As Filed with the Securities and Exchange Commission on September 28, 2000
File No. 811-07880
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 8
THE U.S. EQUITY PORTFOLIO (formerly THE SELECTED U.S. EQUITY PORTFOLIO)
(Exact Name of Registrant as Specified in Charter)
(Address of Principal Executive Offices)
60 State Street, Suite 1300, Boston, Massachusetts 02109
Registrant's Telephone Number, Including Area Code: (800) 221-7930
Margaret W. Chambers, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: John E. Baumgardner, Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. However, beneficial
interests in the Registrant are not being registered under the Securities Act of
1933, as amended (the "1933 Act"), because such interests will be issued solely
in private placement transactions that 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 other investment companies, insurance company
separate accounts, common or commingled trust funds or similar organizations or
entities that are "accredited investors" within the meaning of 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.
PART A
Responses to Items 1,2,3,5 and 9 have been omitted pursuant to paragraph 2(b) of
Instruction B of the General Instructions to Form N-1A.
Item 4. Investment Objectives, Principal Investment Strategies, and Related
Risks
Investment Objective
The Portfolio's goal is to provide high total return from a portfolio of
selected equity securities. This goal can be changed without investor approval.
PRINCIPAL STRATEGIES AND RELATED RISKS
The Portfolio invests primarily in large- and medium-capitalization U.S.
companies. Industry by industry, the Portfolio's weightings are similar to those
of the Standard & Poor's 500 Stock Index (S&P 500). The Portfolio can moderately
underweight or overweight industries when it believes it will benefit
performance.
Within each industry, the Portfolio focuses on those stocks that are ranked as
most undervalued according to the investment process described above. The
Portfolio generally considers selling stocks that appear overvalued.
There can be no assurance that the investment objective of the
Portfolio will be achieved. Future returns will not necessarily resemble past
performance. The portfolio does not represent a complete investment program.
The value of an investment in the Portfolio will fluctuate in response to
movements in the stock market. Performance will also depend on the effectiveness
of J.P. Morgan's research and the management team's stock picking decisions.
By emphasizing undervalued stocks, the Portfolio has the potential to produce
returns that exceed those of the S&P 500. At the same time, by controlling the
industry weightings of the Portfolio so they can differ only moderately from the
industry weightings of the S&P 500, the Portfolio seeks to limit its volatility
to that of the overall market, as represented by this index.
INVESTMENT PROCESS
In managing the Portfolio, J.P. Morgan employs a three-step process:
RESEARCH J.P. Morgan takes an in-depth look at company prospects over a
relatively long period - often as much as five years - rather than focusing on
near-term expectations. This approach is designed to provide insight into a
company's real growth potential. J.P. Morgan's in-house research is developed by
an extensive worldwide network of over 125 career equity analysts. The team of
analysts dedicated to U.S. equities includes more than 20 members, with an
average of over ten years of experience.
VALUATION The research findings
allow J.P. Morgan to rank the companies in each industry group according to
their relative value. The greater a company's estimated worth compared to the
current market price of its stock, the more undervalued the company. The
valuation rankings are produced with the help of a variety of models that
quantify the research team's findings.
STOCK SELECTION The Portfolio buys and sells stocks according to its own
policies, using the research and valuation rankings as a basis. In general, the
management team buys stocks that are identified as undervalued and considers
selling them when they appear overvalued. Along with attractive valuation, the
Portfolio's managers often consider a number of other criteria:
- catalysts that could trigger a rise in a stock's price - high potential reward
compared to potential risk - temporary mispricings caused by market
overreactions
The value of the Portfolio will fluctuate over time. You could lose money if you
sell when the Portfolio's price is lower than when you invested. There is no
assurance that the Portfolio will meet its investment goal. Future returns will
not necessarily resemble past performance.
This table discusses the main elements that make up the
Portfolio's overall risk and reward characteristics. It also outlines the
Portfolio's policies toward various securities, including those that are
designed to help the Portfolio manage risk.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------
POTENTIAL RISKS POLICIES TO BALANCE RISK
------------------------------------------------------------------------
MARKET CONDITIONS
-The Portfolio's price, -Under normal circumstances
yield, and total return the Portfolio plans to
will fluctuate in response remain fully invested with at
to stock market movements least 65% in U.S. small company
stocks; stock investments may
-Adverse market conditions include U.S. and foreign common
may from time to time cause stocks, convertible securities,
the Portfolio to take preferred stocks, trust or
temporary defensive positions partnership interests, warrants,
that are inconsistent with rights, and investment company
its principal investment securities.
strategies and may hinder
the Portfolio from achieving
its investment objective
-The Portfolio seeks to limit
risk through diversification.
-During severe market downturns,
the Portfolio has the option
of investing up to100% of assets
in investment-grade short-term securities.
MANAGEMENT CHOICES
-The Portfolio could - J.P. Morgan focuses its active
underperform its management on securities selection,
benchmark due to its the area where it believes its
securities and asset commitment to research can most
allocation choices enhance returns
FOREIGN INVESTMENTS
-The Portfolio could lose -The Portfolio anticipates that
money because of foreign its total foreign investments
government actions, will not exceed 20% of assets
political instability,
or lack of adequate and
accurate information -The Portfolio actively manages
the currency exposure of its
-Currency exchange rate foreign investments relative to
movements could reduce its benchmark, and may hedge back
gains or create losses into the U.S. dollar from time to time (see also
"Derivatives")
DERIVATIVES
-Derivatives such as -The Portfolio uses derivatives
futures, options, swaps for hedging and for risk management
and foreign currency (i.e., to adjust duration or to
forward contracts that establish or adjust exposure to
are used for hedging the particular securities, markets, or
portfolio or specific currencies); risk management may
securities may not fully include management of the
offset the underlying Portfolio's exposure relative
positions (1) to its benchmark
-Derivatives used for
risk management may not
have the intended effects
and may result in losses
or missed opportunities
-The counterparty to a -The Portfolio only establishes
derivatives contract hedges that it expects will be
could default correlated with underlying positions
-Derivatives that involve
leverage could magnify highly
losses -While the Portfolio may use
derivatives that incidentally
involve leverage, it does not use
</TABLE>
them for the specific purpose of leveraging the Portfolio
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash payment
based on the value of a securities index. An option is the right to buy or sell
securities that is granted in exchange for an agreed-upon sum. A swap is a
privately negotiated agreement to exchange one stream of payments for another. A
foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
ILLIQUID HOLDINGS
-The Portfolio could -The Portfolio may not invest
have difficulty valuing more than 15% of net
holdings precisely assets in illiquid holdings
-The Portfolio could be -To maintain adequate liquidity
unable to sell these to meet redemptions, the Portfolio
holdings at the time may hold investment-grade
or price it desires short-term securities (including
repurchase agreements) and,
for temporary or extraordinary
purposes, may borrow from banks
up to 33 1/3% of the value of its
assets
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
-When the Portfolio buys The Portfolio uses segregated
securities before issue accounts to offset leverage risk
or for delayed delivery,
it could be exposed to
leverage risk if it
does not use segregated
accounts
SHORT-TERM TRADING
-Increased trading would raise -The Portfolio anticipates
the Portfolio's a portfolio turnover
brokerage and related rate of approximately 100%
costs
-Increased short-term -The Portfolio generally
capital gains avoids short-term trading
distributions would except attractive or
to take advantage of unexpected opportunities or
raise shareholders' to meet demands generated by
income tax liability shareholder activity
ITEM 5. MANAGEMENT OF THE PORTFOLIO.
The Portfolio is advised by J.P. Morgan Investment Management Inc. ("JPMIM"
or the "Advisor").
Subject to the supervision of the Portfolio's Trustees, the Advisor makes the
Portfolio's day-to-day investment decisions, arranges for the execution of
portfolio transactions and generally manages the Portfolio's investments.
Effective October 1, 1998 the Portfolio's Investment Advisor is JPMIM. Prior to
that date, Morgan was the Investment Advisor.
JPMIM, a wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("J.P.
Morgan"), is a registered investment adviser under the Investment Advisers Act
of 1940, as amended, and manages employee benefit funds of corporations, labor
unions and state and local governments and the accounts of other institutional
investors, including investment companies. Certain of the assets of employee
benefit accounts under its management are invested in commingled pension trust
funds for which Morgan serves as trustee.
J.P. Morgan, through the Advisor and other subsidiaries, acts as investment
advisor to individuals, governments, corporations, employee benefit plans,
mutual funds and other institutional investors with combined assets under
management of approximately $369 billion.
The basis of the Advisor's
investment process is fundamental investment research as the firm believes that
fundamentals should determine an asset's value over the long term. J.P. Morgan
currently employs over 100 full time research analysts, among the largest
research staffs in the money management industry, in its investment management
divisions located in New York, London, Tokyo, Frankfurt and Singapore to cover
companies, industries and countries on site. In addition, the investment
management divisions employ approximately 300 capital market researchers,
portfolio managers and traders. The conclusions of the equity analysts'
fundamental research is quantified into a set of projected returns for
individual companies through the use of a dividend discount model. These returns
are projected for 2 to 5 years to enable analysts to take a longer term view.
These returns, or normalized earnings, are used to establish relative values
among stocks in each industrial sector. These values may not be the same as the
markets' current valuations of these companies. This provides the basis for
ranking the attractiveness of the companies in an industry according to five
distinct quintiles or rankings. This ranking is one of the factors considered in
determining the stocks purchased and sold in each sector.
The investment advisory services the Advisor provides to the Portfolios are not
exclusive under the terms of the Advisory Agreements. The Advisor is free to and
does render similar investment advisory services to others. The Advisor serves
as investment advisor to personal investors and other investment companies and
acts as fiduciary for trusts, estates and employee benefit plans. Certain of the
assets of trusts and estates under management are invested in common trust funds
for which the Advisor serves as trustee. The accounts which are managed or
advised by the Advisor have varying investment objectives and the Advisor
invests assets of such accounts in investments substantially similar to, or the
same as, those which are expected to constitute the principal investments of the
Portfolios. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolio.
Morgan, also a wholly owned subsidiary of J.P. Morgan, is a bank holding company
organized under the laws of the State of Delaware. Morgan, whose principal
offices are at 60 Wall Street, New York, New York 10260, is a New York trust
company which conducts a general banking and trust business. Morgan is subject
to regulation by the New York State Banking Department and is a member bank of
the Federal Reserve System. Through offices in New York City and abroad, Morgan
offers a wide range of services, primarily to governmental, institutional,
corporate and high net worth individual customers in the United States and
throughout the world.
The Portfolio is managed by officers of the Advisor who, in acting for their
customers, including the Portfolio, do not discuss their investment decisions
with any personnel of J.P. Morgan or any personnel of other divisions of the
Advisor or with any of its affiliated persons, with the exception of certain
investment management affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as salaries
of advisory personnel borne by the Advisor under the Advisory Agreements, the
Portfolio corresponding has agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to the annual rate of 0.40% of the
Portfolio's average daily net assets.
The portfolio management team is led comprised of 23 research analysts, who
select stocks in their respective sectors. Henry D. Cavanna, managing director,
and Bradford L. Frisberg, vice president, oversee the portfolio and manage its
cash flows. Mr. Cananna joined the team in February of 1998, and has been at
J.P. Morgan since 1971. He served as manager of U.S. equity portfolios prior to
managing the fund. Mr. Frishberg has been at J.P. Morgan since 1996 and is a
portfolio manager in the equity and balanced groups. Prior to joining J.P.
Morgan, he managed portfolios for Aetna Investment Management in Hong Kong.
