<PAGE>
MASSMUTUAL INDEXED EQUITY FUND
1295 State Street
Springfield, Massachusetts 01111
1-(888)-743-5274
MassMutual Institutional Funds (the "Trust") is a professionally managed,
open-end investment company designed to offer investors both the opportunity to
pursue long-term investment goals and the flexibility to respond to changes in
their investment objectives and economic and market conditions. The Trust
consists of separate series of shares, each of which has a distinctive
investment objective. This Prospectus describes one of these series, MassMutual
Indexed Equity Fund (the "Fund"), a diversified series of the Trust.
The Fund seeks to approximate as closely as practicable (before fees and
expenses) the capitalization-weighted total rate of return of that portion of
the U.S. market for publicly-traded common stocks composed of larger-capitalized
companies. This investment objective is fundamental and cannot be changed
without shareholder approval. The Fund seeks to achieve its investment objective
by investing all of its assets in the S&P 500 Index Master Portfolio (the
"Master Portfolio"), which is a series of Master Investment Portfolio, an
open-end management investment company, rather than in a portfolio of
securities. The Master Portfolio has substantially the same investment objective
as the Fund and the Fund's investment experience corresponds directly with that
of the Master Portfolio.
The Fund offers three classes of shares: Class A, Class Y and Class S. Each
class is offered to different types of investors and has different expenses. See
"Expense Information" and "How to Purchase, Exchange and Redeem Shares."
This Prospectus sets forth concisely the information about the Fund and the
Trust that a prospective investor should know before investing. Please read it
carefully and retain it for future reference. Certain additional information
about the Fund and the Trust is contained in a Statement of Additional
Information dated July 1, 1998, as amended from time-to-time (the "SAI"), which
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. This additional information is available
without charge by writing to the Secretary, MassMutual Institutional Funds, 1295
State Street, Springfield, Massachusetts 01111-0111.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DISTRIBUTOR
MML Distributors, LLC
1414 Main Street
Springfield, Massachusetts 01144
PROSPECTUS July 1, 1998, supplemented May 3, 1999.
<PAGE>
Table Of Contents
Page
Expense Information ...................................................... 3
The Trust ................................................................ 4
Investment Objective And Policies Of The Fund ............................ 4
Investment Practices Of The Fund And Related Risks ....................... 5
How To Purchase, Exchange And Redeem Shares .............................. 6
Master/Feeder Structure .................................................. 8
Management Of The Fund ................................................... 9
Description Of Shares .................................................... 10
How Fund Shares Are Priced ............................................... 10
Distributions And Taxation ............................................... 11
Investment Performance ................................................... 12
Glossary ................................................................. 13
Disclaimer ............................................................... 13
Appendix - Additional Investment Policies ................................ A-1
2
<PAGE>
Expense Information
As an investor, you pay certain fees and expenses in connection with your
investment. These fees and expenses will vary depending on the class of shares
that you purchase. The fee table shown below is meant to assist you in
understanding these fees and expenses. The fee table shows two categories of
expenses, Shareholder Fees and Annual Fund Operating Expenses. Shareholder Fees
refer to fees paid directly from your investment. Annual Fund Operating Expenses
refer to the costs of operating the Funds. These costs are deducted from a
Fund's assets, which means you pay them indirectly. These expenses include
indirect expenses incurred by the Master Portfolio in which the Fund invests.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Class A Shares Class Y Shares Class S Shares
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your investment) None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund Assets)
Management Fees .05% .05% .05%
Distribution and Service (Rule 12b-1) Fees .25% None None
Other Expenses(1) .55% .40% .37%
Total Annual Fund Operating Expenses (1)(2) .85% .45% .42%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Other Expenses and Total Annual Fund Operating Expenses are based on
estimated amounts for the current fiscal year, but restated to give effect
to a reduction in the administrative service fees charged to the Fund
effective on April 6, 1999.
(2) Employee benefit plans which invest in the Funds through MassMutual
separate investment accounts may pay additional charges under their group
annuity contract or services agreement. Investors who purchase shares
directly from the Funds may also be subject to charges imposed in their
administrative services or other agreement with MassMutual or MassMutual
affiliate. None of these charges are deducted from Fund assets.
EXAMPLES: These examples are intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. The examples
assume that you invest $1,000 in the Fund for the time periods indicated, that
your investment earns a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
- ---------------------------------------------------------------------------
Class A Shares Class Y Shares Class S Shares
- ---------------------------------------------------------------------------
1 year $ 9 $ 5 $ 4
3 years $27 $14 $13
5 years $47 $25 $24
10 years $105 $57 $53
- ---------------------------------------------------------------------------
3
<PAGE>
The Trust
The Trust is an open-end, management investment company designed to offer
investors both the opportunity to pursue long-term investment goals and the
flexibility to respond to changes in their investment objectives and economic
and market conditions. The Trust is organized under the laws of The Commonwealth
of Massachusetts as a Massachusetts business trust pursuant to an Agreement and
Declaration of Trust dated May 28, 1993, as amended from time to time (the
"Declaration of Trust"). The Board of Trustees of the Trust is generally
responsible for management of the business and affairs of the Trust. Trustees
formulate the general policies of the Trust and the Fund, approve contracts and
authorize Trust officers to carry out the decisions of the Board. For more
information concerning the management of the Trust, reference should be made to
the SAI.
Investment Objective And Policies Of The Fund
The Fund seeks to approximate as closely as practicable (before fees and
expenses) the capitalization-weighted total rate of return of that portion of
the U.S. market for publicly-traded common stocks composed of larger-capitalized
companies. This investment objective is fundamental and cannot be changed
without the vote of a majority of the Fund's outstanding voting shares./1/
There can be no assurance that the Fund will achieve its investment objective;
the success of the Fund depends to a great extent upon changes in market
conditions.
The Fund seeks to achieve its investment objective by investing all of its
assets in the S&P 500 Index Master Portfolio (the "Master Portfolio") of Master
Investment Portfolio, an open-end, management investment company ("MIP"). The
Master Portfolio has substantially the same fundamental investment objective as
the Fund. The Master Portfolio seeks to achieve its objective by investing
substantially all of its assets in the same stocks and in substantially the same
percentages as the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index")./2/ The weightings of stocks in the S&P 500 Index are based on each
stock's relative total market capitalization; that is, its market price per
share times the number of shares outstanding.
The Master Portfolio has represented that no attempt is made to manage its
portfolio using economic, financial and market analysis. The Master Portfolio is
managed by determining which securities are to be purchased or sold to
replicate, to the extent feasible, the investment characteristics of the S&P 500
Index. Under normal market conditions, at least 90% of the value of the Master
Portfolio's total assets is invested in securities comprising the S&P 500 Index.
The Master Portfolio has also represented that it attempts to achieve, in both
rising and falling markets, a correlation of at least 95% between the total
return of its net assets, before expenses, and the total return of the S&P 500
Index. Notwithstanding the factors described below, perfect (100%) correlation
would be achieved if the total return of the Master Portfolio's net assets
increased or decreased exactly as the total return of the S&P 500 Index
increased or decreased.
