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MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
Managed Accounts Services Portfolio Trust ("Trust") is an open-end
management investment company currently composed of twelve separate no-load
investment portfolios (each a "Portfolio") professionally managed by Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins" or the "Manager"), a
wholly owned subsidiary of PaineWebber Incorporated ("PaineWebber"). For each
Portfolio other than PACE Money Market Investments, advisory services are
provided by an investment adviser (each an "Adviser") monitored by and
unaffiliated with the Manager. For PACE Money Market Investments, advisory
services are provided by the Manager. Mitchell Hutchins also serves as
distributor for the Portfolios. The Portfolios have no prior operating
history. This Statement of Additional Information ("SAI") is not a prospectus
and should be read only in conjunction with the Trust's current Prospectus,
dated June 21, 1995. You may obtain a copy of the Prospectus by calling any
PaineWebber investment executive or by calling toll- free at 1-800-647-1568.
This SAI is dated June 21, 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Portfolios' investment policies and limitations.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Ratings Group ("S&P") are private services that provide
ratings of the credit quality of debt obligations, including issues of
municipal securities. A description of the range of ratings assigned to
Portfolios by Moody's and S&P applicable to securities in which one or more of
the Portfolios may invest is included in the Appendix to this SAI. The
Portfolios may use these ratings in determining whether to purchase, sell or
hold a security. These ratings represent Moody's and S&P's opinions as to the
quality of the debt obligations that they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards
of quality. Consequently, obligations with the same maturity, interest rate
and rating may have different market prices. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than the rating
indicates. In the event any security held by a Portfolio is downgraded below
the rating categories set forth for each Portfolio as discussed in the
Prospectus, the Portfolio's Adviser (or Mitchell Hutchins in the case of PACE
Money Market Investments) will review the security and determine whether to
retain or dispose of that security, provided that a Portfolio will not invest,
at any time, more than 5% (except PACE Strategic Fixed Income Investments,
which may invest up to 20% and, PACE Global Fixed Income Investments and PACE
Large Company Value Equity Investments, which may invest up to 10%) of its net
assets in securities that are rated below investment grade.
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The process by which S&P and Moody's determine ratings for mortgage- and
asset-backed securities includes consideration of the likelihood of the receipt
by security holders of all distributions, the nature of the underlying
securities, the credit quality of the guarantor, if any, and the structural,
legal and tax aspects associated with such securities. Neither of such ratings
represents an assessment of the likelihood that principal prepayments will be
made by mortgagors or the degree to which such prepayments may differ from
those originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to
prepayments.
The yields on the money market instruments in which PACE Money Market
Investments invests (such as commercial paper and bank obligations) are
dependent on a variety of factors, including general money market conditions,
conditions in the particular market for the obligation, the financial condition
of the issuer, the size of the offering, the maturity of the obligation and the
ratings of the issue. The ratings of nationally recognized statistical rating
organizations ("NRSROs") represent their opinions as to the quality of the
obligations they undertake to rate. Because ratings are general and are not
absolute standards of quality, obligations with the same rating, maturity and
interest rate may have different market prices. Subsequent to its purchase by a
Portfolio, an issue may cease to be rated or its rating may be reduced. In the
event that a security in PACE Money Market Investments' portfolio ceases to be
a "First Tier Security," as defined in the Prospectus, or the Portfolio's
Adviser becomes aware that a security has received a rating below the second
highest rating by Moody's, S&P or any other NRSRO, Mitchell Hutchins, and in
certain cases the Trust's board of trustees, will consider whether that
Portfolio should continue to hold the obligation. A First Tier Security rated
in the highest short-term rating category by a single NRSRO at the time of
purchase that subsequently receives a rating below the highest rating category
from a different NRSRO will continue to be considered a First Tier Security.
Opinions relating to the validity of municipal securities in PACE Municipal
Fixed Income Investments and to the exemption of interest thereon from federal
income tax and also, when available, from the federal alternative minimum tax
are rendered by bond counsel to the respective issuing authorities at the time
of issuance. Neither the Portfolio nor its Adviser will review the proceedings
relating to the issuance of municipal securities or the basis for such
opinions. An issuer's obligations under its municipal securities are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors (such as the federal bankruptcy laws) and federal,
state and local laws that may be enacted that adversely affect the tax-exempt
status of interest on the municipal securities held by the Portfolio or of the
exempt-interest dividends received by that Portfolio's shareholders, extend the
time for payment of principal or interest, or both, or impose other constraints
upon enforcement of such obligations. There is also the possibility that, as a
result of litigation or other conditions, the power or ability of issuers to
meet their obligations for the payment of principal of, and interest on, their
municipal securities may be materially and adversely affected.
In addition to ratings assigned to individual bond issues, each Portfolio's
Adviser analyzes interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and
asset quality. The yields on bonds and other debt securities in which the
Portfolios invest are dependent on a variety of factors, including general
money market conditions, general conditions on the bond market, the financial
condition of the issuer, the size of the offering, the maturity of the
obligation and its rating. There is a wide variation in the quality of bonds,
both
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within a particular classification and between classifications. An issuer's
obligations under its bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of bond holders or
other creditors of an issuer; litigation or other conditions may also adversely
affect the power or ability of issuers to meet their obligations for the
payment of interest and principal on their bonds.
OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. PACE Money
Market Investments may invest in obligations of domestic branches of foreign
banks and foreign branches of domestic banks. Such investments may involve
risks that are different from investments in securities of domestic branches of
domestic banks. These risks may include unfavorable political and economic
developments, withholding taxes, seizure of foreign deposits, currency
controls, interest limitations or other governmental restrictions which might
affect the payment of principal or interest on the securities held by PACE
Money Market Investments. Additionally, there may be less publicly available
information about foreign banks and their branches, as these institutions may
not be subject to the same regulatory requirements as domestic banks.
ADJUSTABLE RATE AND FLOATING RATE MORTGAGE-BACKED SECURITIES. As set forth in
the Prospectus, PACE Government Securities Fixed Income Investments, PACE
Intermediate Fixed Income Investments and PACE Strategic Fixed Income
Investments may invest in adjustable rate mortgage ("ARM") and floating rate
mortgage-backed securities. Because the interest rates on ARM and floating rate
mortgage-backed securities are reset in response to changes in a specified
market index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities. As a
result, during periods of rising interest rates, ARMs generally do not decrease
in value as much as fixed-rate securities. Conversely, during periods of
declining interest rates, ARMs generally do not increase in value as much as
fixed-rate securities. ARM mortgage-backed securities represent a right to
receive interest payments at a rate that is adjusted to reflect the interest
earned on a pool of ARMs. ARMs generally provide that the borrower's mortgage
interest rate may not be adjusted above a specified lifetime maximum rate or,
in some cases, below a minimum lifetime rate. In addition, certain ARMs provide
for limitations on the maximum amount by which the mortgage interest rate may
adjust for any single adjustment period. ARMs also may provide for limitations
on changes in the maximum amount by which the borrower's monthly payment may
adjust for any single adjustment period. In the event that a monthly payment is
not sufficient to pay the interest accruing on the ARM, any such excess
interest is added to the mortgage loan ("negative amortization"), which is
repaid through future monthly payments. If the monthly payment exceeds the sum
of the interest accrued at the applicable mortgage interest rate and the
principal payment that would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess reduces the
principal balance of the ARM. Borrowers under ARMs experiencing negative
amortization may take longer to build up their equity in the underlying
property and may be more likely to default.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds index, that tend to lag behind changes in market interest rates. The
values of ARM mortgage-backed securities supported by ARMs that adjust based on
lagging indices tend to be somewhat more sensitive to interest rate
fluctuations than those reflecting
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current interest rate levels, although the values of such ARM mortgage-backed
securities still tend to be less sensitive to interest rate fluctuations than
fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES. As set
forth in the Prospectus, PACE Government Securities Fixed Income Investments,
PACE Intermediate Fixed Income Investments and PACE Strategic Fixed Income
Investments each are authorized to invest in mortgage- and asset-backed
securities. The yield characteristics of mortgage- and asset-backed securities
differ from those of traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other obligations generally may be prepaid at any time.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Similar factors apply to prepayments on asset-backed securities, but the
receivables underlying asset-backed securities generally are of a shorter
maturity and thus are less likely to experience substantial prepayments. Such
securities, however, often provide that for a specified time period the issuers
will replace receivables in the pool that are repaid with comparable
obligations. If the issuer is unable to do so, repayment of principal on the
asset-backed securities may commence at an earlier date. Mortgage- and asset-
backed securities may decrease in value as a result of increases in interest
rates and may benefit less than other fixed income securities from declining
interest rates because of the risk of prepayment.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to "lock-
in" at a lower interest rate. Conversely, during a period of rising interest
rates, prepayments on ARMs might decrease. The rate of prepayments with respect
to ARMs has fluctuated in recent years.
The rate of interest on mortgage-backed securities is lower than the interest
rates paid on the mortgages included in the underlying pool due to the annual
fees paid to the servicer of the mortgage pool for passing through monthly
payments to certificateholders and to any guarantor, and due to any yield
retained by the issuer. Actual yield to the holder may vary from the coupon
rate, even if adjustable, if the mortgage-backed securities are purchased or
traded in the secondary market at a premium or discount. In addition, there is
normally some delay between the time the
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issuer receives mortgage payments from the servicer and the time the issuer
makes the payments on the mortgage-backed securities, and this delay reduces
the effective yield to the holder of such securities.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools
of fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of
a pool of mortgage-related securities. Conversely, in periods of rising rates
the rate of prepayment tends to decrease thereby lengthening the actual average
life of the pool. However, these effects may not be present, or may differ in
degree, if the mortgage loans in the pools have adjustable interest rates or
other special payment terms, such as a prepayment charge. Actual prepayment
experience may cause the yield of mortgage-backed securities to differ from the
assumed average life yield. Reinvestment of prepayments may occur at lower
interest rates than the original investment, thus adversely affecting the yield
of the Portfolios.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Portfolio purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to
the coupon rate or maturity of the purchased securities. A Portfolio maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to is, in effect, secured by such securities. If the value of such securities
is less than the repurchase price, plus any agreed-upon additional amount, the
other party must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities and the price that was paid by a Portfolio upon
their acquisition is accrued as interest and included in the Portfolio's net
investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to a Portfolio if the other
party to a repurchase agreement becomes bankrupt. Each Portfolio intends to
enter into repurchase agreements only with banks and dealers in transactions
believed by its Adviser (or Mitchell Hutchins in the case of PACE Money Market
Investments or in the case of transactions pursuant to any joint repurchase
arrangements) to present minimal credit risks in accordance with guidelines
established by the Trust's board of trustees. The Adviser will review and
monitor the creditworthiness of those institutions under the board's general
supervision.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements with banks up to an aggregate value of not more than 5%
of its total assets. These agreements involve the sale of securities held by a
Portfolio subject to the Portfolio's agreement to repurchase the securities at
an agreed-upon date and price reflecting a market rate of interest.
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These agreements are considered to be borrowings and may be entered into only
for extraordinary or emergency purposes or arbitrage transactions. While a
reverse repurchase agreement is outstanding, a Portfolio will maintain with its
custodian in a segregated account, cash, U.S. government securities or other
liquid, high-grade debt obligations, marked to market daily, in an amount at
least equal to the Portfolio's obligations under the reverse repurchase
agreement.
ILLIQUID SECURITIES. PACE Global Fixed Income Investments, PACE Small/Medium
Company Growth Equity Investments, PACE International Equity Investments and
PACE International Emerging Markets Equity Investments may each invest up to
15% of its net assets in illiquid securities. PACE Money Market Investments,
PACE Government Securities Fixed Income Investments, PACE Intermediate Fixed
Income Investments, PACE Strategic Fixed Income Investments, PACE Municipal
Fixed Income Investments, PACE Small/Medium Company Value Equity Investments,
PACE Large Company Value Equity Investments and PACE Large Company Growth
Equity Investments may each invest up to 10% of its net assets in illiquid
securities. The term "illiquid securities" for this purpose means securities
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which a Portfolio has valued the securities and
includes, among other things, purchased over-the-counter ("OTC") options,
repurchase agreements maturing in more than seven days, non-marketable or
interest-bearing time deposits and restricted securities other than those the
Adviser has determined are liquid pursuant to guidelines established by the
Trust's board of trustees. Interest-only ("IO") and principal-only ("PO")
mortgage-backed securities are considered illiquid except that the Adviser may
determine that IO and PO classes of fixed-rate mortgage-backed securities
issued by the U.S. government or one of its agencies or instrumentalities are
liquid pursuant to guidelines established by the Trust's board of trustees. The
assets used as cover for OTC options written by a Portfolio will be considered
illiquid unless the OTC options are sold to qualified dealers who agree that
the Portfolio may repurchase any OTC option it writes at a maximum price to be
calculated by a formula set forth in the option agreement. The cover for an OTC
option written subject to this procedure would be considered illiquid only to
the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. Illiquid restricted securities may be sold only
in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933
("1933 Act"). Where registration is required, a 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.
Commercial paper issues in which PACE Money Market Investments may invest
include securities issued by major corporations without registration under the
1933 Act in reliance on the exemption from such registration afforded by
Section 3(a)(3) thereof and commercial paper issued in reliance on the so-
called "private placement" exemption from registration which is afforded by
Section 4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the federal securities laws in that resale
must similarly be made in an exempt transaction. Section 4(2) paper is normally
resold to other institutional investors through or with the assistance of
investment dealers who make a market in Section 4(2) paper, thus providing
liquidity.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private
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placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to
the general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily
resold or on an issuer's ability to honor a demand for repayment. Therefore,
the fact that there are contractual or legal restrictions on resale to the
general public or certain institutions is not dispositive of the liquidity of
such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. ("NASD"). An
insufficient number of qualified buyers interested in purchasing Rule 144A-
eligible restricted securities held by a Portfolio, however, could affect
adversely the marketability of such securities, and a Portfolio might be unable
to dispose of such securities promptly or at favorable prices.
The board of trustees has delegated the function of making day-to-day
determinations of liquidity to the appropriate Adviser or Mitchell Hutchins,
pursuant to guidelines approved by the board. The Adviser or Mitchell Hutchins,
as applicable, takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Each Portfolio's Adviser or Mitchell Hutchins,
as applicable, will monitor the liquidity of restricted securities in each
Portfolio's portfolio and report periodically on such decisions to the board of
trustees.
In making determinations as to the liquidity of municipal lease obligations
purchased by PACE Municipal Fixed Income Investments, the Adviser distinguishes
between direct investments in municipal lease obligations (or participations
therein) and investments in securities that may be supported by municipal lease
obligations or certificates of participation therein. Since these municipal
lease obligation-backed securities are based on a well-established means of
securitization, the Adviser does not believe that investing in such securities
presents the same liquidity issues as direct investments in municipal lease
obligations.
SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES
FOREIGN AND EMERGING MARKET SECURITIES. Many of the foreign and emerging
market securities held by PACE Intermediate Fixed Income Investments, PACE
Strategic Fixed Income Investments, PACE Global Fixed Income Investments, PACE
International Equity Investments and PACE International Emerging Markets Equity
Investments will not be registered with the Securities and Exchange Commission
("SEC"), nor will the issuers thereof be subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by these Portfolios than is available
concerning U.S. companies. Disclosure
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and regulatory standards in many respects are less stringent in emerging market
countries than in the U.S. and other major markets. There also may be a lower
level of monitoring and regulation of emerging markets and the activities of
investors in such markets, and enforcement of existing regulations may be
extremely limited. Foreign companies, and in particular, companies in smaller
and emerging capital markets are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies. Each Portfolio's net
investment income and capital gains from its foreign investment activities may
be subject to non-U.S. withholding taxes.