ITEM 6 MANAGEMENT, ORGANIZATION, AND CAPITAL STRUCTURE.
The U.S. Equity Portfolio (the "Portfolio") is a diversified open-end management
investment company which was organized as a trust under the laws of the State of
New York on January 29, 1993. Beneficial interests in the Portfolio are issued
solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the Securities Act of 1933, as
amended (the "1933 Act"). Investments in the Portfolio may only be made by other
investment companies, insurance company separate accounts, common or commingled
trust funds or similar organizations or entities that are "accredited investors"
within the meaning of 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.
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs approximately 420 analysts and portfolio
managers around the world and has approximately $369 billion in assets under
management, including assets managed by the Portfolio's advisor, JPMIM.
U.S. EQUITY MANAGEMENT APPROACH
The U.S. Equity Portfolio invests primarily in U.S. stocks.
The Portfolio's investment philosophy, developed by its advisor,
focuses on stock picking while largely avoiding sector or market-timing
strategies. Also, under normal market conditions, the Portfolio will remain
fully invested.
MANAGEMENT AND ADMINISTRATION
The Board of Trustees provides broad supervision over the affairs of the
Portfolio Trust. The Portfolio Trust has retained the services of JPMIM as
investment adviser and Morgan as administrative services agent. The Portfolio
Trust has retained the services of Funds Distributor, Inc. ("FDI") as
co-administrator (the "Co-Administrator").
The Portfolio has not retained the services of a principal underwriter or
distributor, since interests in the Portfolio are offered solely in private
placement transactions. FDI, acting as agent for the Portfolio, serves as
exclusive placement agent of interests in the Portfolio. FDI receives no
additional compensation for serving as exclusive placement agent to the
Portfolio.
The Portfolio Trust has entered into a Portfolio Fund Services Agreement with
Pierpont Group to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio Trust's affairs. Pierpont Group was organized
in July 1989 to provide services for The Pierpont Family of Funds (now the J.P.
Morgan Family of Funds), and the Trustees are the equal and sole shareholders of
Pierpont Group. The Portfolios have agreed to pay Pierpont Group a fee in an
amount representing its reasonable costs in performing these services to the
Portfolio Trust and certain other registered investment companies subject to
similar agreements with Pierpont Group. See Item 14 in Part B The principal
offices of Pierpont Group, Inc. are located at 461 Fifth Avenue, New York, New
York 10017.
Advisory services 0.40% of the portfolio's average net assets
Administrative services Portfolio's pro-rata portion of 0.09% of
(fee shared with Funds the first $7 billion in J.P. Morgan-advised
Distributor, Inc.) portfolios, plus 0.04% of the average net assets
Over $7 billion
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in
connection with investments in a portfolio.
ITEM 7. SHAREHOLDER INFORMATION.
INVESTING
Beneficial interests in the Portfolio are issued solely in private placement
transactions that 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
other investment companies, insurance company separate accounts, common or
commingled trust funds, or similar organizations or entities which are
"accredited investors" as defined in Rule 501 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.
An investment in the Portfolio may be made without a sales load. All investments
are made at net asset value next determined after an order is received in "good
order" by the Portfolio. The net asset value of the Portfolio is determined at
the Valuation Time on each Portfolio Business Day.
There is no minimum initial or subsequent investment in the Portfolio. However,
because the Portfolio intends to be as fully invested at all times as is
reasonably practicable in order to enhance the yield on its assets, investments
must be made in federal funds (i.e., monies credited to the account of the
Custodian by a Federal Reserve Bank).
The Portfolio may, at its own option, accept securities in payment for
investments in its beneficial interests. The securities delivered in kind are
valued by the method described in Net Asset Value as of the business day prior
to the day the Portfolio receives the securities. Securities may be accepted in
payment for shares only if they are, in the judgment of the Advisor, appropriate
investments for the Portfolio. In addition, securities accepted in payment for
shares must: (i) meet the investment objective and policies of the Portfolio;
(ii) be acquired by the Portfolio for investment and not for resale; (iii) be
liquid securities which are not restricted as to transfer either by law or
liquidity of market; and (iv) if stock, have a value which is readily
ascertainable as evidenced by a listing on a stock exchange, OTC market or by
readily available market quotations from a dealer in such securities. The
Portfolio reserves the right to accept or reject at its own option any and all
securities offered in payment for beneficial interests.
The Portfolio and FDI reserve the right to cease accepting investments at any
time or to reject any investment order.
ADDING TO YOUR ACCOUNT
Each investor in the Portfolio may add to or reduce its investment in the
Portfolio on each Portfolio Business Day. At the Valuation 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 at the Valuation 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 at the Valuation 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 at the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio at the
Valuation 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 at the Valuation
Time on the following Portfolio Business Day.
SELLING SHARES
An investor in the Portfolio may reduce all or any portion of its investment 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 by
the Portfolio in federal funds normally on the next Portfolio 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 NYSE is closed (other than weekends or holidays) or trading
on the NYSE is restricted or, to the extent otherwise permitted by the 1940 Act,
if an emergency exists.
REDEMPTION IN KIND
If the Portfolio determines that it would be detrimental to the best interest of
the remaining shareholders of the Portfolio to make payment wholly or partly in
cash, payment of the redemption price may be made in whole or in part by a
distribution in kind of securities from the Portfolio, in lieu of cash. If
shares are redeemed in kind, the redeeming shareholder might incur costs in
converting the assets into cash. The Portfolio has received exemptive relief
from the SEC with respect to redemptions in kind by the Fund. The Portfolio is
permitted to pay redemptions to greater than 5% shareholders in securities,
rather than in cash, to the extent permitted by the SEC and applicable law. The
method of valuing portfolio securities is described under "Net Asset Value," and
such valuation will be made as of the same time the redemption price is
determined. The Portfolio on behalf of the Fund and the Portfolio has elected to
be governed by Rule 18f-1 under the 1940 Act pursuant to which the Fund and the
Portfolio are obligated to redeem shares solely in cash up to the lesser of
$250,000 or one percent of the net asset value of the Fund during an 90 day
period for any one shareholder. The Portfolio will redeem Fund shares in-kind
only if it has received a redemption in kind from the Portfolio and therefore
shareholders of the Fund that receive redemptions in-kind will receive
securities of the Portfolio. The Portfolio has advised the Trust the Portfolio
will not redeem in-kind except in circumstances in which the Fund is permitted
to redeem in -kind.
BUSINESS DAYS AND NAV CALCULATIONS
The net asset value ("NAV") of the Portfolio is determined each
business day other than the holidays listed in Part B ("Portfolio Business
Day"). This determination is made once daily as of the close of trading on the
New York Stock Exchange (normally, 4:00 p.m. eastern time).
DIVIDENDS AND DISTRIBUTIONS
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 Internal Revenue Code of 1986,
as amended, assuming that the investor invested all of its assets in the
Portfolio.
TAX CONSIDERATIONS
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 ordinary income and capital
gain 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.
PART B
ITEM 10. COVER PAGE AND TABLE OF CONTENTS
Cover page not applicable.
TABLE OF CONTENTS. PAGE
General Information and History . . . . . . . . . . . B-1
Investment Objective and Policies . . . . . . . . . . B-1
Management of the Portfolio . . . . . . . . . . . . . B-16
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . . . . B-21
Code of Ethics. . . . . . . . . . . . . . . . . . . . B-22
Investment Advisory and Other Services . . . . . . . B-21
Brokerage Allocation and Other Practices . . . . . . B-25
Capital Stock and Other Securities . . . . . . . . . B-27
Purchase, Redemption and Pricing of
Securities Being Offered. . . . . . . . . . . . . . . B-28
Tax Status . . . . . . . . . . . . . . . . . . . . . B-29
Underwriters . . . . . . . . . . . . . . . . . . . . B-31
Calculations of Performance Data . . . . . . . . . . B-31
Financial Statements . . . . . . . . . . . . . . . . B-31
Appendix A . . . . . . . . . . . . . . . . . . . . . Appendix-1
ITEM 11. PORTFOLIO HISTORY.
Not applicable.
ITEM 12. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS.
The investment objective of The U.S. Equity Portfolio (the "Portfolio") is to
provide high total return from a portfolio of selected equity securities.
The Portfolio attempts to achieve its investment objective by primarily
investing, under normal circumstances, at least 65% of its net assets in equity
securities. These equity securities consist of U.S. and foreign common stocks
and other securities with equity characteristics comprised of preferred stock,
warrants, rights, convertible securities, depository receipts (such as ADRs,
EDRs and GDRs) trust certifications, limited partnership interests and
investment company securities (collectively, "Equity Securities"). The
Portfolio's primary equity investments are the common stock of large
capitalization U.S. corporations and, to a limited extent, similar securities of
foreign corporations.
The Portfolio is advised by J.P. Morgan Investment Management Inc. ("JPMIM"
or the "Advisor").
The following discussion supplements the information regarding the investment
objective of the Portfolio and the policies to be employed to achieve this
objective as set forth above and in Part A.
INVESTMENT PROCESS
Research: The Advisor's more than 20 domestic equity analysts, each an industry
specialist with an average of over 10 years of experience, follow approximately
600 predominantly large- and medium-sized U.S. companies -approximately 500 of
which form the universe for the Portfolio's investments. Their research goal is
to forecast normalized, longer term earnings and dividends for the companies
that they cover. In doing this, they may work in concert with the Advisor's
international equity analysts in order to gain a broader perspective for
evaluating industries and companies in today's global economy.
Valuation: The analysts' forecasts are converted into comparable expected
returns using a proprietary dividend discount model, which calculates the
long-term earnings by comparing a company's current stock price with its
forecasted dividends and earnings. Within each sector, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
Stock Selection: A diversified portfolio is constructed using disciplined buy
and sell rules. Purchases are concentrated among first-quintile stocks; the
specific names selected reflect the portfolio manager's judgment concerning the
soundness of the underlying forecasts, the likelihood that the perceived
misvaluation will be corrected within a reasonable time frame, and the magnitude
of the risks versus the rewards. Once a stock falls into the third quintile --
because its price has risen or its fundamentals have deteriorated -- it
generally becomes a candidate for sale. The portfolio manager seeks to hold
sector weightings close to those of the S&P 500 Index, the Portfolio's
benchmark.
EQUITY INVESTMENTS
The Portfolio invests primarily in equity securities consisting of common stock
and other securities with equity characteristics. The securities in which the
Portfolio invests include those listed on any domestic or foreign securities
exchange or traded in the over-the-counter (OTC) market as well as certain
restricted or unlisted securities. A discussion of the various types of equity
investments which may be purchased by the Portfolio appears below.
EQUITY SECURITIES. The common stock in which the Portfolio may invest include
the common stock of any class or series of domestic or foreign corporations or
any similar equity interest, such as trust or partnership interests. The
Portfolio's equity investments may also include preferred stock, warrants,
rights and convertible securities. These investments may or may not pay
dividends and may or may not carry voting rights. Common stock occupies the most
junior position in a company's capital structure.
The convertible securities in which the Portfolio may invest include any debt
securities or preferred stock which may be converted into common stock or which
carry the right to purchase common stock. Convertible securities entitle the
holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time.
The terms of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
COMMON STOCK WARRANTS. The Portfolio may invest in common stock warrants, which
entitle the holder to buy common stock from the issuer of the warrant at a
specific price (the strike price) for a specific period of time. The market
price of warrants may be substantially lower than the current market price of
the underlying common stock, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying common stock.
Warrants generally do not entitle the holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. A warrant will expire worthless if it is not
exercised on or prior to the expiration date.