The Master Portfolio's ability to match its investment performance to the
investment performance of the S&P 500 Index may be affected by, among other
things, the Fund's and the Master Portfolio's expenses, the amount of cash and
cash equivalents held by the Master Portfolio's investment portfolio, the manner
in which the total return of the S&P 500 Index is calculated and the timing,
frequency and size of shareholder purchases and redemptions of both the Fund and
the Master Portfolio. The Master Portfolio uses cash flows from shareholder
purchase and redemption activity to maintain, to the extent feasible, the
similarity of its portfolio to the securities comprising the S&P 500 Index.
Barclays Global Fund Advisors, the Master Portfolio's investment adviser
("BGFA"), regularly monitors the Master Portfolio's correlation to the S&P 500
Index and adjusts the portfolio of the Master Portfolio to the extent necessary
to achieve a correlation of at least 95% with the S&P 500 Index. The Fund's
performance will correspond directly to the experience of the Master Portfolio.
- --------
/1/ As used in this Prospectus, a majority of the outstanding voting shares of
the Fund means the lesser of (a) 67% of the Fund's outstanding shares present at
a meeting of shareholders if more than 50% of the outstanding shares are present
in person or by proxy, or (b) more that 50% of the Fund's outstanding shares.
/2/ S&P does not sponsor the Fund or the Master Portfolio, nor is it affiliated
in any way with Barclays Global Fund Advisors, the Master Portfolio's investment
adviser, the Master Portfolio or the Fund. "Standard & Poor's(R)," "S&P(R),"
"S&P 500(R)," and "Standard & Poor's 500(R)," are trademarks of McGraw-Hill,
Inc. and have been licensed for use by the Fund and the Master Portfolio. The
Fund and the Master Portfolio are not sponsored, endorsed, sold, or promoted by
S&P and S&P makes no representation or warranty, express or implied, regarding
the advisability of investing in the Fund and the Master Portfolio. S&P's only
relationship to the Fund and the Master Portfolio is the licensing of certain
trademarks and trade names of S&P. The S&P 500 Index is determined, composed and
calculated by S&P without regard to the Fund or the Master Portfolio.
4
<PAGE>
In seeking to replicate the performance of the S&P 500 Index, the Master
Portfolio also may engage in futures and options transactions and other
derivative securities transactions, and may lend its portfolio securities, each
of which involves risk. Generally, the Master Portfolio attempts to be fully
invested at all times in securities comprising the S&P 500 Index and in futures
and options on stock index futures. The Master Portfolio may invest up to 10% of
its total assets in high-quality money market instruments to provide liquidity.
See "Appendix - Additional Investment Policies."
Investment Practices Of The Fund And Related Risks
General
The Fund's net asset value per share should be expected to fluctuate. Investors
should consider the Fund as a part of an overall investment program and should
invest only if they are willing to undertake the risks involved. For additional
information on the risks involved in investing in the Fund, see "Appendix -
Additional Investment Policies."
Equity Securities
The stock investments of the Master Portfolio are subject to equity market risk.
Equity market risk is the possibility that common stock prices will fluctuate or
decline over short or even extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and periods when prices
generally decline. Throughout the first half of 1998, the stock market, as
measured by the S&P 500 Index and other commonly used indices, was trading at or
close to record levels. There can be no guarantee that these performance levels
will continue or even be maintained. Changes in the value of the Master
Portfolio's investments will result in changes in the value of its shares and
thus the Fund's total return to investors.
Use of Derivatives
The Master Portfolio may engage in futures and options transactions and other
derivative securities transactions. These are financial instruments which derive
their performance, at least in part, from the performance of an underlying asset
or index. The derivatives the Master Portfolio may use include stock index
futures. While derivatives can be used effectively in furtherance of the Master
Portfolio's investment objective, under certain market conditions, they can
increase the volatility of the Master Portfolio's net asset value and can
decrease the accurate pricing of the Master Portfolio's portfolio. See "Appendix
- - Additional Investment Policies" and "Additional Investment Policies" in the
SAI.
Foreign Securities
Since the stocks of some foreign issuers are included in the S&P 500 Index, the
Master Portfolio's portfolio may contain securities of such foreign issuers, as
well as American Depositary Receipts and similar instruments, which may subject
the Master Portfolio to additional investment risks with respect to those
securities that are different in some respects from those incurred by a fund
which invests only in securities of domestic issuers. Such risks include
possible adverse political and economic developments, seizure or nationalization
of foreign deposits or adoption of governmental restrictions which might
adversely affect the value of the securities of a foreign issuer to investors
located outside the country of the issuer, whether from currency blockage or
otherwise.
Year 2000 Issue
Like other businesses and governments around the world, the Fund and the Master
Portfolio could be adversely affected if the computer systems used by the Fund's
and Master Portfolio's service providers and those with which they do business
do not properly recognize the Year 2000. This is commonly known as the "Year
2000 issue."
In 1996, MassMutual, the Fund's administrator, began an enterprise-wide process
of identifying, evaluating and implementing changes to its computer systems and
applications software to address the Year 2000 issue. MassMutual has advised the
Fund that this is one of MassMutual's highest business operational priorities.
MassMutual is also seeking assurances from the Fund's other service providers
and others with which MassMutual and the Fund conduct business in order to
identify and resolve Year 2000 issues. The Master Portfolio has advised the Fund
that its principal service providers are working on necessary changes to their
systems and that they expect their systems to be adapted on time. There can, of
course, be no assurance of success. In addition, because the Year 2000 issue
affects virtually all organizations, the companies or entities in which the
Master Portfolio invests also could be adversely impacted by the Year 2000
issue. The extent of such impact cannot be predicted.
Other Investment Considerations
Asset allocation and modeling strategies are employed by BGFA for other
investment companies and accounts advised or sub-advised by BGFA. If these
strategies indicate particular securities should be purchased or sold at the
same time by the Master Portfolio and one or more of these investment companies
or accounts, available investments or opportunities for sales will be allocated
equitably to each by BGFA. In some cases, these procedures may adversely affect
the size of the position obtained for or disposed of by the Master Portfolio or
the price paid or received by the Master Portfolio.
Fundamental Investment Restrictions
For a description of fundamental investment restrictions of the Fund which may
not be changed without the affirmative vote of a majority of the outstanding
voting shares of the Fund, reference should be made to the SAI.
5
<PAGE>
How To Purchase, Exchange And Redeem Shares
Features and Eligibility Requirements of Each Class
The Fund offers three Classes of shares: Class S, Class Y and Class A. The
shares offered by this Prospectus are Class S, Class Y and Class A shares. None
of the Classes of shares has up-front or deferred sales charges. Only Class A
shares charge a 12b-1 fee.
Class S and Class Y shares are primarily offered to institutional investors
through institutional distribution channels, such as employer-sponsored
retirement plans or through broker-dealers, financial institutions or insurance
companies. Class A shares are primarily offered through retail distribution
channels, such as broker-dealers or financial institutions. The different
Classes have different fees, expenses and/or minimum investor size requirements.
The difference in the fee structures among the Classes is the result of their
separate arrangements for shareholder and distribution services and not the
result of any difference in amounts charged by the investment adviser for
investment advisory services. Accordingly, investment advisory expenses do not
vary by Class. Different fees and expenses of a Class will affect performance of
that Class. For additional information, call us at 1-888-743-5274 or contact a
sales representative or financial intermediary who offers the Classes.
