commitments.
In the event of such a default, the Portfolio may experience a loss. In
transactions involving currencies, the value of the currency underlying an
instrument may fluctuate due to many factors, including economic conditions,
interest rates, governmental policies and market forces.
Interest Rate and Currency Swaps. The Portfolio will only enter into
interest rate and currency swaps on a net basis, i.e., the two payment streams
are netted out, with the Portfolio receiving or paying, as the case may be, only
the net amount of the two payments. Interest rate and currency swaps do not
involve the delivery of securities, the underlying currency, other underlying
assets or principal. Accordingly, the risk of loss with respect to interest rate
and currency swaps is limited to the net amount of interest or currency payments
that the Portfolio is contractually obligated to make. If the other party to an
interest rate or currency swap defaults, the Portfolio's risk of loss consists
of the net amount of interest or currency payments that the Portfolio is
contractually entitled to receive.
Since interest rate and currency swaps are individually negotiated, the
Portfolio expects to achieve an acceptable degree of correlation between its
portfolio investments and its interest rate or currency swap positions.
When-issued and Delayed Delivery Securities. Securities may be
purchased on a when-issued or delayed delivery basis. For example, delivery and
payment may take place a month or more after the date of the transaction. The
purchase price and the interest rate payable on the securities, if any, are
fixed on the transaction date. The securities so purchased are subject to market
fluctuation and no income accrues until delivery and payment take place. At the
time of its acquisition, a when-issued or delayed delivery security may be
valued at less than the purchase price. Commitments for such when-issued or
delayed delivery securities, which have the effect of borrowing, will be made
only when there is an intention of actually acquiring the securities. On
delivery dates for such transactions, such obligations will be met from
maturities or sales of securities and/or from cash flow.
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Certain Investment Policies. The Portfolio will not invest in illiquid
securities if immediately after such investment more than 10% of the Portfolio's
net assets (taken at market value) would be invested in such securities. The
Portfolio reserves the right to increase this limit to 15% if and when state
securities regulators acquiesce in such higher limit recently adopted by the
Securities and Exchange Commission. For this purpose, illiquid securities
include (a) private placements other than Rule 144A securities (Rule 144A
securities may not, however, be as liquid as similar securities registered under
the 1933 Act if, for example, qualified Rule 144A purchasers are not interested
in purchasing particular Rule 144A securities from the Portfolio), (b) other
securities which are subject to legal or contractual restrictions on resale or
for which there is no readily available market (e.g., trading in the security is
suspended or, in the case of unlisted securities, market makers do not exist or
will not entertain bids or offers), (c) options purchased by the Portfolio
over-the-counter and the cover for options written by the Portfolio
over-the-counter, except with respect to such transactions entered into with
primary in U.S. Government securities pursuant to an agreement requiring a
closing purchase transaction at a formula price, and (d) repurchase agreements
not terminable within seven days. See "Repurchase Agreements" below.
Securities Lending. The Portfolio may seek to increase its income by
lending securities held by it. Securities loans may be made to banks,
broker-dealers and other recognized institutional borrowers of securities and
are required to be secured continuously by collateral consisting of cash, U.S.
Government securities and high quality debt obligations or an irrevocable letter
of credit in favor of the Portfolio, each to be maintained on a current basis at
an amount at least equal to the market value and accrued interest of the
securities loaned. The Portfolio would have the right to call a loan and obtain
the securities loaned on no more than five days' notice. During the existence of
a loan, the Portfolio would continue to receive the equivalent of the interest,
dividends or other distributions paid by the issuer on the securities and would
also receive compensation based on investment of the collateral. As with other
extensions of credit there are risks of delay in recovery or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing and when, in the judgment of the Adviser, the consideration which
can be earned currently from securities loans of this type justifies the
attendant risk. The value of the securities loaned by the Portfolio will not
exceed 30% of the value of the Portfolio's total assets at the time any loan is
made.
Repurchase Agreements. The Portfolio may enter into "repurchase
agreements" pertaining to debt securities with domestic banks or broker-dealers
("counterparties"). There is no percentage restriction on the Portfolio's
ability to enter into repurchase agreements, which are considered to be loans by
the Securities and Exchange Commission. A repurchase agreement arises when a
buyer such as the Portfolio purchases a security and simultaneously agrees to
resell it to the counterparty at an agreed upon future date, normally one day or
a few days later. The resale price is greater that the purchase price,
reflecting an agreed upon interest rate which is effective for the period of
time the buyer's money is invested in the security and which is related to the
current market rate rather than the coupon rate on the purchased security. Such
agreements permit the Portfolio to keep all of its assets at work while
retaining "overnight" flexibility in pursuit of investments of a longer-term
nature. In the event a counterparty defaulted on its repurchase obligation, the
Portfolio might suffer a loss to the extent that the proceeds from the sale of
the collateral were less than the repurchase price. In the event of a
counterparty's bankruptcy, the Portfolio might be delayed in, or prevented from,
selling the collateral for the Portfolio's benefit. The Portfolio's Board of
Trustees has established procedures, which are periodically reviewed by the
Board, pursuant to which the Adviser monitors the creditworthiness of the
counterparties with which the Portfolio enters into repurchase agreement
transactions.
Portfolio Turnover. The Adviser is unable to predict what the annual
portfolio turnover rate of the Portfolio will be, but anticipates that it will
not exceed 350%. A rate of 350% would be considered to be rather high and may
involve additional costs.
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Investment Restrictions. The Portfolio is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Portfolio's
outstanding voting securities, as defined in the 1940 Act. See "Investment
Restrictions" in Part B.
Portfolio Management. It is not intended that the assets of the
Portfolio will be invested in securities for the purpose of short-term profits.
However, the Portfolio will dispose of portfolio securities whenever the Adviser
believes that changes are appropriate. Generally, the primary consideration in
placing portfolio securities transactions with broker-dealers for execution is
to obtain, and maintain the availability of, execution at the most favorable
prices and in the most effective manner possible. For a complete discussion of
portfolio transactions and brokerage allocation, see "Investment Objectives and
Policies" and "Brokerage Allocation and Other Practices" in Part B.
ITEM 5. MANAGEMENT OF THE PORTFOLIO.
The Portfolio's Board of Trustees provides broad supervision over the
affairs of the Portfolio. See "Trustees and Officers" in Item 14 of Part B for a
complete description of the Trustees of the Portfolio.
The Adviser. The Adviser manages the assets of the Portfolio pursuant
to an Advisory Agreement (the "Advisory Agreement") and, subject to such
policies as the Board of Trustees of the Portfolio may determine, makes
investment decisions for the Portfolio. For its services under the Advisory
Agreement, the Adviser receives an annual fee computed daily and paid monthly
based at an annual rate equal to 0.75% of the Portfolio's average daily net
assets. The Adviser may, from time to time, voluntarily waive all or a portion
of its fees payable under the Advisory Agreement.
The Adviser, a wholly-owned subsidiary of The Chase Manhattan
Corporation, a registered bank holding company, is a commercial bank offering a
wide range of banking and investment services to customers throughout the United
States and around the world. Its headquarters is at One Chase Manhattan Plaza,
New York, New York 10081. The Adviser, including its predecessor organizations,
has over 100 years of money management experience and renders investment
advisory services to others. Also included among the Adviser's accounts are
commingled trust funds and a broad spectrum of individual trust and investment
management portfolios. These accounts have varying investment objectives.
On August 27, 1995, The Chase Manhattan Corporation announced its entry
into an Agreement and Plan of Merger (the "Merger Agreement") with Chemical
Banking Corporation ("Chemical"), a bank holding company, pursuant to which The
Chase Manhattan Corporation will merge with and into Chemical (the "Holding
Company Merger"). Under the terms of the Merger Agreement, Chemical will be the
surviving corporation in the Holding Company Merger and will continue its
corporate existence under Delaware law under the name "The Chase Manhattan
Corporation" ("New Chase"). The board of directors of each holding company has
approved the Holding Company Merger, which will create the second largest bank
holding company in the United States based on assets. The consummation of the
Holding Company Merger is subject to certain closing conditions. On December 11,
1995, the respective shareholders of The Chase Manhattan Corporation and
Chemical voted to approve the Holding Company Merger. The Holding Company Merger
is expected to be completed on or about March 31, 1996.
Subsequent to the Holding Company Merger, it is expected that the
adviser to the Portfolio, The Chase Manhattan Bank, N.A., will be merged with
and into Chemical Bank. a New York State chartered bank ("Chemical Bank") (the
"Bank Merger" and together with the Holding Company Merger, the "Mergers"). The
surviving bank will continue operations under the name The Chase Manhattan Bank
(as used herein, the term "Chase" refers to The Chase Manhattan Bank, N.A. and
its successor in the Bank Merger, and the term "Adviser" means Chase (including
its successor in the Bank Merger) in its capacity as investment adviser to the
Portfolio). The consummation of the Bank Merger is subject to certain closing
conditions, including the receipt of certain regulatory approvals. The Bank
Merger is expected to occur in July 1996.
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Chemical is a publicly owned bank holding company incorporated under
Delaware law and registered under the Federal Bank Holding Company Act of 1956,
as amended. As of December 31, 1995, through its direct or indirect
subsidiaries, Chemical managed more than $57 billion in assets, including
approximately $6.9 billion in mutual fund assets in 11 mutual fund portfolios.
Chemical Bank is a wholly owned subsidiary of Chemical and is a New York State
chartered bank.
Certain Relationships and Activities. The Adviser and its affiliates
may have deposit, loan and other commercial banking relationships with the
issuers of securities purchased on behalf of the Portfolio, including
outstanding loans to such issuers which may be repaid in whole or in part with
the proceeds of securities so purchased. The Adviser and its affiliates deal,
trade and invest for their own accounts in U.S. Government obligations,
municipal obligations and commercial paper and are among the leading dealers of
various types of U.S. Government obligations and municipal obligations. The
Adviser will not invest the Portfolio's assets in any U.S. Government
obligations, municipal obligations or commercial paper purchased from itself or
any affiliate, although under circumstances such securities may be purchased
from other members of an underwriting syndicate in which the Adviser or an
affiliate is a non-principal member. This restriction may limit the amount or
type of U.S. Government obligations, municipal obligations or commercial paper
available to be purchased by the Portfolio. The Adviser has informed the
Portfolio that in making its investment decisions, it does not obtain or use
material inside information in the possession of any other division or
department of the Adviser, including the division that performs services for the
Portfolio as Sub-Custodian, or in the possession of any affiliate of the
Adviser.