The costs attributable to foreign investing that these five Portfolios must
bear frequently are higher than those attributable to domestic investing; this
is particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing. Investment income on certain foreign
securities in which the Portfolios may invest may be subject to foreign
withholding or other government taxes that could reduce the return of these
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign tax to which the
Portfolios would be subject.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of the Portfolio are uninvested and no return is earned thereon. The
inability of the Portfolio to make intended security purchases due to
settlement problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Portfolio due to subsequent
declines in the value of such portfolio security or, if the Portfolio has
entered into a contract to sell the security, could result in possible
liability to the purchaser.
SOVEREIGN DEBT. Investment by PACE Intermediate Fixed Income Investments,
PACE Strategic Fixed Income Investments, PACE Global Fixed Income Investments,
PACE International Equity Investments and PACE International Emerging Markets
Equity Investments in debt securities issued by foreign governments and their
political subdivisions or agencies ("Sovereign Debt") involves special risks.
The issuer of the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal and/or
interest when due in accordance with the terms of such debt, and the Portfolio
may have limited legal recourse in the event of default.
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of
its debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of Sovereign Debt in the event
of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign
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reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. Increased
protectionism on the part of a country's trading partners, or political changes
in those countries, could also adversely affect its exports. These events could
diminish a country's trade account surplus, if any, or the credit standing of a
particular local government or agency. Another factor bearing on the ability of
a country to repay Sovereign Debt is the level of the country's international
reserves. Fluctuations in the level of these reserves can affect the amount of
foreign exchange readily available for external debt payments and, thus, could
have a bearing on the capacity of the country to make payments on its Sovereign
Debt.
To the extent that a country has a current account deficit (generally when
exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt
obligations can be affected by a change in international interest rates since
the majority of these obligations carry interest rates that are adjusted
periodically based upon international rates.
With respect to Sovereign Debt of emerging market issuers, investors should
be aware that certain emerging market countries are among the largest debtors
to commercial banks and foreign governments. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt; such moratoria are currently in effect in certain Latin American
countries.
Certain emerging market countries have experienced difficulty in servicing
their Sovereign Debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds
(discussed below), and obtaining new credit to finance interest payments.
Holders of Sovereign Debt, including PACE Strategic Fixed Income Investments
and PACE Global Fixed Income Investments, may be requested to participate in
the rescheduling of such debt and to extend further loans to sovereign debtors.
The interests of holders of Sovereign Debt could be adversely affected in the
course of restructuring arrangements or by certain other factors referred to
below. Furthermore, some of the participants in the secondary market for
Sovereign Debt may also be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to
other market participants. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of certain issuers of Sovereign Debt. There are no bankruptcy
proceedings by which Sovereign Debt on which a sovereign has defaulted may be
collected in whole or in part.
Foreign investment in certain Sovereign Debt is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in such Sovereign Debt and increase the costs and expenses
of the Portfolio. Certain countries in which the Portfolio will invest require
governmental approval prior to investments by foreign persons, limit the amount
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of investment by foreign persons in a particular issuer, limit the investment
by foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries or impose additional taxes on foreign investors.
Certain issuers may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments, the country could impose temporary restrictions on foreign capital
remittances. The Portfolio could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for repatriation of
capital, as well as by the application to the Portfolio of any restrictions on
investment. Investing in local markets may require the Portfolio to adopt
special procedures, seek local government approvals or take other actions, each
of which may involve additional costs to the Portfolio.
BRADY BONDS. PACE Global Fixed Income Investments, PACE International Equity
Investments and PACE International Emerging Markets Equity Investments may
invest in Brady Bonds and other Sovereign Debt of countries that have
restructured or are in the process of restructuring Sovereign Debt pursuant to
the Brady Plan, an initiative announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure
their outstanding external commercial bank indebtedness. In restructuring its
external debt under the Brady Plan framework, a debtor nation negotiates with
its existing bank lenders as well as multilateral institutions such as the
International Monetary Fund ("IMF"). The Brady Plan framework, as it has
developed, contemplates the exchange of commercial bank debt for newly issued
Brady Bonds. Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
International Bank for Reconstruction and Development (more commonly known as
the "World Bank") and the IMF support the restructuring by providing funds
pursuant to loan agreements or other arrangements which enable the debtor
nation to collateralize the new Brady Bonds or to repurchase outstanding bank
debt at a discount.
Brady Plan debt restructurings totalling more than $80 billion have been
implemented to date in Mexico, Costa Rica, Venezuela, Uruguay, Nigeria,
Argentina and the Philippines and, in addition, Brazil has announced intentions
to issue Brady Bonds. There can be no assurance that the circumstances
regarding the issuance of Brady Bonds by these countries will not change.
Investors should recognize that Brady Bonds have been issued only recently, and
accordingly do not have a long payment history. Agreements implemented under
the Brady Plan to date are designed to achieve debt and debt-service reduction
through specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for
bonds issued at 100% of face value of such debt, which carry a below-market
stated rate of interest (generally known as par bonds), bonds issued at a
discount from the face value of such debt (generally known as discount bonds),
bonds bearing an interest rate which increases over time and bonds issued in
exchange for the advancement of new money by existing lenders. Regardless of
the stated face amount and stated interest rate of the various types of Brady
Bonds, the Portfolios will purchase Brady Bonds in secondary markets, as
described below, in which the price and yield to the investor reflect market
conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due to maturity
by U.S. Treasury zero coupon bonds with maturities equal to the final maturity
of such Brady Bonds. Collateral purchases are financed by the IMF, the World
Bank and the debtor nations' reserves. In the event
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of a default with respect to collateralized Brady Bonds as a result of which
the payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high-grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components: (1) the
collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments and (4) any collateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. The Portfolios may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) repayment of principal
primarily on the willingness and ability of the foreign government to make
payment in accordance with the terms of the Brady Bonds. Brady Bonds issued to
date are purchased and sold in secondary markets through U.S. securities
dealers and other financial institutions and are generally maintained through
European transnational securities depositories.
STRUCTURED FOREIGN INVESTMENTS. PACE Strategic Fixed Income Investments, PACE
Global Fixed Income Investments, PACE International Equity Investments and PACE
International Emerging Markets Equity Investments may each invest a portion of
its assets in interests in U.S. and foreign entities organized and operated
solely for the purpose of securitizing or restructuring the investment
characteristics of foreign securities. This type of securitization or
restructuring involves the deposit with or purchase by a U.S. or foreign
entity, such as a corporation or trust, or specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by the entity of one or
more classes of securities ("Structured Foreign Investments") backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued Structured
Foreign Investments to create securities with different investment
characteristics such as varying maturities, payment priorities and interest
rate provisions, and the extent of the payments made with respect to Structured
Foreign Investments is dependent on the extent of the cash flow on the
underlying instruments.
The Structured Foreign Investments in which these Portfolios typically will
invest involve no credit enhancement. Accordingly, their credit risk generally
will be equivalent to that of the underlying instruments. The Portfolios are
permitted, however, to invest in classes of Structured Foreign Investments that
are subordinated to the right of payment of another class. Subordinated
Structured Foreign Investments typically have higher yields and present greater
risks than unsubordinated Structured Foreign Investments. Structured Foreign
Investments are typically sold in private placement transactions, and there
currently is no active trading market for Structured Foreign Investments.
FOREIGN CURRENCY TRANSACTIONS. Although PACE Strategic Fixed Income
Investments, PACE Global Fixed Income Investments, PACE International Equity
Investments and PACE International Emerging Markets Equity Investments value
their assets daily in U.S. dollars, they do not intend to
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convert their holdings of foreign currencies to U.S. dollars on a daily basis.
The Portfolio's foreign currencies may be held as "foreign currency call
accounts" at foreign branches of foreign or domestic banks. These accounts bear
interest at negotiated rates and are payable upon relatively short demand
periods. If a bank became insolvent, a Portfolio could suffer a loss of some or
all of the amounts deposited. Each of these Portfolios may convert foreign
currency to U.S. dollars from time to time. Although foreign exchange dealers
generally do not charge a stated commission or fee for conversion, the prices
posted generally include a "spread," which is the difference between the prices
at which the dealers are buying and selling foreign currencies.
CONVERTIBLE SECURITIES. As described in the Prospectus, PACE Strategic Fixed
Income Investments, PACE Large Company Value Equity Investments, PACE Large
Company Growth Equity Investments, PACE Small/Medium Company Value Equity
Investments, PACE Small/Medium Company Growth Equity Investments, PACE
International Equity Investments and PACE International Emerging Markets Equity
Investments may each invest in convertible securities. Before conversion,
convertible securities have characteristics similar to non-convertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable non-convertible
securities. While no securities investment is without some risk, investments in
convertible securities generally entail less risk than the issuer's common
stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed income security.
The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock). The investment value of a convertible
security is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and other factors also may have an effect on
the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value and generally the conversion decreases as the convertible security
approaches maturity. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition,
a convertible security generally will sell at a premium over its conversion
value determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Portfolio is called for
redemption, the Portfolio will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party.
INVERSE FLOATERS. Inverse floaters are instruments whose interest rates bear
an inverse relationship to the interest rate on another security or the value
of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest rate paid on the inverse
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floater, with the result that the inverse floater's price will be considerably
more volatile than that of a fixed-rate bond.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Each Portfolio may invest up to 10% of
its total assets in secured or unsecured variable or floating rate loans
("Loans") arranged through private negotiations between a borrowing corporation
and one or more banks ("Lenders"). A Portfolio's investments in Loans will be
primarily in the form of participations ("Participations") in Loans, although a
Portfolio may acquire assignments ("Assignments") of portions of Loans from
third parties. Participations typically will result in a Portfolio receiving
payments of principal, interest and any fees to which it is entitled from the
Lender selling the Participations and relying upon the Lender to collect those
payments from the borrower. In connection with purchasing Participations, a
Portfolio generally has no direct right to enforce compliance by the borrower
with the terms of the loan agreement relating to the Loan, and the Portfolio
may not directly benefit from any collateral supporting the Loan in which it
has purchased the Participation. As a result, a Portfolio may assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, a Portfolio
may be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower or receive the full benefit of any
collateral. A Portfolio will acquire Participations only if both the borrower
and the Lender interpositioned between the Portfolio and the borrower meet the
Portfolio's credit standards.
When the Portfolio purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. Under an Assignment, a Portfolio
generally will be able to collect payments and enforce remedies directly from
or against the borrower. Conversely, however, a Portfolio may not have the
benefit of the services of a lead or agent bank to administer the Loan on the
Portfolio's behalf.
Assignments and Participations are generally not registered under the 1933
Act and thus are usually subject to the Portfolios' limitations on investments
in illiquid securities. Because there is no liquid market for such securities,
the Portfolios anticipate that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on the Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet the Portfolio's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the borrower. Under
normal circumstances, the bank issuing the Participation will be considered the
issuer for purposes of concentration and diversification.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. A security purchased on a when-
issued or delayed delivery basis is recorded as an asset on the commitment date
and is subject to changes in market value, generally based upon changes in the
level of interest rates. Thus, fluctuation in the value of the security from
the time of the commitment date will affect the Portfolio's net asset value.
When the Portfolio commits to purchase securities on a when-issued or delayed
delivery basis, its custodian will set aside in a segregated account cash, U.S.
government securities, or other liquid high-grade debt securities with a market
value equal to the amount of the commitment. If necessary, additional assets
will be placed in the account daily so that the value of the account will equal
or exceed the amount of the Portfolio's purchase commitment. The Portfolio
purchases when-issued securities only with the intention of taking delivery,
but may sell the right to acquire the security prior to delivery if the Adviser
or Mitchell Hutchins, as the case may be, deems it advantageous to do so, which
may result in capital gain or loss to a Portfolio.
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LEVERAGE
Each Portfolio may borrow up to 33 1/3% of its total assets and may borrow in
excess of its 33 1/3% limitation for extraordinary or emergency purposes, but
not in excess of an additional 5% of its total assets. Borrowing constitutes
leverage, a speculative technique. No Portfolio currently expects to leverage,
other than through the techniques described above and in the Prospectus during
the first year of operations. A Portfolio will only use leverage when its
Adviser believes that such leverage will benefit the Portfolio after taking
leverage risks into consideration.
The net asset value of a Portfolio and its yield may be more volatile due to
the Portfolio's use of leverage. Leverage also creates interest expenses for a
Portfolio, which will reduce its net income. To the extent the income derived
from securities purchased with funds obtained through leverage exceeds the
interest and other expenses that a Portfolio will have to pay in connection
with such leverage, the Portfolio's net income will be greater than if leverage
were not used. Conversely, if the income from the assets obtained through
leverage is not sufficient to cover the cost of leverage, the net income of a
Portfolio will be less than if leverage were not used, and therefore the amount
available for distribution to stockholders will be reduced.
TYPES OF MUNICIPAL SECURITIES
The types of municipal securities identified in the Prospectus as eligible
for purchase by PACE Municipal Fixed Income Investments may include obligations
of issuers whose revenues are primarily derived from mortgage loans on housing
projects for moderate to low income families. The Portfolio also may purchase
mortgage subsidy bonds that are normally issued by special purpose public
authorities. In some cases the repayment of such bonds depends upon annual
legislative appropriations; in other cases repayment is a legal obligation of
the issuer and, if the issuer is unable to meet its obligations, repayment
becomes a moral commitment of a related government unit (subject, however, to
such appropriations).
STAND-BY COMMITMENTS. The Portfolio may acquire stand-by commitments pursuant
to which a bank or other municipal bond dealer agrees to purchase securities
that are held in the Portfolio's portfolio or that are being purchased by the
Portfolio, at a price equal to (1) the acquisition cost (excluding any accrued
interest paid on acquisition), less any amortized market premium or plus any
accrued market or original issue discount, plus (2) all interest accrued on the
securities since the last interest payment date or the date the securities were
purchased by the Portfolio, whichever is later. Although the Portfolio does not
currently intend to acquire stand-by commitments with respect to municipal
securities held in their portfolios, the Portfolio may acquire such commitments
under unusual market conditions to facilitate portfolio liquidity.
The Portfolio will enter into stand-by commitments only with those banks or
other dealers that, in the opinion of the Portfolio's Adviser, present minimal
credit risk. The Portfolio's right to exercise stand-by commitments would be
unconditional and unqualified. A stand-by commitment would not be transferable
by the Portfolio, although it could sell the underlying securities to a third
party at any time. The Portfolio may pay for stand-by commitments either
separately in cash or by paying a higher price for the securities that are
acquired subject to such a commitment (thus reducing the yield to maturity
otherwise available for the same securities). The acquisition of a stand-by
commitment would not ordinarily affect the valuation or maturity of the
underlying municipal securities. Stand-by commitments acquired by the Portfolio
would be valued at zero in determining net asset value. Whether the Portfolio
paid directly or indirectly for a stand-by commitment, its cost would be
treated as unrealized depreciation and would be amortized over the period the
commitment is held by the Portfolio.
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PUT BONDS. The Portfolio may invest in put bonds that have a fixed rate of
interest and a final maturity beyond the date on which the put may be
exercised. If the put is a "one time only" put, the Portfolio ordinarily will
either sell the bond or put the bond, depending upon the more favorable price.