FOREIGN INVESTMENTS
The Portfolio may invest in certain foreign securities. The Portfolio does not
expect more than 20% of its investments, at the time of purchase, to be in
securities of foreign issuers. This 20% limit is designed to accommodate the
increased globalization of companies as well as the redomiciling of companies
for tax treatment purposes. It is not currently expected to be used to increase
direct non-U.S. exposure.
Investors should realize that the value of the Portfolio's investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Portfolio's operations. Furthermore, the economies of individual foreign
nations may differ from the U.S. economy, whether favorably or unfavorably, in
areas such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investments made by the Portfolio must be made in compliance
with U.S. and foreign currency restrictions and tax laws restricting the amounts
and types of foreign investments.
Foreign investments may be made directly in securities of foreign issuers or in
the form of American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and Global Depository Receipts ("GDRs") or other similar securities of
foreign issuers. ADRs are securities, typically issued by a U.S. financial
institution (a "depository"), that evidence ownership interests in a security or
a pool of securities issued by a foreign issuer and deposited with the
depository. ADRs include American Depository Shares and New York Shares. EDRs
are receipts issued by a European financial institution. GDRs, which are
sometimes referred to as Continental Depository Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depository, whereas an unsponsored facility may be established by a depository
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depository receipt generally bear all costs of the
unsponsored facility. The depository of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
Since investments in foreign securities may involve foreign currencies, the
value of the Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Portfolio may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
the settlement of foreign securities transactions or to manage the Portfolio's
currency exposure related to foreign investments.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Portfolio may buy and sell securities and receive interest and
dividends in currencies other than the U.S. dollar, the Portfolio may enter from
time to time into foreign currency exchange transactions. The Portfolio either
enters into these transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market or uses forward contracts to
purchase or sell foreign currencies. The cost of the Portfolio's spot currency
exchange transactions is generally the difference between the bid and offer spot
rate of the currency being purchased or sold.
A forward foreign currency exchange contract is an obligation by the Portfolio
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
derivative instruments, as their value derives from the spot exchange rates of
the currencies underlying the contract. These contracts are entered into in the
interbank market directly between currency traders (usually large commercial
banks) and their customers. A forward foreign currency exchange contract
generally has no deposit requirement and is traded at a net price without
commission. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of the Portfolio's securities or
in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
The Portfolio may enter into foreign currency exchange transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or
anticipated securities transactions. The Portfolio may also enter into forward
contracts to hedge against a change in foreign currency exchange rates that
would cause a decline in the value of existing investments denominated or
principally traded in a foreign currency. To do this, the Portfolio would enter
into a forward contract to sell the foreign currency in which the investment is
denominated or principally traded in exchange for U.S. dollars or in exchange
for another foreign currency. The Portfolio will only enter into forward
contracts to sell a foreign currency in exchange for another foreign currency if
the Advisor expects the foreign currency purchased to appreciate against the
U.S. dollar.
Although these transactions are intended to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time they limit any
potential gain that might be realized should the value of the hedged currency
increase. In addition, forward contracts that convert a foreign currency into
another foreign currency will cause the Portfolio to assume the risk of
fluctuations in the value of the currency purchased vis a vis the hedged
currency and the U.S. dollar. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market movements in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities
no interest accrues to the Portfolio until settlement takes place. At the time
the Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction, reflect the value each
day of such securities in determining its net asset value and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, the Portfolio will maintain
with the custodian a segregated account with liquid assets, consisting of cash,
U.S. Government securities or other appropriate securities, in an amount at
least equal to such commitments. On delivery dates for such transactions, the
Portfolio will meet its obligations from maturities or sales of the securities
held in the segregated account and/or from cash flow. If the Portfolio chooses
to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. Also, the Portfolio
may be disadvantaged if the other party to the transaction defaults. It is the
current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of the Portfolio's total
assets, less liabilities other than the obligations created by when-issued
commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies may be
acquired by the Portfolio to the extent permitted under the Investment Company
Act of 1940 (the "1940 Act"). These limits require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of the
Portfolio's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group,
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio. As a shareholder of another investment
company, the Portfolio would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that the
Portfolio bears directly in connection with its own operations.
The Securities and Exchange Commission ("SEC") has granted the Portfolio an
exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets the following conditions: (1) the Portfolio
may invest in one or more of the permitted money market funds up to an aggregate
limit of 25% of its assets; and (2) the Advisor will waive and/or reimburse its
advisory fee from the Portfolio in an amount sufficient to offset any doubling
up of investment advisory and shareholder servicing fees. The Portfolio has
applied for additional exemptive relief from the SEC to permit the Portfolio to
invest in additional affiliated investment companies. If the requested relief is
granted, the Portfolio would then be permitted to invest in non-money market
affiliated funds, subject to certain conditions specified in the applicable
order.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Portfolio sells a security
and agrees to repurchase the same security at a mutually agreed upon date and
price reflecting the interest rate effective for the term of the agreement. For
purposes of the 1940 Act, a reverse repurchase agreement is also considered as
the borrowing of money by the Portfolio and, therefore, a form of leverage.
Leverage may cause any gains or losses for the Portfolio to be magnified. The
Portfolio will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, the Portfolio will enter into a reverse repurchase
agreement only when the interest income to be earned from the investment of the
proceeds is greater than the interest expense of the transaction. The Portfolio
will not invest the proceeds of a reverse repurchase agreement for a period
which exceeds the duration of the reverse repurchase agreement. The Portfolio
will establish and maintain with the Custodian a separate account with a
segregated portfolio of securities in an amount at least equal to its purchase
obligations under its reverse repurchase agreements.
LOANS OF PORTFOLIO SECURITIES. The Portfolio is permitted to lend its securities
in an amount up to 33 1/3% of the value of such Portfolio's net assets. The
Portfolio may lend its securities if such loans are secured continuously by cash
or equivalent collateral or by a letter of credit in favor of the Portfolio at
least equal at all times to 100% of the market value of the securities loaned,
plus paid interest. While such securities are on loan, the borrower will pay the
Portfolio any income accruing thereon. Loans will be subject to termination by
the Portfolio in the normal settlement time, generally three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Portfolio and its investors. The Portfolio may pay reasonable finders' and
custodial fees in connection with a loan. In addition, the Portfolio will
consider all facts and circumstances including the creditworthiness of the
borrowing financial institution, and the Portfolio will not make any loans in
excess of one year. The Portfolio will not lend their securities to any officer,
Trustee, Director, employee, or affiliate of the Portfolio, Advisor, Private
Placement Agent or Administrator, unless otherwise permitted by applicable law.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED SECURITIES. The
Portfolio may not acquire any illiquid securities if, as a result thereof, more
than 15% of the Portfolio's net assets would be in illiquid investments. Subject
to this non-fundamental policy limitation, the Portfolio may acquire investments
that are illiquid or have limited liquidity, such as private placements or
investments that are not registered under the Securities Act of 1933, as amended
(the "1933 Act") and cannot be offered for public sale in the United States
without first being registered under the 1933 Act. An illiquid investment is any
investment that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which it is valued by the Portfolio. The
price the Portfolio pays for illiquid securities or receives upon resale may be
lower than the price paid or received for similar securities with a more liquid
market. Accordingly the valuation of these securities will reflect any
limitations on their liquidity.
The Portfolio may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor and approved by the Trustees. The Trustees will
monitor the Advisor's implementation of these guidelines on a periodic basis.
As to illiquid investments, the Portfolio is subject to a risk that should the
Portfolio decide to sell them when a ready buyer is not available at a price the
Portfolio deems representative of their value, the value of the Portfolio's net
assets could be adversely affected. Where an illiquid security must be
registered under the 1933 Act before it may be sold, the Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it decided
to sell.
MONEY MARKET INSTRUMENTS
Although the Portfolio intends, under normal circumstances and to the extent
practicable, to be fully invested in equity securities, the Portfolio may invest
in money market instruments to the extent consistent with its investment
objective and policies. The Portfolio may make money market investments pending
other investment or settlement, for liquidity or in adverse market conditions. A
description of the various types of money market instruments that may be
purchased by the Portfolio appears below. Also see "Quality and Diversification
Requirements".
U.S. TREASURY SECURITIES. The Portfolio may invest in direct obligations of
the U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in obligations
issued or guaranteed by U.S. Government agencies or instrumentalities. These
obligations may or may not be backed by the "full faith and credit" of the
United States. Securities which are backed by the full faith and credit of the
United States include obligations of the Government National Mortgage
Association, the Farmers Home Administration, and the Export-Import Bank. In the
case of securities not backed by the full faith and credit of the United States,
the Portfolio must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Portfolio
may invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
FOREIGN GOVERNMENT OBLIGATIONS. The Portfolio, subject to its applicable
investment policies, may also invest in short-term obligations of foreign
sovereign governments or of their agencies, instrumentalities, authorities or
political subdivisions. These securities may be denominated in the U.S. dollar
or in another currency. See "Foreign Investments".
BANK OBLIGATIONS. The Portfolio may invest in negotiable certificates of
deposit, time deposits and bankers' acceptances of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total assets
(the "Asset Limitation") and are organized under the laws of the United States
or any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees). See "Foreign Investments". The Portfolio will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank. The Portfolio may also invest in obligations
of international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade between
nations (e.g., the European Investment Bank, the Inter-American Development
Bank, or the World Bank).
COMMERCIAL PAPER. The Portfolio may invest in commercial paper including master
demand obligations. Master demand obligations are obligations that provide for a
periodic adjustment in the interest rate paid and permit daily changes in the
amount borrowed. Master demand obligations are governed by agreements between
the issuer and Morgan Guaranty Trust Company of New York ("Morgan"), an
affiliate of the Advisor, acting as agent, for no additional fee. The monies
loaned to the borrower come from accounts managed by Morgan or its affiliates,
pursuant to arrangements with such accounts. Interest and principal payments are
credited to such accounts. Morgan, an affiliate of the Advisor, has the right to
increase or decrease the amount provided to the borrower under an obligation.
The borrower has the right to pay without penalty all or any part of the
principal amount then outstanding on an obligation together with interest to the
date of payment. Since these obligations typically provide that the interest
rate is tied to the Federal Reserve commercial paper composite rate, the rate on
master demand obligations is subject to change. Repayment of a master demand
obligation to participating accounts depends on the ability of the borrower to
pay the accrued interest and principal of the obligation on demand which is
continuously monitored by Morgan. Since master demand obligations typically are
not rated by credit rating agencies, the Portfolio may invest in such unrated
obligations only if at the time of an investment the obligation is determined by
the Advisor to have a credit quality which satisfies the Portfolio's quality
restrictions. See "Quality and Diversification Requirements". It is possible
that the issuer of a master demand obligation could be a client of Morgan to
whom Morgan, an affiliate of the Advisor, in its capacity as a commercial bank,
has made a loan.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements with
brokers, dealers or banks that meet the credit guidelines approved by the
Trustees. In a repurchase agreement, the Portfolio buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. The resale price normally is in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for the
period of time the Portfolio is invested in the agreement and is not related to
the coupon rate on the underlying security. A repurchase agreement may also be
viewed as a fully collateralized loan of money by the Portfolio to the seller.
The period of these repurchase agreements will usually be short, from overnight
to one week, and at no time will the Portfolio invest in repurchase agreements
for more than thirteen months. The securities which are subject to repurchase
agreements, however, may have maturity dates in excess of thirteen months from
the effective date of the repurchase agreement. The Portfolio will always
receive securities as collateral whose market value is, and during the entire
term of the agreement remains, at least equal to 100% of the dollar amount
invested by the Portfolio in each agreement plus accrued interest, and the
Portfolio will make payment for such securities only upon physical delivery or
upon evidence of book entry transfer to the account of the Portfolio's custodian
(the "Custodian"). If the seller defaults, the Portfolio might incur a loss if
the value of the collateral securing the repurchase agreement declines and might
incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the security, realization upon disposal of the collateral by the Portfolio may
be delayed or limited.