The Administrator. Chase serves as the Administrator pursuant to a
separate Administration Agreement. The Administrator supervises the overall
administration of the Portfolio. The Administrator provides certain
administrative services, including, among other responsibilities, coordinating
relationships with independent contractors and agents; preparing for signature
by officers and filing of certain documents required for compliance with
applicable laws and regulations; preparing financial statements; arranging for
the maintenance of books and records; and providing office facilities necessary
to carry out the duties thereunder. The Administrator is entitled to receive
from the Portfolio a fee computed daily and paid monthly at an annual rate equal
to 0.05% of its average daily net assets. The Administrator may, from time to
time, voluntarily waive all or a portion of its fees payable to it under the
Administration Agreement.
Glass-Steagall Act. Chase has received the opinion of its legal counsel
that it and its affiliates may provide the services described in the Advisory
and the Administration Agreements, as described above, without violating the
federal banking law commonly known as the Glass-Steagall Act. The Act generally
bars banks from publicly underwriting or distributing certain securities.
Possible future changes in federal law or administrative or judicial
interpretations of current or future law, however, could prevent Chase from
continuing to perform investment advisory services and administrative services
for the Portfolio. If that occurred, the Board of Trustees promptly would seek
to obtain the services of another qualified adviser, custodian or administrator,
as necessary. Although no assurances can be given, the Portfolio believes that,
if necessary, the transfer to a new adviser, custodian or administrator could be
accomplished without undue disruption to its operations.
The Portfolio has not retained the services of a principal underwriter
or distributor, as interests in the Portfolio are offered solely in private
placement transactions.
Expenses. The expenses of the Portfolio include the compensation of its
Trustees; registration fees; interest charges; taxes; fees and expenses of
independent auditors, of legal counsel and of any transfer agent, custodian, or
registrar of the Portfolio; insurance premiums; and expenses of calculating the
Portfolio's net asset value and net income.
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The expenses of the Portfolio also include all fees under the
Administration Agreement; the expenses connected with the execution, recording
and settlement of security transactions; fees and expenses of the Custodian for
all services to the Portfolio, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of preparing and mailing
reports to investors and to governmental officers and commissions; expenses of
meetings of investors; and the advisory fees payable to the Adviser under the
Advisory Agreement.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is organized as a trust under the laws of the State of
New York. Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Each investor is entitled to a vote in
proportion to the amount of its investment in the Portfolio. Investments in the
Portfolio may not be transferred, but an investor may withdraw all or any
portion of its investment at any time at net asset value. Investors in the
Portfolio (e.g., investment companies, insurance company separate accounts and
common and commingled trust funds) will each be liable for all obligations of
the Portfolio. However, the risk of an investor in the Portfolio incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations.
Investments in the Portfolio have no preemptive or conversion rights
and are fully paid and nonassessable, except as set forth below. The Portfolio
is not required to hold annual meetings of investors but the Portfolio will hold
special meetings of investors when in the judgment of the Trustees it is
necessary or desirable to submit matters for an investor vote. Investors have
the right to communicate with other investors to the extent provided in Section
16(c) of the 1940 Act in connection with requesting a meeting of investors for
the purpose of removing one or more Trustees, which removal requires a
two-thirds vote of the Portfolio's beneficial interests. Investors also have
under certain circumstances the right to remove one or more Trustees without a
meeting. Upon liquidation of the Portfolio, investors would be entitled to share
pro rata in the net assets of the Portfolio available for distribution to
investors.
The Portfolio does not intend to distribute to its investors its net
investment income or its net realized capital gains, if any. The end of the
Portfolio's fiscal year is October 31.
Under the anticipated method of operation of the Portfolio, the
Portfolio will not be subject to any income tax. However, each investor in the
Portfolio will be taxable on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's taxable income, gain,
loss, deductions and credits in determining its income tax liability. The
determination of such share will be made in accordance with the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions
will be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio.
Investor inquiries may be directed to the Portfolio's exclusive
placement agent, Signature Broker-Dealer Services, Inc., 6 St. James Avenue,
Boston, MA 02116.
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See "General Description of the
Registrant" above.
An investment in the Portfolio may be made in U.S. dollars without a
sales load at the net asset value next determined after an order is received in
"good
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order" by the Portfolio. There is no minimum initial or subsequent investment in
the Portfolio. No money may be paid to any intermediary in Hong Kong who is not
a dealer or exempt dealer.
The Portfolio reserves the right to cease accepting investments at any
time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each day the New York Stock Exchange is open for trading. At
4:00 p.m., Eastern Time, on each such day, the value of each investor's
beneficial interest in the Portfolio will be determined by multiplying the net
asset value of the Portfolio by the percentage, effective for that day, which
represents that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or reductions, which are to be effected as of 4:00
p.m., Eastern Time, on such day, will then be effected. The investor's
percentage of the aggregate beneficial interests in the Portfolio will then be
recomputed as the percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Portfolio as of 4:00 p.m.,
Eastern Time, on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Portfolio
effected as of that time, and (ii) the denominator of which is the aggregate net
asset value of the Portfolio as of that time, on such day, plus or minus, as the
case may be, the amount of net additions to or reductions in the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m., Eastern Time, on the following day
the New York Stock Exchange is open for trading.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may reduce any portion or all of its
investment at any time without charge at the net asset value next determined
after a request in "good order" is furnished by the investor to the Portfolio.
The proceeds of a reduction will be paid in U.S. dollars by the Portfolio
normally on the next business day after the reduction is effected, but in any
event within seven days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
reduction may be suspended or the payment of the proceeds therefrom postponed
during any period in which the New York Stock Exchange is closed (other than
weekends or holidays) or trading on such Exchange is restricted, or, to the
extent otherwise permitted by the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS.
Page
General Information and History..............................B-1
Investment Objective and Policies............................B-1
Management of the Portfolio.................................B-19
Control Persons and Principal Holders of Securities.........B-23
Investment Advisory and Other Services......................B-23
Brokerage Allocation and Other Practices....................B-25
Capital Stock and Other Securities..........................B-27
Purchase, Redemption and Pricing of Securities..............B-29
Tax Status..................................................B-31
Underwriters................................................B-32
Calculation of Performance Data.............................B-32
Financial Statements........................................B-32
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
Part A contains additional information about the investment objective
of Global Fixed Income Portfolio (the "Portfolio"). This Part B should only be
read in conjunction with Part A.
INVESTMENT OBJECTIVE
The Portfolio seeks to provide a high total return, achieving such
through current income and capital appreciation, through investment in a
portfolio of high quality fixed income securities of U.S. and foreign issuers
and through transactions in foreign currencies.
INVESTMENT POLICIES
U.S. Government Securities. For a description of
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, see below.
Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptance can be as
long as 270 days, most acceptances have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement
<PAGE>
involving periodically fluctuating rates of interest under a letter agreement
between a commercial paper issuer and an institutional lender pursuant to which
the lender may determine to invest varying amounts.
For a description of commercial paper ratings, see below.
Zero Coupon, Payment in Kind and Stripped Government Obligations. The
Portfolio may invest in zero coupon bonds, deferred interest bonds, bonds on
which the interest is payable in kind ("PIK bonds") and U.S. Treasury bonds or
notes and their unmatured interest coupons which have been separated or
stripped. Zero coupon and deferred interest bonds are debt obligations which are
issued at a significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest accrual date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. Although this period of delay is different for each deferred interest
bond, a typical period is approximately one-third of the bond's term to
maturity. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments experience greater volatility in market value due to changes in
interest rates than debt obligations which provide for regular payments of
interest. The Portfolio will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to investors and which
because no cash is received at the time of accrual, may require the liquidation
of other portfolio securities to satisfy the Portfolio's distribution
obligations. Stripped obligations are created when the holder of U.S. Treasury
bonds or notes, typically a custodian bank or investment brokerage firm, strips
their unmatured interest coupons and resells each component separately. Stripped
interest coupons have been marketed in custodial receipt programs under such
names as "TIGRS" and "CATS." The underlying bonds and notes are sold and either
held in book-entry form at a Federal Reserve Bank or, in the case of bearer
securities, in trust on behalf of the owners thereof.
Mortgage-Backed Securities. The Portfolio may also invest in
mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations (see "Mortgage Pass-Through Securities"). The Portfolio
may also invest in debt securities which are secured with collateral consisting
of mortgage-backed securities (see "Collateralized Mortgage Obligations") and in
other types of mortgage-related securities (see "Other Mortgage-Backed
Securities" and "Other Asset-Backed Securities") but not including stripped
mortgage-backed securities. Not more than 25% of the Portfolio's assets will be
invested in such debt securities.
Prepayments of principal by mortgagors and mortgage foreclosures will
usually result in the return of a greater part of principal invested far in
advance of the maturity of the mortgages in the pool. A decline in interest
rates may lead to a faster rate of repayment of the underlying mortgages and
expose the Portfolio to a lower rate of return upon reinvestment. To the extent
that such mortgage-backed securities are held by the Portfolio, the prepayment
right will tend to limit to some degree any potential increase in net asset
value of the Portfolio because the value of the mortgage-backed securities held
by the Portfolio may not appreciate as rapidly as the price of noncallable debt
securities.
Mortgage Pass-Through Securities. Interests in pools of mortgage-backed
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
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borrowers on their mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of beneficial interests of the Portfolio. Also, the GNMA securities often
are purchased at a premium over the maturity value of the underlying mortgages.
This premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved sellers which include state- and
federal-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the 12 Federal
Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages from FHLMC's national portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection of principal,
but PCs are not backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans ("Private
Certificates"). Such issuers may in addition be the originators and/or servicers
of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of
payments. However, timely payment of interest and principal of these pools may
be supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Portfolio's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Portfolio may buy
mortgage-related securities without insurance or guarantees if through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Adviser determines that the securities' quality standards are
equivalent to the Portfolio's quality standards applicable to corporate debt
obligations. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable.
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The Portfolio invests in mortgage-backed securities rated AA or higher
by Moody's or S&P or which, if unrated, are determined by the Adviser pursuant
to criteria established by the Board of Trustees to be of comparable quality.
Collateralized Mortgage Obligations ("CMOs"). The Portfolio may invest
in CMOs, including, with respect to up to 5% of total assets, "interest only"
and "principal only" classes thereof issued by the U.S. Government or its
agencies and instrumentalities. In a typical CMO transaction, a corporation
issues multiple series (e.g., A, B, C, through Z) of CMO bonds ("Bonds").