Except as described below, all Classes of shares of the Fund have identical
voting, dividend, liquidation and other rights, preferences, terms and
conditions. The only differences among the various Classes are: (a) each Class
may be subject to different expenses specific to that Class; (b) each Class has
a different Class designation; (c) each Class has exclusive voting rights with
respect to matters solely affecting such Class; (d) each Class offered in
connection with a 12b-1 Plan will bear the expense of the payments that would be
made pursuant to that 12b-1 Plan, and only that Class will be entitled to vote
on matters pertaining to that 12b-1 Plan; and (e) each Class will have different
exchange privileges.
Each Class of the Fund's shares invests in the same portfolio of securities.
Because each Class will have different expenses, they will likely have different
share prices. All Classes of shares are available for purchase by insurance
company separate investment accounts. Each Class of shares of the Fund may also
be purchased by the following Eligible Purchasers:
Class A Shares
Eligible Purchasers. Class A shares may be purchased by:
. Qualified plans under Internal Revenue Code of 1986 (the "Code") Section
401(a), Code Section 403(b) plans, Code Section 457 plans and other
retirement plans;
. Individual retirement accounts described in Code Section 408; and
. Other institutional investors, nonqualified deferred compensation plans,
and voluntary employees' beneficiary associations described in Code Section
501(c)(9).
These Eligible Purchasers must have an agreement with MassMutual or a MassMutual
affiliate to purchase Class A Shares. There is no minimum plan or institutional
investor size to purchase Class A shares.
Class A Shares may be offered to present or former officers, directors,
trustees, and employees (and their spouses, parents, children and siblings) of
the Funds, MassMutual and its affiliates and retirement plans established by
them for their employees.
Class Y Shares
Eligible Purchasers. Class Y shares may be purchased by:
. Non-qualified deferred compensation plans;
. Registered mutual funds;
. Qualified plans under Code Section 401(a), Code Section 403(b) plans, Code
Section 457 plans and other retirement plans, where plan assets of the
employer generally or are expected to exceed $5 million; and
. Other institutional investors with assets generally in excess of $5
million.
These Eligible Purchasers must have an agreement with MassMutual or a MassMutual
affiliate to purchase Class Y shares.
Class S Shares
Eligible Purchasers. Class S shares may be purchased by:
. Qualified plans under Code Section 401(a), Code Section 403(b) plans, Code
Section 457 plans and other retirement plans, where plan assets of the
employer generally or are expected to exceed $100 million;
. Registered mutual funds; and
. Other institutional investors with assets generally in excess of $100
million.
These Eligible Purchasers must have an agreement with MassMutual or a MassMutual
affiliate to purchase Class S shares.
6
<PAGE>
Class A Shares - Distribution and Service (Rule 12b-1) Fees
Class A shares are sold at net asset value per share without an initial sales
charge. Therefore, 100% of an Investor's money is invested in the Fund.
Distribution and Service (Rule 12b-1) Fees. The Fund has adopted a Rule 12b-1
Plan for Class A shares of the Fund. Under the Plan, the Fund is permitted to
pay distribution and service fees at the annual rate of .25%, in the aggregate,
of the Fund's average daily net assets attributable to Class A shares.
Distribution fees may be paid to brokers or other financial intermediaries for
providing services in connection with the distribution and marketing of Class A
shares and for related expenses. Services fees may be paid to brokers or other
financial intermediaries for providing personal services to Class A shareholders
and/or maintaining Class A shareholder accounts and for related expenses.
Compensation under the Plan for service fees will be paid to MassMutual and
compensation under the Plan for distribution fees will be paid to the
Distributor. MassMutual and the Distributor will be entitled to retain a portion
of the fees generated by an account, or may reallow the full amount to the
brokers or other intermediaries.
The Class A 12b-1 Plan is of a type known as a compensation plan. This means
that although the Trustees are expected to take into account the expenses of
MassMutual and the Distributor, the fees are payable to compensate MassMutual
and the Distributor for services rendered even if the amount paid by the Fund
exceeds MassMutual's or the Distributor's expenses. See the SAI for a
description of the types of permissible distribution and service fee
expenditures by the Distributor and MassMutual, respectively.
Class Y Shares - No Sales Charges
Class Y shares of the Fund are not subject to front-end sales charges.
Therefore, 100% of an Investor's money is invested in the Fund. In addition,
Class Y shares of the Fund are not subject to deferred sales charges or to any
distribution or service fees.
Class S Shares - No Sales Charges
SIAs purchase Class S shares directly from the Fund without a front-end sales
charge. Therefore, 100% of an SIA Investor's money is invested in the Fund. In
addition, Class S shares of the Fund are not subject to any deferred sales
charges or any distribution or service fees.
Purchase of Shares
Shares of the Trust are offered on each day the New York Stock Exchange ("NYSE")
is open for trading (a "Business Day"). Purchase orders received by the Transfer
Agent from MassMutual (as servicing agent of the Distributor) on a Business Day
prior to 4:00 p.m., Eastern Time, will be processed based on that day's closing
net asset value.
Plan Investors purchasing group annuity contracts from MassMutual which have the
Fund as an investment option under their Plans ("Group Annuity Investors") and
Rollover IRAs must place their purchase orders with MassMutual (as servicing
agent of the Distributor) at its home office and must be accompanied by
sufficient funds. Acceptable methods of payment include checks, federal funds
wires, and automated clearing house transactions ("ACH"). MassMutual, as
servicing agent of the Distributor, will not transmit a purchase order to the
Trust's Transfer Agent until MassMutual has determined that the purchase order
is in good form. Generally, a purchase order will be determined by MassMutual to
be in good form if such order: (1) includes all information and documentation
necessary to make appropriate Investor, Plan, trustee and/or Plan Participant/3/
(if applicable) allocations to the Fund and/or other investment options under
the Plan; and (2) is received by MassMutual at its home office prior to the
close of the NYSE. Purchase orders by wire will be in good form only upon
receipt by MassMutual of: (1) immediately available funds, deposited to the
appropriate MassMutual account; and (2) a confirmation of the wire receipt. Any
order to purchase Fund shares which is received by MassMutual after the close of
the NYSE on a Business Day will be transmitted to the Trust's Transfer Agent on
the next Business Day. For more specific information regarding what information
and documentation are necessary for MassMutual to determine that a purchase
order is in good form with respect to a particular Plan, Plan Investors should
refer to Plan Documents.
For non-qualified deferred compensation plans eligible to purchase Class Y
shares that have entered into an administrative services agreement with
MassMutual, Class Y shares will be purchased directly by the Plan's trustee
pursuant to the terms of the administrative services agreement. Investors Bank &
Trust Company may serve as a Plan's trustee under the terms of the
administrative services agreement. MassMutual separate investment accounts may
purchase Class A, Class Y and Class S shares directly from the Trust. Other
Investors eligible to purchase Class A and Class Y shares that have entered into
an administrative services or other agreement with MassMutual must place
purchase orders in accordance with the terms of such administrative services or
other agreement. All other Investors must enter into an agreement permitting
direct purchases from the Trust.