The Portfolio may make investments in other debt securities with remaining
effective maturities of not more than thirteen months, including without
limitation corporate and foreign bonds, asset-backed securities and other
obligations described in this Part B.
QUALITY AND DIVERSIFICATION REQUIREMENTS
The Portfolio intends to meet the diversification requirements of the 1940 Act.
To meet these requirements, 75% of the assets of the Portfolio is subject to the
following fundamental limitations: (1) the Portfolio may not invest more than 5%
of its total assets in the securities of any one issuer, except obligations of
the U.S. Government, its agencies and instrumentalities, and (2) the Portfolio
may not own more than 10% of the outstanding voting securities of any one
issuer. As for the other 25% of the Portfolio's assets not subject to the
limitation described above, there is no limitation on investment of these assets
under the 1940 Act, so that all of such assets may be invested in securities of
any one issuer. Investments not subject to the limitations described above could
involve an increased risk to the Portfolio should an issuer, or a state or its
related entities, be unable to make interest or principal payments or should the
market value of such securities decline. The Portfolio will also comply with the
diversification requirements imposed by the Internal Revenue Code of 1986 as
amended (the "Code"), for qualification as a regulated investment company. See
Item 19 below.
The Portfolio may invest in convertible debt securities, for which there are no
specific quality requirements. In addition, at the time the Portfolio invests in
any commercial paper, bank obligation or repurchase agreement, the issuer must
have outstanding debt rated A or higher by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("Standard & Poor's"), the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no such ratings are
available, the investment must be of comparable quality in the Advisor's
opinion. At the time the Portfolio invests in any other short-term debt
securities, they must be rated A or higher by Moody's or Standard & Poor's, or
if unrated, the investment must be of comparable quality in the Advisor's
opinion. A description of illustrative credit ratings is set forth in Appendix A
attached to this Part B.
In determining suitability of investment in a particular unrated security, the
Advisor takes into consideration asset and debt service coverage, the purpose of
the financing, history of the issuer, existence of other rated securities of the
issuer, and other relevant conditions, such as comparability to other issuers.
OPTIONS AND FUTURES TRANSACTIONS
The Portfolio may (a) purchase and sell exchange traded and over-the-counter
(OTC) put and call options on equity securities or indexes of equity securities,
(b) purchase and sell futures contracts on indexes of equity securities and (c)
purchase and sell put and call options on futures contracts on indexes of equity
securities. Each of these instruments is a derivative instrument as its value
derives from the underlying asset or index.
The Portfolio may utilize options and futures contracts to manage its exposure
to changing interest rates and/or security prices. Some options and futures
strategies, including selling futures contracts and buying puts, tend to hedge
the Portfolio's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of the Portfolio's overall strategy in a manner deemed
appropriate to the Advisor and consistent with the Portfolio's objective and
policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
The use of options and futures is a highly specialized activity which involves
investment strategies and risks different from those associated with ordinary
portfolio securities transactions, and there can be no guarantee that their use
will increase a Portfolio's return. While the use of these instruments by the
Portfolio may reduce certain risks associated with owning its portfolio
securities, these techniques themselves entail certain other risks. If the
Advisor applies a strategy at an inappropriate time or judges market conditions
or trends incorrectly, options and futures strategies may lower the Portfolio's
return. Certain strategies limit the Portfolio's possibilities to realize gains
as well as limiting its exposure to losses. The Portfolio could also experience
losses if the prices of its options and futures positions were poorly correlated
with its other investments, or if it could not close out its positions because
of an illiquid secondary market. In addition, the Portfolio will incur
transaction costs, including trading commissions and option premiums, in
connection with its futures and options transactions and these transactions
could significantly increase the Portfolio's turnover rate.
The Portfolio may purchase put and call options on securities, indexes of
securities and futures contracts, or purchase and sell futures contracts, only
if such options are written by other persons and if the aggregate premiums paid
on all such options which are held at any time do not exceed 20% of the
Portfolio's net assets, and (ii) the aggregate margin deposits required on all
such futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
OPTIONS
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Portfolio
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Portfolio pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. The
Portfolio may terminate its position in a put option it has purchased by
allowing it to expire or by exercising the option. The Portfolio may also close
out a put option position by entering into an offsetting transaction, if a
liquid market exists. If the option is allowed to expire, the Portfolio will
lose the entire premium it paid. If the Portfolio exercises a put option on a
security, it will sell the instrument underlying the option at the strike price.
If the Portfolio exercises an option on an index, settlement is in cash and does
not involve the actual sale of securities. If an option is American style, it
may be exercised on any day up to its expiration date. A European style option
may be exercised only on its expiration date.
The buyer of a typical put option can expect to realize a gain if the price of
the underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the instrument underlying the option at the option's strike price. A
call buyer typically attempts to participate in potential price increases of the
instrument underlying the option with risk limited to the cost of the option if
security prices fall. At the same time, the buyer can expect to suffer a loss if
security prices do not rise sufficiently to offset the cost of the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Portfolio writes a put option,
it takes the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the Portfolio assumes the obligation to pay
the strike price for the instrument underlying the option if the other party to
the option chooses to exercise it. The Portfolio may seek to terminate its
position in a put option it writes before exercise by purchasing an offsetting
option in the market at its current price. If the market is not liquid for a put
option the Portfolio has written, however, the Portfolio must continue to be
prepared to pay the strike price while the option is outstanding, regardless of
price changes, and must continue to post margin as discussed below.
If the price of the underlying instrument rises, a put writer would generally
expect to profit, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the writer will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the put writer would expect to
suffer a loss. This loss should be less than the loss from purchasing and
holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Portfolio to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an index of
securities or a futures contract is required to deposit cash or securities or a
letter of credit as margin and to make mark to market payments of variation
margin as the position becomes unprofitable.
OPTIONS ON INDEXES. Options on securities indexes are similar to options on
securities, except that the exercise of securities index options is settled by
cash payment and does not involve the actual purchase or sale of securities. In
addition, these options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. The Portfolio, in purchasing or selling index options, is
subject to the risk that the value of its portfolio securities may not change as
much as an index because the Portfolio's investments generally will not match
the composition of an index.
For a number of reasons, a liquid market may not exist and thus the Portfolio
may not be able to close out an option position that it has previously entered
into. When the Portfolio purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and the Portfolio may incur additional
losses if the counterparty is unable to perform.
EXCHANGE TRADED AND OVER-THE-COUNTER OPTIONS. All options purchased or sold by
the Portfolio will be traded on a securities exchange or will be purchased or
sold by securities dealers (OTC options) that meet creditworthiness standards
approved by the Board of Trustees. While exchange-traded options are obligations
of the Options Clearing Corporation, in the case of OTC options, the Portfolio
relies on the dealer from which it purchased the option to perform if the option
is exercised. Thus, when the Portfolio purchases an OTC option, it relies on the
dealer from which it purchased the option to make or take delivery of the
underlying securities. Failure by the dealer to do so would result in the loss
of the premium paid by the Portfolio as well as loss of the expected benefit of
the transaction.
Provided that the Portfolio has arrangements with certain qualified dealers who
agree that the Portfolio may repurchase any option it writes for a maximum price
to be calculated by a predetermined formula, the Portfolio may treat the
underlying securities used to cover written OTC options as liquid. In these
cases, the OTC option itself would only be considered illiquid to the extent
that the maximum repurchase price under the formula exceeds the intrinsic value
of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase
or sell (write) futures contracts and purchase or sell put and call options ,
including put and call options on futures contracts. Futures contracts obligate
the buyer to take and the seller to make delivery at a future date of a
specified quantity of a financial instrument or an amount of cash based on the
value of a securities index. Currently, futures contracts are available on
various types of fixed income securities, including but not limited to U.S.
Treasury bonds, notes and bills, Eurodollar certificates of deposit and on
indexes of fixed income securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a security
or make a cash settlement payment based on changes in a financial instrument or
securities index on an agreed date, an option on a futures contract entitles its
holder to decide on or before a future date whether to enter into such a
contract. If the holder decides not to exercise its option, the holder may close
out the option position by entering into an offsetting transaction or may decide
to let the option expire and forfeit the premium thereon. The purchaser of an
option on a futures contract pays a premium for the option but makes no initial
margin payments or daily payments of cash in the nature of "variation" margin
payments to reflect the change in the value of the underlying contract as does a
purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid by the
purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Portfolio are paid by the Portfolio into a segregated
account, in the name of the Futures Commission Merchant, as required by the 1940
Act and the SEC's interpretations thereunder.
COMBINED POSITIONS. The Portfolio may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of the overall position. For example, the
Portfolio may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price, in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the
Portfolio's current or anticipated investments exactly. The Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Portfolio's
investments well. Options and futures contracts prices are affected by such
factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Portfolio's options
or futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require the Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired. (See "Exchange Traded and Over-the-Counter
Options" above for a discussion of the liquidity of options not traded on an
exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures and options
on futures contracts that can be held or controlled by an entity. If an adequate
exemption cannot be obtained, the Portfolio or the Advisor may be required to
reduce the size of its futures and options positions or may not be able to trade
a certain futures or options contract in order to avoid exceeding such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The Portfolio
intends to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which the Portfolio can commit assets
to initial margin deposits and option premiums. In addition, the Portfolio will
comply with guidelines established by the SEC with respect to coverage of
options and futures contracts by mutual funds, and if the guidelines so require,
will set aside appropriate liquid assets in a segregated custodial account in
the amount prescribed. Securities held in a segregated account cannot be sold
while the futures contract or option is outstanding, unless they are replaced
with other suitable assets. As a result, there is a possibility that segregation
of a large percentage of the Portfolio's assets could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
Although the Portfolio will not be commodity pools, certain derivatives
subject the Portfolio to the rules of the Commodity Futures Trading Commission
which limit the extent to which the Fund can invest in such derivatives. The
Portfolio may invest in futures contracts and options with respect thereto for
hedging purposes without limit. However, the Portfolio may not invest in such
contracts and options for other purposes if the sum of the amount of initial
margin deposits and premiums paid for unexpired options with respect to such
contracts, other than for bona fide hedging purposes, exceeds 5% of the
liquidation value of the Portfolio's assets, after taking into account
unrealized profits and unrealized losses on such contracts and options;
provided, however, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the 5%
limitation.
SWAPS AND RELATED SWAP PRODUCTS
The Portfolio may engage in swap transactions, including, but not limited to,
interest rate, currency, securities index, basket, specific security and
commodity swaps, interest rate caps, floors and collars and options on interest
rate swaps (collectively defined as "swap transactions").
The Portfolio may enter into swap transactions for any legal purpose consistent
with its investment objective and policies, such as for the purpose of
attempting to obtain or preserve a particular return or spread at a lower cost
than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities the Portfolio anticipates purchasing at a later date, or to gain
exposure to certain markets in the most economical way possible. The Portfolio
will not sell interest rate caps, floors or collars if it does not own
securities with coupons which provide the interest that the Portfolio may be
required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional counterparties for periods ranging from a few weeks to several
years. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of return) that would be earned or realized on
specified notional investments or instruments. The gross returns to be exchanged
or "swapped" between the parties are calculated by reference to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency or
commodity, or in a "basket" of securities representing a particular index. The
purchaser of an interest rate cap or floor, upon payment of a fee, has the right
to receive payments (and the seller of the cap is obligated to make payments) to
the extent a specified interest rate exceeds (in the case of a cap) or is less
than (in the case of a floor) a specified level over a specified period of time
or at specified dates. The purchaser of an interest rate collar, upon payment of
a fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a pre-specified notional
amount with pre-specified terms with the seller of the option as the
counterparty.