Proceeds of the offering of the Bonds are used to purchase mortgages or mortgage
pass-through certificates ("Collateral"). The Collateral is pledged to a third
party trustee as security for the Bonds. Principal and interest payments from
the Collateral are used to pay principal on the Bonds in the order A, B, C
through Z. The Series A, B and C Bonds (i.e., all Bonds other than Series Z) all
bear current interest. Interest on the Series Z Bond is accrued and added to
principal, and a like amount is paid as principal on the Series A, B or C Bond
currently being paid off. When the Series A, B and C Bonds (i.e., all Bonds
other than Series Z) are paid in full, interest and principal on the Series Z
Bond begins to be paid currently.
FHLMC Collateralized Mortgage Obligations ("FHLMC CMOs"). FHLMC CMOs
are debt obligations of FHLMC issued in multiple classes having different
maturity dates which are secured by the pledge of a pool of conventional
mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of principal and
interest on the CMOs are made semiannually, as opposed to monthly. The amount of
principal payable on each semiannual payment date is determined in accordance
with FHLMC's mandatory sinking fund schedule, which, in turn, is equal to
approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date is made to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Adviser expects that
governmental, government-related or private entities may create mortgage loan
pools and other mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term
fixed-rate mortgages. The Portfolio will not purchase mortgage-backed securities
or any other assets which, in the opinion of the Adviser, are not readily
marketable if, as a result, more than 10% of the value of the Portfolio's net
assets will be not readily marketable. The Portfolio may also invest in
debentures and other securities of real estate investment trusts. As new types
of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with the Portfolio's investment objective, policies and
quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities. The Portfolio may invest in asset-backed
securities, including conditional sales contracts, equipment lease certificates
and equipment trust certificates. The Adviser expects that other asset-backed
securities (unrelated to mortgage loans) will be offered to investors in the
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future. Several types of asset-backed securities already exist, including, for
example, "Certificates for Automobile ReceivablesSM" or "CARSSM" ("CARS"). CARS
represent undivided fractional interests in a trust whose assets consist of a
pool of motor vehicle retail installment sales contracts and security interests
in the vehicles securing the contracts. Payments of principal and interest on
CARS are passed-through monthly to certificate holders, and are guaranteed up to
certain amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the trustee or originator of the CARS
trust. An investor's return on CARS may be affected by early prepayment of
principal on the underlying vehicle sales contracts. If the letter of credit is
exhausted, the CARS trust may be prevented from realizing the full amount due on
a sales contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, the failure
of servicers to take appropriate steps to perfect the CARS trust's rights in the
underlying loans and the servicer's sale of such loans to bona fide purchasers,
giving rise to interests in such loans superior to those of the CARS trust, or
other factors. As a result, certificate holders may experience delays in
payments or losses if the letter of credit is exhausted. Consistent with its
investment objective and policies, the Portfolio also may invest in other types
of asset-backed securities. In the selection of other asset-backed securities,
the Adviser will attempt to assess the liquidity of the security giving
consideration to the nature of the security, the frequency of trading in the
security, the number of dealers making a market in the security and the overall
nature of the marketplace for the security.
The limitations on the net assets of the Portfolio which may be
invested in mortgage-backed securities, including CMOs, real estate mortgage
investment conduits and other mortgage-backed securities, do not apply where the
obligations involved are issued or guaranteed as to the payment of principal or
interest by the U.S. Government, its agencies authorities or instrumentalities.
The Board of Trustees will monitor the Adviser's assessment of the
liquidity of asset-backed securities and the Adviser will make its assessments
pursuant to guidelines approved by the Board of Trustees.
Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act" or the "1933 Act"), securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Portfolio may invest up to 5% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts from
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registration "transactions by an issuer not involving any public offering".
Section 4(2) instruments are restricted in the sense that they can only be
resold through the issuing dealer and only to institutional investors; they
cannot be resold to the general public without registration. Restricted
securities issued under Section 4(2) of the Securities Act will be treated as
illiquid and subject to the Portfolio's overall 15% limitation on illiquid
securities.
The Securities and Exchange Commission (the "SEC") has recently adopted
Rule 144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the
Securities Act of resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this new regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
The Board of Trustees, which has the ultimate responsibility for
determinations as to liquidity of portfolio securities, has adopted guidelines
and procedures for determining the liquidity of Rule 144A securities and
monitoring the Adviser's implementation thereof.
Additional Policies Regarding Derivative and Related Transactions. As
explained more fully below, the Portfolio may employ derivative and related
instruments as tools in the management of portfolio assets. Put briefly, a
"derivative" instrument may be considered a security or other instrument which
derives its value from the value or performance of other instruments or assets,
interest or currency exchange rates, or indexes. For instance, derivatives
include futures, options, forward contracts, structured notes and various
over-the-counter instruments.
Like other investment tools or techniques, the impact of using
derivatives strategies or similar instruments depends to a great extent on how
they are used. Derivatives are generally used by portfolio managers in three
ways: First, to reduce risk by hedging (offsetting) an investment position.
Second, to substitute for another security particularly where it is quicker,
easier and less expensive to invest in derivatives. Lastly, to speculate or
enhance portfolio performance. When used prudently, derivatives can offer
several benefits, including easier and more effective hedging, lower transaction
costs, quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for the Portfolio.
The Portfolio may invest its assets in derivative and related
instruments subject only to the Portfolio's investment objective and policies
and the requirement that the Portfolio maintain segregated accounts consisting
of liquid assets, such as cash, U.S. Government securities, or other high-grade
debt obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset so as to avoid
leveraging the Portfolio.
The value of some derivative or similar instruments in which the
Portfolio may invest may be particularly sensitive to changes in prevailing
interest rates or other economic factors, and--like other investments of the
Portfolio --the ability of the Portfolio to successfully utilize these
instruments may depend in part upon the ability of the Adviser to forecast
interest rates and other economic factors correctly. If the Adviser incorrectly
forecasts such factors and has taken positions in derivative or similar
instruments contrary to prevailing market trends, the Portfolio could be exposed
to the risk of a loss. THE PORTFOLIO MIGHT NOT EMPLOY ANY OR ALL OF THE
STRATEGIES DESCRIBED HEREIN, AND NO ASSURANCE CAN BE GIVEN THAT ANY STRATEGY
USED WILL SUCCEED.
Set forth below is an explanation of the various derivatives strategies
and related instruments the Portfolio may employ along with risks or special
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attributes associated with them. This discussion is intended to supplement the
discussion in Part A above as well as provide useful information to prospective
investors.
Derivative and Related Instruments. To the extent permitted by the
investment objectives and policies of the Portfolio, and as described more fully
below, the Portfolio may: purchase, write and exercise call and put options on
securities, securities indexes (including using options in combination with
securities, other options or derivative instruments); enter into futures
contracts and options on futures contracts; purchase and sell mortgage-backed
and asset-backed securities; and purchase and sell structured products.
Risk Factors. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments. There can be no guarantee
that there will be a correlation between price movements in a hedging vehicle
and in the portfolio assets being hedged. As incorrect correlation could result
in a loss on both the hedged assets in the Portfolio and the hedging vehicle so
that the portfolio return might have been greater had hedging not been
attempted. This risk is particularly acute in the case of "cross-hedges" between
currencies. The Adviser may incorrectly forecast interest rates, market values
or other economic factors in utilizing a derivatives strategy. In such a case,
the Portfolio may have been in a better position had it not entered into such
strategy. Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. In other words, hedging usually limits both potential
losses as well as potential gains. Strategies not involving hedging may increase
the risk to the Portfolio. Certain strategies, such as yield enhancement, can
have speculative characteristics and may result in more risk to the Portfolio
than hedging strategies using the same instruments. There can be no assurance
that a liquid market will exist at a time when the Portfolio seeks to close out
an option, futures contract or other derivative or related position. Many
exchanges and boards of trade limit the amount of fluctuation permitted in
option or futures contract prices during a single day; once the daily limit has
been reached on particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain 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. Finally,
over-the-counter instruments typically do not have a liquid market. Lack of a
liquid market for any reason may prevent the Portfolio from liquidating an
unfavorable position. Activities of large traders in the futures and securities
markets involving arbitrage, "program trading," and other investment strategies
may cause price distortions in these markets. In certain instances, particularly
those involving over-the-counter transactions, forward contracts there is a
greater potential that a counterparty or broker may default or be unable to
perform on its commitments. In the event of such a default, the Portfolio may
experience a loss.
Specific Uses and Strategies. Set forth below are explanations of the
Portfolio's use of various strategies involving derivatives and related
instruments.
OPTIONS ON SECURITIES, SECURITIES INDEXES AND DEBT INSTRUMENTS. The
Portfolio may PURCHASE, SELL or EXERCISE call and put options on (i) securities,
(ii) securities indexes, and (iii) debt instruments.
Although in most cases these options will be exchange-traded, the
Portfolio may also purchase, sell or exercise over-the-counter options.
Over-the-counter options differ from exchange-traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller. As such, over-the-counter options generally have much less market
liquidity and carry the risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities the Portfolio intends to purchase pending its
ability to invest in such securities in an orderly manner. The Portfolio may
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also use combinations of options to minimize costs, gain exposure to markets or
take advantage of price disparities or market movements. For example, the
Portfolio may sell put or call options it has previously purchased or purchase
put or call options it has previously sold. These transactions may result in a
net gain or loss depending on whether the amount realized on the sale is more or
less than the premium and other transaction costs paid on the put or call option
which is sold. The Portfolio may write a call or put option in order to earn the
related premium from such transactions. Prior to exercise or expiration, an
option may be closed out by an offsetting purchase or sale of a similar option.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, when
the Portfolio writes a covered call (i.e., where the underlying securities are
held by the Portfolio) has, in return for the premium on the option, given up
the opportunity to profit from a price increase in the underlying securities
above the exercise price, but has retained the risk of loss should the price of
the underlying securities decline. The writer of an option has no control over
the time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price.
If a put or call option purchased by the Portfolio is not sold when it
has remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or , in the
case of a call, remains less than or equal to the exercise price, the Portfolio
will lose its entire investment in the option. Also, where a put or call option
on a particular security is purchased to hedge against price movements in a
related security, the price of the put or call option may move more or less than
the price of the related security. There can be no assurance that a liquid
market will exist when the Portfolio seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, the Portfolio may be unable to close out a position.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments, and (iii) options on these futures contracts ("futures
options").