The sale of Trust shares will be suspended during any period when the
determination of net asset value is suspended. The sale of Trust shares also may
be suspended by the Board of Trustees whenever the Board determines that it is
in the Trust's best interest to do so. The Trust, in its complete discretion,
may reject any order for purchase of its shares.
- ------------------------------------------
/3/ See "Glossary" for a definition of Plan Participant.
7
<PAGE>
Exchange Privileges and Procedures
Investors have the privilege of exchanging shares of the Fund for the same class
of shares of another series of the Trust, subject to the provisions of Plan
Documents, any administrative services or other agreement with MassMutual and
applicable laws, including state insurance laws. However, exchanges may be
restricted or refused by the Fund if, in the opinion of the Trust: (1) an
Investor has engaged in excessive trading; (2) the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets; or (3)
a pattern of exchanges coincides with a "market timing" strategy that might be
disruptive to the Fund. The Fund also reserves the right to refuse exchange
purchases by any person or group of persons, if, in the Trust's judgment, the
Fund would be unable to invest the funds effectively in accordance with its
investment objective and policies, or otherwise potentially would be adversely
affected. The Trust reserves the right on 60 days' written notice to modify or
terminate the exchange privilege. Furthermore, any exchange limits imposed by
the Trust may be modified, in the sole discretion of the Trust, for Plan
Investors so that the Trust's exchange privileges are consistent with Plan or
group annuity contract exchange limits as set forth in Plan Documents and
Department of Labor regulations. Plan Investors and Plan Participants should
refer to Plan Documents and related materials to determine what, if any,
exchange limitations apply to them.
For Group Annuity Investors and Rollover IRAs, exchange requests must be
delivered to MassMutual at its home office. An Investor that has entered into an
administrative services or other agreement with MassMutual must deliver exchange
requests in good form pursuant to the terms of its administrative services or
other agreement. All other Investors must deliver exchange requests in good form
to the Transfer Agent.
Any exchange will involve the redemption of shares and the purchase of shares in
another series of the Trust on the basis of the next calculated net asset value
per share of each series of the Trust after the exchange request is received by
the Transfer Agent. Exchange requests will not be transmitted to the Transfer
Agent until determined to be in good form./4/
Redeeming Shares
For Group Annuity Investors and Rollover IRAs, redemption requests must be sent
to MassMutual at its home office. An Investor that has entered into an
administrative services or other agreement with MassMutual must deliver
redemption requests in good form pursuant to the terms of its administrative
services or other agreement. All other Investors must deliver redemption
requests in good form to the Transfer Agent.
The Fund redeems its shares at their net asset value as next computed after
receipt by the Transfer Agent of a request for redemption. Redemption requests
will not be transmitted to the Transfer Agent until determined to be in good
form. Redemption payments will be made within seven days after receipt of the
written request therefor by the Trust, except that the right of redemption may
be suspended or payments postponed when permitted by applicable law and
regulations. When redemption is requested of shares recently purchased by
check, payment may be delayed until the check has been collected, which may take
up to 15 days from receipt of the check.
Master/Feeder Structure
The Fund is a feeder fund in a master/feeder structure. Accordingly, the Fund
invests all of its assets in the Master Portfolio which has substantially the
same investment objective as the Fund. See "Investment Objective And Policies of
the Fund." In addition to selling its shares to the Fund, the Master Portfolio
has sold and may continue to sell its shares to certain other mutual funds or
other accredited investors. Information regarding additional options, if any,
for investment in shares of the Master Portfolio is available from Stephens
Inc., the Master Portfolio's placement agent ("Stephens"), and may be obtained
by calling 1-800-643-9691. The expenses and, correspondingly, the returns of
other investment options investing in the Master Portfolio may differ from those
of the Fund.
The Fund is liable for its proportionate share of the obligations of the Master
Portfolio. However, the risk of the Fund incurring financial loss on account of
such liability is limited to circumstances in which both inadequate insurance
exists and the Master Portfolio itself is unable to meet its obligations. If a
mutual fund or other investor withdraws its investment from the Master
Portfolio, the economic efficiencies (e.g., spreading fixed expenses across a
larger asset base) that should be available through investment in the Master
Portfolio may not be fully achieved or maintained. In addition, given the
relatively novel nature of the master/feeder structure, accounting and
operational difficulties could occur. See "Expense Information" for additional
description of the Fund's and Master Portfolio's expenses.
The Master Portfolio's investment objective and other fundamental policies,
which are substantially the same as those of the Fund, cannot be changed without
the vote of a majority (as defined in the Investment Company Act of 1940 (the
"1940 Act") of the Master Portfolio's outstanding voting interests. On the
other hand, certain policies of the Master Portfolio which are non-fundamental
can be changed by vote of a majority of the MIP Board of Trustees without a vote
of interestholders.
Whenever the Fund is requested to vote on matters pertaining to the Master
Portfolio, the Trust will either hold a meeting of the Fund's shareholders and
will cast its votes as instructed by Fund shareholders, or vote the shares of
the Master Portfolio held by it in the same proportion as the vote of all
- ---------------------------------------
/4/ See "Purchase of Shares" above for a discussion of the term "in good form."
8
<PAGE>
other holders of such security. If the Fund is requested to vote on matters
pertaining to the Master Portfolio and the Fund holds a meeting of the Fund's
shareholders, the Trustees of the Trust will vote shares for which they receive
no voting instructions in the same proportion as the shares for which they do
receive voting instructions. If the Master Portfolio's investment objective or
policies are changed, the Fund could subsequently change its objective or
policies to correspond to those of the Master Portfolio or the Fund could redeem
its Master Portfolio interests and either seek a new investment company with a
matching objective in which to invest or retain its own investment adviser to
manage its portfolio in accordance with its objective. In the latter case, the
Fund's inability to find a substitute investment company in which to invest or
equivalent management services could adversely affect shareholders' investments
in the Fund. Investment of the Fund's assets in the Master Portfolio is not a
fundamental policy of the Fund and a shareholder vote is not required for the
Fund to withdraw its investment from the Master Portfolio.
Information on the Fund's and Master Portfolio's investment objectives, policies
and restrictions is included under "Investment Objective and Policies of the
Fund" and "Appendix - Additional Investment Policies" in this Prospectus and in
corresponding sections of the SAI.
As of June 1, 1998, the S&P 500 Stock Fund of MasterWorks Funds Inc., 111 Center
Street, Little Rock, Arkansas 72201, owned approximately 88.41% of the
outstanding voting securities of the Master Portfolio and could be considered a
"controlling person" of the Master Portfolio for purposes of the 1940 Act.
Management Of The Fund
General
The Fund has not retained the services of an investment adviser because the
Fund's assets are invested in the Master Portfolio, which has retained
investment advisory services. See "Master Portfolio Investment Adviser" below.
However, the Fund bears a pro rata portion of the investment advisory and
certain other fees paid by the Master Portfolio, such as accounting, legal and
SEC registration fees. The Fund is also responsible for its own expenses
relating to, among other things, administrative, custodial and fund accounting
services, and transfer and dividend-disbursing agency services.