The "notional amount" of a swap transaction is the agreed upon basis
for calculating the payments that the parties have agreed to exchange. For
example, one swap counterparty may agree to pay a floating rate of interest
(e.g., 3 month LIBOR) calculated based on a $10 million notional amount on a
quarterly basis in exchange for receipt of payments calculated based on the same
notional amount and a fixed rate of interest on a semi-annual basis. In the
event the Portfolio is obligated to make payments more frequently than it
receives payments from the other party, it will incur incremental credit
exposure to that swap counterparty. This risk may be mitigated somewhat by the
use of swap agreements which call for a net payment to be made by the party with
the larger payment obligation when the obligations of the parties fall due on
the same date. Under most swap agreements entered into by the Portfolio,
payments by the parties will be exchanged on a "net basis", and the Portfolio
will receive or pay, as the case may be, only the net amount of the two
payments.
The amount of the Portfolio's potential gain or loss on any swap
transaction is not subject to any fixed limit. Nor is there any fixed limit on
the Portfolio's potential loss if it sells a cap or collar. If the Portfolio
buys a cap, floor or collar, however, the Portfolio's potential loss is limited
to the amount of the fee that it has paid. When measured against the initial
amount of cash required to initiate the transaction, which is typically zero in
the case of most conventional swap transactions, swaps, caps, floors and collars
tend to be more volatile than many other types of instruments.
The use of swap transactions, caps, floors and collars involves
investment techniques and risks which are different from those associated with
portfolio security transactions. If the Advisor is incorrect in its forecasts of
market values, interest rates, and other applicable factors, the investment
performance of the Portfolio will be less favorable than if these techniques had
not been used. These instruments are typically not traded on exchanges.
Accordingly, there is a risk that the other party to certain of these
instruments will not perform its obligations to the Portfolio or that the
Portfolio may be unable to enter into offsetting positions to terminate its
exposure or liquidate its position under certain of these instruments when it
wishes to do so.
Such occurrences could result in losses to the Portfolio.
The Advisor will, however, consider such risks and will enter into
swap and other derivatives transactions only when it believes that the risks are
not unreasonable.
The Portfolio will maintain cash or liquid assets in a segregated
account with its custodian in an amount sufficient at all times to cover its
current obligations under its swap transactions, caps, floors and collars. If
the Portfolio enters into a swap agreement on a net basis, it will segregate
assets with a daily value at least equal to the excess, if any, of the
Portfolio's accrued obligations under the swap agreement over the accrued amount
the Portfolio is entitled to receive under the agreement. If the Portfolio
enters into a swap agreement on other than a net basis, or sells a cap, floor or
collar, it will segregate assets with a daily value at least equal to the full
amount of the Portfolio's accrued obligations under the agreement.
The Portfolio will not enter into any swap transaction, cap, floor, or
collar, unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in which
many types of swap transactions are traded have grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the markets for certain types of swaps (e.g., interest rate swaps) have become
relatively liquid. The markets for some types of caps, floors and collars are
less liquid.
The liquidity of swap transactions, caps, floors and collars will be as set
forth in guidelines established by the Advisor and approved by the Trustees
which are based on various factors, including (1) the availability of dealer
quotations and the estimated transaction volume for the instrument, (2) the
number of dealers and end users for the instrument in the marketplace, (3) the
level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and
(5) the nature of the marketplace for trades (including the ability to assign or
offset the Portfolio's rights and obligations relating to the instrument). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.
During the term of a swap, cap, floor or collar, changes in the value
of the instrument are recognized as unrealized gains or losses by marking to
market to reflect the market value of the instrument. When the instrument is
terminated, the Portfolio will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and the Portfolio's basis in the contract.
The federal income tax treatment with respect to swap transactions,
caps, floors, and collars may impose limitations on the extent to which the
Portfolio may engage in such transactions.
RISK MANAGEMENT
The Portfolio may employ non-hedging risk management techniques. Risk
management strategies are used to keep the Portfolio fully invested and to
reduce the transaction costs associated with cash flows into and out of the
Portfolio. The objective where equity futures are used to "equitize" cash is to
match the notional value of all futures contracts to the Portfolio's cash
balance. The notional value of futures and of the cash is monitored daily. As
the cash is invested in securities and/or paid out to participants in
redemptions, the Advisor simultaneously adjusts the futures positions. Through
such procedures, the Portfolio not only gains equity exposure from the use of
futures, but also benefits from increased flexibility in responding to client
cash flow needs. Additionally, because it can be less expensive to trade a list
of securities as a package or program trade rather than as a group of individual
orders, futures provide a means through which transaction costs can be reduced.
Such non-hedging risk management techniques are not speculative, but because
they involve leverage include, as do all leveraged transactions, the possibility
of losses as well as gains that are greater than if these techniques involved
the purchase and sale of the securities themselves rather than their synthetic
derivatives.
PORTFOLIO TURNOVER. The portfolio turnover rates for the fiscal years ended May
31, 1998, 1999 and 2000 were 106% 84% and 84%, respectively. A rate of 100%
indicates that the equivalent of all of the Portfolio's assets have been sold
and reinvested in a year. High portfolio turnover may result in the realization
of substantial net capital gains. To the extent net short term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for federal income tax purposes. See Item 19 below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Portfolio. Except
where otherwise noted, these investment restrictions are "fundamental" policies
which, under the 1940 Act, may not be changed without the vote of a "majority of
the outstanding voting securities" (as defined in the 1940 Act) of the
Portfolio. A "majority of the outstanding voting securities" is defined in the
1940 Act as the lesser of (a) 67% or more of the voting securities present at a
security holders meeting if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy, or (b) more than 50% of
the outstanding voting securities. The percentage limitations contained in the
restrictions below apply at the time of the purchase of securities.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof, are amended or modified, the Portfolio:
1. May not make any investments inconsistent with the Portfolio's classification
as a diversified investment company under the Investment Company Act;
2. May not purchase any security which would cause the Portfolio to concentrate
its investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;
3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. May not underwrite securities of other issuers, except to the extent that the
Portfolio, in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Portfolio may (a) invest in securities or other instruments
directly or indirectly secured by real estate, and (b) invest in securities or
other instruments issued by issuers that invest in real estate;
7. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodities contracts; but this shall not
prevent the Portfolio from purchasing, selling and entering into financial
futures contracts (including futures contracts on indices of securities,
interest rates and currencies), options on financial futures contracts
(including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and
forward contracts or other derivative instruments that are not related to
physical commodities; and
8. May make loans to other persons, in accordance with the Portfolio's
investment objective and policies and to the extent permitted by applicable law.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restrictions described
below are not fundamental policies of the Portfolio and may be changed by its
Trustees. These non-fundamental investment policies require that the Portfolio:
(i) May not acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of the Portfolio's net assets would be in investments which are illiquid;
(ii) May not purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued or delayed delivery
securities, or to short sales that are covered in accordance with SEC rules; and
(iii) May not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.
There will be no violation of any investment restriction if that restriction is
complied with at the time the relevant action is taken notwithstanding a later
change in market value of an investment, in net or total assets, in the
securities rating of the investment, or any other later change.
For purposes of fundamental investment restrictions regarding industry
concentration, the Advisor may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if the Advisor determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Advisor may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents.
ITEM 13. MANAGEMENT OF THE PORTFOLIO.
The Trustees and officers of the Portfolio, their business addresses and
principal occupations during the past five years and dates of birth are set
forth below. Their titles may have varied during that period. An asterisk
indicates that a Trustee is an "interested person" (as defined in the 1940 Act)
of the Portfolio.
TRUSTEES AND OFFICERS
Frederick S. Addy -- Trustee; Retired; Former Executive Vice President and Chief
Financial Officer, Amoco Corporation. His address is 5300 Arbutus Cove, Austin,
Texas 78746, and his date of birth is January 1, 1932.
William G. Burns -- Trustee; Retired; Former Vice Chairman and Chief Financial
Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, Florida 32779, and
his date of birth is November 2, 1932.
Arthur C. Eschenlauer -- Trustee; Retired; Former Senior Vice President, Morgan
Guaranty Trust Company of New York. His address is 14 Alta Vista Drive, RD #2,
Princeton, New Jersey 08540, and his date of birth is May 23, 1934. Matthew
Healey1 -- Trustee, Chairman and Chief Executive Officer; Chairman, Pierpont
Group, Inc. ("Pierpont Group"), since prior to 1993. His address is c/o Pierpont
Group, Inc., 461 Fifth Avenue, New York, New York 10017. His date of birth is
August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Prior to April, 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, New York 10901, and his date of birth is March
17, 1934.
Each Trustee is currently paid an annual fee of $75,000 (adjusted as of April 1,
1997) for serving as Trustee of the Master Portfolios (as defined below), J.P.
Morgan Funds, J.P. Morgan Institutional Funds and J.P. Morgan Series Trust and
is reimbursed for expenses incurred in connection with service as a Trustee. The
Trustees may hold various other directorships unrelated to the Portfolio.
Trustee compensation expenses paid by the Portfolio for the calendar year ended
December 31, 1999 is set forth below.
NAME OF TRUSTEE
AGGREGATE TRUSTEE COMPENSATION PAID BY THE PORTFOLIO DURING 1999 TOTAL
TRUSTEE COMPENSATION ACCRUED BY THE MASTER PORTFOLIOS(*), J.P. MORGAN
INSTITUTIONAL FUNDS, J.P. MORGAN FUNDS AND J.P. MORGAN SERIES TRUST DURING
1999(**) Frederick S. Addy, Trustee $2,125
$75,000
William G. Burns,
Trustee
$2,125
$75,000
Arthur C. Eschenlauer,
Trustee
$2,125
$75,000
Matthew Healey,
Trustee(***), Chairman
and Chief Executive
Officer
$2,125
$75,000
Michael P. Mallardi,
Trustee
$2,125
$75,000
(*) Includes the Portfolio and 18 other portfolios (collectively, the "Master
Portfolios") for which JPMIM acts as investment advisor.
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 17 investment companies (14 investment
companies comprising the Master Portfolios, J.P. Morgan Funds, J.P. Morgan
Institutional Funds and J.P. Morgan Series Trust) in the fund complex.
(**) During 1999, Pierpont Group paid Mr. Healey, in his role as Chairman of
Pierpont Group compensation in the amount of $153,800, contributed $23,100 to a
defined contribution plan on his behalf and paid $17,300 in insurance premiums
for his benefit.
The Trustees of the Portfolio are the same as the Trustees
of each of the other Master Portfolios, J.P. Morgan Funds, J.P. Morgan
Institutional Funds and J.P. Morgan Series Trust. In accordance with applicable
state requirements, a majority of the disinterested Trustees have adopted
written procedures reasonably appropriate to deal with potential conflicts of
interest arising from the fact that the same individuals are Trustees of the
Master Portfolios, J.P. Morgan Funds and J.P. Morgan Institutional Funds, up to
and including creating a separate board of trustees.