The futures contracts and futures options may be based on various
securities in which the Portfolio may invest such as foreign currencies,
certificates of deposit, Eurodollar time deposits, securities indices, economic
indices (such as the Consumer Price Indices compiled by the U.S. Department of
Labor) and other financial instruments and indices.
These instruments may be used to hedge portfolio positions and
transactions as well as to gain exposure to markets. For example, the Portfolio
may sell a futures contract--or buy a futures option--to protect against a
decline in value, or reduce the duration, of portfolio holdings. Likewise, these
instruments may be used when the Portfolio intends to acquire an instrument or
enter into a position. For example, the Portfolio may purchase a futures
contract--or buy a futures option--to gain immediate exposure in a market or
otherwise offset increases in the purchase price of securities or currencies to
be acquired in the future. Futures options may also be written to earn the
related premiums.
When writing or purchasing options, the Portfolio may simultaneously
enter into other transactions involving futures contracts or futures options in
order to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. The Portfolio may engage in cross-hedging by purchasing or
selling futures or options on a security or currency different from the security
or currency position being hedged to take advantage of relationships between the
two securities or currencies.
Investments in futures contracts and options thereon involve risks
similar to those associated with options transactions discussed above. The
Portfolio will only enter into futures contracts or options on futures contracts
which are
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standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system.
FORWARD CONTRACTS. The Portfolio may use foreign currency and
interest-rate forward contracts for various purposes as described below.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. The Portfolio may
invest in securities denominated in foreign currencies may, in addition to
buying and selling foreign currency futures contracts and options on foreign
currencies and foreign currency futures, enter into forward foreign currency
exchange contracts to reduce the risks or otherwise take a position in
anticipation of changes in foreign exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be a 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.
By entering into a forward foreign currency contract, the Portfolio "locks in"
the exchange rate between the currency it will deliver and the currency it will
receive for the duration of the contract. As a result, the Portfolio reduces its
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into. The
effect on the value of the Portfolio is similar to selling securities
denominated in one currency and purchasing securities denominated in another.
Transactions that use two foreign currencies are sometimes referred to as
"cross- hedges."
The Portfolio may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Portfolio's investments or
anticipated investments in securities denominated in foreign currencies. The
Portfolio may also enter into these contracts for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.
The Portfolio may also use forward contracts to hedge against changes
in interest rates, increase exposure to a market or otherwise take advantage of
such changes. An interest-rate forward contract involves the obligation to
purchase or sell a specific debt instrument at a fixed price at a future date.
MORTGAGE-BACKED SECURITIES. The Portfolio may purchase mortgage-backed
securities--i.e., securities representing an ownership interest in a pool of
mortgage loans issued by lenders such as mortgage bankers, commercial banks and
savings and loan associations. Mortgage loans included in the pool--but not the
security itself--may be insured by the Government National Mortgage Association
or the Federal Housing Administration or guaranteed by the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation or the Veterans
Administration. Mortgage-backed securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. ALTHOUGH PROVIDING THE POTENTIAL FOR ENHANCED
RETURNS, MORTGAGE-BACKED SECURITIES CAN ALSO BE VOLATILE AND RESULT IN
UNANTICIPATED LOSSES.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of the principal invested
far in advance of the maturity of the mortgages in the pool. THE ACTUAL YIELD OF
A MORTGAGE-BACKED SECURITY MAY BE ADVERSELY AFFECTED BY THE PREPAYMENT OF
MORTGAGES INCLUDED IN THE MORTGAGE POOL UNDERLYING THE SECURITY.
The Portfolio may also invest in securities representing interests in
collateralized mortgage obligations ("CMOs"), real estate mortgage investment
conduits ("REMICs") and in pools of certain other asset-backed bonds and
mortgage pass-through securities. Like a bond, interest and prepaid principal
are paid, in most cases, semi-annually. CMOs are collateralized by portfolios of
mortgage
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pass-through securities guaranteed by the U.S. Government, or U.S.
Government-related, entities, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. Monthly payment of principal received
from the pool of underlying mortgages, including prepayments, is first returned
to investors holding the shortest maturity class. Investors holding the longer
maturity classes receive principal only after the first class has been retired.
An investor is partially protected against a sooner than desired return of
principal because of the sequential payments.
REMICs include governmental and/or private entities that issue a fixed
pool of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities. REMICs issued by private
entities are not U.S. Government securities and are not directly guaranteed by
any government agency. They are secured by the underlying collateral of the
private issuer.
STRUCTURED PRODUCTS. The Portfolio may purchase interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain debt obligations, thereby creating "structured
products." The cash flow on the underlying instruments may be apportioned among
the newly issued structured products to create securities with different
investment characteristics such as varying maturities, payment priorities and
interest rate provisions. THE EXTENT OF THE PAYMENTS MADE WITH RESPECT TO
STRUCTURED PRODUCTS IS DEPENDENT ON THE EXTENT OF THE CASH FLOW ON THE
UNDERLYING INSTRUMENTS.
The Portfolio may also invest in other types of structured products,
including among others, spread trades and notes linked by a formula (e.g., a
multiple) to the price of an underlying instrument or currency. A spread trade
is an investment position relating to a difference in the prices or interest
rates of two securities or currencies where the value of the investment position
is determined by movements in the difference between the prices or interest
rates, as the case may be, of the respective securities or currencies.
INVESTMENTS IN STRUCTURED PRODUCTS GENERALLY ARE SUBJECT TO GREATER
VOLATILITY THAN AN INVESTMENT DIRECTLY IN THE UNDERLYING MARKET OR SECURITY. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.
Additional Restrictions on the Use of Futures and Option Contracts.
Regulations of the CFTC require that the Portfolio enter into transactions in
futures contracts and options thereon for hedging purposes only, in order to
assure that they are not deemed to be a "commodity pools" under such
regulations. In particular, CFTC regulations require that all short futures
positions be entered into for the purpose of hedging the value of securities
held in the Portfolio's portfolio, and that all long futures positions either
constitute bona fide hedging transactions, as defined in such regulations, or
have a total value not in excess of an amount determined by reference to certain
cash and securities positions maintained for the Portfolio, and accrued profits
on such positions. In addition, the Portfolio may not purchase or sell such
instruments if, immediately thereafter, the sum of the amount of initial margin
deposits on its existing futures positions and premiums paid for options on
futures contracts would exceed 5% of the market value of the Portfolio's total
assets.
When the Portfolio purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with the Portfolio's custodian so that the amount so
segregated, plus the initial deposit and variation margin held in the account of
its broker, will at all times equal the value of the futures contract, thereby
insuring that the use of such futures is unleveraged.
The Portfolio's ability to engage in the hedging transactions described
herein may be limited by the current federal income tax requirement that the
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Portfolio derive less than 30% of its gross income from the sale or other
disposition of stock or securities held for less than three months.
Loans of Portfolio Securities. Certain securities dealers who make
"short sales" or who wish to obtain particular securities for short periods may
seek to borrow them from institutional investors such as the Portfolio. The
Portfolio reserves the right to seek to increase its income by lending its
portfolio securities. Under present regulatory policies, including those of the
Board of Governors of the Federal Reserve System and the SEC, such loans may be
made only to member firms of the New York Stock Exchange, and are required to be
secured continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis in an amount at least equal to the
market value of the securities loaned. Under a loan, the Portfolio has the right
to call a loan and obtain the securities loaned at any time on five days'
notice.
During the existence of a loan, the Portfolio continues to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and also receives compensation based on investment of the collateral. The
Portfolio does not, however, have the right to vote any securities having voting
rights during the existence of the loan, but can call the loan in anticipation
of an important vote to be taken among holders of the securities or of the
giving or withholding of their consent on a material matter affecting the
investment.
As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral if the borrower of the
securities experiences financial difficulty. However, the loans will be made
only to dealers deemed by the Portfolio to be of good standing, and when, in the
judgment of the Portfolio, the consideration that can be earned currently from
securities loans of this type justifies the attendant risk. In the event the
Portfolio makes securities loans, it is not intended that the value of the
securities loaned would exceed 30% of the value of the Portfolio's total assets.
Non-diversification. The Portfolio has registered as a
"non-diversified" investment company. The Portfolio may invest more than 5% of
its assets in the obligations of a single issuer, subject to diversification
requirements under federal tax laws. At present, these requirements do not
permit more than 25% of the value of the Portfolio's total assets to be invested
in securities (other than various securities issued or guaranteed by the United
States or its agencies or instrumentalities) of any one issuer, at the close of
any calendar quarter. Since a relatively high percentage of the assets of the
Portfolio may be invested in the obligations of a limited number of issuers, the
net asset value of the Portfolio may be more susceptible to any single economic,
political or regulatory occurrence than the net asset value of a diversified
investment company.
Investor approval is not required to change any of the investment
policies discussed above, except as otherwise noted herein and in Part A.
INVESTMENT RESTRICTIONS
The Portfolio has adopted the following investment restrictions which
may not be changed without the approval of a "majority of the outstanding voting
securities" of the Portfolio, which, under the 1940 Act and the rules thereunder
and as used herein means the lesser of (i) 67% or more of the total beneficial
interests of the Portfolio present at a meeting, if the holders of more than 50%
of the total beneficial interests of the Portfolio are present or represented by
proxy, or (ii) more than 50% of the total beneficial interests of the Portfolio.