If the bond has a series of puts after the first put, the bond will be held as
long as, in the judgment of the Portfolio's Adviser, it is in the best interest
of the Portfolio to do so. There is no assurance that the issuer of a put bond
acquired by the Portfolio will be able to repurchase the bond upon the exercise
date, if the Portfolio chooses to exercise its right to put the bond back to
the issuer.
MUNICIPAL LEASE OBLIGATIONS. Although municipal lease obligations do not
constitute general obligations of the municipality for which its taxing power
is pledged, they ordinarily are backed by its covenant to budget for,
appropriate, and make the payments due under the lease obligation. The leases
underlying certain municipal lease obligations, however, provide that lease
payments are subject to partial or full abatement if, because of material
damage or destruction of the leased property, there is substantial interference
with the lessee's use or occupancy of such property. This "abatement risk" may
be reduced by the existence of insurance covering the leased property, the
maintenance by the lessee of reverse funds or the provision of credit
enhancements such as letters of credit.
Certain municipal lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. In the case of a "non- appropriation" lease, a Portfolio's
ability to recover under the lease in the event of a non-appropriation or
default will be limited solely to the repossession of leased property without
recourse to the general credit of the lessee, and disposition of the property
in the event of foreclosure might prove difficult. The Portfolio does not
intend to invest a significant portion of its assets in such "non-
appropriation" municipal lease obligations. There is no limitation on the
Portfolio's ability to invest in other municipal lease obligations.
PARTICIPATION INTERESTS. The Portfolio also may invest in participation
interests in municipal bonds, including industrial development bonds ("IDBs"),
private activity bonds ("PABs") and floating and variable rate securities. A
participation interest gives the Portfolio an undivided interest in a municipal
bond owned by a bank. The Portfolio has the right to sell the instrument back
to the bank. Such right generally is backed by the bank's irrevocable letter of
credit or guarantee and permits the Portfolio to draw on the letter of credit
on demand, after specified notice, for all or any part of the principal amount
of the Portfolio's participation interest plus accrued interest. Generally, the
Portfolio intends to exercise the demand under the letters of credit or other
guarantees only (1) upon a default under the terms of the underlying bond, (2)
to maintain the Portfolio's portfolio in accordance with its investment
objective and policies, or (3) as needed to provide liquidity to the Portfolio
in order to meet redemption requests. The ability of a bank to fulfill its
obligations under a letter of credit or guarantee might be affected by possible
financial difficulties of its borrowers, adverse interest rate or economic
conditions, regulatory limitations, or other factors. The Portfolio's Adviser
will monitor the pricing, quality, and liquidity of the participation interests
held by the Portfolio, and the credit standing of banks issuing letters of
credit or guarantees supporting such participation interests, on the basis of
published financial information reports of NRSROs and bank analytical services.
FLOATING RATE AND VARIABLE RATE MUNICIPAL SECURITIES. As noted in the
Prospectus, the Portfolio may invest in floating rate and variable rate
municipal securities with or without demand features. A demand feature gives
the Portfolio the right to sell the securities back to a specified
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party, usually a remarketing agent, on a specified date. A demand feature is
often backed by a letter of credit or guarantee from a bank. As discussed
under "Participation Interests," to the extent that payment of an obligation
is backed by a bank's letter of credit or guarantee, such payment may be
subject to the bank's ability to satisfy that commitment. The interest rate on
floating rate or variable rate securities ordinarily is readjusted on the
basis of the prime rate of the bank that originated the financing or some
other index or published rate, such as the 90-day U.S. Treasury Bill rate.
Generally, these interest rate adjustments cause the market value of floating
rate and variable rate municipal securities to fluctuate less than the market
value of fixed-rate obligations. Accordingly, as interest rates decrease or
increase, the potential for capital appreciation or capital depreciation is
less than for fixed-rate obligations.
HEDGING AND RELATED STRATEGIES
As discussed in the Prospectus, each Portfolio (except PACE Money Market
Investments, PACE Municipal Fixed Income Investments, PACE Small/Medium
Company Value Equity Investments and PACE Large Company Growth Equity
Investments) may use a variety of financial instruments ("Instruments"), which
may include certain options, futures contracts (sometimes referred to as
"futures"), options on futures contracts, forward currency contracts and
interest rate protection transactions, to attempt to hedge the portfolio of
the Portfolio and to attempt to enhance the Portfolio's income or return. The
particular Instruments are described in Appendix A to the Prospectus.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of an Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in a Portfolio's portfolio. Thus, in a short hedge a
Portfolio takes a position in an Instrument whose price is expected to move in
the opposite direction of the price of the investment being hedged. For
example, a Portfolio might purchase a put option on a security to hedge
against a potential decline in the value of that security. If the price of the
security declined below the exercise price of the put, the Portfolio could
exercise the put and thus limit its loss below the exercise price to the
premium paid plus transaction costs. In the alternative, because the value of
the put option can be expected to increase as the value of the underlying
security declines, the Portfolio might be able to close out the put option and
realize a gain to offset the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of an Instrument intended
partially or fully to offset potential increases in the acquisition cost of
one or more investments that a Portfolio intends to acquire. Thus, in a long
hedge a Portfolio takes a position in an Instrument whose price is expected to
move in the same direction as the price of the prospective investment being
hedged. For example, a Portfolio might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of
the call, the Portfolio could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transaction costs.
Alternatively, the Portfolio might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Portfolio owns
or intends to acquire. Instruments on indices of equity or debt securities, in
contrast, generally are used to hedge against price movements in broad
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equity or debt market sectors in which the Portfolio has invested or expects to
invest. Instruments on debt securities may be used to hedge either individual
securities or broad fixed income market sectors.
The use of Instruments is subject to applicable regulations of the SEC, the
several options and futures exchanges upon which they are traded, the Commodity
Futures Trading Commission ("CFTC") and various state regulatory authorities.
In addition, a Portfolio's ability to use Instruments will be limited by tax
considerations. See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, the Advisers expect to discover additional opportunities in
connection with options, futures contracts, forward currency contracts and
other techniques. These new opportunities may become available as an Adviser
develops new techniques, as regulatory authorities broaden the range of
permitted transactions and as new options, futures contracts, forward currency
contracts or other techniques are developed. An Adviser may utilize these
opportunities to the extent that they are consistent with the Portfolio's
investment objective and permitted by the Portfolio's investment limitations
and applicable regulatory authorities. The Prospectus or SAI will be
supplemented to the extent that new products or techniques involve materially
different risks than those described below or in the Prospectus.
SPECIAL RISKS OF THESE STRATEGIES. The use of these Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Instruments are described in the sections that follow.
(1) Successful use of most Instruments depends upon the Adviser's ability to
predict movements of the overall securities, currency and interest rate
markets, which require different skills than predicting changes in the prices
of individual securities. While each Adviser is experienced in the use of
Instruments, there can be no assurance that any particular strategy adopted
will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of an Instrument and price movements of the investments being
hedged. For example, if the value of an Instrument used in a short hedge
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Instruments are traded.
The effectiveness of hedges using Instruments on indices will depend on the
degree of correlation between price movements in the index and price movements
in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Portfolio entered in a
short hedge because the Adviser projected a decline in the price of a security
in the Portfolio's portfolio, and the price of that security increased instead,
the gain from that increase might be wholly or partially
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offset by a decline in the price of the Instrument. Moreover, if the price of
the Instrument declined by more than the increase in the price of the
security, the Portfolio could suffer a loss. In either such case, the
Portfolio would have been in a better position had it not hedged at all.
(4) As described below, a Portfolio might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Instruments involving obligations to third parties (i.e.,
Instruments other than purchased options). If a Portfolio were unable to close
out its positions in such Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair a Portfolio's ability to
sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that a Portfolio sell a portfolio
security at a disadvantageous time. A Portfolio's ability to close out a
position in an Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market,
the ability and willingness of the other party to the transaction ("contra
party") to enter into a transaction closing out the position. Therefore, there
is no assurance that any position can be closed out at a time and price that
is favorable to the Portfolio.
COVER FOR THESE STRATEGIES. Transactions using Instruments, other than
purchased options, expose a Portfolio to an obligation to another party. A
Portfolio will not enter into any such transactions unless it owns either (1)
an offsetting (covered) position in securities, currencies or other options,
futures contracts or forward contracts, or (2) cash, receivables and short-
term debt securities, with a value sufficient at all times to cover its
potential obligations to the extent not covered as provided in (1) above. Each
Portfolio will comply with SEC guidelines regarding cover for these
Instruments and will, if the guidelines so require, set aside cash, U.S.
government securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount as determined
daily on a mark-to-market basis.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Instrument is open, unless they are replaced
with other appropriate assets. As a result, the commitment of a large portion
of a Portfolio's assets to cover or segregated accounts could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
OPTIONS. The Portfolios may purchase put and call options, and write (sell)
and purchase call options on debt and equity securities, foreign currencies
and indices of debt or equity securities. The purchase of call options serves
as a long hedge, and the purchase of put options serves as a short hedge.
Writing covered put or call options can enable a Portfolio to enhance income
by reason of the premiums paid by the purchasers of such options. However, if
the market price of the security underlying a put option declines to less than
the exercise price on the option, minus the premium received, the Portfolio
would expect to suffer a loss. Writing call options serves as a limited short
hedge, because declines in the value of the hedged investment would be offset
to the extent of the premium received for writing the option. However, if the
security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Portfolio
will be obligated to sell the security at less than its market value. If the
call option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under "Investment
Policies and Restrictions--Illiquid Securities."
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The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options that expire unexercised have no value.
A Portfolio may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a Portfolio may terminate
its obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Portfolio may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit a Portfolio to realize
profits or limit losses on an option position prior to its exercise or
expiration.
The Portfolios may purchase or write both exchange-traded and OTC options.
Currently, many options on equity securities are exchange-traded. Exchange
markets for options on debt securities and foreign currencies exist, but these
instruments are primarily traded on the OTC market. Exchange-traded options in
the United States are issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect, guarantees completion
of every exchange-traded option transaction. In contrast, OTC options are
contracts between a Portfolio and its contra party (usually a securities dealer
or a bank) with no clearing organization guarantee. Thus, when a Portfolio
purchases or writes an OTC option, it relies on the party from whom it
purchased the option or to whom it has written the option to make or take
delivery of the underlying investment upon exercise of the option. In the case
of purchased options, failure by the contra party to do so would result in the
loss of any premium paid by the Portfolio as well as the loss of any expected
benefit of the transaction.
Generally, the OTC debt and foreign currency options used by the Portfolios
are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
A Portfolio's ability to establish and close out positions in exchange-traded
options depends on the existence of a liquid market. Each Portfolio intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a
Portfolio will enter into OTC options only with contra parties that are
expected to be capable of entering into closing transactions with the
Portfolio, there is no assurance that the Portfolio will be able to close out
an OTC option position at a favorable price prior to expiration. In the event
of insolvency of the contra party, the Portfolio might be unable to close out
an OTC position at any time prior to its expiration.
If the Portfolio were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a call option
written by a Portfolio could cause material losses because the Portfolio would
be unable to sell the investment used as cover for the written option until the
option expires or is exercised.
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<PAGE>
GUIDELINES FOR OPTIONS. Each Portfolio's use of options is governed by the
following guidelines, which can be changed by the Trust's board of trustees
without shareholder vote:
(1) A Portfolio may purchase a put or call option, including any straddles or
spreads, only if the value of its premium, when aggregated with the premiums on
all other options held by the Portfolio, does not exceed 5% of the Portfolio's
total assets.
(2) The aggregate value of securities underlying put options written by a
Portfolio, determined as of the date the put options are written, will not
exceed 50% of the Portfolio's net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on futures
contracts) purchased by the Portfolio are held at any time will not exceed 20%
of the Portfolio's total net assets.
FUTURES. The purchase of futures or call options thereon can serve as long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing call options on futures contracts can serve as a
limited short hedge, using a strategy similar to that used for writing call
options on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge.
Futures strategies also can be used to manage the average duration of a
Portfolio's portfolio. If its Adviser wishes to shorten the average duration of
a Portfolio, the Portfolio may sell a futures contract or a call option
thereon, or purchase a put option on that futures contract. If its Adviser
wishes to lengthen the average duration of a Portfolio, the Portfolio may buy a
futures contract or a call option thereon, or sell a put option thereon.
PACE Global Fixed Income Investments may also write put options on foreign
currency futures contracts while at the same time purchasing call options on
the same futures contracts in order synthetically to create a long futures
contract position. Such options would have the same strike prices and
expiration dates. The Portfolio will engage in this strategy only when it is
more advantageous to the Portfolio than is purchasing the futures contract.
No price is paid upon entering into a future contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit in a
segregated account with its custodian, in the name of the futures commission
merchant ("FCM") through whom the transaction was effected, "initial margin"
consisting of cash or U.S. government securities, in an amount generally equal
to 10% or less of the contract value. Margin must also be deposited when
writing an option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Portfolio at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, a
Portfolio may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally in
the future by regulatory action.
Subsequent "variation margin" payments are made to and from the FCM daily as
the value of the futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing, but represents a daily
settlement of a Portfolio's obligations to or from a FCM.
20
<PAGE>
When a Portfolio purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Portfolio
purchases or sells a futures contract or writes an option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Portfolio has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, a futures contract or option
identical to the instrument purchased or sold. Positions in futures and options
on futures may be closed only on an exchange or board of trade that provides a
secondary market. Each Portfolio intends to enter into these transactions only
on exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or option can vary from the previous
day's settlement price; once that limit is reached, no trades may be made that
day at a price beyond the limit. Daily price limits do not limit potential
losses because prices could move to the daily limit for several consecutive
days with little or no trading, thereby preventing liquidation of unfavorable
positions.
If a Portfolio were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Portfolio would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Portfolio would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are
less onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
GUIDELINES FOR FUTURES AND RELATED OPTIONS. Each Portfolio's use of futures
and related options is governed by the following guidelines, which can be
changed by the Trust's board of trustees without shareholder vote:
(1) To the extent a Portfolio enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums required to establish
these on those positions (excluding the amount by which options are "in-the-
money") may not exceed 5% of the Portfolio's net assets.
21
<PAGE>
(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on futures
contracts) purchased by a Portfolio that are held at any time will not exceed
20% of the Portfolio's total net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by a Portfolio will not exceed 5% of the Portfolio's
total assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. PACE Strategic
Fixed Income Investments, PACE Global Fixed Income Investments, PACE
International Equity Investments and PACE International Emerging Markets Equity
Investments each may use options and futures on foreign currencies, as
described above, and forward currency forward contracts, as described below, to
hedge against movements in the values of the foreign currencies in which the
Portfolios' securities are denominated. Such currency hedges can protect
against price movements in a security that a Portfolio owns or intends to
acquire that are attributable to changes in the value of the currency in which
it is denominated. Such hedges do not, however, protect against price movements
in the securities that are attributable to other causes.
The Portfolios might seek to hedge against changes in the value of a
particular currency when no Instruments on that currency are available or such
Instruments are more expensive than certain other Instruments. In such cases, a
Portfolio may hedge against price movements in that currency by entering into
transactions using Instruments on another foreign currency or a basket of
currencies, the values of which the Adviser believes will have a positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the Instrument will not correlate perfectly with movements in
the price of the currency being hedged is magnified when this strategy is used.
The Portfolios may also use options and futures on foreign currencies,
options on currency futures and forward currency contracts for income and
return enhancement, for example, by shifting a Portfolio's exposure from one
foreign currency (or the U.S. dollar) to another foreign currency.
The value of Instruments on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such Instruments, the
Portfolios could be disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the Instruments until they reopen.