Master Portfolio Investment Adviser
BGFA serves as investment adviser to the Master Portfolio. Pursuant to an
Investment Advisory Contract with the Master Portfolio, BGFA provides investment
guidance and policy direction in connection with the management of the Master
Portfolio's assets, subject to the overall authority of MIP's Board of Trustees
and in conformity with Delaware law and the stated policies of the Master
Portfolio. MIP is registered under the 1940 Act as an open-end management
investment company. MIP was organized on October 21, 1993 as a Delaware business
trust.
BGFA is a direct subsidiary of Barclays Global Investors, N.A. ("BGI") which, in
turn, is an indirect subsidiary of Barclays Bank PLC ("Barclays"). BGFI and BGI
are located at 45 Fremont Street, San Francisco, California 94105. BGFA serves
as investment adviser or sub-investment adviser to several registered open-end
management investment companies and has been registered with the SEC as an
investment adviser since 1984. As of April 30, 1998, BGFA and its affiliates
managed, administered and advised approximately $575 billion of assets. For its
advisory services to the Master Portfolio, BGFA is contractually entitled to
receive from the Master Portfolio a monthly fee at the annual rate of .05% of
the Master Portfolio's average daily net assets. For the fiscal year ended
February 28, 1998, BGFA received amounts equal to .05% of the average daily net
assets of the Master Portfolio as compensation for its advisory services.
BGFA, Barclays and their affiliates deal, trade and invest for their own account
in the types of securities in which the Master Portfolio may invest and may have
deposit, loan and commercial banking relationships with the issuers of
securities purchased by the Master Portfolio. BGFA has informed the Master
Portfolio that in making investment decisions BGFA does not obtain or use
material inside information in its possession.
Independent legal counsel to MIP and special counsel to BGFA has advised MIP and
BGFA that BGFA and its affiliates may perform the services contemplated by the
Investment Advisory Contract and this Prospectus without violation of the
Glass-Steagall Act. Such counsel has pointed out, however, that there are no
controlling judicial or administrative interpretations or decisions and that
future judicial or administrative interpretations of, or decisions relating to,
present federal or state statutes, including the Glass-Steagall Act, and
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as future changes in such statutes, regulations and judicial
or administrative decisions or interpretations, could prevent such entities from
continuing to perform, in whole or in part, such services. If any such entity
were prohibited from performing any such services, it is expected that new
agreements would be proposed or entered into with another entity or entities
qualified to perform such services.
Fund Administrator and Sub-Administrator
MassMutual has entered into an administrative services agreement with the Fund
pursuant to which MassMutual is obligated to provide all necessary
administrative and shareholder services and to bear some class expenses, such as
federal and state registration fees, printing and postage. The Fund is
responsible for (i) its pro rata portion of certain fees and expenses paid by
the Master Portfolio, which may include but are not limited to custody,
sub-administration, accounting, legal, audit, SEC registration , brokerage and
other expenses
9
<PAGE>
connected to the execution of portfolio transactions, trustees and any
extraordinary expenses and (ii) certain other expenses of the Fund, including
brokerage, taxes, interest, fees and expenses of non-interested trustees, legal
fees, any required trademark licensing fees, custody and audit fees. MassMutual
may, at its expense, employ others to supply all or any part of the services to
be provided to the Fund pursuant to the administrative services agreement. The
Trust, on behalf of the Fund, pays MassMutual an administrative services fee
monthly for the administrative services performed at annual rates of the average
daily net assets of the applicable class of shares of the Fund as follows:
.5345% for Class A shares; .3845% for Class Y Shares; and .3545% for Class S
Shares.
MassMutual has entered into a sub-administration agreement with Investors Bank &
Trust Company ("IBT"). As sub-administrator, IBT generally assists in all
aspects of Fund administration. IBT is compensated by MassMutual for providing
administrative services to the Fund. IBT also serves as the sub-administrator to
the Master Portfolio and is compensated by BGI for providing administrative
services to the Master Portfolio.
Fund Distributor, Transfer Agent, Dividend Disbursing Agent and Custodian
MML Distributors, LLC acts as Distributor to the Fund. MML Distributors, LLC is
a majority owned subsidiary of MassMutual. MML Distributors, LLC may serve as a
distributor of securities issued by other investment companies.
IBT serves as the Fund's Sub-Administrator, Transfer Agent, Dividend Disbursing
Agent and Custodian. As Custodian, IBT has custody of the Fund's securities, and
maintains certain financial and accounting books and records.
Master Portfolio Co-Administrators and Placement Agent
Stephens, located at 111 Center Street, Little Rock, Arkansas 72201, and BGI,
serve as the Master Portfolio's co-administrators pursuant to a
Co-Administration Agreement with the Master Portfolio. Under the
Co-Administration Agreement, Stephens and BGI provide general supervision of the
operations of the Master Portfolio, other than the provision of investment
advice. The administrative services provided to the Master Portfolio also
include coordination of the other services provided to the Master Portfolio,
compilation of information for reports to the SEC and state securities
commissions, preparation of proxy statements and interestholder reports and
general supervision of data compilation in connection with preparing periodic
reports to MIP's Board of Trustees and officers. In addition, Stephens furnishes
office space and certain facilities to conduct the Master Portfolio's business,
and compensates MIP's trustees, officers and employees who are affiliated with
Stephens. BGI has delegated certain of its administrative duties to IBT. IBT,
as sub-administrator, is compensated by BGI for performing certain
administrative services. Stephens and BGI are not currently entitled to
compensation for providing administrative services to the Master Portfolio.
Stephens also serves as the placement agent of the Master Portfolio's shares but
does not receive compensation for acting as placement agent.
Master Portfolio Custodian, Transfer and Dividend-Disbursing Agent
IBT acts as custodian, transfer agent and dividend disbursing agent to the
Master Portfolio.
Description Of Shares
The Trust is a professionally managed, open-end, series investment company. The
Trust may issue an unlimited number of shares of multiple classes, in one or
more series as the Trustees may authorize, with or without par value as the
Trustees may prescribe. Each share of a particular class of a series represents
an equal proportionate interest in that series with each other share of the same
class, none having priority or preference over another. Each series is preferred
over all other series in respect of the assets allocated to that series. Each
share of a particular class of a series is entitled to a pro rata share of any
distributions declared in respect of that class and, in the event of
liquidation, a pro rata share of the net assets of that class remaining after
satisfaction of outstanding liabilities. When issued, shares are fully paid and
non-assessable and have no preemptive or subscription rights. Under the Trust's
Declaration of Trust, the Board of Trustees is authorized to create new series
and classes without shareholder approval. To date, shares of twelve separate
series have been authorized, one of which constitutes the interests in the Fund
described in this Prospectus.
Shares of the Fund entitle their holder to one vote for each dollar (or
proportionate fractional vote for each fraction of a dollar) of net asset value
per share of the Fund or class for each share held as to any matter on which
such shares are entitled to vote.
The Trust is not required to hold annual meetings of shareholders. Special
meetings may be called for such purposes as electing Trustees, voting on
management agreements and with respect to such additional matters relating to
the Trust as may be required by the Trust's Declaration of Trust and the 1940
Act. See also "Master/Feeder Structure." Shareholder inquiries regarding the
Fund should be directed to MassMutual Institutional Funds, 1295 State Street,
Springfield, Massachusetts 01111-0001.