The Portfolio may not:
(1) borrow money or pledge, mortgage or hypothecate its
assets, except through lending portfolio securities and except that, as
a temporary measure for extraordinary or emergency purposes it may
borrow in an amount not to exceed 1/3 of the current value of its net
assets, including the amount borrowed, and may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings
(it is intended that money would be borrowed by the Portfolio only from
banks and only to accommodate requests for the reductions of
investments in the Portfolio
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while effecting an orderly liquidation of portfolio securities),
provided that collateral arrangements with respect to the Portfolio's
permissible futures and options transactions, including initial and
variation margin, are not considered to be a pledge of assets for
purposes of this restriction; the Portfolio will not purchase
investment securities if its outstanding borrowing, including
repurchase agreements, exceeds 5% of the value of its total assets; for
additional related restrictions, see clause (i) under the caption
"State and Federal Restrictions" hereafter;
(2) purchase any security or evidence of interest therein on
margin, except that such short-term credit may be obtained as may be
necessary for the clearance of purchases and sales of securities and
except that, with respect to the Portfolio's permissible options and
futures transactions, deposits of initial and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures or options positions;
(3) underwrite securities issued by other persons except
insofar as the Portfolio may technically be deemed an underwriter under
the 1933 Act in selling a portfolio security;
(4) knowingly invest in securities which are subject to legal
or contractual restrictions on resale (including securities that are
not readily marketable, but not including repurchase agreements
maturing in not more than seven days) if, as a result thereof, more
than 10% of the Portfolio's total assets (taken at market value) would
be so invested (including repurchase agreements maturing in more than
seven days);
(5) purchase or sell real estate (including limited
partnership interests but excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts in the ordinary course of business,
other than (i) with respect to the Portfolio's permissible futures and
options transactions or (ii) forward purchases and sales of foreign
currencies or securities (the Portfolio reserves the freedom of action
to hold and to sell real estate acquired as a result of its ownership
of securities);
(6) purchase securities of any issuer if such purchase at the
time thereof would cause more than 10% of the voting securities of such
issuer to be held by the Portfolio;
(7) make short sales of securities or maintain a short
position, unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short, and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at any one
time (it is the present intention of management to make such sales only
for the purpose of deferring realization of gain or loss for federal
income tax purposes; such sales would not be made of securities subject
to outstanding options);
(8) concentrate its investments in any particular industry,
but if it is deemed appropriate for the achievement of the Portfolio's
investment objective, up to 25% of its assets at market value at the
time of each investment, may be invested in any one industry, except
that this restriction does not apply to U.S. Government securities (in
addition, so long as a single foreign government or supranational
organization is considered to be an "industry" for purposes of this 25%
limitation, the Portfolio will comply therewith), and except that, with
respect to the Portfolio's permissible futures and options
transactions, positions in options and futures shall not be subject to
this restriction; or
(9) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder, provided that
collateral arrangements with respect to permissible options and futures
transactions,
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including deposits of initial and variation margin, are not considered
to be the issuance of a senior security for purposes of this
restriction.
The Portfolio is not permitted to make loans to other persons, except
(i) through the lending of its portfolio securities and provided that any such
loans not exceed 30% of the Portfolio's total assets (taken at market value),
(ii) through the use of repurchase agreements or the purchase of short-term
obligations and provided that not more than 10% of the Portfolio's total assets
will be invested in repurchase agreements maturing in more than seven days, or
(iii) by purchasing, subject to the limitation in paragraph 5 above, a portion
of an issue of debt securities of types commonly distributed privately to
financial institutions, for which purposes the purchase of short-term commercial
paper or a portion of an issue of debt securities which are part of an issue to
the public shall not be considered the making of a loan.
In addition, the Portfolio may enter into repurchase agreements and has
adopted the following operating policy with respect to such activity, which is
not fundamental and which may be changed without investor approval. Repurchase
agreements (a purchase of and a simultaneous commitment to resell a security at
an agreed-upon price on an agreed-upon date) may be entered into only with
member banks of the Federal Reserve System and securities dealers believed
creditworthy and only if fully collateralized by U.S. Government obligations or
other securities in which the Portfolio is permitted to invest. If the
counterparty of a repurchase agreement fails to pay the sum agreed to on the
agreed-upon delivery date, the Portfolio would have the right to sell the
securities constituting the collateral; however, the Portfolio might thereby
incur a loss and in certain cases may not be permitted to sell such securities.
Moreover, as noted above in paragraph 5, the Portfolio may not, as a matter of
fundamental policy, invest more than 10% of its total assets in repurchase
agreements maturing in more than seven days.
The Portfolio has no current intention of making short sales of
securities or maintaining a short position.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain federal
and state statutes and regulatory policies, as a matter of operating policy, the
Portfolio will not: (i) sell any security which it does not own unless by virtue
of its ownership of other securities the Portfolio has at the time of sale a
right to obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions, (ii) invest for the
purpose of exercising control or management, (iii) purchase securities issued by
any registered investment company except by purchase in the open market where no
commission or profit to a sponsor or dealer results from such purchase other
than the customary broker's commission, or except when such purchase, though not
made in the open market, is part of plan of merger or consolidation; provided,
however, that the securities of any registered investment company will not be
purchased on behalf of the Portfolio if such purchase at the time thereof would
cause more than 5% or 10% of the Portfolio's total assets (taken at the greater
of cost or market value) to be invested in the securities of such issuer or the
securities of registered investment companies, respectively, or would cause more
than 3% of the outstanding voting securities of any such issuer to be held by
the Portfolio; and provided, further, that securities issued by any open-end
investment company shall not be purchased on behalf of the Portfolio, (iv)
invest more than 10% of the Portfolio's total assets (taken at the greater of
cost ormarket value) in securities that are not readily marketable, (v) as to
50% of its total assets, purchase securities of any issuer if such purchase at
the time thereof would cause the Portfolio to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, (vi) invest more than 5% of the Portfolio's assets in
companies which, including predecessors, have a record of less than three years'
continuous operation, (vii) invest in warrants valued at the lower of cost or
market, in excess of 5% of the value of the Portfolio's net assets, and no more
than 2% of such value may be warrants which are not listed on the New York or
American Stock Exchanges, or (viii) purchase or retain in the Portfolio's
portfolio any securities issued by an issuer any of whose officers, directors,
trustees or
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security holders is an officer or Trustee of the Portfolio, or is an officer or
director of the Adviser, if after the purchase of the securities of such issuer
by the Portfolio one or more of such persons owns beneficially more than 1/2 of
1% of the shares or securities, or both, all taken at market value, of such
issuer, and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or both,
all taken at market value. These policies are not fundamental and may be changed
by the Portfolio's Board of Trustees without investor approval.
PERCENTAGE AND RATING RESTRICTIONS: If a percentage or rating
restriction on investment or utilization of assets set forth above or referred
to in Part A is adhered to at the time an investment is made or assets are so
utilized, a later change in percentage resulting from changes in the value of
the portfolio securities or a later change in the rating of a portfolio security
of the Portfolio will not be considered a violation of policy.
The Portfolio will comply with all securities laws in each state and
foreign jurisdiction in which the shares or units of any investor in the
Portfolio are registered for sale.
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.
MARITIME ADMINISTRATION BONDS--are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FHA DEBENTURES--are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S. Government.
GNMA CERTIFICATES--are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government.
FHLMC BONDS--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
FNMA BONDS--are bonds issued and guaranteed by the Federal National
Mortgage Association. These bonds are not guaranteed by the U.S. Government.
FEDERAL HOME LOAN BANK NOTES AND BONDS--are notes and bonds issued by
the Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES AND BONDS--are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
Although this list includes a description of the primary types of U.S.
Government agency or instrumentality obligations in which the Portfolio intends
to invest, the Portfolio may invest in obligations of U.S. Government agencies
or instrumentalities other than those listed above.
BOND AND COMMERCIAL PAPER RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's corporate debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. Debt
rated
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"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree.
The rating "AA" may be modified by the addition of a plus or minus sign
to show relative standing within such category.
Moody's Bond Ratings
Excerpts from Moody's description of its corporate bond ratings: Aaa
- -judged to be the best quality, carry the smallest degree of investment risk; Aa
- -judged to be of high quality by all standards.
Fitch Investors Service Bond Ratings
AAA. Securities of this rating are regarded as strictly high-grade,
broadly marketable, suitable for investment by trustees and fiduciary
institutions, and liable to but slight market fluctuation other than through
changes in the money rate. The factor last named is of importance varying with
the length of maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public utility fields,
though some industrial obligations have this rating. The prime feature of an AAA
rating is showing of earnings several times or many times interest requirements
with such stability of applicable earnings that safety is beyond reasonable
question whatever changes occur in conditions. Other features may enter in, such
as a wide margin of protection through collateral security or direct lien on
specific property as in the case of high class equipment certificates or bonds
that are first mortgages on valuable real estate. Sinking funds or voluntary
reduction of the debt by call or purchase are often factors, while guarantee or
assumption by parties other than the original debtor may also influence the
rating.
AA. Securities in this group are of safety virtually beyond question,
and as a class are readily salable while many are highly active. Their merits
are not greatly unlike those of the AAA class, but a security so rated may be of
junior though strong lien--in many cases directly following an AAA security--or
the margin of safety is less strikingly broad. The issue may be the obligation
of a small company, strongly secured but influenced as to ratings by the lesser
financial power of the enterprise and more local type of market.
Standard & Poor's Commercial Paper Ratings
A is the highest commercial paper rating category utilized by S&P,
which uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
Moody's Commercial Paper Ratings
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to
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<PAGE>
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Fitch-1, Fitch-2, Duff 1 and Duff 2 Commercial Paper Ratings
Commercial paper rated "Fitch-1" is considered to be the highest grade
paper and is regarded as having the strongest degree of assurance for timely
payment. "Fitch-2" is considered very good grade paper and reflects an assurance
of timely payment only slightly less in degree than the strongest issue.
Commercial paper issues rated "Duff 1" by Duff & Phelps, Inc. have the
following characteristics: very high certainty of timely payment, excellent
liquidity factors supported by strong fundamental protection factors, and risk
factors which are very small. Issues rated "Duff 2" have a good certainty of
timely payment, sound liquidity factors and company fundamentals, small risk
factors, and good access to capital markets.
ITEM 14. MANAGEMENT OF THE PORTFOLIO.
The Trustees and officers of the Portfolio and their principal
occupations for at least the past five years are set forth below. Their titles
may have varied during that period. Asterisks indicate those Trustees who are
"interested persons" (as defined in the 1940 Act) of the Portfolio. Unless
otherwise indicated below, the address of each officer is 125 West 55th Street,
New York, New York 10019.
Names, Position(s) with Principal Occupations and Business Experience
the Portfolio and Address for the Past 5 Years
- ------------------------- ---------------------------------------------
Stuart W. Cragin, Jr. Retired; formerly, President, Fairfield Testing
Trustee Laboratory, Inc. He has previously served in a
108 Valley Road variety of marketing, manufacturing and general
Cos Cob, CT 06807 management positions with Union Camp Corp.,
Trinity Paper & Plastics Corp., and Conover
Industries.
Irving L. Thode Retired; Vice President of Quotron Systems. He
Trustee has previously served in a number of executive
80 Perkins Road positions with Control Data Corp., including
Greenwich, CT 06830 President of its Latin American Operations, and
General Manager of its Data Services business.