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<PAGE>
Settlement of transactions involving foreign currencies might be required to
take place within the country issuing the underlying currency. Thus, a
Portfolio might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS. PACE Strategic Fixed Income Investments, PACE
Global Fixed Income Investments, PACE International Equity Investments and PACE
International Emerging Markets Equity Investments may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed amount of
U.S. dollars or another foreign currency. Such transactions may serve as long
hedges--for example, a Portfolio may purchase a forward currency contract to
lock in the U.S. dollar price of a security denominated in a foreign currency
that the Portfolio intends to acquire. Forward currency contracts may also
serve as short hedges--for example, a Portfolio may sell a forward currency
contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency.
As noted above, each of these Portfolios may seek to hedge against changes in
the value of a particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which its Adviser
believes will have a positive correlation to the values of the currency being
hedged. In addition, the Portfolios may use forward currency contracts to shift
exposure to foreign currency fluctuations from one country to another. For
example, if a Portfolio owns securities denominated in a foreign currency and
its Adviser believes that currency will decline relative to another currency,
it might enter into a forward contract to sell an appropriate amount of the
first foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as
"cross hedging." Use of a different foreign currency magnifies the risk that
movements in the price of the Instrument will not correlate or will correlate
unfavorably with the foreign currency being hedged.
The cost to the Portfolios of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are entered into on a principal basis, no fees or commissions are involved.
When a Portfolio enters into a forward currency contract, it relies on the
contra party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the contra party to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, a
forward contract identical to the forward contract purchased or sold. Secondary
markets generally do not exist for forward currency contracts, with the result
that closing transactions generally can be made for forward currency contracts
only by negotiating directly with the contra party. Thus, there can be no
assurance that a Portfolio will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the contra party, the Portfolio might be unable to close out a
forward currency contract at any time prior to maturity. In either event, the
Portfolio would continue to be subject to market risk with respect to the
position, and would continue to be required to maintain a position in the
securities or currencies that are the subject of the hedge or to maintain cash
or securities in a segregated account.
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<PAGE>
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
foreign currency contract has been established. Thus, a Portfolio might need to
purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
INTEREST RATE PROTECTION TRANSACTIONS. PACE Government Securities Fixed
Income Investments and PACE Strategic Fixed Income Investments may enter into
interest rate protection transactions, including interest rate swaps and
interest rate caps, collars and floors. Interest rate swap transactions involve
an agreement between two parties to exchange payments that are based, for
example, on variable and fixed rates of interest and that are calculated on the
basis of a specified amount of principal (the "notional principal amount") for
a specified period of time. Interest rate cap and floor transactions involve an
agreement between two parties in which the first party agrees to make payments
to the contra party when a designated market interest rate goes above (in the
case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. An interest rate collar
combines elements of buying a cap and selling a floor.
These Portfolios may enter into interest rate protection transactions to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. These Portfolios may also use interest
rate protection transactions for income and return enhancement purposes.
Each of these Portfolios may enter into interest rate swaps, caps, collars
and floors on either an asset- or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. Mitchell Hutchins and each Portfolio's Adviser
believe such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to the Portfolio's borrowing restrictions.
The net amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash, U.S. government securities or other liquid high-
grade debt obligations having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by a custodian
that satisfies the requirements of the Investment Company Act of 1940 ("1940
Act"). A Portfolio also will establish and maintain such segregated accounts
with respect to its total obligations under any interest rate swaps that are
not entered into on a net basis and with respect to any interest rate caps,
collars and floors that are written by the Portfolio.
A Portfolio will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by its Adviser to present
minimal credit risks in accordance with guidelines established by the Trust's
board of trustees. If there is a default by the other party to such a
transaction, the Portfolio will have to rely on its contractual remedies (which
may be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
SHORT SALES "AGAINST THE BOX". Each Portfolio may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to defer realization of gains or losses for tax or other purposes.
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<PAGE>
To make delivery to the purchaser in a short sale, the executing broker borrows
the securities being sold short on behalf of the Portfolio, and the Portfolio
is obligated to replace the securities borrowed at a date in the future. When a
Portfolio sells short, it will establish a margin account with the broker
effecting the short sale, and will deposit collateral with the broker. In
addition, the Portfolio will maintain with its custodian, in a segregated
account, the securities that could be used to cover the short sale. A Portfolio
will incur transaction costs, including interest expense, in connection with
opening, maintaining and closing short sales against the box. None of the
Portfolios currently intend to have obligations under short-sales that at any
time during the coming year exceed 5% of the Portfolio's net assets.
A Portfolio might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins or an Adviser believes that the
price of a security may decline, thereby causing a decline in the value of a
security owned by the Portfolio or a security convertible into or exchangeable
for a security owned by the Portfolio, or when Mitchell Hutchins or an Adviser
want to sell a security that the Portfolio owns at a current price, but also
wishes to defer recognition of gain or loss for federal income tax purposes. In
such case, any loss in the Portfolio's long position after the short sale
should be reduced by a gain in the short position. Conversely, any gain in the
long position should be reduced by a loss in the short position. The extent to
which gains or losses in the long position are reduced will depend upon the
amount of the securities sold short relative to the amount of the securities
the Portfolio owns, either directly or indirectly, and in the case where the
Portfolio owns convertible securities, changes in the investment values or
conversion premiums of such securities.
INVESTMENT RESTRICTIONS
The Trust has adopted investment restrictions numbered 1 through 11 below as
fundamental policies of the Portfolios. Under the 1940 Act, a fundamental
policy may not be changed without the vote of a majority of the outstanding
voting securities of a Portfolio, which is defined in the 1940 Act as the
lesser of (1) 67% or more of the shares present at a Portfolio meeting, if the
holders of more than 50% of the outstanding shares of the Portfolio are present
or represented by proxy or (2) more than 50% of the outstanding shares of the
Portfolio. Investment restrictions 12 through 22 may be changed by a vote of a
majority of the board of trustees at any time.
Under the investment restrictions adopted by the Portfolios:
1. A Portfolio, other than PACE Intermediate Fixed Income Investments,
and PACE Global Fixed Income Investments, may not purchase securities
(other than U.S. government securities) of any issuer if, as a result of
the purchase, more than 5% of the value of the Portfolio's total assets
would be invested in such issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to this 5%
limitation.
2. A Portfolio will not purchase more than 10% of the outstanding voting
securities of any one issuer, except that this limitation is not applicable
to the Portfolio's investments in U.S. government securities and up to 25%
of the Portfolio's assets may be invested without regard to these
limitations.
3. A Portfolio, other than PACE Municipal Fixed Income Investments, will
invest no more than 25% of the value of its total assets in securities of
issuers in any one industry, the term industry being deemed to include the
government of a particular country other than the United States. This
limitation is not applicable to a Portfolio's investments in U.S.
government securities.
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<PAGE>
4. A Portfolio will not issue senior securities (including borrowing
money from banks and other entities and through reverse repurchase
agreements and mortgage dollar rolls) in excess of 33 1/3% of its total
assets (including the amount of senior securities issued, but reduced by
any liabilities and indebtedness not constituting senior securities),
except that a Portfolio may borrow up to an additional 5% of its total
assets (not including the amount borrowed) for extraordinary or emergency
purposes.
5. A Portfolio will not pledge, hypothecate, mortgage, or otherwise
encumber its assets, except to secure permitted borrowings or in connection
with its use of forward contracts, futures contracts, options, swaps, caps,
collars and floors.
6. A Portfolio will not lend any funds or other assets, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements consistent with the Portfolio's investment objective
and policies.
7. A Portfolio will not purchase securities on margin, except that a
Portfolio may obtain any short-term credits necessary for the clearance of
purchases and sales of securities. For purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts or options on futures contracts will not be deemed to be
a purchase of securities on margin.
8. A Portfolio will not make short sales of securities or maintain a
short position, unless at all times when a short position is open it owns
an equal amount of the securities or securities convertible into or
exchangeable for, without payment of any further consideration, securities
of the same issue as, and equal in amount to, the securities sold short
("short sales against the box"), and unless not more than 10% of the
Portfolio's net assets (taken at market value) is held as collateral for
such sales at any one time.
9. A Portfolio will not purchase or sell real estate or real estate
limited partnership interests, except that it may purchase and sell
mortgage related securities and securities of companies that deal in real
estate or interests therein.
10. A Portfolio will not purchase or sell commodities or commodity
contracts (except currencies, forward currency contracts, futures contracts
and options and other similar contracts).
11. A Portfolio will not act as an underwriter of securities, except that
a Portfolio may acquire restricted securities under circumstances in which,
if the securities were sold, the Portfolio might be deemed to be an
underwriter for purposes of the 1933 Act.
12. A Portfolio will not invest in oil, gas or other mineral leases or
exploration or development programs.
13. A Portfolio will not make investments for the purpose of exercising
control of management.
14. A Portfolio will not purchase any securities if as a result (unless
the security is acquired pursuant to a plan of reorganization or an offer
of exchange) the Portfolio would own any securities of a registered open-
end investment company or more than 3% of the total outstanding voting
stock of any registered closed-end investment company or more than 5% of
the total value of the Portfolio's total assets would be invested in
securities of any one or more registered closed-end investment companies.
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<PAGE>
15. A Portfolio will not purchase any security if as a result the
Portfolio would then have more than 5% of its total assets invested in
securities of companies (including predecessors) that have been in
continuous operation for fewer than three years.
16. A Portfolio will not purchase or retain securities of any company if,
to the knowledge of the Trust after reasonable inquiry, any of the Trust's
officers or trustees or any officer or director of Mitchell Hutchins or the
Adviser for that Portfolio individually owns more than 1/2 of 1% of the
outstanding securities of the company and together they own beneficially
more than 5% of the securities.
17. A Portfolio will not invest in excess of 5% of the value of its net
assets in warrants, valued at the lower of cost or market value. Included
within this amount, but not to exceed 2% of the value of a Portfolio's net
assets, may be warrants that are not listed on the New York Stock Exchange,
Inc. ("NYSE") or the American Stock Exchange, Inc. Warrants acquired by a
Portfolio in units or attached to securities may be deemed to be without
value.
18. A Portfolio may not purchase securities of other investment
companies, except to the extent permitted by the 1940 Act in the open
market at no more than customary brokerage commission rates. This
limitation does not apply to securities received or acquired as dividends,
through offers of exchange, or as a result of reorganization, consolidation
or merger.
19. A Portfolio (other than PACE Small/Medium Company Growth Equity
Investments) will not purchase the securities of any issuer which, together
with its predecessors, has a record of less than three years of continuous
operation, or in securities which are restricted as to disposition
(including Rule 144A securities) if, as a result of such purchase, more
than 15% of the Portfolio's total assets would be invested in such
securities.
20. PACE Small/Medium Company Growth Equity Investments will not invest
more than 10% of its net assets in (i) securities of any issuer which,
together with its predecessors, has a record of less than three years of
continuous operation, (ii) illiquid securities, and (iii) securities of
issuers that are restricted from being sold to the public without
registration under the 1933 Act. This restriction does not apply to
restricted securities eligible for resale pursuant to Rule 144A under the
1933 Act determined to be liquid under guidelines approved by the Trust's
board of trustees.
21. PACE Small/Medium Company Growth Equity Investments will not engage
in short-term trading.
22. PACE Small/Medium Company Growth Equity Investments will not invest
in puts, calls, straddles, spreads, and any combination thereof unless such
investments are for hedging purposes or are covered by cash or securities.
The Trust may make commitments more restrictive than the restrictions listed
above so as to permit the sale of shares of a Portfolio in certain states.
Should the Trust determine that a commitment is no longer in the best interests
of the Portfolio and its shareholders, the Trust will revoke the commitment by
terminating the sale of shares of the Portfolio in the state involved. If a
percentage restriction is adhered to at the time of an investment or
transaction, a later increase or decrease in percentage resulting from a change
in values of portfolio securities or amount of total assets will not be
considered a violation of any of the foregoing limitations, except that with
regard to the borrowings limitation in investment restriction number 4, the
Portfolios will comply with the applicable restrictions of Section 18 of the
1940 Act.
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TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------------- --------------------
<S> <C> <C>
Margo N. Alexander**; 48 Trustee and Ms. Alexander is president, chief executive
President officer and a director of Mitchell
Hutchins. Prior to January 1995, Ms. Alex-
ander was an executive vice president of
PaineWebber. Ms. Alexander is also presi-
dent of 27 other investment companies for
which Mitchell Hutchins or PaineWebber
serves as investment adviser.
David J. Beaubien; 60 Trustee Mr. Beaubien is chairman of Yankee Environ-
101 Industrial Road mental Systems, Inc., a manufacturer of
Box 746 meteorological measuring systems. Prior to
Turners Falls, MA 01376 January 1991, he was senior vice president
of EG&G, Inc., a company which makes and
provides a variety of scientific and tech-
nically oriented products and services. He
is also a director if IEC, Inc., a manu-
facturer of electronic assemblies; Belfort
Instruments, Inc., a manufacturer of envi-
ronmental instruments; and Oriel Corp., a
manufacturer of optical instruments. From
1985 to January 1995, Mr. Beaubien served
as a director or trustee on the boards of
the Kidder, Peabody & Co. Incorporated mu-
tual funds. Mr. Beaubien is also a direc-
tor or trustee of 13 other investment com-
panies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
E. Garrett Bewkes, Jr.**; 68 Trustee Mr. Bewkes is a director of PaineWebber
Group Inc. ("PW Group") (holding company
of PaineWebber and Mitchell Hutchins) and
a consultant to PW Group. Prior to 1988,
he was chairman of the board, president
and chief executive officer of American
Bakeries Company. Mr. Bewkes is also a di-
rector of Interstate Bakeries Corporation
and NaPro Biotherapeutics, Inc. and a di-
rector or trustee of 27 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment adviser.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------------- --------------------
<S> <C> <C>
William W Hewitt, Jr.; Trustee Mr. Hewitt is retired. Since 1988, he has
66 served as a director or trustee on the
P.O. Box 2359 boards of the Guardian Life Insurance Com-
Princeton, New Jersey pany mutual funds. From 1990 to January
08543-2359 1995, Mr. Hewitt served as a director or
trustee on the boards of the Kidder,
Peabody & Co. Incorporated mutual funds.
From 1986-1988, he was an executive vice
president and director of mutual funds,
insurance and trust services of Shearson
Lehman Brothers Inc. Mr. Hewitt is also a
director or trustee of 13 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Morton L. Janklow; 65 Trustee Mr. Janklow is a senior partner of Janklow
598 Madison Avenue Nesbit Associates, an international liter-
New York, New York 10022 ary agency representing leading authors in
their relationships with publishers and
motion picture, television and multi-media
companies, and of counsel to the law firm
of Janklow, Newborn & Ashley. Mr. Janklow
is also a director of Marvel Entertainment
Group Inc., a leading youth entertainment
company.
J. Richard Sipes**; 48 Trustee Mr. Sipes is director of Retail Underwrit-
1200 Harbor Boulevard ing and Trading for PaineWebber. Mr. Sipes
Weehawken, New Jersey is also a director of PW Trust Co.,
07087 PaineWebber Futures Management Corp.,
PaineWebber Properties Inc., Puerto Rico
Investors Tax-Free Fund and Puerto Rico
Investors Tax-Free Fund II.
William D. White; 61 Trustee Mr. White is retired. From February 1989
P.O. Box 199 through March 1994, he was president of
Upper Black Eddy, PA the National League of Professional Base-
ball Clubs. Prior to 1989, he was a tele-
vision sportscaster for WPIX-TV, New York.