The Trustees of the Portfolio decide upon general policies and are responsible
for overseeing the Portfolio's business affairs. On January 15, 1994 the
Portfolio entered into a Portfolio Fund Services Agreement with Pierpont Group
to assist the Trustees in exercising their overall supervisory responsibilities
for the Portfolio's affairs. Pierpont Group was organized in July 1989 to
provide services for The Pierpont Family of Funds (now the J.P. Morgan Family of
Funds), and the Trustees are the equal and sole shareholders of Pierpont Group.
The Portfolio has agreed to pay Pierpont Group a fee in an amount representing
its reasonable costs in performing these services to the Portfolio and other
registered investment companies subject to similar agreements with Pierpont
Group. These costs are periodically reviewed by the Trustees.
The aggregate fees paid to Pierpont Group by the Portfolio for the fiscal years
ended May 31, 1998, 1999 and 2000 were $30,613 $18,019 and $12,016,
respectively.
The Portfolio has no employees; its executive officers (listed below), other
than the Chief Executive Officer and the officers who are employees of the
Advisor, are provided and compensated by Funds Distributor, Inc. ("FDI"), a
wholly owned indirect subsidiary of Boston Institutional Group, Inc. The
Portfolio's officers conduct and supervise the business operations of the
Portfolio.
The officers of the Portfolio, their principal occupations during the past five
years and dates of birth are set forth below. The business address of each of
the officers unless otherwise noted is 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
MATTHEW HEALEY - Chief Executive Officer; Chairman, Pierpont Group, since prior
to 1993. His address is c/o Pierpont Group, Inc., 451 Fifth Avenue, New York,
New York, 10017 Andrews Road, Boynton Beach, FL 33436. His date of birth is
August 23, 1937.
MARGARET W. CHAMBERS - Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959.
MARIE E. CONNOLLY - Vice President and Assistant Treasurer. President, Chief
Executive Officer, Chief Compliance Officer and Director of FDI, Premier Mutual
Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an officer of
certain investment companies distributed or administered by FDI.. Her date of
birth is August 1, 1957.
DOUGLAS C. CONROY - Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. From April 1993 to January 1995,
Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust Company. His
date of birth is March 31, 1969.
KAREN JACOPPO-WOOD - Vice President and Assistant Secretary. Vice President and
Senior Counsel of FDI and an officer of certain investment companies distributed
or administered by FDI. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager of SEC Registration at Scudder, Stevens & Clark, Inc. Her date of birth
is December 29, 1966.
CHRISTOPHER J. KELLEY - Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. His date of birth is December 24, 1964.
MARY A. NELSON - Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. Her
date of birth is April 22, 1964.
MARY JO PACE - Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Manager for the Budgeting and Expense Processing Group. Prior to September 1995,
Ms. Pace served as a Fund Administrator for Morgan Guaranty Trust Company of New
York. Her address is 522 Fifth Avenue, New York, New York 10036. Her date of
birth is March 13, 1966.
ELBA VASQUEZ - Vice President and Assistant Secretary. Vice President since
February 1999, Assistant Vice President (since June 1997), and Sales Associate
(since May 1996) of FDI. Formerly (March 1990 - May 1996), employed in various
mutual fund sales and marketing positions by U.S. Trust Company of New York. Her
address is 200 Park Avenue, New York, New York 10166. Her date of birth is
December 14, 1961.
GEORGE A. RIO - President and Treasurer. Executive Vice President and
Client Service Director of FDI since April 1998. From June 1995 to March 1998,
Mr. Rio was Senior Vice President and Senior Key Account Manager for Putnam
Mutual Funds. From May 1994 to June 1995, Mr. Rio was Director of Business
Development for First Data Corporation. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO - Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
as Head of Infrastructure and is responsible for special projects. Prior to
January 2000, she served as the Manager of the Tax Group and is responsible for
U.S. mutual fund tax matters. Prior to September 1995, Ms. Rotundo served as a
Senior Tax Manager in the Investment Company Services Group of Deloitte & Touche
LLP. Her address is 522 Fifth Avenue, New York, New York 10036. Her date of
birth is September 26, 1965.
CODE OF ETHICS
The Portfolios, the Advisor and FDI have adopted codes of ethics pursuant to
Rule 17j-1 under the 1940 Act. Each of these codes permits personnel subject to
such code to invest in securities, including securities that may be purchased or
held by the Portfolios. Such purchases, however, are subject to preclearance and
other procedures reasonably necessary to prevent Access Persons from engaging in
any unlawful conduct set forth in Rule 17j-1.
The Portfolio's Declaration of Trust provides that it 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
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 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.
ITEM 14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of August 31, 2000, J.P. Morgan Institutional U.S. Equity Fund and J.P.
Morgan U.S. Equity Fund (series of J.P. Morgan Institutional Funds and J.P.
Morgan Funds, respectively) (the "Funds") owned 71.97% and 10.44%, respectively,
of the outstanding beneficial interests in the Portfolio. So long as the Funds
control the Portfolio, they may take actions without the approval of any other
holder of beneficial interests in the Portfolio. Each of the Funds has
informed the Portfolio that whenever it is requested to vote on matters
pertaining to the Portfolio (other than a vote by the Portfolio to continue the
operation of the Portfolio upon the withdrawal of another investor in the
Portfolio), it will hold a meeting of its shareholders and will cast its vote as
instructed by those shareholders. The officers and Trustees of the Portfolio own
none of the outstanding beneficial interests in the Portfolio.
ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. Effective October 1, 1998 the Portfolio's investment
advisor is JPMIM. Prior to that date, Morgan was the investment advisor.
JPMIM, a wholly owned subsidiary of J.P. Morgan & Co. Incorporated ("J.P.
Morgan"), is a registered investment adviser under the Investment Advisers Act
of 1940, as amended, and manages employee benefit funds of corporations, labor
unions and state and local governments and the accounts of other institutional
investors, including investment companies. Certain of the assets of employee
benefit accounts under its management are invested in commingled pension trust
funds for which Morgan serves as trustee.
J.P. Morgan, through the Advisor and other subsidiaries, acts as investment
advisor to individuals, governments, corporations, employee benefit plans,
mutual funds and other institutional investors with combined assets under
management of approximately $369 billion.
J.P. Morgan has a long history of service as adviser, underwriter and lender to
an extensive roster of major companies and as a financial advisor to national
governments. The firm, through its predecessor firms, has been in business for
over a century and has been managing investments since 1913.
The basis of the Advisor's investment process is fundamental investment research
as the firm believes that fundamentals should determine an asset's value over
the long term. J.P. Morgan currently employs over 100 full time research
analysts, among the largest research staffs in the money management industry, in
its investment management divisions located in New York, London, Tokyo,
Frankfurt and Singapore to cover companies, industries and countries on site. In
addition, the investment management divisions employ approximately 420 capital
market researchers, portfolio managers and traders. The conclusions of the
equity analysts' fundamental research is quantified into a set of projected
returns for individual companies through the use of a dividend discount model.
These returns are projected for 2 to 5 years to enable analysts to take a longer
term view. These returns, or normalized earnings, are used to establish relative
values among stocks in each industrial sector. These values may not be the same
as the markets' current valuations of these companies. This provides the basis
for ranking the attractiveness of the companies in an industry according to five
distinct quintiles or rankings. This ranking is one of the factors considered in
determining the stocks purchased and sold in each sector.
The investment advisory services the Advisor provides to the Portfolio are not
exclusive under the terms of the Advisory Agreement. The Advisor is free to and
does render similar investment advisory services to others. The Advisor serves
as investment advisor to personal investors and other investment companies and
acts as fiduciary for trusts, estates and employee benefit plans. Certain of the
assets of trusts and estates under management are invested in common trust funds
for which the Advisor serves as trustee. The accounts which are managed or
advised by the Advisor have varying investment objectives and the Advisor
invests assets of such accounts in investments substantially similar to, or the
same as, those which are expected to constitute the principal investments of the
Portfolio. Such accounts are supervised by officers and employees of the Advisor
who may also be acting in similar capacities for the Portfolio. See Item 16
below.
Sector weightings are generally similar to a benchmark with the emphasis on
security selection as the method to achieve investment performance superior to
the benchmark. The benchmark for the Portfolio is currently the S&P 500 Index.
Morgan, also a wholly owned subsidiary of J.P. Morgan, is a bank holding company
organized under the laws of the State of Delaware. Morgan, whose principal
offices are at 60 Wall Street, New York, New York 10260, is a New York trust
company which conducts a general banking and trust business. Morgan is subject
to regulation by the New York State Banking Department and is a member bank of
the Federal Reserve System. Through offices in New York City and abroad, Morgan
offers a wide range of services, primarily to governmental, institutional,
corporate and high net worth individual customers in the United States and
throughout the world.
The Portfolio is managed by employees of the Advisor who, in acting for their
customers, including the Portfolio, do not discuss their investment decisions
with any personnel of J.P. Morgan or any personnel of other divisions of the
Advisor or with any of its affiliated persons, with the exception of certain
investment management affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as salaries
of advisory personnel borne by the Advisor under the Investment Advisory
Agreement, the Portfolio has agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to the annual rate of 0.40% of the
Portfolio's average daily net assets.
For the fiscal years ended May 31, 1998 1999 and 2000, the Portfolio paid
Morgan $3,534,791 $2,911,314 and $2,767,011, respectively, in advisory fees. See
also the Portfolio's financial statements which are incorporated herein by
reference.
The Investment Advisory Agreement provides that it will continue in effect for a
period of two years after execution only if specifically approved annually
thereafter (i) by a vote of the holders of a majority of the Portfolio's
outstanding securities or by its Trustees and (ii) by a vote of a majority of
the Trustees who are not parties to the Advisory Agreement or "interested
persons" as defined by the 1940 Act cast in person at a meeting called for the
purpose of voting on such approval. The Investment Advisory Agreement will
terminate automatically if assigned and is terminable at any time without
penalty by a vote of a majority of the Trustees of the Portfolio or by a vote of
the holders of a majority of the Portfolio's voting securities on 60 days'
written notice to the Advisor and by the Advisor on 90 days' written notice to
the Portfolio.
If the Advisor were prohibited from acting as investment advisor to the
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Under a separate agreement, Morgan provides administrative and related services
to the Portfolio. See "Administrative Services Agent" in Part A above.
CO-ADMINISTRATOR. Under the Portfolio's Co-Administration Agreement dated August
1, 1996, FDI serves as the Portfolio's Co-Administrator. FDI (i) provides office
space, equipment and clerical personnel for maintaining the organization and
books and records of the Portfolio; (ii) provides officers for the Portfolio;
(iii) files Portfolio regulatory documents and mails Portfolio communications to
Trustees and investors; and (iv) maintains related books and records. The
Co-Administration Agreement may be renewed or amended by the Trustees without an
investor vote. The Co-Administration Agreement is terminable at any time without
penalty by a vote of a majority of the Trustees of the Portfolio on not more
than 60 days' written notice nor less than 30 days' written notice to the other
party. The Co-Administrator may, subject to the consent of the Trustees of the
Portfolio, subcontract for the performance of its obligations, provided,
however, that unless the Portfolio expressly agrees in writing, the
Co-Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions. See "Administrative
Services Agent" below.
For its services under the Co-Administration Agreement, the Portfolio has agreed
to pay FDI fees equal to its allocable share of an annual complex-wide charge of
$425,000 plus FDI's out-of-pocket expenses. The amount allocable to the
Portfolio is based on the ratio of its net assets to the aggregate net assets of
the Master Portfolios and certain other investment companies subject to similar
agreements with FDI.
The following administrative fees were paid by the Portfolio to FDI for the
fiscal years ended May 31, 1998 1999 and 2000: $18,971, $11,075 and $6,803,
respectively.