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H. Richard Vartabedian* Consultant, Republic Bank of New York; formerly,
Trustee and Chairman Senior Investment Officer, Division Executive of
P.O. Box 296 the Investment Management Division of The Chase
Beach Road, Hendrick's Head Manhattan Bank, N.A., 1980 through 1991.
Southport, ME 04576
Fergus Reid, III* Chairman of the Board of Trustees of Mutual Fund
Trustee Group and Mutual Fund Trust. Chairman and Chief
202 June Road Executive Officer, Lumelite Corporation, since
Stamford, CT 06840 September 1985; Trustee, Morgan Stanley
Portfolios; from 1982 through 1984, Managing
Director, Bernhard Associates (venture capital
firm).
John R.H. Blum Attorney in private practice; formerly Partner,
Trustee Richards, O'Neil & Allegaert (law firm);
1 John Street Commissioner of Agriculture, State of
Millerton, NY Connecticut.
The Board of Trustees met seven times during the twelve months ended December
31, 1995, and each of the Trustees attended at least 75% of those meetings.
The Board of Trustees of the Trust presently has an Audit Committee. The members
of the Audit Committee are Messrs. Vartabedian, Cragin, Thode and Reid. The
function of the Audit Committee is to recommend independent auditors and monitor
accounting and financial matters. The Audit Committee met two times during the
fiscal year ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.
Each Trustee is reimbursed for expenses incurred in attending each
meeting of the Board of Trustees or any committee thereof. Each Trustee who is
not an affiliate of the Adviser is compensated for his or her services according
to a fee schedule which recognizes the fact that each Trustee also serves as a
Trustee of other investment companies advised by the Adviser. Each Trustee
receives a fee, allocated among all investment companies for which the Trustee
serves, which consists of an annual retainer component and a meeting fee
component. Effective August 21, 1995, each Trustee of the Vista Funds receives a
quarterly retainer of $12,000 and an additional per meeting fee of $1,500. Prior
to August 21, 1995, the quarterly retainer was $9,000 and the per-meeting fee
was $1,000. The Chairman of the Trustees and the Chairman of the Investment
Committee each receive a 50% increment over regular Trustee total compensation
for serving in such capacities for all the investment companies advised by the
Adviser.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended October 31, 1995 for each Trustee of the Portfolio:
Compen- Pension or
sation Retirement
paid by Benefits Total
Growth & Accrued Compensation
Income as Fund from "Fund
Expenses Complex"(1)
Fergus Reid, III, Trustee $ 0 0 $78,456.65
H. Richard Vartabedian, Trustee $3750 0 74,804.44
Stuart W. Cragin, Jr., Trustee 0 0 52,304.39
Irving L. Thode, Trustee 0 0 52,304.39
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John R. H. Blum, Trustee 0 0 51,304.37
(1) Data reflects total compensation earned during the period January 1,
1995 to December 31, 1995 for service as a Trustee to all thirty-two
(Portfolios) Funds advised by the Adviser.
VISTA FUNDS RETIREMENT PLAN FOR ELIGIBLE TRUSTEES
Effective August 21, 1995, the Trustees also instituted a Retirement Plan for
Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not an
employee of the Adviser, Administrator or Distributor or any of their
affiliates) may be entitled to certain benefits upon retirement from the Board
of Trustees. Pursuant to the Plan, the normal retirement date is the date on
which the eligible Trustee has attained age 65 and has completed at least five
years of continuous service with one or more of the investment companies advised
by the Adviser (collectively, the "Covered Portfolios"). Each Eligible Trustee
is entitled to receive from the Covered Portfolios an annual benefit commencing
on the first day of the calendar quarter coincident with or following his date
of retirement equal to 10% of the highest annual compensation received from the
Covered Portfolios multiplied by the number of such Trustee's years of service
(not in excess of 10 years) completed with respect to any of the Covered
Portfolios. Such benefit is payable to each eligible Trustee in monthly
installments for the life of the Trustee.
Set forth in the table below are the estimated annual benefits payable to an
eligible Trustee upon retirement assuming various compensation and years of
service classifications. As of December 31, 1995, the estimated credited years
of service for Messrs. Reid, Blum, Vartabedian, Cragin, and Thode are 11, 11, 3,
3 and 3, respectively.
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<PAGE>
HIGHEST ANNUAL COMPENSATION PAID BY ALL VISTA FUNDS
40,000 45,000 50,000 55,000
YEARS OF
SERVICE ESTIMATED ANNUAL BENEFIT UPON RETIREMENT
10 40,000 45,000 50,000 55,000
9 36,000 40,500 45,000 49,500
8 32,000 36,000 40,000 44,000
7 28,000 31,500 35,000 38,500
6 24,000 27,000 30,000 33,000
5 20,000 22,500 25,000 27,500
Effective August 21, 1995, the Trustees instituted a Deferred Compensation Plan
for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which each
Trustee (who is not an employee of the Adviser, Administrator or Distributor or
any of their affiliates) may enter into agreements with the Funds whereby
payment of the Trustees' fees are deferred until the payment date elected by the
Trustee (or the Trustee's termination of service). The deferred amounts are
deemed invested in shares of a Fund on whose Board the Trustee sits, subject to
the Trustee's election. The deferred amounts are paid out in a lump sum or over
a period of several years as elected by the Trustee at the time of deferral. If
a deferring Trustee dies prior to the distribution of amounts held in the
deferral account, the balance of the deferral account will be distributed to the
Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death. The following Eligible
Trustees have executed a deferred compensation agreement for the 1996 calendar
year: Messrs. Thode and Vartabedian.
PRINCIPAL EXECUTIVE OFFICERS:
The principal executive officers of the Trust are as follows:
H. Richard Vartabedian - President and Trustee.
Martin R. Dean - Treasurer and Assistant Secretary; Vice President, BISYS
Portfolios Group, Inc.
Ann Bergin - Secretary and Assistant Treasurer; Vice President, BISYS Funds
Group, Inc.; Secretary, Vista Broker-Dealer Services, Inc.
OWNERSHIP OF SHARES OF THE PORTFOLIOS. The Trustees and officers as a group
directly or beneficially own less than 1% of the Portfolio.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liability to the Trust or its shareholders, it is finally adjudicated that
they engaged in wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices or with respect to any matter
unless it is finally adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust.
In the case of settlement, such indemnification will not be provided unless it
has been determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
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in wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
The Portfolio pays no direct remuneration to any officer of the Trust.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of January 31, 1996, December 31, 1993, Vista Global Fixed Income Fund
owned substantially all of the value of the outstanding interests in the
Portfolio. Because Vista Global Fixed Income Fund controls the Portfolio, Vista
Global Fixed Income Fund may take actions without the approval of any other
investor.
Vista Global Fixed Income Fund has informed the Portfolio that whenever
it is requested to vote on any proposal of the Portfolio, it will hold a meeting
of shareholders and will cast its vote as instructed by its shareholders. It is
anticipated that other investors in the Portfolio will follow the same or a
similar practice.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
ADVISER
The Adviser manages the assets of the Portfolio pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). Pursuant to the terms of the
Advisory Agreement, the Adviser provides the Portfolio with such investment
advice and supervision as it deems necessary for the proper supervision of the
Portfolio's investments. The Adviser continuously provides investment programs
and determines from time to time what securities shall be purchased, sold or
exchanged and what portion of the Portfolio's assets shall be held uninvested.
The Adviser furnishes, at its own expense, all services, facilities and
personnel necessary in connection with managing the investments and effecting
portfolio transactions for the Portfolio. The other expenses attributable to,
and payable by the Portfolio, are described under "Expenses" in Part A. The
Advisory Agreement will continue in effect from year to year only if such
continuance is specifically approved at least annually by the Board of Trustees
or by vote of a majority of the Portfolio's outstanding voting securities and,
in either case, by a majority of the Trustees who are not parties to the
Advisory Agreement or interested persons of any such party, at a meeting called
for the purpose of voting on the Advisory Agreement.
Pursuant to the terms of the Advisory Agreement, the Adviser is permitted
to render services to others. The Advisory Agreement is terminable without
penalty by the Portfolio on not more than 60 days', nor less than 30 days',
written notice when authorized either by a majority vote of the Portfolio's
beneficial interests or by a vote of a majority of the Board of Trustees, or by
the Adviser on not more than 60 days', nor less than 30 days', written notice,
and will automatically terminate in the event of its "assignment" (as defined in
the 1940 Act). The Advisory Agreement provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of portfolio
transactions for the Portfolio, except for wilful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties thereunder.
In consideration of the services provided by the Adviser pursuant to the
Advisory Agreement, the Portfolio pays an investment advisory fee computed and
paid monthly based on a rate equal to 0.75% of the Portfolio's average daily net
assets on an annualized basis for the Portfolio's then-current fiscal year.
However, the Adviser may voluntarily agree to waive a portion of the fee payable
to it on a month-to-month basis.
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<PAGE>
ADMINISTRATOR
See Part A for a general description of the services provided by Chase as
Administrator pursuant to its Administration Agreement with the Portfolio. The
Administrator provides certain administrative services, including, among other
responsibilities, coordinating the negotiation of contracts and fees with, and
the monitoring of performance and billing of, independent contractors and
agents; preparation for signature by an officer of all documents required to be
filed for compliance with applicable laws and regulations; arranging for the
computation of performance data, including net asset value and yield; responding
to investor inquiries, and arranging for the maintenance of books and records
and providing, at its own expense, office facilities, equipment and personnel
necessary to carry out its duties. The Administration Agreement provides that
the Administrator may render administrative services to others. The
Administration Agreement also provides that neither the Administrator nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission in the administration or management of the Portfolio, except for
wilful misfeasance, bad faith or gross negligence in the performance of its or
their duties or by reason of reckless disregard of its or their obligations and
duties under the Administration Agreement.
In consideration of the services provided by the Administrator pursuant to
the Administration Agreement, the Administrator receives a fee computed and paid
monthly at an annual rate equal to 0.05% of the Portfolio's average daily net
assets on an annualized basis for the Portfolio's then-current fiscal year. The
Administrator may voluntarily waive a portion of the fees payable to it on a
month-to-month basis.