Mr. White is also a director or trustee of
10 other investment companies for which
PaineWebber or Mitchell Hutchins serves as
investment adviser.
Teresa M. Boyle; 36 Vice President Ms. Boyle is a first vice president and
manager--advisory administration of Mitch-
ell Hutchins. Prior to November 1993, she
was compliance manager of Hyperion Capital
Management, Inc., an investment advisory
firm. Prior to April 1993, Ms. Boyle was a
vice
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------------- --------------------
<S> <C> <C>
president and manager--legal administra-
tion of Mitchell Hutchins. Ms. Boyle is
also a vice president of 40 other invest-
ment companies for which Mitchell Hutchins
or PaineWebber serves as investment advis-
er.
Joan L. Cohen; 30 Vice President and Ms. Cohen is a vice president and attorney
Assistant Secretary of Mitchell Hutchins. Prior to December
1993, she was an associate at the law firm
of Seward & Kissel. Ms. Cohen is also a
vice president and assistant secretary of
27 other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
C. William Maher; 34 Vice President and Mr. Maher is a first vice president and the
Assistant Treasurer senior manager of the Fund Administration
Division of Mitchell Hutchins. Mr. Maher
is also a vice president and assistant
treasurer of 27 other investment companies
for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Ann E. Moran; 37 Vice President and Ms. Moran is a vice president of Mitchell
Assistant Treasurer Hutchins. Ms. Moran is also a vice presi-
dent and assistant treasurer of 40 other
investment companies for which Mitchell
Hutchins or PaineWebber serves as invest-
ment adviser.
Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice president
Secretary and deputy general counsel of Mitchell
Hutchins. Ms. O'Donnell is also a vice
president and secretary of 40 other in-
vestment companies for which Mitchell
Hutchins or PaineWebber serves as invest-
ment adviser.
Victoria E. Schonfeld; Vice President Ms. Schonfeld is a managing director and
44 general counsel of Mitchell Hutchins. From
April 1990 to May 1994, she was a partner
in the law firm of Arnold & Porter. Prior
to April 1990, she was a partner in the
law firm of Shereff, Friedman, Hoffman &
Goodman. Ms. Schonfeld is also a vice
president of 40 other investment companies
for which Mitchell Hutchins or PaineWebber
serves as investment adviser.
Paul H. Schubert; 32 Vice President and Mr. Schubert is a vice president of Mitch-
Assistant Treasurer ell Hutchins. From August 1992 to August
1994, he was a vice president at BlackRock
Financial Management, L.P. Prior to August
1992, he was an audit manager with Ernst &
Young LLP. Mr. Schubert is also a vice
president and
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- --------------------- ------------------- --------------------
<S> <C> <C>
assistant treasurer of 40 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Martha J. Slezak; 32 Vice President and Ms. Slezak is a vice president of Mitchell
Assistant Treasurer Hutchins. From September 1991 to April
1992, she was fund-raising director for a
U.S. Senate campaign. Prior to September
1991, she was a tax manager with Arthur
Andersen & Co. LLP. Ms. Slezak is also a
vice president and assistant treasurer of
40 other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Julian F. Sluyters; 34 Vice President and Mr. Sluyters is a senior vice president and
Treasurer the director of the mutual fund finance
division of Mitchell Hutchins. Prior to
1991, he was an audit senior manager with
Ernst & Young LLP. Mr. Sluyters is also a
vice president and treasurer of 40 other
investment companies for which Mitchell
Hutchins or PaineWebber serves as invest-
ment adviser.
Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president and as-
Assistant Secretary sociate general counsel of Mitchell
Hutchins. Prior to 1993, he was a partner
in the law firm of Shereff, Friedman,
Hoffman & Goodman. Mr. Todd is also a vice
president and assistant secretary of 40
other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>
- --------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Messrs. Bewkes and Sipes and Ms. Alexander are "interested persons" of the
Trust as defined in the 1940 Act by virtue of their positions with
PaineWebber, PW Group and/or Mitchell Hutchins.
The Trust pays trustees who are not "interested persons" of the Trust
$35,000 annually and $5,000 per meeting of the board or any committee thereof.
Trustees are reimbursed for any expenses incurred in attending meetings.
Trustees of the Trust who are "interested persons" of the Trust as defined in
the 1940 Act receive no compensation from the Trust. Trustees and officers of
the Trust own in the aggregate less than 1% of the shares of each Portfolio.
Because Mitchell Hutchins, the Advisers and PaineWebber perform substantially
all of the services necessary for the operation of the Trust and the
Portfolios, the Trust requires no employees. No officer, director or employee
of Mitchell Hutchins, an Adviser or PaineWebber presently receives any
compensation from the Trust for acting as a trustee or officer. The table
below includes certain information relating to the compensation of the Trust's
trustees.
31
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pensions or
Retirement
Benefits
Aggregate Accrued as Estimated
Compensation Part of a Annual Total Compensation
From the Portfolio's Benefits Upon from the Trust and
Name of Person, Position Trust* Expenses Retirement the Fund Complex+
- ------------------------ ------------ ----------- ------------- ------------------
<S> <C> <C> <C> <C>
Margo N. Alexander,
Trustee -- -- -- --
David J. Beaubien,
Trustee $60,000 -- -- --
E. Garrett Bewkes, Jr.,
Trustee -- -- -- --
William W. Hewitt,
Trustee 60,000 -- -- --
Morton L. Janklow,
Trustee 60,000 -- -- --
J. Richard Sipes,
Trustee -- -- -- --
William D. White,
Trustee 60,000 -- -- $33,250
</TABLE>
- --------
* Represents amounts estimated to be paid to each trustee during the fiscal
year ending July 31, 1996.
+ Represents amounts paid to each trustee during the calendar year ended
December 31, 1994.
32
<PAGE>
INVESTMENT MANAGEMENT, ADVISORY AND DISTRIBUTION
ARRANGEMENTS
INVESTMENT MANAGEMENT ARRANGEMENTS. Mitchell Hutchins acts as the investment
manager to the Trust pursuant to an Investment Management and Administration
Agreement with the Trust ("Management Agreement") dated as of June 15, 1995.
Pursuant to the Management Agreement with the Trust, Mitchell Hutchins, subject
to the supervision of the Trust's board of trustees and in conformity with the
stated policies of the Trust, manages both the investment operations of the
Trust and the composition of the Trust's Portfolios, including the purchase,
retention, disposition and lending of securities. Mitchell Hutchins is
authorized to enter into advisory agreements for investment advisory services
("Advisory Agreement") in connection with the management of the Trust and the
Portfolios. Mitchell Hutchins will have responsibility for monitoring the
investment advisory services furnished pursuant to any such Advisory
Agreements. Mitchell Hutchins reviews the performance of all Advisers and makes
recommendations to the trustees of the Trust with respect to the retention and
renewal of Advisory Agreements. In connection therewith, Mitchell Hutchins is
obligated to keep certain books and records of the Trust. Mitchell Hutchins
also administers the Trust's business affairs and, in connection therewith,
furnishes the Trust with office facilities, together with those ordinary
clerical and bookkeeping services which are not being furnished by the Trust's
custodian and the Transfer Agent, the Trust's transfer and dividend disbursing
agent. The management services of Mitchell Hutchins for the Trust are not
exclusive under the terms of the Management Agreement, and Mitchell Hutchins is
free to, and does, render management services to others.
As required by state regulation, Mitchell Hutchins will reimburse a Portfolio
if and to the extent that the aggregate operating expenses of the Portfolio
exceed applicable limits in any fiscal year. Currently, the most restrictive
such limit applicable to a Portfolio is 2.5% of the first $30 million of the
Portfolio's average daily net assets, 2.0% of the next $70 million of its
average daily net assets and 1.5% of its average daily net assets in excess of
$100 million. Certain expenses, such as brokerage commissions, taxes, interest,
distribution fees, certain expenses attributable to investing outside the
United States and extraordinary items, are excluded from this limitation.
In connection with its management of the business affairs of the Trust,
Mitchell Hutchins bears the following expenses:
(1) the salaries and expenses of all of its and the Trust's personnel except
the fees and expenses of trustees who are not affiliated persons of Mitchell
Hutchins or the Trust's Advisers;
(2) all expenses incurred, by Mitchell Hutchins or by the Trust in connection
with managing the ordinary course of the Trust's business, other than those
assumed by the Trust as described below; and
(3) the fees payable to each Adviser pursuant to the Advisory Agreements
between Mitchell Hutchins and each Adviser.
Under the terms of the Management Agreement, each Portfolio bears all
expenses incurred in its operation that are not specifically assumed by
Mitchell Hutchins or the Portfolio's Adviser. General expenses of the Trust not
readily identifiable as belonging to a Portfolio or to the Trust's other
Portfolios are allocated among series by or under the direction of the board of
trustees in such manner as the board deems to be fair and equitable. Expenses
borne by each Portfolio include the
33
<PAGE>
following (or a Portfolio's share of the following): (1) the cost (including
brokerage commissions) of securities purchased or sold by a Portfolio and any
losses incurred in connection therewith, (2) fees payable to and expenses
incurred on behalf of a Portfolio by Mitchell Hutchins, (3) organizational
expenses, (4) filing fees and expenses relating to the registration and
qualification of a Portfolio's shares and the Trust under federal and state
securities laws and maintenance of such registrations and qualifications, (5)
fees and salaries payable to trustees who are not interested persons (as
defined in the 1940 Act) of the Trust, Mitchell Hutchins or the Adviser, (6)
all expenses incurred in connection with trustees' services, including travel
expenses, (7) taxes (including any income or franchise taxes) and governmental
fees, (8) costs of any liability, uncollectible items of deposit and other
insurance or fidelity bonds, (9) any costs, expenses or losses arising out of a
liability of or claim for damages or other relief asserted against the Trust or
a Portfolio for violation of any law, (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent trustees,
(11) charges of custodians, transfer agents and other agents, (12) costs of
preparing share certificates, (13) expenses of setting in type and printing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders, and
costs of mailing such materials to existing shareholders, (14) any
extraordinary expenses (including fees and disbursements of counsel) incurred
by the Trust or a Portfolio, (15) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations, (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof, (17) the cost
of investment company literature and other publications provided to trustees
and officers and (18) costs of mailing, stationery and communications
equipment.
Under the Management Agreement, Mitchell Hutchins will not be liable for any
error or judgment or mistake of law or for any loss suffered by a Portfolio in
connection with the performance of the contract, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Mitchell
Hutchins in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. The Management Agreement terminates
automatically upon its assignment and is terminable at any time without penalty
by the Trust's board of trustees or by vote of the holders of a majority of a
Portfolio's outstanding voting securities, on 60 days' written notice to
Mitchell Hutchins or by Mitchell Hutchins on 60 days' written notice to the
Portfolio.
The following table shows the approximate net assets as of May 31, 1995,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or subadviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
Investment Category Net Assets
------------------- ----------
($ mil)
<S> <C>
Domestic (excluding Money Market)................................. $5,756.9
Global............................................................ 3,355.2
Equity/Balanced................................................... 2,726.5
Fixed Income (excluding Money Market)............................. 6,385.6
Taxable Fixed Income............................................ 4,577.6
Tax-Free Fixed Income........................................... 1,808.0
Money Market Funds................................................ 18,519.0
</TABLE>
ADVISORY ARRANGEMENTS. As noted in the Prospectus, subject to the monitoring
of the Manager and, ultimately, the trustees, each Adviser manages the
securities held by the Portfolio it serves in
34
<PAGE>
accordance with the Portfolio's stated investment objectives and policies,
makes investment decisions for the Portfolio and places orders to purchase and
sell securities on behalf of the Portfolio.
The Advisory Agreements were approved by the board of trustees including a
majority of the Trustees who are not parties to such contract or interested
persons of any such parties, on June 15, 1995 and was approved by Mitchell
Hutchins, as sole shareholder of the Trust on June 19, 1995.
Each Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement. Each Advisory Agreement may be terminated by the Trust
upon not more than 60 days' written notice. Each Advisory Agreement may be
terminated by Mitchell Hutchins or the Adviser upon not more than 120 days'
written notice. Each Advisory Agreement provides that it will continue in
effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the 1940 Act.
Under the Advisory Agreements, the Advisers will not be liable for any error
or judgment or mistake of law or for any loss suffered by a Portfolio in
connection with the performance of the contract, except a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Advisers
in the performance of their duties or from reckless disregard of their duties
and obligations thereunder. Each Adviser has agreed to its fees as described in
the Prospectus and which are generally lower than the fees it charges to
institutional accounts for which it serves as investment adviser and performs
all administrative functions associated with serving in that capacity in
recognition of the reduced administrative responsibilities it has undertaken
with respect to the Portfolio. By virtue of the management, monitoring and
administrative functions performed by Mitchell Hutchins, and the fact that
Advisers are not required to make decisions regarding the allocation of assets
among the major sectors of the securities markets, each Adviser serves in a
subadvisory capacity to the Portfolio. Subject to the monitoring by the Manager
and, ultimately, the board of trustees, each Adviser's responsibilities are
limited to managing the securities held by the Portfolio it serves in
accordance with the Portfolio's stated investment objective and policies,
making investment decisions for the Portfolio and placing orders to purchase
and sell securities on behalf of the Portfolio.
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
shares of each Portfolio under a distribution contract with the Trust dated as
of June 15, 1995 ("Distribution Contract") that requires Mitchell Hutchins to
use its best efforts, consistent with its other businesses, to sell shares of
the Portfolios. Shares of the Portfolios are offered continuously. Under a
dealer agreement between Mitchell Hutchins and PaineWebber dated as of June 15,
1995 ("Dealer Agreement"), PaineWebber sells the Portfolios' shares.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for a Portfolio other than PACE Money
Market Investments are made by the Adviser, subject to the overall review of
the Manager and the board of trustees. Decisions to buy and sell securities for
PACE Money Market Investments are made by Mitchell Hutchins, subject to the
overall review of the board of trustees. Although investment decisions for the
Portfolios are made independently from those of the other accounts managed by
the Adviser or Mitchell Hutchins, as applicable, investments of the type that
the Portfolio may make also may be made by those other accounts. When a
Portfolio and one or more other accounts managed by the
35
<PAGE>
Adviser or Mitchell Hutchins, as applicable, are prepared to invest in, or
desire to dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by the Adviser or Mitchell
Hutchins, as applicable, to be equitable to each. In some cases, this procedure
may adversely affect the price paid or received by a Portfolio or the size of
the position obtained or disposed of by a Portfolio.
Transactions on U.S. stock exchanges and some foreign stock exchanges involve
the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. No stated
commission is generally applicable to securities traded in U.S. OTC markets,
but the prices of those securities include undisclosed commissions or mark-ups.
The cost of securities purchased from underwriters include an underwriting
commission or concession and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down. U.S. government
securities generally are purchased from underwriters or dealers, although
certain newly issued U.S. government securities may be purchased directly from
the U.S. Treasury or from the issuing agency or instrumentality.