How Fund Shares Are Priced
The net asset value (closing price) of the Fund is determined once daily at 4:00
p.m., Eastern Time, on each day on which the NYSE is open for trading.
The net asset value for shares of a class of the Fund is computed by adding the
value of the Fund's portfolio investments (i.e., the value of its investments in
the Master Portfolio) plus cash and other assets, if any, attributable to that
class, less any liabilities, and dividing the resulting total
10
<PAGE>
by the total outstanding shares of the class. The net asset value of each class
is expected to fluctuate daily.
The Fund's investment in the Master Portfolio is valued at the Fund's
proportionate interest in the net asset value of the Master Portfolio. The
Master Portfolio calculates the net asset value of its shares on the same days
and at the same time as the Fund. Except for debt obligations with remaining
maturities of 60 days or less, which are valued at amortized cost, the Master
Portfolio's other assets are valued at current market prices, or if such prices
are not readily available, at fair value as determined in good faith in
accordance with guidelines approved by MIP's Board of Trustees. Prices used for
such valuations may be provided by independent pricing services. For further
information regarding the methods employed in valuing the Master Portfolios'
investments, see "Valuation of Portfolio Securities" in the SAI.
A dealer or other organization selling shares of the Fund may receive different
levels of compensation for selling one class of shares over another. Class A
shares of the Fund, which may be purchased at the net asset value per share next
determined after receipt of a purchase request in good order, are subject to the
service and distribution fees under Rule 12b-1, as set forth and expressed on an
annual basis under "Expense Information."
MassMutual may directly, or through the Distributor, pay cash compensation to
persons who provide services on behalf of Class Y shares. This compensation is
paid by MassMutual, not from Fund assets. MassMutual may pay intermediaries up
to .15% of the amount invested for the servicing of Class Y shares. The payments
on account of Class Y shares will be based on criteria established by
MassMutual. Compensation paid to brokers or other intermediaries for selling or
providing services on account of Class A shares is described above under "Class
A Shares Distribution and Service (Rule 12b-1) Fees". Where Class Y shares are
sold in connection with nonqualified deferred compensation plans where the
employer sponsor has an administrative services agreement with MassMutual or its
affiliate, additional compensation may be paid as determined by MassMutual from
time to time according to established criteria. As of the date of this
Prospectus, aggregate annual compensation in such cases does not exceed .50%.
Annual compensation paid on account of Class A or Class Y shares will be paid
quarterly, in arrears.
Distributions And Taxation
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986 (the "Code"). As a regulated investment
company, the Fund will not be subject to federal income taxes on its ordinary
income and net realized capital gain distributed to its shareholders. In
general, if the Fund fails to distribute at least 98% of such income and gain in
the calendar year in which it is earned, the undistributed amount will be
subject to a 4% excise tax.
The Fund seeks to qualify as a regulated investment company by investing all of
its assets in the Master Portfolio. Based upon the classification of the Master
Portfolio as a non-publicly traded partnership for federal income tax purposes,
MIP believes that the Master Portfolio will not be subject to federal income tax
and will be deemed to "pass through" any interest, dividends, gains and losses
of the Master Portfolio to the Fund in proportion to the Fund's interest in the
Master Portfolio. If the Master Portfolio were to accrue but not distribute any
interest, dividends or gains, the Fund would be deemed to have recognized its
allocable share of such income, regardless of whether or not such income has
been distributed by the Master Portfolio. However, the Master Portfolio has
represented that it seeks to minimize recognition by the Fund and other
investors of interest, dividends and gains without a corresponding distribution.
Many Investors, including most tax qualified Plan Investors, may be eligible for
preferential federal income tax treatment on distributions received from the
Fund and dispositions of Fund shares. This Prospectus does not attempt to
describe in any respect such preferential tax treatment. Any prospective
Investor that is a trust or other entity eligible for special tax treatment
under the Code that is considering purchasing shares of the Fund, either
directly or indirectly through a life insurance company separate account, should
consult its tax advisers about the federal, state and local tax consequences
particular to it, as should persons considering whether to have amounts held for
their benefit by such trusts or other entities invested in shares of the Fund.
Investors that do not receive preferential tax treatment are subject to federal
income taxes on distributions received in respect of their shares. Distributions
of the Fund's ordinary income and short-term capital gain are taxable to the
shareholder as ordinary income whether received in cash or additional shares.
Designated long-term capital gain distributions are taxable as long-term capital
gain whether distributed in cash or additional shares and regardless of how long
the Investor has owned shares of the Fund; however, a loss recognized from the
sale of Fund shares held for six months or less will be treated as a long-term
capital loss to the extent of long-term capital gains distributions. Under the
Taxpayer Relief Act of 1997, long-term capital gains generally will be subject
to a 28% or 20% tax rate, depending on the holding period in the portfolio
investments. Certain designated dividends may be eligible for the
dividends-received deduction for corporate shareholders. Investors should
consult with their tax advisers for additional information concerning the
federal, state and local tax consequences of purchasing shares of the Fund.
Dividends from net investment income and distributions of any net realized
capital gains of the Fund are declared and paid annually or at other times as
necessary to meet regulatory requirements. Distributions shall be paid in full
and fractional shares of the applicable class of the Fund at net asset value on
the first Business Day after the record date for the distribution, unless,
subject to such terms and conditions of the underlying Plan Documents, the
Investor has elected to receive dividend payments in cash. Dividends paid for a
class of the Fund will vary in relation to the expenses of that class.
11
<PAGE>
Investment Performance
The Fund commenced operations on March 1, 1998. The Fund calculates the
performance for each Class for periods commencing prior to March 1, 1998, by
including the corresponding total return of the Master Portfolio (which
includes, for the period from July 2, 1993 through May 25, 1994, the performance
of its predecessor) adjusted to reflect the deduction of the anticipated fees
and expenses applicable to each class of the Fund as stated in the Fee Table.
See "Expense Information." These fees and expenses include, in the case of Class
A shares, Rule 12b-1 fees. The Master Portfolio's predecessor, a regulated
investment company which commenced operations on July 2, 1993, converted into a
master/feeder structure on May 25, 1994 by exchanging all of its assets for
beneficial interests in the Master Portfolio. The Master Portfolio commenced
operations on May 26, 1994, with the same investment adviser, the same
investment objective and substantially similar investment policies as its
predecessor.
The Fund from time-to-time may advertise certain investment performance figures.
These figures are based on historical earnings but past performance data is not
necessarily indicative of future performance of the Fund. The Fund may advertise
its total return and its holding period return (also known as cumulative total
return) for various periods of time. Total return is calculated by determining,
over a period of time as stated in the advertisement, the average annual
compounded rate of return that an investment in the Fund earned over that
period, assuming reinvestment of all distributions. Holding period return refers
to the percentage change in the value of an investment in a Fund over a period
of time (as stated in the advertisement), assuming reinvestment of all
distributions. Total return differs from holding period return principally in
that total return is an average annual figure while holding period return is an
aggregate figure for the entire period.
Average Annual Total Return for the year ended February 28, 1999.