TRANSFER AGENT AND CUSTODIAN
DST, Systems, Inc. ("DST") acts as the Portfolio's transfer agent (the
"Transfer Agent"). For its services as Transfer Agent, DST receives such
compensation as is from time to time agreed upon by the Portfolio and DST. DST's
address is 127 W. 10th Street, Kansas City, Missouri 64105. Pursuant to a
Custodian Agreement, Chase acts as the custodian of the Portfolio's assets, for
which Provident receives such compensation as is from time to time agreed upon
by the Portfolio and Chase. The responsibilities of the Custodian include
safeguarding and controlling the Portfolio's cash and securities, handling the
receipt and delivery of securities, determining income and collecting interest
on the Portfolio's investments, maintaining books of original entry for
Portfolio accounting and other required books and accounts, and calculating the
daily net asset value of beneficial interests in the Portfolio. Portfolio
securities and cash may be held by other sub-custodian banks if such
arrangements are reviewed and approved by the Trustees. The investment division
of Chase which serves as the Custodian does not determine the investment
policies of the Portfolio or decide which securities will be bought or sold on
behalf of the Portfolio or otherwise have access to or share material inside
information with the internal division that performs advisory services for the
Portfolio.
INDEPENDENT ACCOUNTANTS
Price Waterhouse, LLP, 1177 Avenue of the Americas, New York, New York
10036, independent accountants of the Portfolio, provides the Portfolio with
audit services, tax return preparation, and assistance and consultation with
respect to the preparation of filings with the SEC.
COUNSEL
Counsel to the Portfolio is Kramer, Levin, Naftalis, Nessen, Kamin &
Frankel, 919 Third Avenue, New York, New York 10022.
HONG KONG REPRESENTATIVE
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The Hong Kong Representative of the Portfolio is The Chase Manhattan
Bank, N.A. - Hong Kong branch, World Trade Center, 280 Gloucester Road, Causeway
Bay, Hong Kong. Copies of this Registration Statement, including exhibits, may
be inspected free of charge at the office of the Hong Kong Representative.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
Specific decisions to purchase or sell securities for the Portfolio are
made by a portfolio manager who is an employee of the Adviser and who is
appointed and supervised by senior officers of the Adviser. Changes in the
Portfolio's investments are reviewed by the Board of Trustees. The portfolio
manager may serve other clients of the Adviser in a similar capacity. Money
market instruments are generally purchased in principal transactions without
payment of brokerage commissions.
The frequency of portfolio transactions--portfolio turnover rate--will
vary from year to year depending upon market conditions. Because a high turnover
rate may increase the Portfolio's transaction costs and the possibility of
taxable short-term gains (see "Tax Status" herein), the Adviser will weigh the
added costs of short-term investment against anticipated gains. The portfolio
turnover rate for the Portfolio for the period December 31, 1992 through October
31, 1993, the period November 1, 1993 through October 31, 1994 and the fiscal
year ended October 31, 1995 was 456%, 345% and 624%, respectively .
The primary consideration in placing portfolio security transactions
with broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Portfolio and
other clients of the Adviser on the basis of their professional capability, the
value and quality of their brokerage services, and the level of their brokerage
commissions. Debt securities are traded principally in the over-the-counter
market through dealers acting on their own account and not as brokers. In the
case of securities traded in the over-the-counter market (where no stated
commissions are paid but the prices include a dealer's markup or markdown), the
Adviser normally seeks to deal directly with the primary market makers unless,
in its opinion, best execution is available elsewhere. In the case of securities
purchased from underwriters, the cost of such securities generally includes a
fixed underwriting commission or concession. From time to time, soliciting
dealer fees are available to the Adviser on the tender of portfolio securities
in so-called tender or exchange offers. Such soliciting dealer fees are in
effect recaptured for the Portfolio by the Adviser. At present, no other
recapture arrangements are in effect.
Under the Portfolio's Advisory Agreement and as permitted by Section 28(e)
of the Securities Exchange Act of 1934, the Adviser may cause the Portfolio to
pay a broker-dealer which provides brokerage and research services to the
Adviser an amount of commission for effecting a securities transaction for the
Portfolio in excess of the amount other broker-dealers would have charged for
the transaction if the Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing broker-dealer viewed in terms of either a
particular transaction or the Adviser's overall responsibilities to the
Portfolio or to its clients. Not all of such services are useful or of value in
advising the Portfolio.
The term "brokerage and research services" includes advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers of
securities, furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Adviser, be reasonable in relation to the value of the brokerage services
B-22
<PAGE>
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Portfolio and the Adviser's other clients as part of providing advice as to
the availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Adviser for no consideration
other than brokerage or underwriting commissions. Securities may be bought or
sold through such broker-dealers, but at present, unless otherwise directed by
the Portfolio, a commission higher than one charged elsewhere will not be paid
to such a firm solely because it provided Research to the Adviser.
The Adviser's investment management personnel will attempt to evaluate
the quality of Research provided by brokers. Results of this effort are
sometimes used by the Adviser as a consideration in the selection of brokers to
execute portfolio transactions. However, the Adviser would be unable to quantify
the amount of commissions which are paid as a result of such Research because a
substantial number of transactions are effected through brokers which provide
Research but which are selected principally because of their execution
capabilities.
The management fees that the Portfolio pays to the Adviser will not be
reduced as a consequence of the Adviser's receipt of brokerage and research
services. To the extent the Portfolio's portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Portfolio will
exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services would be useful and of value to the Adviser
in serving the Portfolio and other clients and, conversely, such services
obtained by the placement of brokerage business of other clients would be useful
to the Adviser in carrying out its obligations to the Portfolio. While such
services are not expected to reduce the expenses of the Adviser, the Adviser
would, through use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its own
staff.
In certain instances, there may be securities that are suitable for the
Portfolio as well as one or more of the Adviser's other clients. Investment
decisions for the Portfolio and for the Adviser's other clients are made with a
view to achieving their respective investment objectives. It may develop that
the same investment decision is made for more than one client or that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When the Portfolio or one or more other clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Portfolio is
concerned. However, it is believed that the ability of the Portfolio to
participate in volume transactions will generally produce better executions for
the Portfolio.
For the period December 31, 1992 through October 31, 1993 and November 1,
1993 through October 31, 1994 and the fiscal year ended October 31, 1995, the
Portfolio paid no brokerage commissions .
No securities transactions are executed with the Adviser, or with any
affiliate of the Adviser, acting either as principal or as broker. Similarly, no
securities transactions are executed with any person or entity which directly or
indirectly controls a beneficial interest in the Portfolio equal to 20% or more
of the net asset value of the Portfolio.
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<PAGE>
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees of the Portfolio if they
choose to do so and in such event the other investors in the Portfolio would not
be able to elect any Trustee. The Portfolio is not required to hold annual
meetings of investors but the Portfolio will hold special meetings of investors
when in the judgment of the Portfolio's Trustees it is necessary or desirable to
submit matters for an investor vote. No material amendment may be made to the
Portfolio's Declaration of Trust without the affirmative majority vote of
investors (with the vote of each being in proportion to the amount of its
investment).
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two-thirds of its
investors (with the vote of each being in proportion to the amount of their
investment), except that if the Trustees of the Portfolio recommend such sale of
assets, the approval by vote of a majority of the investors (with the vote of
each being in proportion to the amount of its investment) will be sufficient.
The Portfolio may also be terminated (i) upon liquidation and distribution of
its assets, if approved by the vote of two-thirds of its investors (with the
vote of each being in proportion to the amount of its investment), or (ii) by
the Trustees of the Portfolio by written notice to its investors.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the
Portfolio are not binding upon the Trustees individually but only upon the
property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. The Declaration of Trust provides
that the trustees and officers will be indemnified by the Portfolio against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Portfolio, unless, as to
liability to the Portfolio or its investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or unless with respect to any
other matter it is finally adjudicated that they did not act in good faith in
the reasonable
B-24
<PAGE>
belief that their actions were in the best interests of the Portfolio. In the
case of settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
The Portfolio will continue in existence until 20 years after the death of
the last survivor of certain specified individuals listed in its Declaration of
Trust unless it is terminated or dissolved earlier in accordance with the
provisions of that Declaration.
The Portfolio will furnish to each of its investors at least annually as
of the end of its fiscal year a report of operations containing a balance sheet
and a statement of income prepared in conformity with generally accepted
accounting principles and an opinion of an independent public accountant on such
financial statements. The Portfolio will also furnish to each of its investors
at least semiannually an interim report of operations containing an unaudited
balance sheet and an unaudited statement of income.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. See "Purchase of Securities" and
"Redemption or Repurchase" in Part A.
The Portfolio's portfolio securities and other assets are valued as
follows:
Equity securities are valued at the last sale price on the exchange on
which they are primarily traded or on the NASDAQ system for unlisted national
market issues, or at the last quoted bid price for securities in which there
were no sales during the day or for unlisted securities not reported on the
NASDAQ system. Bonds and other fixed income securities (other than short-term
obligations, but including listed issues) are valued on the basis of valuations
furnished by a pricing service, the use of which has been approved by the Board
of Trustees. In making such valuations, the pricing service utilizes both
dealer-supplied valuations and electronic data processing techniques that take
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data, without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-term obligations which mature in 60 days or less are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Futures and option contracts that are traded on commodities or securities
exchanges are normally valued at the settlement price on the exchange on which
they are traded. Portfolio securities (other than short-term obligations) for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Interest income on long-term obligations is determined on the basis of
interest accrued plus amortization of discount (generally, the difference
between issue price and stated redemption price at maturity) and premiums
(generally, the excess of purchase price over stated redemption price at
maturity). Interest income on short-term obligations is determined on the basis
of interest and discount accrued less amortization of premium.
Any assets or liabilities initially denominated in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes
B-25
<PAGE>
into account the quotes provided by a number of such major banks. If neither of
these alternatives is available or both are deemed not to provide a suitable
methodology for converting a foreign currency into U.S. dollars, the Board of
Trustees, in good faith, will establish a conversion rate for such currency.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each day that the New York Stock Exchange is open for business.
As of 4:00 p.m. (Eastern time) on each such day, the value of each investor's
interest in the Portfolio will be determined by multiplying the net asset value
of the Portfolio by the percentage representing that investor's share of the
aggregate beneficial interests in the Portfolio. Any additions or reductions
which are to be effected on that day will then be effected. The investor's
percentage of the aggregate beneficial interests in the Portfolio will then be
recomputed as the percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Portfolio as of 4:00 p.m. on such
day plus or minus, as the case may be, the amount of net additions to or
reductions in the investor's investment in the Portfolio effected on such day
and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 p.m. on such day plus or minus, as the case may be, the
amount of net additions to or reductions in the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of 4:00 p.m. on the following day the New York Stock Exchange is
open for trading.