In selecting brokers or dealers to execute securities transactions on behalf
of a Portfolio, its Adviser or Mitchell Hutchins, as applicable, seeks the best
overall terms available. In assessing the best overall terms available for any
transactions, the Adviser or Mitchell Hutchins, as applicable, will consider
the factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and the amount of the commission, if any,
for the specific transaction and on a continuing basis. In addition, each
Advisory Agreement between the Trust and an Adviser authorizes the Adviser, in
selecting brokers or dealers to execute a particular transaction, and in
evaluating the best overall terms available, to consider the brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) provided to the Portfolio and/or other
accounts over which the Adviser or its affiliates exercise investment
discretion. The fees under the Management Agreement and the Advisory
Agreements, respectively, are not reduced by reason of a Portfolio's Adviser
receiving brokerage and research services. The board of trustees of the Trust
will periodically review the commissions paid by a Portfolio to determine if
the commissions paid over representative periods of time were reasonable in
relation to the benefits inuring to the Portfolio. OTC purchases and sales by a
Portfolio are transacted directly with principal market makers except in those
cases in which better prices and executions may be obtained elsewhere.
To the extent consistent with applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC under the 1940 Act, the board of
trustees has determined that transactions for a Portfolio may be executed
through PaineWebber and other affiliated broker-dealers if, in the judgment of
the Adviser, the use of an affiliated broker-dealer is likely to result in
price and execution at least as favorable as those of other qualified broker-
dealers, and if, in the transaction, the affiliated broker-dealer charges the
Portfolio a fair and reasonable rate.
No Portfolio will purchase any security, including U.S. government securities
or municipal securities, during the existence of any underwriting or selling
group relating thereto of which PaineWebber is a member, except to the extent
permitted by the SEC.
A Portfolio may use PaineWebber and other affiliated broker-dealers as a
commodities broker in connection with entering into futures contracts and
options on futures contracts if, in the
36
<PAGE>
judgment of the Adviser, the use of an affiliated broker-dealer is likely to
result in price and execution at least as favorable as those of other qualified
broker-dealers, and if, in the transaction, the affiliated broker-dealer
charges the Portfolio a fair and reasonable rate.
Research services furnished by dealers or brokers with or through which a
Portfolio effects securities transactions may be used by Mitchell Hutchins or
an Adviser in advising other funds or accounts and, conversely, research
services furnished to Mitchell Hutchins or an Adviser by dealers or brokers in
connection with other funds or accounts Mitchell Hutchins or an Adviser advises
may be used by Mitchell Hutchins or an Adviser in advising the Portfolios over
which Mitchell Hutchins or the Adviser has investment discretion. Information
and research received from such brokers or dealers will be in addition to, and
not in lieu of, the services required to be performed by Mitchell Hutchins or
the Advisers under the Management Agreement and Advisory Agreements.
PORTFOLIO TURNOVER
PACE Money Market Investments may attempt to increase yields by trading to
take advantage of short-term market variations, which results in high portfolio
turnover. Because purchases and sales of money market instruments are usually
effected as principal transactions, this policy does not result in high
brokerage commissions to the Portfolio. The other Portfolios do not intend to
seek profits through short-term trading. Nevertheless, the Portfolios will not
consider portfolio turnover rate a limiting factor in making investment
decisions.
A Portfolio's turnover rate is calculated by dividing the lesser of purchases
or sales of its portfolio securities for the year by the monthly average value
of the portfolio securities. Securities or options with remaining maturities of
one year or less on the date of acquisition are excluded from the calculation.
Under certain market conditions, a Portfolio authorized to engage in
transactions in options may experience increased portfolio turnover as a result
of its investment strategies. For instance, the exercise of a substantial
number of options written by a Portfolio (due to appreciation of the underlying
security in the case of call options or depreciation of the underlying security
in the case of put options) could result in a turnover rate in excess of 100%.
A portfolio turnover rate of 100% would occur if all of a Portfolio's
securities that are included in the computation of turnover were replaced once
during a period of one year.
Certain other practices that may be employed by a Portfolio also could result
in high portfolio turnover. For example, portfolio securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another comparable quality purchased at
approximately the same time to take advantage of what an Adviser believes to be
a temporary disparity in the normal yield relationship between the two
securities. These yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or supply of,
various types of securities.
Portfolio turnover rates may vary greatly from year to year as well as within
a particular year and may be affected by cash requirements for redemptions of a
Portfolio's shares as well as by requirements that enable the Portfolio to
receive favorable tax treatment.
37
<PAGE>
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION
As discussed in the Prospectus, shares of each Portfolio may be exchanged
without payment of any exchange fee for shares of another Portfolio at their
respective net asset values. Portfolio shares, however, are not exchangeable
with shares of other PaineWebber or Mitchell Hutchins/Kidder, Peabody mutual
funds. Shareholders will receive at least 60 days' notice of any termination
or material modification of the exchange offer, except no notice need be given
if, under extraordinary circumstances, either redemptions are suspended under
the circumstances described below or a Portfolio temporarily delays or ceases
the sales of its shares because it is unable to invest amounts effectively in
accordance with the Portfolio's investment objectives, policies and
restrictions.
If conditions exist that make cash payments undesirable, each Portfolio
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the Portfolio and valued in the same
way as they would be valued for purposes of computing the Portfolio's net
asset value. If payment is made in securities, a shareholder may incur
brokerage expenses in converting these securities into cash. The Trust has
elected, however, to be governed by Rule 18f-1 under the 1940 Act, under which
a Portfolio is obligated to redeem shares 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 one shareholder. This election is irrevocable unless the SEC
permits its withdrawal. A Portfolio may suspend redemption privileges or
postpone the date of payment during any period (1) when the NYSE is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Portfolio to dispose of securities owned by it or fairly
to determine the value of its assets or (3) as the SEC may otherwise permit.
The redemption price may be more or less than the shareholder's cost,
depending on the market value of a Portfolio's portfolio at the time.
VALUATION OF SHARES
Each Portfolio determines its net asset value per share as of the close of
regular trading (currently 4:00 p.m., eastern time) on the NYSE on each Monday
through Friday when the NYSE is open. Currently, the NYSE is closed on the
observance of the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are being valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are generally valued on
the exchange considered by Mitchell Hutchins as the primary market. Securities
traded in the OTC market and listed on the National Association of Securities
Dealers Automatic Quotation System ("NASDAQ") are valued at the last available
sale price on NASDAQ at 4:00 p.m., eastern time; other OTC securities are
valued at the last bid price available prior to valuation. Securities and
assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the
Trust's board of trustees. It should be recognized that judgment often plays a
greater role in valuing non-investment grade debt securities than is the case
with respect to securities for which a broader range of dealer quotations and
last-sale information is available. All investments quoted in foreign currency
are valued daily in U.S. dollars on the basis of the foreign currency exchange
rate prevailing at the time such valuation is
38
<PAGE>
determined by the Portfolios' custodian. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining
until maturity, unless the board of trustees determines that this does not
represent fair value.
Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events will not be
reflected in a computation of a Portfolio's net asset value on that day. If
events materially affecting the value of such investments or currency exchange
rates occur during such time period, the investments will be valued at their
fair value as determined in good faith by or under the direction of the Trust's
board of trustees. The foreign currency exchange transaction of a Portfolio
conducted on a spot (that is, cash) basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate
in an amount generally less than one-tenth of one percent due to the costs of
converting from one currency to another.
PACE Money Market Investments values its portfolio securities in accordance
with the amortized cost method of valuation under Rule 2a-7 (the "Rule") under
the 1940 Act. To use amortized cost to value its portfolio securities, the
Portfolio must adhere to certain conditions under the Rule relating to the
Portfolio's investments, some of which are discussed in the Prospectus.
Amortized cost is an approximation of market value of an instrument, whereby
the difference between its acquisition cost and value at maturity is amortized
on a straight-line basis over the remaining life of the instrument. The effect
of changes in the market value of a security as a result of fluctuating
interest rates is not taken into account and thus the amortized cost method of
valuation may result in the value of a security being higher or lower than its
actual market value. In the event that a large number of redemptions take place
at a time when interest rates have increased, the Portfolio might have to sell
portfolio securities prior to maturity and at a price that might not be
desirable.
The board of trustees of the Trust has established procedures ("Procedures")
for the purpose of maintaining a constant net asset value of $1.00 per share
for PACE Money Market Investments, which include a review of the extent of any
deviation of net asset value per share, based on available market quotations,
from the $1.00 amortized cost per share. Should that deviation exceed 1/2 of 1%
for any Portfolio, the board of trustees will promptly consider whether any
action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redeeming shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. PACE Money Market Investments will maintain a
dollar-weighted average portfolio maturity of 90 days or less and will not
purchase any instrument with a remaining maturity greater than 13 months (as
calculated under the Rule), will limit portfolio investments, including
repurchase agreements, to those U.S. dollar-denominated instruments that are of
eligible quality under the Rule and that the Portfolio's Adviser, acting
pursuant to the Procedures, determine present minimal credit risks, and will
comply with certain reporting and recordkeeping procedures. There is no
assurance that a constant net asset value per share will be maintained. In the
event amortized cost ceases to represent fair value per share, the board will
take appropriate action.
In determining the approximate market value of portfolio investments, each
Portfolio may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves and
other specific adjustments. This may result
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<PAGE>
in the securities being valued at a price different from the price that would
have been determined had the matrix or formula method not been used. All cash,
receivables and current payables are carried at their face value. Other assets,
if any, are valued at fair value as determined in good faith by or under the
direction of the board of trustees.
PERFORMANCE INFORMATION
Each Portfolio's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes ("Standardized
Return") used in a Portfolio's Performance Advertisements are calculated
according to the following formula:
P(1 + T) to the power of n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of a
Portfolio
T = average annual total return of shares of that Portfolio
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. All dividends and other distributions are assumed
to have been reinvested at net asset value.
Each Portfolio also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). A Portfolio calculates Non-Standardized
Return for specified periods of time by assuming an investment of $1,000 in
Portfolio shares and assuming the reinvestment of all dividends and other
distributions. The rate of return is determined by subtracting the initial
value of the investment from the ending value and by dividing the remainder by
the initial value.
YIELD. Yields used in a Portfolio's Performance Advertisements, except for
those given for PACE Money Market Investments, are calculated by dividing the
Portfolio's interest and dividend income attributable to the Portfolio's shares
for a 30-day period ("Period"), net of expenses attributable to such Portfolio,
by the average number of shares of such Portfolio entitled to receive dividends
during the Period and expressing the result as an annualized percentage
(assuming semi-annual compounding) of the net asset value per share at the end
of the Period. Yield quotations are calculated according to the following
formula:
a-b to the power of 6
YIELD = 2[(--- + 1) - 1]
cd
where: a = interest and other income earned during the period attributable to a
Portfolio
b = expenses accrued for the Period attributable to a Portfolio (net of
reimbursements)
c = the average daily number of shares of a Portfolio outstanding during
the period that were entitled to receive dividends
d = the net asset value per share on the last day of the Period
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Except as noted below, in determining interest and dividend income earned
during the Period (a variable in the above formula), a Portfolio calculates
interest earned on each debt obligation held by it during the Period by (1)
computing the obligation's yield to maturity, based on the market value of the
obligation (including actual accrued interest) on the last Business Day of the
Period or, if the obligation was purchased during the Period, the purchase
price plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest) to determine the interest income on the
obligation for each day of the subsequent period that the obligation is in the
portfolio. Once interest earned is calculated in this fashion for each debt
obligation held by the Portfolio, interest earned during the Period is then
determined by totalling the interest earned on all debt obligations. For
purposes of these calculations, the maturity of an obligation with one or more
call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.
Tax exempt-yield for PACE Municipal Fixed Income Investments is calculated
according to the same formula except the variable "a" equals interest exempt
from federal income tax earned during the Period. This tax-exempt yield may
then be translated into tax-equivalent yield according to the following
formula:
e
TAX EQUIVALENT YIELD = (---) + t
1p
E = tax-exempt yield of the Portfolio
p = stated income tax rate
t = taxable yield of the Portfolio
The tax-equivalent yield of PACE Municipal Fixed Income Investments assumes a
39.6% effective federal tax rate.
PACE Money Market Investments computes its yield and effective yield
quotations using standardized methods required by the SEC. The Portfolio from
time to time advertises (1) its current yield based on a recently ended seven-
day period, computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance
of one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from that shareholder account, dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7), with the
resulting yield figure carried to at least the nearest hundredth of one
percent, and (2) its effective yield based on the same seven-day period by
compounding the base period return by adding 1, raising the sum to a power
equal to (365/7), and subtracting 1 from the result, according to the following
formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) to the power of 365/7] - 1
Yield may fluctuate daily and does not provide a basis for determining future
yields. Because the yield of each Portfolio fluctuates, it cannot be compared
with yields on savings accounts or other investment alternatives that provide
an agreed-upon or guaranteed fixed yield for a stated period of time. However,
yield information may be useful to an investor considering temporary
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<PAGE>
investments in money market instruments. In comparing the yield of one money
market fund to another, consideration should be given to each Portfolio's
investment policies, including the types of investments made, the average
maturity of the portfolio securities and whether there are any special account
charges that may reduce the yield.
OTHER INFORMATION. In Performance Advertisements, each Portfolio may compare
its Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Services
("Wiesenberger"), Investment Company Data, Inc. ("ICD"), or Morningstar Mutual
Funds ("Morningstar") or with the performance of appropriate recognized stock
and other indices, including (but not limited to) the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, the Wilshire
5000 Index, other Wilshire Associates equities indices, Frank Russell Company
equity indices, the Morgan Stanley Capital International Perspective Indices,
the Salomon Brothers World Government bond indices, the Lehman Brothers Bond
indices, Municipal Bond Buyers Indices, 90 day Treasury Bills, 30-year and 10-
year U.S. Treasury Bonds and changes in the Consumer Price Index as published
by the U.S. Department of Commerce. The Portfolio also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of a Portfolio and comparative mutual fund data and ratings
reported in independent periodicals, including (but not limited to) THE WALL
STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD,
BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST
and THE KIPLINGER LETTERS. Ratings may include criteria relating to portfolio
characteristics in addition to performance information. In connection with a
ranking, a Portfolio may also provide additional information with respect to
the ranking, such as the particular category to which it relates, the number of
funds in the category, the criteria on which the ranking is based, and the
effect of sales charges, fee waivers and/or expense reimbursements.
Each Portfolio may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Portfolio investment are
reinvested by being paid in additional Portfolio shares, any future income or
capital appreciation of the Portfolio would increase the value, not only of the
original Portfolio investment, but also of the additional Portfolio shares
received through reinvestment. As a result, the value of the Portfolio
investment would increase more quickly than if dividends or other distributions
had been paid in cash.
TAXES
ALL PORTFOLIOS. Each Portfolio is treated as a separate corporation for
federal income tax purposes. In order to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code, each Portfolio must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of taxable net
investment income, net short-term capital gain and, for certain Portfolios, net
gains from certain foreign currency transactions) plus, in the case of PACE
Municipal Fixed Income Investments, its net interest income excludable from
gross income under section 103(a) of the Internal Revenue Code
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<PAGE>
("Distribution Requirement") and must meet several additional requirements.
With respect to each Portfolio, these requirements include the following: (1)
the Portfolio must derive at least 90% of its gross income each taxable year
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of securities or foreign currencies, or
other income (including gains from options, futures or forward currency
contracts) derived with respect to its business of investing in securities or
those currencies ("Income Requirement"); (2) the Portfolio must derive less
than 30% of its gross income each taxable year from the sale or other
disposition of securities, or any of the following, that were held for less
than three months--options or futures (other than those on foreign currencies),
or foreign currencies (or options, futures or forward contracts thereon) that
are not directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable year,
at least 50% of the value of its total assets must be represented by cash and
cash items, U.S. government securities, securities of other RICs and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Portfolio's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities; and (4) at the close of each quarter of the Portfolio's
taxable year, not more than 25% of the value of its total assets may be
invested in securities (other than U.S. government securities or the securities
of other RICs) of any one issuer.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a
date in any of those months will be deemed to have been paid by the Portfolio
and received by the shareholders on December 31 of that year if the
distributions are paid by the Portfolio during the following January.