ADMINISTRATIVE SERVICES AGENT. The Portfolio has entered into a Restated
Administrative Services Agreement (the "Services Agreement") with Morgan,
pursuant to which Morgan provides administrative and related services to the
Portfolio, including services related to tax compliance, preparation of
financial statements, calculation of performance data, oversight of service
providers and certain regulatory and Board of Trustees matters.
Under the Services Agreement, effective August 1, 1996, the Portfolio has agreed
to pay Morgan fees equal to its allocable share of an annual complex-wide
charge. This charge is calculated daily based on the aggregate net assets of the
Master Portfolios and J.P. Morgan Series Trust in accordance with the following
annual schedule: 0.09% of the first $7 billion of their aggregate average daily
net assets and 0.04% of their aggregate average daily net assets in excess of $7
billion, less the complex-wide fees payable to FDI. The portion of this charge
payable by the Portfolio is determined by the proportionate share that its net
assets bear to the total net assets of the Master Portfolios, the other
investors in the Master Portfolios for which Morgan provides similar services
and J.P. Morgan Series Trust.
Under administrative services agreements in effect with Morgan from December 29,
1995 through July 31, 1996, the Portfolio paid Morgan a fee equal to its
proportionate share of an annual complex-wide charge. This charge was calculated
daily based on the aggregate net assets of the Master Portfolios in accordance
with the following schedule: 0.06% of the first $7 billion of the Master
Portfolios' aggregate average daily net assets and 0.03% of the Master
Portfolios' aggregate average daily net assets in excess of $7 billion.
For the fiscal years ended May 31, 1998, 1999 and 2000, the Portfolio paid
$265,956 $198,407 and $172,419, respectively, in administrative fees.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York ("BONY"), One Wall Street, New York, New York 10286, serves
as the Trust's and Portfolio's custodian and fund accounting agent. Pursuant to
the Custodian Contracts, BONY is responsible for holding portfolio securities
and cash and maintaining the books of account and records of portfolio
transactions.
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110, serves as the Fund's transfer and dividend
disbursing agent. As transfer agent and dividend disbursing agent, State Street
is responsible for maintaining account records detailing the ownership of Fund
shares and for crediting income, capital gains and other changes in share
ownership to shareholder accounts.
INDEPENDENT ACCOUNTANTS. The independent
accountants of the Portfolio are PricewaterhouseCoopers LLP, 1177 Avenue of the
Americas, New York, New York 10036. PricewaterhouseCoopers LLP conducts an
annual audit of the financial statements of the Portfolio, assists in the
preparation and/or review of the Portfolio's federal and state income tax
returns and consults with the Portfolio as to matters of accounting and federal
and state income taxation.
EXPENSES. In addition to the fees payable to the service providers identified
above, the Portfolio is responsible for usual and customary expenses associated
with its operations. Such expenses include organization expenses, legal fees,
insurance costs, the compensation and expenses of the Trustees, registration
fees under federal securities laws, and extraordinary expenses, applicable to
the Portfolio. Such expenses also include registration fees under foreign
securities laws and brokerage expenses.
Morgan has agreed that it will reimburse the Portfolio to the extent necessary
to maintain the daily total operating expenses at an annual rate of 0.60% of the
Portfolio's average daily net assets. This reimbursement arrangement can be
changed or terminated at any time at the option of Morgan.
ITEM 16. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Advisor places orders for the Portfolio for all purchases and sales of
portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See Item 12 above.
Fixed income and debt securities and municipal bonds and notes are generally
traded at a net price with dealers acting as principal for their own accounts
without a stated commission. The price of the security usually includes profit
to the dealers. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In connection with portfolio transactions for the Portfolio, the Advisor intends
to seek the best execution on a competitive basis for both purchases and sales
of securities.
In selecting a broker, the Advisor considers a number of factors including: the
price per unit of the security; the broker's reliability for prompt, accurate
confirmations and on-time delivery of securities; the firm's financial
condition; as well as the commissions charged. A broker may be paid a brokerage
commission in excess of that which another broker might have charged for
effecting the same transaction if, after considering the foregoing factors, the
Advisor decides that the broker chosen will provide the best execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of the Portfolio review regularly the
reasonableness of commissions and other transaction costs incurred by the
Portfolio in light of facts and circumstances deemed relevant from time to time,
and, in that connection, will receive reports from the Advisor and published
data concerning transaction costs incurred by institutional investors generally.
Research services provided by brokers to which the Advisor has allocated
brokerage business in the past include economic statistics and forecasting
services, industry and company analyses, portfolio strategy services,
quantitative data, and consulting services from economists and political
analysts. Research services furnished by brokers are used for the benefit of all
the Advisor's clients and not solely or necessarily for the benefit of the
Portfolio. The Advisor believes that the value of research services received is
not determinable and does not significantly reduce its expenses. The Portfolio
does not reduce its fee to the Advisor by any amount that might be attributable
to the value of such services.
The Portfolio paid the following approximate
brokerage commissions for the fiscal years ended May 31, 1998, 1999 and 2000:
$1,614,293, $1,163,432 and $1,148,804, respectively. Subject to the
overriding objective of obtaining the best execution of orders, the Advisor may
allocate a portion of the Portfolio's portfolio brokerage transactions to
affiliates of the Advisor. In order for affiliates of the Advisor to effect any
portfolio transactions for the Portfolio, the commissions, fees or other
remuneration received by such affiliates must be reasonable and fair compared to
the commissions, fees, or other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time. Furthermore,
the Trustees of the Portfolio, including a majority of the Trustees who are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
The Portfolio's portfolio securities will not be purchased from or through or
sold to or through the Exclusive Placement Agent or Advisor or any other
"affiliated person" (as defined in the 1940 Act), of the Exclusive Placement
Agent or Advisor when such entities are acting as principals, except to the
extent permitted by law. In addition, the Portfolio will not purchase securities
during the existence of any underwriting group relating thereto of which the
Advisor or an affiliate of the Advisor is a member, except to the extent
permitted by law.
On those occasions when the Advisor deems the purchase or sale of a security to
be in the best interests of the Portfolio as well as other customers, including
other Portfolios, the Advisor, to the extent permitted by applicable laws and
regulations, may, but is not obligated to, aggregate the securities to be sold
or purchased for the Portfolio with those to be sold or purchased for other
customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Portfolio. In some instances,
this procedure might adversely affect the Portfolio.
If the Portfolio effects a closing purchase transaction with respect to an
option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Portfolio will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Portfolio may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
ITEM 17. 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 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 and has no current intention 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 its percentage of the
beneficial interests in the Portfolio), except that if the Trustees recommend
such sale of assets, the approval by vote of a majority of the investors (with
the vote of each being in proportion to its percentage of the beneficial
interests of the Portfolio) 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 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 Portfolio's 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.
ITEM 18. PURCHASE, REDEMPTION AND PRICING OF SHARES.
Beneficial interests in the Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the meaning of
Section 4(2) of the 1933 Act.
The value of investments listed on a domestic or foreign securities
exchange, including National Association of Securities Dealers Automated
Quotations ("NASDAQ"), other than options on stock indexes, is based on the last
sale prices on the exchange on which the security is principally traded (the
"primary exchange"). If there has been no sale on the primary exchange on the
valuation date, and the spread between bid and asked quotations on the primary
exchange is less than or equal to 10% of the bid price for the security, the
security shall be valued at the average of the closing bid and asked quotations
on the primary exchange. Under all other circumstances (e.g. there is no last
sale on the primary exchange, there are no bid and asked quotations on the
primary exchange, or the spread between bid and asked quotations is greater than
10% of the bid price), the value of the security shall be the last sale price on
the primary exchange up to ten days prior to the valuation date unless, in the
judgment of the portfolio manager, material events or conditions since such last
sale necessitate fair valuation of the security. The value of each security for
which readily available market quotations exist is based on a decision as to the
broadest and most representative market for such security. For purposes of
calculating net asset value all assets and liabilities initially expressed in
foreign currencies will be converted into U.S. dollars at the prevailing rate
currency average on the valuation date.
Options on stock indexes traded on national securities exchanges are valued at
the close of options trading on such exchanges which is currently 4:10 p.m. New
York time. Stock index futures and related options, which are traded on
commodities exchanges, are valued at their last sales price as of the close of
such commodities exchanges which is currently 4:15 p.m., New York time. Options
and futures traded on foreign exchanges are valued at the last sale price
available prior to the calculation of the Fund's net asset value. Securities or
other assets for which market quotations are not readily available (including
certain restricted and illiquid securities) are valued at fair value in
accordance with procedures established by and under the general supervision and
responsibility of the Trustees. Such procedures include the use of independent
pricing services which use prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. Short-term investments which mature in
60 days or less are valued at amortized cost if their original maturity was 60
days or less, or by amortizing their value on the 61st day prior to maturity, if
their original maturity when acquired by the Portfolio was more than 60 days,
unless this is determined not to represent fair value by the Trustees.
Trading in securities on most foreign markets is normally completed before the
close of trading in U.S. markets and may also take place on days on which the
U.S. markets are closed. If events materially affecting the value of securities
occur between the time when the market in which they are traded closes and the
time when the Fund's net asset value is calculated, such securities will be
valued at fair value in accordance with procedures established by and under the
general supervision of the Trustees.
If the Portfolio determines that it would be detrimental to the best interest of
the remaining investors in the Portfolio to make payment wholly or partly in
cash, payment of the redemption price may be made in whole or in part by a
distribution in kind of securities from the Portfolio, in lieu of cash, in
conformity with the applicable rule of the SEC. If interests are redeemed in
kind, the redeeming investor might incur transaction costs in converting the
assets into cash. The method of valuing portfolio securities is described above
and such valuation will be made as of the same time the redemption price is
determined. The Portfolio has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Portfolio is obligated to redeem interests solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the
Portfolio during any 90 day period for any one investor. The Portfolio will not
redeem in kind except in circumstances in which an investor is permitted to
redeem in kind.
The net asset value of the Portfolio will not be computed on the days the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. On days when U.S. trading markets close
early in observance of these holidays, the Portfolio would expect to close for
purchases and withdrawals at the same time. The Portfolio may also close for
purchases and withdrawals at such other times as may be determined by the
Trustees to the extent permitted by applicable law. The days on which net asset
value is determined are the Portfolio's business days.
ITEM 19. TAXATION OF THE PORTFOLIO.
The Portfolio is organized as a New York trust. The Portfolio is not subject to
any income or franchise tax in the State of New York. However each investor in
the Portfolio will be subject to U.S. Federal income tax in the manner described
below on its share (as determined in accordance with the governing instruments
of the Portfolio) of the Portfolio's ordinary income and capital gain 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.
Although, as described above, the Portfolio will not be subject to federal
income tax, it will file appropriate income tax returns.
It is intended that the Portfolio's assets will be managed in such a way that an
investor in the Portfolio will be able to satisfy the requirements of Subchapter
M of the Code. To ensure that investors will be able to satisfy the requirements
of subchapter M, the Portfolio must satisfy certain gross income and
diversification requirements.
Gains or losses on sales of portfolio securities will be treated as long-term
capital gains or losses if the securities have been held for more than one year
except in certain cases where, if applicable, a put is acquired or a call option
is written thereon. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Portfolio lapses or is
terminated through a closing transaction, such as a repurchase by the Portfolio
of the option from its holder, the Portfolio will realize a short-term capital
gain or loss, depending on whether the premium income is greater or less than
the amount paid by the Portfolio in the closing transaction. If securities are
purchased by the Portfolio pursuant to the exercise of a put option written by
it, the Portfolio will subtract the premium received from its cost basis in the
securities purchased.