The Portfolio reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making payment in
whole or in part in readily marketable securities chosen by the Portfolio and
valued as they are for purposes of computing the Portfolio's net asset value (a
redemption in kind). If payment is made in securities, an investor may incur
transaction expenses in converting these securities into cash.
The Portfolio will not redeem in kind except in circumstances in which the
owner of a beneficial interest in the Portfolio is permitted to redeem in kind
or unless requested by such owner.
ITEM 20. TAX STATUS.
Taxation of the Portfolio. The Portfolio is not subject to federal income
taxation. Instead, the investors in the Portfolio must take into account, in
computing their federal income tax liability, their share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether they have received any cash distributions from the Portfolio.
The Portfolio is not subject to any income or franchise tax in the State of New
York or the Commonwealth of Massachusetts.
Distributions received by investors in the Portfolio generally will not
result in the investor's recognizing any gain or loss for federal income tax
purposes, except that (1) gain will be recognized to the extent that any cash
distributed exceeds the investor's basis in its interest in the Portfolio prior
to the distribution, (2) income or gain may be realized if the distribution is
made in liquidation of the investor's entire interest in the Portfolio and
includes a disproportionate share of any unrealized receivables held by the
Portfolio, and (3) loss may be recognized if the distribution is made in
liquidation of the investor's entire interest in the Portfolio and consists
solely of cash and/or unrealized receivables. The investor's basis in its
interest in the Portfolio generally will equal the amount of cash and the basis
of any property which the investor invests in the Portfolio, increased by the
investor's share of income from the Portfolio, and decreased by the amount of
any cash distributions and the basis of any property distributed from the
Portfolio.
The Portfolio will not be required to pay any federal income or excise
tax.
Income received by the Portfolio from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
B-26
<PAGE>
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Portfolio's assets to be invested
in various countries will vary.
If the Portfolio is liable for foreign taxes, and if more than 50% of
the value of the Portfolio's total assets at the close of its taxable year
consists of securities of foreign corporations, it may make an election pursuant
to which certain foreign taxes paid by it would be treated as having been paid
directly by shareholders of the entities which have invested in the Portfolio.
Pursuant to such election, the amount of foreign taxes paid will be included in
the income of such shareholders, and such shareholders (except tax-exempt
shareholders) may, subject to certain limitations, claim either a credit or
deduction for the taxes.
The amount of foreign taxes for which an investor may claim a credit in
any year will generally be subject to a separate limitation for "passive
income", which includes, among other items of income, dividends, interest and
certain foreign currency gains. Because capital gains realized by the Portfolio
on the sale of foreign securities will be treated as U.S.-source income, the
available credit of foreign taxes paid with respect to such gains may be
restricted by this limitation.
Foreign Withholding Taxes. Income received by the Portfolio from
sources within foreign countries may be subject to withholding and other taxes
imposed by such countries.
Foreign Investors. The tax consequences to a foreign investor of an
investment in the Portfolio may be different from those described herein.
Foreign investors are advised to consult their own tax advisers with respect to
the particular tax consequences to a foreign investor of an investment in the
Portfolio.
It is not expected that any Hong Kong or principal taxes will be levied on
the Portfolio's income or capital, or on an investor in the Portfolio upon a
reduction in or redemption of the beneficial interest of that investor.
ITEM 21. UNDERWRITERS.
Not applicable.
ITEM 22. CALCULATION OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The audited financial statements for the fiscal year ended October 31,
1995 of the Portfolio are incorporated herein by reference to the Portfolio's
annual report to shareholders as filed with the Securities and Exchange
Commission by Mutual Fund Group on Form N-30D on December 29, 1995, accession
number 0000950123-95-003915.
B-27
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
Not applicable
FINANCIAL STATEMENTS INCLUDED IN PART B:
The audited financial statements for the fiscal year ended October
31, 1995 of the Portfolio are incorporated herein by reference to the
Portfolio's annual report to shareholders as filed with the
Securities and Exchange Commission by Mutual Fund Group on Form N-30D
on December 29, 1995, accession number 0000950123-95-003915.
FINANCIAL STATEMENTS INCLUDED IN PART C:
None.
(B) EXHIBITS:
1 Declaration of Trust.1
2 By-Laws.1
5 Investment Advisory Agreement.1
8(a) Custodian Agreement.2
8(b) Sub-Custodian Agreement.2
9 Administrative Services Agreement.1
10. Consent of Kramer, Levin, Naftalis, Nessen, Kamin &
Frankel 3
- ----------------------
1Previously filed on December 24, 1992.
2Previously filed on February 1, 1993.
3Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
Not applicable
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF FEBRUARY 1, 1996
Beneficial Interests One
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust.
C-1
<PAGE>
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser and administrator are insured under an errors
and omissions liability insurance policy. The Registrant and its officers are
also insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Chase Manhattan Bank, N.A. (the "Adviser") is a commercial
bank providing a wide range of banking and investment services.
To the knowledge of the Registrant, none of the directors or executive
officers of the Adviser, except those described below, are or have been, at any
time during the past two years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain directors
and executive officers of the Adviser also hold or have held various positions
with bank and non-bank affiliates of the Adviser, including its parent, The
Chase Manhattan Corporation. Each director listed below is also a director of
The Chase Manhattan Corporation.
Principal Occupation or Other
Position with the Employment of a Substantial Nature
Name Adviser During the Past Two Years
- ----------------- ----------------- -----------------------------------
Thomas G. Labreque Chairman of the Chairman, Chief Executive Officer
Board, Chief and a Director of The Chase
Executive Officer Manhattan Corporation and a
and Director Director of AMAX, Inc.
Richard J. Boyle Vice Chairman of the Vice Chairman of the Board and a
Board and Director Director of The Chase Manhattan
Corporation and a Trustee of
Prudential Realty Trust
Robert R. Douglass Vice Chairman of the Vice Chairman of the Board and a
Board and Director Director of The Chase Manhattan
Corporation and Trustee of HRE
Properties
Joan Ganz Cooney Director Chairman of the Executive Committee
of the Board of Trustees, formerly
Chief Executive Officer, of
Children's Television Workshop and
a Director of each of Johnson &
Johnson, Metropolitan Life
Insurance Company and Xerox
Corporation
Edward S. Finkelstein Director Retired Chairman and Chief
Executive Officer and Director of
R. H. Macy & Co., Inc.; and a
Director of Time Warner Inc.
H. Laurance Fuller Director Chairman, President, Chief
Executive Officer and Director of
Amoco Corporation and Director of
Abbott Laboratories
Howard C. Kauffman Director Retired President of Exxon
Corporation and a Director of each
of Pfizer Inc. and Ryder System,
Inc.
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<PAGE>
Paul W. MacAvoy Director Dean of the Yale School of
Organization and Management
David T. McLaughlin Director President and Chief Executive
Officer of The Aspen Institute,
Chairman of Standard Fuse
Corporation and a Director of each
of ARCO Chemical Company and
Westinghouse Electric Corporation
Edmund T. Pratt, Jr. Director Chairman Emeritus, formerly
Chairman and Chief Executive
Officer, of Pfizer Inc. and a
Director of each of Pfizer Inc.,
Celgene Corp., General Motors
Corporation and International Paper
Company
Henry B. Schacht Director Chairman and Chief Executive
Officer of Cummins Engine Company,
Inc. and a Director of each of
American Telephone and Telegraph
Company and CBS Inc.
A. Alfred Taubman Director Chairman and Director, formerly
also Chief Executive Officer, of
The Taubman Company, Inc., majority
shareholder and chairman of
Sotheby's Holdings, Inc., owner of
Woodward & Lothrop, Inc. and its
subsidiary, John Wanamaker, and
Chairman of A&W Restaurants, Inc.
and a Director of R.H. Macy & Co.,
Inc.
Donald H. Trautlein Director Retired Chairman and Chief
Executive Officer of Bethlehem
Steel Corporation and a Director of
each of Data General Corporation
and Phoenix Re Corporation
Kay R. Whitmore Director Chairman of the Board, President
and Chief Executive Officer and
Director of Eastman Kodak Company
C-3
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
DST Systems, Inc. 21 W. 10th Street
(transfer agent) Kansas City, MO 64105
The Chase Manhattan Bank, N.A. 1211 Avenue of the Americas
(investment adviser administrator New York, New York 10089
and custodian)
Signature Broker-Dealer Services, Inc. 6 St. James Avenue, Suite 900
(exclusive placement agent) Boston, MA 02116
ITEM 31. MANAGEMENT SERVICES.
Not applicable
ITEM 32. UNDERTAKINGS.
Not applicable
C-4
<PAGE>
SIGNATURES
Global Fixed Income Portfolio has duly caused this amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of New York, on the 21st day of February 1996.
GLOBAL FIXED INCOME PORTFOLIO
By /s/ H. Richard Vartabedian
--------------------------
H. Richard Vartabedian, Chairman
This amendment to the Registration Statement on Form N-1A of Global
Fixed Income Portfolio has been signed below by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
/s/ H. Richard Vartabedian Chairman and Trustee February 21, 1996
- --------------------------
H. Richard Vartabedian
/s/ Stuart W. Cragin, Jr. Trustee February 21, 1996
- -------------------------
Stuart W. Cragin, Jr.
/s/ Fergus Reid, III Trustee February 21, 1996
- --------------------
Fergus Reid, III
/s/ Irving L. Thode Trustee February 21, 1996
- --------------------
Irving L. Thode
/s/ William T. Armstrong Trustee February 21, 1996
- ------------------------
William T. Armstrong
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EXHIBIT INDEX
EXHIBIT NUMBER
(10) Consent of Kramer, Levin, Naftalis,
Nessen, Kamin & Frankel
Exhibit No. 10
Consent of Kramer, Levin, Naftalis,
Nessen, Kamin & Frankel
<PAGE>
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
9 1 9 T H I R D A V E N U E
NEW YORK, N.Y. 10022 3852
(212) 715 9100
FAX
(212) 715-8000
______
WRITER'S DIRECT NUMBER
(212) 715-9100
February 27, 1996
Global Fixed Income Portfolio
125 West 55th Street
New York, New York 10019
Re:Registration Statement on Form N-1A
File No. 811-7392
Gentlemen:
We hereby consent to the reference of our firm as counsel in this Registration
Statement on Form N-1A.
Very truly yours,
/s/Kramer, Levin, Naftalis, Nessen,
Kamin & Frankel