Accordingly, those distributions will be taxed to shareholders for the year in
which that December 31 falls.
A portion of the dividends from a Portfolio's investment company taxable
income (whether paid in cash or in additional Portfolio shares) may be eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the aggregate dividends received by a Portfolio from
U.S. corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
If shares of a Portfolio are sold at a loss after being held for six months
or less, the loss will be treated as long-term, instead of short- term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.
Dividends and interest received by certain Portfolios may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on their securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors. If more than 50%
of the value of a Portfolio's total assets at the close of its taxable year
consists of securities of foreign corporations, the Portfolio will be eligible
to, and may, file an election with the Internal Revenue Service that will
enable its shareholders, in effect, to receive the benefit of the foreign tax
credit with respect to any foreign and U.S. possessions income taxes paid by
it. Pursuant to the election, the Portfolio would treat those taxes as
dividends paid to its shareholders and each shareholder would be required to
(1) include in
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<PAGE>
gross income, and treat as paid by the shareholder, the shareholder's
proportionate share of those taxes, (2) treat the shareholder's share of those
taxes and of any dividend paid by the Portfolio that represents income from
foreign or U.S. possessions sources as the shareholder's own income from those
sources, and (3) either deduct the taxes deemed paid by the shareholder in
computing the shareholder's taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against the shareholder's
federal income tax. Each Portfolio will report to its shareholders shortly
after each taxable year their respective shares of the Portfolio's income from
sources within, and taxes paid to, foreign countries and U.S. possessions if it
makes this election.
Each Portfolio will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures and entering into forward currency
contracts, involves complex rules that will determine for income tax purposes
the character and timing of recognition of the gains and losses a Portfolio
realizes in connection therewith. Income from the disposition of foreign
currencies (except certain gains therefrom that may be excluded by future
regulations), and income from transactions in options, futures and forward
contracts derived by a Portfolio with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under the
Income Requirement. However, income from the disposition of options and futures
(other than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures and forward contracts
on foreign currencies, that are not directly related to a Portfolio's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the Short-Short Limitation if they are held
for less than three months.
If a Portfolio satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. Each Portfolio will consider whether it should seek to qualify for
this treatment for its hedging transactions. To the extent a Portfolio does not
qualify for this treatment, it may be forced to defer the closing out of
certain options, futures and forward currency contracts beyond the time when it
otherwise would be advantageous to do so, in order for the Portfolio to qualify
as a RIC.
Certain Portfolios may acquire zero coupon Treasury securities, zero coupon
securities of corporate issuers, other securities issued with original issue
discount ("OID") and payment-in-kind ("PIK") securities. As the holder of such
securities, each such Portfolio would have to include in its gross income (1)
the OID that accrues on the securities during the taxable year, even if it
receives no corresponding payment on the securities during the year, and (2)
the securities it receives as "interest" on PIK securities. With respect to
clause (1) above, each Portfolio will elect similar treatment for securities
purchased at a discount from their face value ("market discount"). Because each
Portfolio annually must distribute substantially all of its investment company
taxable income, including any accrued OID, market discount and other non-cash
income, in order to satisfy the
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<PAGE>
Distribution Requirement and avoid imposition of the Excise Tax, a Portfolio
may be required in a particular year to distribute as a dividend an amount that
is greater than the total amount of cash it actually receives. Those
distributions will be made from a Portfolio's cash assets or from the proceeds
of sales of portfolio securities, if necessary. A Portfolio may realize capital
gains or losses from those sales, which would increase or decrease the
Portfolio's investment company taxable income and/or net capital gain (the
excess of net long-term capital gain over net short-term capital loss). In
addition, any such gains may be realized on the disposition of securities held
for less than three months. Because of the Short-Short Limitation, any such
gains would reduce a Portfolio's ability to sell other securities, or certain
options, futures or forward currency contracts, held for less than three months
that it might wish to sell in the ordinary course of its portfolio management.
PACE INTERNATIONAL EQUITY INVESTMENTS AND PACE INTERNATIONAL EMERGING MARKETS
EQUITY INVESTMENTS. Each of these Portfolios may invest in the stock of
"passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under
certain circumstances, a Portfolio will be subject to federal income tax on a
portion of any "excess distribution" received on the stock of a PFIC or of any
gain on disposition of such stock (collectively "PFIC income"), plus interest
thereon, even if the Portfolio distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included
in the Portfolio's investment company taxable income and, accordingly, will not
be taxable to it to the extent that income is distributed to its shareholders.
If a Portfolio invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF") then in lieu of the foregoing tax and interest
obligation, the Portfolio will be required to include in income each year its
pro rata share of the QEF's annual ordinary earnings and net capital gain, even
if they are not distributed by the QEF to the Portfolio; those amounts likely
would have to be distributed by the Portfolio to satisfy the Distribution
Requirement and avoid imposition of the Excise Tax. In most instances it will
be very difficult, if not impossible, to make this election because of certain
requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Portfolios,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the owner's adjusted basis in that stock
(including mark-to-market gain for each prior year for which an election was in
effect).
PACE MUNICIPAL FIXED INCOME INVESTMENTS. Entities or other persons who are
"substantial users" (or persons related to "substantial users") of facilities
financed by IDBs or PABs should consult their tax advisers before purchasing
shares of this Portfolio because, for users of certain of these facilities, the
interest on those bonds is not exempt from federal income tax. For these
purposes, "substantial user" is defined to include a "non-exempt person" who
regularly uses in a trade or business a part of a facility financed from the
proceeds of IDBs or PABs.
Up to 85% of social security and railroad retirement benefits may be included
in taxable income for recipients whose adjusted gross income (including income
from tax-exempt sources such as the Portfolio) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Portfolio
still are tax-exempt to the extent described in the Prospectus; they are only
included in the calculations of whether a recipient's income exceeds the
established amounts.
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If shares of the Portfolio are sold at a loss after being held for six months
or less, the loss will be disallowed to the extent of any exempt-interest
dividends received on those shares and will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received thereon.
Although the Portfolio does not currently expect to invest in instruments
that generate taxable interest income, if it does so, under the circumstances
described in the Prospectus, the portion of any Portfolio dividend attributable
to the interest earned thereon will be taxable to the Portfolio's shareholders
as ordinary income to the extent of the Portfolio's earnings and profits, and
only the remaining portion will qualify as an exempt-interest dividend. The
respective portions will be determined by the "actual earned" method, under
which the portion of any dividend that qualifies as an exempt-interest dividend
may vary, depending on the relative proportions of tax-exempt and taxable
interest earned during the dividend period. Moreover, if the Portfolio realizes
capital gain as a result of market transactions, any distributions of the gain
will be taxable to its shareholders.
OTHER INFORMATION
The name of the Trust is Managed Accounts Services Portfolio Trust. The Trust
is organized as a Delaware business trust. Although Delaware law statutorily
limits the potential liabilities of a Delaware business trust's shareholders to
the same extent as it limits the potential liabilities of shareholders of a
Delaware corporation, shareholders of a Portfolio could, under certain
conflicts of laws jurisprudence in various states, be held personally liable
for the obligations of the Trust or a Portfolio. However, the Trust's Trust
Instrument disclaims shareholder liability for acts or obligations of the Trust
or its Portfolios and requires that notice of such disclaimer be given in each
written obligation made or issued by the trustees or by any officers or officer
by or on behalf of the Trust, the Portfolios, the trustees or any of them in
connection with the Trust. The Trust Instrument provides for indemnification
from a Portfolio's property for all losses and expenses of any Portfolio
shareholder held personally liable for the obligations of a Portfolio. Thus,
the risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which a Portfolio itself would be
unable to meet its obligations, a possibility which Mitchell Hutchins believes
is remote and not material. Upon payment of any liability incurred by a
shareholder solely by reason of being or having been a shareholder of a
Portfolio, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the Portfolio. The trustees intend to
conduct the operations of the Portfolios in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the
Portfolios.
In the event any of the initial shares of a Portfolio are redeemed during the
five-year amortization period, the redemption proceeds will be reduced by a pro
rata portion of any unamortized deferred organizational expenses in the same
proportion as the number of initial shares being redeemed bears to the number
of initial shares outstanding at the time of redemption.
COUNSEL. The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, N.W.,
Washington, D.C. 20036-5891 has passed upon the legality of the shares offered
by the Prospectus. Kirkpatrick & Lockhart LLP also acts as counsel to Mitchell
Hutchins and PaineWebber in connection with other matters.
INDEPENDENT AUDITORS. Ernst & Young LLP, New York, New York, serves as the
Trust's independent auditors.
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Managed Accounts Services Portfolio Trust
We have audited each of the accompanying statements of assets and liabilities
of Managed Accounts Services Portfolio Trust (comprising, respectively, PACE
Money Market Investments, PACE Government Securities Fixed Income Investments,
PACE Intermediate Fixed Income Investments, PACE Strategic Fixed Income
Investments, PACE Municipal Fixed Income Investments, PACE Global Fixed Income
Investments, PACE Large Company Value Equity Investments, PACE Large Company
Growth Equity Investments, PACE Small/Medium Company Value Equity Investments,
PACE Small/Medium Company Growth Equity Investments, PACE International Equity
Investments and PACE International Emerging Markets Equity Investments
Portfolios) as of June 16, 1995. These statements of assets and liabilities are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these statements of assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of Managed
Accounts Services Portfolio Trust at June 16, 1995 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
June 16, 1995
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MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE MONEY MARKET INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................ $ 12,000
Deferred organizational expenses................................ 94,833
--------
Total assets.................................................. 106,833
--------
Liabilities:
Organizational expenses payable................................. 94,833
--------
Total liabilities............................................. 94,833
--------
Net Assets (applicable to 12,000 shares of beneficial interest,
$0.001 par value, issued and outstanding)........................ $ 12,000
========
Net asset value per share......................................... $ 1.00
========
</TABLE>
ORGANIZATION
PACE Money Market Investments (the "Portfolio") is a diversified portfolio of
Managed Accounts Services Portfolio Trust (the "Trust"). The Trust is
registered with the Securities and Exchange Commission as an open-end
management investment company currently composed of twelve separate no-load
investment portfolios and was organized as a Delaware business trust under the
laws of the State of Delaware by Certificate of Trust dated September 9, 1994,
as amended June 9, 1995. The trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest of separate series, par value
$0.001 per share. Prior to June 16, 1995, the Trust has had no activities other
than organizational matters and the sale to Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins") of 12,000 shares of beneficial interest of the
Portfolio for $12,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational cost, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENT
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate of 0.15% of the Portfolio's average
daily net assets. In addition, the Portfolio also pays Mitchell Hutchins an
administration fee that is computed daily and paid monthly at an annual rate of
0.20% of the Portfolio's average daily net assets.