- ---------------------------
- --------------------------------------------------------------------------------
Class A Class Y Class S
- --------------------------------------------------------------------------------
1 Year 18.40% 18.98% 19.13%
- --------------------------------------------------------------------------------
3 Years 25.53% 26.03% 26.22%
- --------------------------------------------------------------------------------
5 Years 22.81% 23.29% 23.49%
- --------------------------------------------------------------------------------
Since Inception (July 2, 1993) 20.84% 21.33% 21.53%
- --------------------------------------------------------------------------------
The quoted performance data includes the performance of the Master Portfolio
(adjusted as described above) for all periods before March 1, 1998. Past
performance is not predictive of future performance. Employee benefit plans that
invest Plan Assets in MassMutual SIAs that purchase Class S shares may be
subject to certain other charges as set forth in their respective Plan
Documents. Investors that enter into an administrative services or other
agreement with MassMutual may also be subject to certain charges as set forth
in their respective agreements. Total return figures would be lower if they
reflected these charges.
12
<PAGE>
Glossary
Investor: includes a plan sponsor, plan fiduciary, trustee, institutional
investor, insurance company separate investment account, and/or any other person
or entity described in the Prospectus as an eligible purchaser of shares, that
purchases shares of the Trust and is hereinafter referred to as Investor or
collectively referred to as Investors. An Investor that is a separate investment
account of MassMutual is referred to as an SIA Investor to the extent it invests
in the Trust. Investors that are purchasing shares of the Fund on behalf of a
Plan are sometimes referred to as Plan Investors. The term Investor does not
include a Plan Participant.
Plan: refers to all defined contribution and defined benefit retirement plans
and any other employee retirement arrangement that invests in the Fund,
including non-qualified deferred compensation plans and tax sheltered annuity
plans.
Plan Assets: assets held by the Plan trustee of a particular Plan.
Plan Participant: includes active, deferred and suspended Plan Participants on
whose behalf Plan Assets are invested, as well as any other individual included
in the computation of active participants under the appropriate Form 5500 filed
with the Internal Revenue Service, if applicable.
Plan Documents: refer to the documents that created and are related to a
particular employee benefit plan. These documents might include trust documents,
insurance contracts (including group annuity contracts), administrative service
agreements and other agreements for the provision of services or benefits for
the plan and its participants.
Disclaimer
NEITHER THE FUND NOR THE MASTER PORTFOLIO IS SPONSORED, ENDORSED, SOLD OR
PROMOTED BY STANDARD & POOR'S ("S&P"). S&P MAKES NO REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, TO THE FUND, THE MASTER PORTFOLIO OR ANY MEMBER OF THE
PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN THE
FUND PARTICULARLY OR THE ABILITY OF THE S&P 500 INDEX TO TRACK GENERAL STOCK
MARKET PERFORMANCE. S&P'S ONLY RELATIONSHIP TO THE FUND IS THE LICENSING OF
CERTAIN TRADEMARKS AND TRADE NAMES OF S&P WITHOUT REGARD TO THE FUND. S&P HAS
NO OBLIGATION TO TAKE THE NEEDS OF THE FUND INTO CONSIDERATION IN DETERMINING,
COMPOSING OR CALCULATING THE S&P 500 INDEX. S&P IS NOT RESPONSIBLE FOR AND HAS
NOT PARTICIPATED IN THE DETERMINATION OF THE PRICES AND AMOUNT OF THE FUND'S
SHARES OR THE TIMING OF THE ISSUANCE OR SALE OF THE FUND'S SHARES OR IN THE
DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE FUND'S SHARES ARE TO
BE CONVERTED INTO CASH. S&P HAS NO OBLIGATION OR LIABILITY IN CONNECTION WITH
THE ADMINISTRATION, MARKETING OR TRADING OF THE FUND'S SHARES.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR
ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
The name MassMutual Institutional Funds is the designation of the Trust under a
Declaration of Trust dated May 28, 1993, as amended. The obligations of the
Trust are not personally binding upon, nor shall resort be had to the property
of, any of the Trustees, shareholders, officers, employees or agents of the
Trust, but only the property of the relevant series of the Trust shall be bound.
13
<PAGE>
Appendix - Additional Investment Policies
Portfolio Securities
The Master Portfolio, subject to the terms of this Prospectus and the Fund's
SAI, may invest in the securities described below.
U.S. Government Obligations - The Master Portfolio may invest in various types
of U.S. Government obligations. U.S. Government obligations include securities
issued or guaranteed as to principal and interest by the U.S. Government, its
agencies or instrumentalities. Payment of principal and interest on U.S.
Government obligations (i) may be backed by the full faith and credit of the
United States (as with U.S. Treasury obligations and GNMA certificates) or (ii)
may be backed solely by the issuing or guaranteeing agency or instrumentality
itself (as with FNMA notes). In the latter case, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, which agency or instrumentality may be
privately owned. There can be no assurance that the U.S. Government would
provide financial support to its agencies or instrumentalities where it is not
obligated to do so. As a general matter, the value of debt instruments,
including U.S. Government obligations, declines when market interest rates
increase and rises when market interest rates decrease. Certain types of U.S.
Government obligations are subject to fluctuations in yield or value due to
their structure or contract terms.
Securities of Non-U.S. Issuers - The Master Portfolio may invest in certain
securities of non-U.S. issuers as discussed below.
Obligations of Foreign Governments, Banks and Corporations - The Master
- ----------------------------------------------------------
Portfolio may invest in U.S. dollar-denominated short-term obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities that are determined by BGFA to be of
comparable quality to the other obligations in which the Master Portfolio may
invest. The Master Portfolio may also invest in debt obligations of
supranational entities. Supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, the Asian Development Bank, and the InterAmerican Development Bank.
The percentage of the Master Portfolio's assets invested in obligations of
foreign governments and supranational entities will vary depending on the
relative yields of such securities, the economic and financial markets of the
countries in which the investments are made and the interest rate climate of
such countries.
The Master Portfolio may invest a portion of its total assets in high-quality,
short-term (one year or less) debt obligations of foreign branches of U.S. banks
or U.S. branches of foreign banks that are denominated in and pay interest in
U.S. dollars.
American Depositary Receipts and Similar Instruments - To the extent necessary
- ----------------------------------------------------
to replicate the investment characteristics of the S&P 500 Index, the Master
Portfolio may invest in foreign securities through American Depositary Receipts
("ADRs") and similar instruments convertible into securities of foreign issuers.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs (sponsored or unsponsored) are
receipts typically issued by a U.S. bank or trust company and traded on a U.S.
Stock Exchange, that evidence ownership of underlying foreign securities.
Issuers of unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, such information may not correlate to
the market value of the unsponsored ADR.
Short-Term Instruments and Temporary Investments - The Master Portfolio may
invest in high-quality money market instruments on an ongoing basis to provide
liquidity or for temporary purposes when there is an unexpected level of
shareholder purchases or redemptions. The instruments in which the Master
Portfolio may invest include: (i) short-term obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (including
government-sponsored enterprises); (ii) negotiable certificates of deposit
("CDs"), bankers' acceptances, fixed time deposits and other obligations of
domestic banks (including foreign branches) that have more than $1 billion in
total assets at the time of investment and that are members of the Federal
Reserve System or are examined by the Comptroller of the Currency or whose
deposits are insured by the FDIC; (iii) commercial paper rated at the date of
purchase "Prime-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of
comparable quality as determined by BGFA; (iv) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at the date of
purchase of not more than one year that are rated at least "Aa" by Moody's or
"AA" by S&P; (v) repurchase agreements; and (vi) short-term, U.S.
dollar-denominated obligations of foreign banks (including U.S. branches) that,
at the time of investment have more than $10 billion, or the equivalent in other
currencies, in total assets and in the opinion of BGFA are of comparable
quality to obligations of U.S. banks which may be purchased by the Master
Portfolio.