Under the Code, gains or losses attributable to disposition of foreign currency
or to foreign currency contracts, or to fluctuations in exchange rates between
the time the Portfolio accrues income or receivables or expenses or other
liabilities denominated in a foreign currency and the time the Portfolio
actually collects such income or pays such liabilities, are treated as ordinary
income or ordinary loss. Similarly, gains or losses on the disposition of debt
securities held by the Portfolio, if any, denominated in foreign currency, to
the extent attributable to fluctuations in exchange rates between the
acquisition and disposition dates are also treated as ordinary income or loss.
Forward currency contracts, options and futures contracts entered into by the
Portfolio may create "straddles" for U.S. federal income tax purposes and this
may affect the character and timing of gains or losses realized by the Portfolio
on forward currency contracts, options and futures contracts or on the
underlying securities.
Certain options, futures and foreign currency contracts held by the Portfolio at
the end of each fiscal year will be required to be "marked to market" for
federal income tax purposes -- i.e., treated as having been sold at market
value. For options and futures contracts, 60% of any gain or loss recognized on
these deemed sales and on actual dispositions will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss regardless of how long the Portfolio has held such options or
futures. Any gain or loss recognized on foreign currency contracts will be
treated as ordinary income.
The Portfolio may invest in equity securities of foreign issuers. If the
Portfolio purchases shares in certain foreign investment funds (referred to as
passive foreign investment companies ("PFICs") under the Code), investors who
are U.S. persons generally would be subject to special rules on any "excess
distribution" from such foreign investment fund, including any gain from the
disposition of such shares. Under these special rules, (i) the gain or excess
distribution would be allocated ratably over the investor's holding period for
such shares, (ii) the amount allocated to the taxable year in which the gain or
excess distribution was realized would be taxable as ordinary income, (iii) the
amount allocated to each prior year, with certain exceptions, would be subject
to tax at the highest tax rate in effect for that year and (iv) the interest
charge generally applicable to underpayments of tax would be imposed in respect
of the tax attributable to each such year. Alternatively, an investor may, if
certain conditions are met, include in its income each year a pro rata portion
of the foreign investment fund's income, whether or not distributed to the
Portfolio.
The Portfolio will be permitted to "mark to market" any marketable stock held by
the Portfolio in a PFIC. If the Portfolio made such an election, the investor in
the Portfolio would include in income each year an amount equal to its share of
the excess, if any, of the fair market value of the PFIC stock as of the close
of the taxable year over the adjusted basis of such stock. The investor would be
allowed a deduction for its share of the excess, if any, of the adjusted basis
of the PFIC stock over its fair market value as of the close of the taxable
year, but only to the extent of any net mark-to-market gains with respect to the
stock included by the investor for prior taxable years.
FOREIGN INVESTORS. It is intended that the Portfolio will conduct its affairs
such that its income and gains will not be effectively connected with the
conduct of a U.S. trade or business. Provided the Portfolio conducts its affairs
in such a manner, allocations of U.S. source dividend income to an investor who,
as to the United States, is a foreign trust, foreign corporation or other
foreign investor will be subject to U.S. withholding tax at the rate of 30% (or
lower treaty rate), and allocations of portfolio interest (as defined in the
Code) or short term or net long term capital gains to such investors generally
will not be subject to U.S. tax.
STATE AND LOCAL TAXES. The Portfolio may be subject to state or local taxes in
jurisdictions in which the Portfolio is deemed to be doing business. In
addition, the treatment of the Portfolio and its investors in those states which
have income tax laws might differ from treatment under the federal income tax
laws. Investors should consult their own tax advisors with respect to any state
or local taxes.
FOREIGN TAXES. The Portfolio may be subject to foreign withholding taxes
with respect to income received from
sources within foreign countries.
OTHER TAXATION. The investment by an investor in the Portfolio does not cause
the investor to be liable for any income or franchise tax in the State of New
York. Investors are advised to consult their own tax advisors with respect to
the particular tax consequences to them of an investment in the Portfolio.
ITEM 20. UNDERWRITERS.
The exclusive placement agent for the Portfolio is FDI, which receives no
additional compensation for serving in this capacity. Investment companies,
insurance company separate accounts, common and commingled trust funds and
similar organizations and entities may continuously invest in the Portfolio.
ITEM 21. CALCULATION OF PERFORMANCE DATA.
Not applicable.
ITEM 22. FINANCIAL STATEMENTS.
The Portfolio's May 31, 2000 annual report to investors filed with the SEC
pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder is
incorporated herein by reference. (Accession No. 0000912057-00-033170, filed
July 26, 2000.)
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A - Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debts in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debts in this category than for debts in higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
SHORT-TERM TAX-EXEMPT NOTES
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest rating
assigned by Standard & Poor's and has a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics are given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory
capacity to pay principal and interest.
MOODY'S
CORPORATE AND MUNICIPAL BONDS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time
may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to the principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well established access to a range of financial markets
and assured sources of alternate liquidity.
SHORT-TERM TAX EXEMPT NOTES
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes with this
rating enjoy strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
PART C
ITEM 23. EXHIBITS.
(a) Declaration of Trust, as amended, was filed as Exhibit No. 1 to
Post-Effective Amendment No. 26 to the Registration Statement filed on September
27, 1996 (Accession Number 0000912057-96-021331).
(a)1 Amendment No. 5 to Declaration of Trust; Amendment and Fifth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest.*
(a)2 Amendment No. 6 to Declaration of Trust; Amendment and Sixth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest was filed as Exhibit No. 1(b) to Post-Effective Amendment No. 32 to the
Registration Statement on February 28, 1997 (Accession Number
0001016964-97-000038).
(a)3 Amendment No. 7 to Declaration of Trust; Amendment and Seventh Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest was filed as Exhibit No. 1(c) to Post-Effective Amendment No. 34 to the
Registration Statement on April 30, 1997 (Accession Number
0001019694-97-000063).
(a)4 Amendment No. 8 to Declaration of Trust; Amendment and Eighth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest was filed as Exhibit No. 1(d) to Post-Effective Amendment No. 41 to the
Registration Statement on October 21, 1997 (Accession Number
0001042058-97-000006).
(a)5 Amendment No. 9 to Declaration of Trust; Amendment and Ninth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest was filed as Exhibit No. 1(e) to Post-Effective Amendment No. 45 to the
Registration Statement on December 29, 1997 (Accession Number
0001041455-97-000013).
(a)6 Amendment No. 10 to Declaration of Trust; Amendment and Tenth Amended
and Restated Establishment and Designation of Series of Shares of Beneficial
Interest and change voting procedures to dollar-based voting was filed as
Exhibit No. (a)6 to Post-Effective Amendment No. 59 to the Registration
Statement on December 31, 1998 (Accession Number 0001041455-98-000098).
(b) By-Laws of the Registrant.(3)
(b)(1) Amendment to Restated By-Laws of Registrant filed as Exhibit No. (b)
1 to Post Effective Amendment No. 67 to the Registration Statement on February
28, 2000 (Accession Number 0001041455-00-000057)
(d)1 Investment Advisory Agreement between the Registrant and Morgan
Guaranty Trust Company of New York ("Morgan").(3)
(d)2 Form of Investment Advisory Agreement between the Registrant and J.P.
Morgan Investment Management Inc. ("JPMIM").(4)
(e) Distribution Agreement between Registrant and Funds Distributor, Inc.
("FDI").*
(g)1 Custodian Contract between the Registrant and State Street Bank and
Trust Company ("State Street").(1)
(g)2 Amendment (dated July 1, 1996) to Custodian Contract between the Registrant
and State Street.(2)
(g)3 Custodian Contract between Registrant and The Bank
of New York filed as Exhibit (g)2 to Post Effective Amendment No. 67 to
Registrant's registration statement on Form N-1A on February 28, 2000 (Accession
number
0001041455-00-000057)
(h)1 Co-Administration Agreement between the Registrant and Funds
Distributor, Inc. (dated August 1, 1996).(2)
(h)2 Restated Administrative Services Agreement between the Registrant and
Morgan (dated August 1, 1996).(2)
(h)2a Amended Exhibit 1 to Restated Administrative Services Agreement
between the Registrant and Morgan.(3)
(h)3 Transfer Agency and Service Agreement between the Registrant and State
Street.(3)
(h)4 Amended and Restated Portfolio Fund Services Agreement between the
Registrant and Pierpont Group, Inc. (dated July 11, 1996).(2)
(h)5 Restated Shareholder Servicing Agreement between Registrant and Morgan
Guaranty Trust Company of New York ("Morgan Guaranty") filed as Exhibit
(h)2 to Post-Effective Amendment No. 53 to the Registration Statement on
August 25, 1998 (Accession No. 0001041455-98-000052).
(h)6 Transfer Agency and Service Agreement between Registrant and State
Street.*
(h)7 Restated Administrative Services Agreement between Registrant and
Morgan Guaranty.*
(h)8 Fund Services Agreement, as amended, between Registrant and Pierpont
Group, Inc.*
(l) Investment representation letters of initial investors.(3)
(n) Financial Data Schedule. Not applicable.
(p) Code of Ethics filed herewith.
(1) Incorporated herein by reference from the Registrant's registration
statement on form N-1A (the "Registration Statement") as filed with the
Securities and Exchange Commission on April 1, 1994.
(2)Incorporated herein by reference from Amendment No. 3 to the
Registration Statement as filed with the Securities and Exchange Commission on
September 27, 1996 (Accession No. 0000912057-96-021424).
(3) Incorporated herein by reference from Amendment No. 5 to the Registration
Statement as filed with the Securities and Exchange Commission on January 2,
1998 (Accession No. 0001041455-98-000003).
(4)Incorporated herein by reference from Amendment No. 6 to the
Registration Statement as filed with the Securities and Exchange Commission on
October 2, 1998 (Accession No. 0001041455-98-000070).
------------------------ * Incorporated herein by reference to
Post-Effective Amendment No. 30 to the Registration Statement filed on December
27, 1996 (Accession Number 0001016964-96-000066).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE PORTFOLIO.
Not applicable
ITEM 25. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration of Trust,
filed as an Exhibit hereto.
The Trustees and officers of the Registrant and the personnel of the
Registrant's co-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, as amended.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
JPMIM is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, and is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated. JPMIM manages employee benefit funds of corporations, labor unions
and state and local governments and the accounts of other institutional
investors, including investment companies.
To the knowledge of the Registrant, none of the directors, except those
set forth below, or executive officers of JPMIM, is or has been during the past
two fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain officers and directors
of JPMIM also hold various positions with, and engage in business for, J.P.
Morgan & Co. Incorporated, which owns all the outstanding stock of JPMIM.
ITEM 27. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 28. 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:
Morgan Trust Guaranty Company of New York, 60 Wall Street, New York, New York
10260-0060 or 522 Fifth Avenue, New York, New York 10036 (records relating to
its functions as investment adviser and administrative services agent).
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110, serves as the Fund's transfer and dividend
disbursing agent. As transfer agent and dividend disbursing agent, State Street
is responsible for maintaining account records detailing the ownership of Fund
shares and for crediting income, capital gains and other changes in share
ownership to shareholder accounts.
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston, Massachusetts
02109.
Pierpont Group, Inc., 461 Fifth Avenue, New York, New York 10017 (records
relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Not applicable.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as amended,
the Registrant has duly caused this Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly authorized, in New York,
New York, on the 28th day of September, 2000.
THE U.S. EQUITY PORTFOLIO
By: /s/ Christopher Kelley
--------------------------------
Christopher Kelley
Vice President and Assistant Secretary
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
Ex-99.Code of Ethics