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OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 0.50% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the Pace Program, shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
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MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................. $ 8,000
Deferred organizational expenses................................. 94,833
--------
Total assets................................................... 102,833
--------
Liabilities:
Organizational expenses payable.................................. 94,833
--------
Total liabilities.............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest, $0.001
par value, issued and outstanding)................................ $ 8,000
========
Net asset value per share.......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE Government Securities Fixed Income Investments (the "Portfolio") is a
diversified portfolio of Managed Accounts Services Portfolio Trust (the
"Trust"). The Trust is registered with the Securities and Exchange Commission
as an open-end management investment company currently composed of twelve
separate no-load investment portfolios and was organized as a Delaware business
trust under the laws of the State of Delaware by Certificate of Trust dated
September 9, 1994, as amended June 9, 1995. The trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share. Prior to June 16, 1995, the Trust
has had no activities other than organizational matters and the sale to
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") of 667 shares of
beneficial interest of the Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
50
<PAGE>
of 0.50% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement, between Mitchell Hutchins and
Pacific Investment Management Company (the "Sub-Adviser"), Mitchell Hutchins
(not the Portfolio) pays the Sub-Adviser a fee at the annual rate of 0.25% of
the Portfolio's average daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 0.85% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
51
<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE INTERMEDIATE FIXED INCOME INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................ $ 8,000
Deferred organizational expenses ............................... 94,833
--------
Total assets.................................................. 102,833
--------
Liabilities:
Organizational expenses payable................................. 94,833
--------
Total liabilities............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest,
$0.001 par value, issued and outstanding)........................ $ 8,000
========
Net asset value per share......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE Intermediate Fixed Income Investments (the "Portfolio") is a non-
diversified portfolio of Managed Accounts Services Portfolio Trust (the
"Trust"). The Trust is registered with the Securities and Exchange Commission
as an open-end management investment company currently composed of twelve
separate no-load investment portfolios and was organized as a Delaware business
trust under the laws of the State of Delaware by Certificate of Trust dated
September 9, 1994, as amended June 9, 1995. The trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share. Prior to June 16, 1995, the Trust
has had no activities other than organizational matters and the sale to
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") of 667 shares of
beneficial interest of the Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
52
<PAGE>
of 0.40% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and Pacific
Income Advisers, Inc. (the "Sub-Adviser"), Mitchell Hutchins (not the
Portfolio) pays the Sub-Adviser a fee at the annual rate of 0.20% of the
Portfolio's average daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 0.85% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
53
<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE STRATEGIC FIXED INCOME INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................. $ 8,000
Deferred organizational expenses................................. 94,833
--------
Total assets................................................... 102,833
--------
Liabilities:
Organizational expenses payable.................................. 94,833
--------
Total liabilities.............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest, $0.001
par value, issued and outstanding)................................ $ 8,000
========
Net asset value per share.......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE Strategic Fixed Income Investments (the "Portfolio") is a diversified
portfolio of Managed Accounts Services Portfolio Trust (the "Trust"). The Trust
is registered with the Securities and Exchange Commission as an open-end
management investment company currently composed of twelve separate no-load
investment portfolios and was organized as a Delaware business trust under the
laws of the State of Delaware by Certificate of Trust dated September 9, 1994,
as amended June 9, 1995. The trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest of separate series, par value
$0.001 per share. Prior to June 16, 1995, the Trust has had no activities other
than organizational matters and the sale to Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins") of 667 shares of beneficial interest of the
Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
54
<PAGE>
of 0.50% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and Pacific
Investment Management Company (the "Sub-Adviser"), Mitchell Hutchins (not the
Portfolio) pays the Sub-Adviser a fee at the annual rate of 0.25% of the
Portfolio's average daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 0.85% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
55
<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE MUNICIPAL FIXED INCOME INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................. $ 8,000
Deferred organizational expenses ................................ 94,833
--------
Total assets................................................... 102,833
--------
Liabilities:
Organizational expenses payable.................................. 94,833
--------
Total liabilities.............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest, $0.001
par value, issued and outstanding)................................ $ 8,000
========
Net asset value per share.......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE Municipal Fixed Income Investments (the "Portfolio") is a diversified
portfolio of Managed Accounts Services Portfolio Trust (the "Trust"). The Trust
is registered with the Securities and Exchange Commission as an open-end
management investment company currently composed of twelve separate no-load
investment portfolios and was organized as a Delaware business trust under the
laws of the State of Delaware by Certificate of Trust dated September 9, 1994,
as amended June 9, 1995. The trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest of separate series, par value
$0.001 per share. Prior to June 16, 1995, the Trust has had no activities other
than organizational matters and the sale to Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins") of 667 shares of beneficial interest of the
Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
56
<PAGE>
of 0.40% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and Morgan
Grenfell Capital Management, Incorporated (the "Sub-Adviser"), Mitchell
Hutchins (not the Portfolio) pays the Sub-Adviser a fee at the annual rate of
0.20% of the Portfolio's average daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 0.85% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the Pace Program, shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
57
<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE GLOBAL FIXED INCOME INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................. $ 8,000
Deferred organizational expenses................................. 94,833
--------
Total assets................................................... 102,833
--------
Liabilities:
Organizational expenses payable.................................. 94,833
--------
Total liabilities.............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest, $0.001
par value, issued and outstanding)................................ $ 8,000
========
Net asset value per share.......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE Global Fixed Income Investments (the "Portfolio") is a non-diversified
portfolio of Managed Accounts Services Portfolio Trust (the "Trust"). The Trust
is registered with the Securities and Exchange Commission as an open-end
management investment company currently composed of twelve separate no-load
investment portfolios and was organized as a Delaware business trust under the
laws of the State of Delaware by Certificate of Trust dated September 9, 1994,
as amended June 9, 1995. The trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest of separate series, par value
$0.001 per share. Prior to June 16, 1995, the Trust has had no activities other
than organizational matters and the sale to Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins") of 667 shares of beneficial interest of the
Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
58
<PAGE>
of 0.60% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and Rogge
Global Partners plc (the "Sub-Adviser"), Mitchell Hutchins (not the Portfolio)
pays the Sub-Adviser a fee at the annual rate of 0.35% of the Portfolio's
average daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 0.95% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, Shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
59
<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................ $ 8,000
Deferred organizational expenses................................ 94,833
--------
Total assets.................................................. 102,833
--------
Liabilities:
Organizational expenses payable................................. 94,833
--------
Total liabilities............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest,
$0.001 par value, issued and outstanding)........................ $ 8,000
========
Net asset value per share......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE Large Company Value Equity Investments (the "Portfolio") is a
diversified portfolio of Managed Accounts Services Portfolio Trust (the
"Trust"). The Trust is registered with the Securities and Exchange Commission
as an open-end management investment company currently composed of twelve
separate no-load investment portfolios and was organized as a Delaware business
trust under the laws of the State of Delaware by Certificate of Trust dated
September 9, 1994, as amended June 9, 1995. The trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share. Prior to June 16, 1995, the Trust
has had no activities other than organizational matters and the sale to
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") of 667 shares of
beneficial interest of the Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
60
<PAGE>
of 0.60% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and Brinson
Partners, Inc. (the "Sub-Adviser"), Mitchell Hutchins (not the Portfolio) pays
the Sub-Adviser a fee at the annual rate of 0.30% of the Portfolio's average
daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 1.00% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
61
<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................... $ 8,000
Deferred organizational expenses................................... 94,833
--------
Total assets..................................................... 102,833
--------
Liabilities:
Organizational expenses payable.................................... 94,833
--------
Total liabilities................................................ 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest, $0.001
par value, issued and outstanding).................................. $ 8,000
========
Net asset value per share............................................ $ 12.00
========
</TABLE>
ORGANIZATION
PACE Large Company Growth Equity Investments (the "Portfolio") is a
diversified portfolio of Managed Accounts Services Portfolio Trust (the
"Trust"). The Trust is registered with the Securities and Exchange Commission
as an open-end management investment company currently composed of twelve
separate no-load investment portfolios and was organized as a Delaware business
trust under the laws of the State of Delaware by Certificate of Trust dated
September 9, 1994, as amended June 9, 1995. The trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share. Prior to June 16, 1995, the Trust
has had no activities other than organizational matters and the sale to
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") of 667 shares of
beneficial interest of the Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
62
<PAGE>
of 0.60% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and
Chancellor Capital Management, Inc. (the "Sub-Adviser"), Mitchell Hutchins (not
the Portfolio) pays the Sub-Adviser a fee at the annual rate of 0.30% of the
Portfolio's average daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 1.00% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
63
<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................. $ 8,000
Deferred organizational expenses ................................ 94,833
--------
Total assets................................................... 102,833
--------
Liabilities:
Organizational expenses payable.................................. 94,833
--------
Total liabilities.............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest, $0.001 $ 8,000
par value, issued and outstanding)................................ ========
Net asset value per share.......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE Small/Medium Company Value Equity Investments (the "Portfolio") is a
diversified portfolio of Managed Accounts Services Portfolio Trust (the
"Trust"). The Trust is registered with the Securities and Exchange Commission
as an open-end management investment company currently composed of twelve
separate no-load investment portfolios and was organized as a Delaware business
trust under the laws of the State of Delaware by Certificate of Trust dated
September 9, 1994, as amended June 9, 1995. The trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share. Prior to June 16, 1995, the Trust
has had no activities other than organizational matters and the sale to
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") of 667 shares of
beneficial interest of the Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
64
<PAGE>
of 0.60% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and
Brandywine Asset Management, Inc. (the "Sub-Adviser"), Mitchell Hutchins (not
the Portfolio) pays the Sub-Adviser a fee at the annual rate of 0.30% of the
Portfolio's average daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 1.00% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
65
<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................. $ 8,000
Deferred organizational expenses ................................ 94,833
--------
Total assets................................................... 102,833
--------
Liabilities:
Organizational expenses payable.................................. 94,833
--------
Total liabilities.............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest, $0.001
par value, issued and outstanding)................................ $ 8,000
========
Net asset value per share.......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE Small/Medium Company Growth Equity Investments (the "Portfolio") is a
diversified portfolio of Managed Accounts Services Portfolio Trust (the
"Trust"). The Trust is registered with the Securities and Exchange Commission
as an open-end management investment company currently composed of twelve
separate no-load investment portfolios and was organized as a Delaware business
trust under the laws of the State of Delaware by Certificate of Trust dated
September 9, 1994, as amended June 9, 1995. The trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share. Prior to June 16, 1995, the Trust
has had no activities other than organizational matters and the sale to
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") of 667 shares of
beneficial interest of the Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
66
<PAGE>
of 0.60% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and
Westfield Capital Management Company, Inc. (the "Sub-Adviser"), Mitchell
Hutchins (not the Portfolio) pays the Sub-Adviser a fee at the annual rate of
0.30% of the Portfolio's average daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 1.00% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, Shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolio of
the Trust.
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<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE INTERNATIONAL EQUITY INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................. $ 8,000
Deferred organizational expenses ................................ 94,833
--------
Total assets................................................... 102,833
--------
Liabilities:
Organizational expenses payable.................................. 94,833
--------
Total liabilities.............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest, $0.001
per value, issued and outstanding)................................ $ 8,000
========
Net asset value per share.......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE International Equity Investments (the "Portfolio") is a diversified
portfolio of Managed Accounts Services Portfolio Trust (the "Trust"). The Trust
is registered with the Securities and Exchange Commission as an open-end
management investment company currently composed of twelve separate no-load
investment portfolios and was organized as a Delaware business trust under the
laws of the State of Delaware by Certificate of Trust dated September 9, 1994,
as amended June 9, 1995. The trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest of separate series, par value
$0.001 per share. Prior to June 16, 1995, the Trust has had no activities other
than organizational matters and the sale to Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins") of 667 shares of beneficial interest of the
Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
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of 0.70% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and Martin
Currie Inc. (the "Sub-Adviser"), Mitchell Hutchins (not the Portfolio) pays the
Sub-Adviser a fee at the annual rate of 0.40% of the Portfolio's average daily
net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 1.50% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, Shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolios of
the Trust.
69
<PAGE>
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 16, 1995
<TABLE>
<S> <C>
Assets:
Cash............................................................. $ 8,000
Deferred organizational expenses ................................ 94,833
--------
Total assets................................................... 102,833
--------
Liabilities:
Organizational expenses payable.................................. 94,833
--------
Total liabilities.............................................. 94,833
--------
Net Assets (applicable to 667 shares of beneficial interest, $0.001
par value, issued and outstanding)................................ $ 8,000
========
Net asset value per share.......................................... $ 12.00
========
</TABLE>
ORGANIZATION
PACE International Emerging Markets Equity Investments (the "Portfolio") is a
diversified portfolio of Managed Accounts Services Portfolio Trust (the
"Trust"). The Trust is registered with the Securities and Exchange Commission
as an open-end management investment company currently composed of twelve
separate no-load investment portfolios and was organized as a Delaware business
trust under the laws of the State of Delaware by Certificate of Trust dated
September 9, 1994, as amended June 9, 1995. The trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, par value $0.001 per share. Prior to June 16, 1995, the Trust
has had no activities other than organizational matters and the sale to
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") of 667 shares of
beneficial interest of the Portfolio for $8,000.
Costs incurred and to be incurred in connection with the organization and
initial registration of the Trust will be paid initially by Mitchell Hutchins;
however, the Trust will reimburse Mitchell Hutchins for such costs. Such
organizational costs, estimated at $94,833, and representing the Portfolio's
allocation of total organizational costs incurred by the Trust will be deferred
and amortized on the straight line method over a period not to exceed 60 months
from the date the Trust commences investment operations.
MANAGEMENT AGREEMENTS
The Trust has entered into an Investment Management Agreement (the
"Management Agreement") with Mitchell Hutchins. Under the Management Agreement,
the Portfolio pays Mitchell Hutchins a fee for its services that is computed
daily and paid monthly at the annual rate
70
<PAGE>
of 0.90% of the Portfolio's average daily net assets. In addition, the
Portfolio also pays Mitchell Hutchins an administration fee that is computed
daily and paid monthly at the annual rate of 0.20% of the Portfolio's average
daily net assets.
Under a separate Sub-Advisory Agreement between Mitchell Hutchins and
Schroder Capital Management International Inc. (the "Sub-Adviser"), Mitchell
Hutchins (not the Portfolio) pays the Sub-Adviser a fee at the annual rate of
0.50% of the Portfolio's average daily net assets.
OTHER INFORMATION
Through the Portfolio's first fiscal year ending July 31, 1996, Mitchell
Hutchins will voluntarily reimburse expenses of the Portfolio or waive all or a
portion of the fees otherwise payable to them, or both, up to the point which
will lower the overall expense ratio of the Portfolio to 1.50% of the
Portfolio's average daily net assets.
Shares of the Portfolio currently are available only to participants in the
PaineWebber PACE Program ("PACE Program"). Under the PACE Program, Shareholders
will pay PaineWebber Incorporated a separate investment advisory fee at an
annual rate of up to 1.50% of the value of shares of each of the portfolio of
the Trust.
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APPENDIX
DESCRIPTION OF MOODY'S LONG-TERM DEBT RATINGS
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 greater than the "Aaa" securities; A. Bonds which
are rated "A" possess many favorable investment attributes and are 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 some time 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.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "B" in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong; AA. Debt rated "AA" has a
very strong capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree; A. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated "BBB" is
regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories; BB, B. Debt rated "BB" and "B" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the least degree of speculation. While such debt will likely have
some quality and
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protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions; BB. Debt rated "BB" has less near-
term vulnerability to default than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BBB--"
rating; B. Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB--" rating.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information in which to base a rating or that S&P does not rate a
particular type of obligation as matter of policy.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
"aaa". An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks; "aa". An issue
which is rated "aa" is considered a high-grade preferred stock. This rating
indicates that there is reasonable assurance that earnings and asset protection
will remain relatively well maintained in the foreseeable future; "a". An issue
which is rated "a" is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the "aaa" and "aa"
classification, earnings and asset protection are nevertheless expected to be
maintained at adequate levels; "baa". An issue which is rated "baa" is
considered to be medium grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time; "ba". An issue which is
rated "ba" is considered to have speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very moderate and
not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class; "b". An issue which is rated "b"
generally lacks the characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue over any long
period of time may be small; "caa". An issue which is rated "caa" is likely to
be in arrears on dividend payments. This rating designation does not purport to
indicate the future status of payments; "ca". An issue which is rated "ca" is
speculative in a high degree and is likely to be in arrears on dividends with
little likelihood of eventual payments; "c". This is the lowest rated class of
preferred or preference stock. Issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
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DESCRIPTION OF S&P PREFERRED STOCK RATINGS
"AAA". This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations. "AA". A preferred stock issue rated "AA" also qualifies as a
high-quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
"AAA"; "A". An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions; "BBB". An
issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the "A" category; "BB", "B", "CCC". Preferred
stocks rated "BB", "B" and "CCC" are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
PRIME-1. Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by many of the following
characteristics: Leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure 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. PRIME-2. Issuers (or supporting institutions) rated Prime-
2 (P-2) have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above, but to a lesser degree. Earnings trends and coverage ratios, while
sound will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 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
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation. A-2. Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1". A-3. Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the
higher designations. B. Issues rated "B" are regarded
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as having only an adequate capacity for timely payment. However, such capacity
may be damaged by changing conditions or short-term adversities.
DESCRIPTION OF MOODY'S FOUR HIGHEST MUNICIPAL BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. 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. They are rated lower than the Aaa 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 made the long-term risks appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A are judged to be upper medium grade obligations.
Security for 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.
DESCRIPTION OF S&P FOUR HIGHEST MUNICIPAL BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree. The
AA rating may be modified by the addition of a plus or minus sign to show
relative standing within the AA rating category.
A. Debt rated A is regarded as safe. This rating differs from the two higher
ratings because, with respect to general obligation bonds, there is some
weakness which, under certain adverse circumstances, might impair the ability
of the issuer to meet debt obligations at some future date. With respect to
revenue bonds, debt service coverage is good but not exceptional and stability
of pledged revenues could show some variations because of increased competition
or economic influences in revenues.
BBB. Bonds rated BBB are regarded as having adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
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DESCRIPTION OF MOODY'S HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER
SHORT-TERM LOANS
Moody's ratings for state and municipal notes and other short-term loans are
designated "Moody's Investment Grade" ("MIG" or, for variable or floating rate
obligations, "VMIG"). Such ratings recognize the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the borrower
and short-term cyclical elements are critical in short-term ratings. Symbols
used will be as follows:
MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection from established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing or both.
MIG-2/VMIG-2. Loans bearing this designation are of high quality, with
margins of protection that are ample although not so large as in the
preceding group.
DESCRIPTION OF S&P RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS
S&P TAX EXEMPT NOTE RATINGS ARE GENERALLY GIVEN TO SUCH NOTES THAT MATURE IN
THREE YEARS OR LESS. THE TWO HIGHER RATING CATEGORIES ARE AS FOLLOWS:
SP-1. Very strong or strong capacity to pay principal and interest. These
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIOS OR THEIR DISTRIBUTOR. THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY THE PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INVESTMENT POLICIES AND RESTRICTIONS....................................... 1
HEDGING AND RELATED STRATEGIES............................................. 16
TRUSTEES AND OFFICERS...................................................... 28
INVESTMENT MANAGEMENT, ADVISORY AND DISTRIBUTION ARRANGEMENTS.............. 33
PORTFOLIO TRANSACTIONS..................................................... 35
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION............................. 38
VALUATION OF SHARES........................................................ 38
PERFORMANCE INFORMATION.................................................... 40
TAXES...................................................................... 42
OTHER INFORMATION.......................................................... 46
APPENDIX................................................................... 72
</TABLE>
LOGO Recycled Paper
(C) 1995 PaineWebber Incorporated
MANAGED ACCOUNTS SERVICES
PORTFOLIO TRUST
PAINEWEBBER
PACE (SM)
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL
INFORMATION
JUNE 21, 1995
- --------------------------------------------------------------------------------
PAINEWEBBER