Bank Obligations - The Master Portfolio may invest in bank obligations,
- ----------------
including certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions.
A-1
<PAGE>
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by the Master Portfolio will not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the Federal Deposit Insurance Corporation.
Bankers' acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations, bearing fixed, floating- or variable-interest
rates.
Commercial Paper and Short-Term Corporate Debt Instruments - The Master
- ----------------------------------------------------------
Portfolio may invest in commercial paper (including variable amount master
demand notes), which consists of short-term, unsecured promissory notes issued
by corporations to finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Variable amount master demand notes are demand
obligations that permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes. The
investment adviser to the Master Portfolio monitors on an ongoing basis the
ability of an issuer of a demand instrument to pay principal and interest on
demand.
The Master Portfolio also may invest in non-convertible corporate debt
securities (e.g., bonds and debentures) with not more than one year remaining to
maturity at the date of settlement. The Master Portfolio will invest only in
such corporate bonds and debentures that are rated at the time of purchase at
least "Aa" by Moody's or "AA" by S&P. Subsequent to its purchase by the Master
Portfolio, an issue of securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Master Portfolio.
The investment adviser to the Master Portfolio will consider such an event in
determining whether the Master Portfolio should continue to hold the obligation.
To the extent the Master Portfolio continues to hold such obligations, it may be
subject to additional risk of default.
Repurchase Agreements - The Master Portfolio may enter into repurchase
- ---------------------
agreements wherein the seller of a security to the Master Portfolio agrees to
repurchase that security from the Master Portfolio at a mutually-agreed upon
time and price. The period of maturity is usually quite short, often overnight
or a few days, although it may extend over a number of months. The Master
Portfolio may enter into repurchase agreements only with respect to securities
that could otherwise be purchased by the Master Portfolio, and all repurchase
transactions must be collateralized. The Master Portfolio may incur a loss on a
repurchase transaction if the seller defaults and the value of the underlying
collateral declines or is otherwise limited or if receipt of the security or
collateral is delayed. The Master Portfolio may participate in pooled repurchase
agreement transactions with other funds advised by BGFA. See "Additional
Investment Policies" in the SAI for additional information.
Investment Company Securities - The Master Portfolio may invest in securities
issued by other open-end investment companies which principally invest in
securities of the type in which the Master Portfolio invests. Under the 1940
Act, the Master Portfolio's investment in such securities currently is limited
to, subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Master Portfolio's net assets with respect to
any one investment company and (iii) 10% of the Master Portfolio's net assets
in the aggregate. Investments in the securities of other investment companies
generally will involve duplication of advisory fees and certain other expenses.
The Master Portfolio may also purchase shares of exchange-listed closed-end
funds.
Futures Contracts and Options Transactions - The Master Portfolio may use
futures as a substitute for a comparable market position in the underlying
securities.
A futures contract is an agreement between two parties, a buyer and a seller, to
exchange a particular commodity or financial instrument at a specific price on a
specific date in the future. An option transaction generally involves a right,
which may or may not be exercised, to buy or sell a commodity or financial
instrument at a particular price on a specified future date. Futures contracts
and exchange traded options are standardized and traded on exchanges, where the
exchange serves as the ultimate counterparty for all contracts. Consequently,
the primary credit risk on futures contracts is the creditworthiness of the
exchange. Futures contracts are subject to market risk (i.e., exposure to
adverse price changes).
Although the Master Portfolio intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Master
Portfolio to substantial
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losses. If it is not possible, or if the Master Portfolio determines not to
close a futures position in anticipation of adverse price movements, the Master
Portfolio will be required to make daily cash payments on variation margin.
Stock Index Futures and Options on Stock Index Futures - The Master Portfolio
- ------------------------------------------------------
may invest in stock index futures contracts and options on stock index futures
contracts as a substitute for a comparable market position in the underlying
securities.
A stock index future obligates the seller to deliver (and the purchaser to
take), effectively, an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. With respect
to stock indices that are permitted investments, the Master Portfolio intends to
purchase and sell futures contracts on the stock index for which it can obtain
the best price with consideration also given to liquidity. There can be no
assurance that a liquid market will exist at the time when the Master Portfolio
seeks to close out a futures contract or a futures option position. Lack of a
liquid market may prevent liquidation of an unfavorable position. Currently, the
Master Portfolio intends to limit its investments in such instruments to S&P 500
Index futures and options thereon.
Loans of Portfolio Securities - The Master Portfolio may lend securities from
its portfolio to domestic brokers, dealers and financial institutions (but not
individuals) in order to increase the return on the Master Portfolio's
portfolio. The value of the loaned securities may not exceed one-third of the
Master Portfolio's total assets and loans of portfolio securities are fully
collateralized based on values that are marked to market daily. The Master
Portfolio will not enter into any portfolio security lending arrangement having
a duration of longer than one year. The principal risk of portfolio lending is
potential default or insolvency of the borrower. In either of these cases, the
Master Portfolio could experience delays in recovering securities or collateral
or could lose all or part of the value of the loaned securities. The Master
Portfolio may pay reasonable administrative and custodial fees in connection
with loans of portfolio securities and may pay a portion of the interest or fee
earned thereon to the borrower or a placing broker. See "Additional Investment
Policies" in the SAI for additional information.
Borrowing Money - As a fundamental policy, the Master Portfolio is permitted to
borrow to the extent permitted under the 1940 Act. However, the Master Portfolio
currently intends to borrow money only for temporary or emergency (not
leveraging) purposes, and may borrow up to one-third of the value of its total
assets (including the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the borrowing
is made. While borrowings exceed 5% of the Master Portfolio's total assets, the
Master Portfolio will not make any new investments.
Floating- and Variable-Rate Obligations - The Master Portfolio may purchase debt
instruments with interest rates that are periodically adjusted at specified
intervals or whenever a benchmark rate or index changes. These adjustments
generally limit the increase or decrease in the amount of interest received on
the debt instruments. Floating- and variable-rate instruments are subject to
interest-rate risk and credit risk.
Illiquid Securities - The Master Portfolio may hold up to 15% of the value of
its net assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with its investment objective. Such
securities may include securities that are not readily marketable, such as
privately issued securities and other securities that are subject to legal or
contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the Master Portfolio cannot exercise a demand feature on
not more than seven days' notice and as to which there is no secondary market
and repurchase agreements providing for settlement more than seven days after
notice.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions -
The Master Portfolio may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
Although the Master Portfolio will generally purchase securities with the
intention of acquiring them, the Master Portfolio may dispose of securities
purchased on a when-issued, delayed-delivery or a forward commitment basis
before settlement when deemed appropriate by the BGFA.
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