<PAGE>
As filed with the Securities and Exchange Commission on April 21, 1995
1933 Act Registration No. 33-87254
1940 Act Registration No. 811-8764
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. 1 [ X ]
Post-Effective Amendment No. [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 1 [ X ]
(Check appropriate box or boxes.)
Managed Accounts Services Portfolio Trust
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 713-2000
GREGORY K. TODD, Esq.
Managed Accounts Services Portfolio Trust
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
Copies to:
ARTHUR J. BROWN, Esq. PHILIP J. FINA, Esq.
Kirpatrick & Lockhart Kirkpatrick & Lockhart
1800 M Street, N.W. One International Place
Suite 900, South Lobby Boston, MA 02110-2637
Washington, D.C. 20036 Telephone: (617) 261-3100
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: As soon as
practicable after this Registration Statement becomes effective.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, an
indefinite number of shares of common stock is being registered by this
Registration Statement.
Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section
8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to
said Section 8(a), may determine.
<PAGE>
Managed Accounts Services Portfolio Trust
-----------------------------------------
Contents of Registration Statement
----------------------------------
This Registration Statement consists of the following papers and
documents:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Managed Accounts Services Portfolio Trust
-----------------------------------------
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>
Managed Accounts Services Portfolio Trust
Form N-1A Cross Reference Sheet
Part A Item No.
and Caption Prospectus Caption
--------------- ------------------
1. Cover Page . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . Prospectus Summary
3. Condensed Financial Information . . Performance Information
4. General Description of Registrant . Prospectus Summary;
Investment Objectives and
Policies of the Portfolios;
General Information
5. Management of the Fund . . . . . . Management; General
Information
5A. Management's Discussion of Fund
Performance . . . . . . . . . . . . Not applicable
6. Capital Stock and Other Securities Cover Page; Dividends and
Taxes; General Information
7. Purchase of Securities Being Purchases; Exchanges;
Offered . . . . . . . . . . . . . . Valuation of Shares; Other
Services and Information;
Management
8. Redemption or Repurchase . . . . . Redemptions; Other Services
and Information
9. Pending Legal Proceedings . . . . . Not Applicable
Part B Item No. Statement of Additional
and Caption Information Caption
--------------- -----------------------
10. Cover Page . . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . . Table of Contents
12. General Information and History . . Other Information
13. Investment Objectives and Policies Investment Policies and
Restrictions; Hedging and
Related Strategies; Portfolio
Transactions
<PAGE>
14. Management of the Registrant . . . Trustees and Officers;
Investment Management,
Advisory, and Distribution
Arrangements
15. Control Persons and Principal
Holders of Securities . . . . . . . Trustees and Officers
16. Investment Advisory and Other Investment Management,
Services . . . . . . . . . . . . . Advisory and Distribution
Arrangements; Other
Information
17. Brokerage Allocation and Other Portfolio Transactions
Practices . . . . . . . . . . . . .
18. Capital Stock and Other Securities Not applicable
19. Purchase, Redemption Pricing of
Securities Being Offered . . . . . Additional Exchange and
Redemption Information;
Valuation of Shares
20. Tax Status . . . . . . . . . . . . Taxes
21. Underwriters . . . . . . . . . . . Investment Management,
Advisory and Distribution
Arrangements
22. Calculation of Performance Data . . Performance Information
23. Financial Statements . . . . . . . Financial Statements
(to be filed)
Part C
------
Information required to be included in Part C is set forth under
the appropriate item, so numbered, in Part C of this Registration
Statement.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 21, 1995
Managed Accounts Services Portfolio Trust
Prospectus dated ___________, 1995
1285 Avenue of the Americas, New York, New York 10019
-------------------------------------------------------------------------
Managed Accounts Services Portfolio Trust (the "Trust") is an
open-end, management investment company currently composed of twelve
separate no-load investment series (each a "Portfolio") managed by
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins" or the
"Manager"), a wholly owned subsidiary of PaineWebber Incorporated
("PaineWebber"). Shares of the Portfolios currently are available only to
participants in the PACE Program. The PACE Program and the Trust are
designed to assist investors in devising an asset allocation strategy to
meet their individual needs. PaineWebber, through the PACE Program,
provides investment advisory services in connection with the allocation of
assets among the Portfolios by: identifying the investor's risk tolerances
and investment objectives based on information provided by the investor;
identifying and recommending in writing a suggested allocation of assets
among the Portfolios that conforms to those tolerances and objectives;
providing a monthly account statement; and providing performance data on a
quarterly basis. See "Purchases -- The PACE Program."
For each Portfolio other than PACE Money Market Investments,
investment advisory services are provided by an investment adviser (each
an "Adviser") monitored and compensated by, and unaffiliated with, the
Manager. For PACE Money Market Investments, investment advisory services
are provided by Mitchell Hutchins. The Trust consists of the following
twelve Portfolios:
o PACE Money Market Investments
o PACE Government Securities Fixed Income Investments
o PACE Intermediate Fixed Income Investments
o PACE Strategic Fixed Income Investments
o PACE Municipal Fixed Income Investments
o PACE Global Fixed Income Investments
o PACE Large Company Value Equity Investments
o PACE Large Company Growth Equity Investments
o PACE Small/Medium Company Value Equity Investments
o PACE Small/Medium Company Growth Equity Investments
o PACE International Equity Investments
o PACE International Emerging Markets Equity Investments
An investment in PACE Money Market Investments is neither insured
nor guaranteed by the U.S. government. While PACE Money Market
Investments seeks to maintain a stable net asset value of $1.00 per share,
there can be no assurance that it will be able to do so.
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . 3
TRUST EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS . . . . . . . . 8
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
VALUATION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . 40
PURCHASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
REDEMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
OTHER SERVICES AND INFORMATION . . . . . . . . . . . . . . . . . . . 43
EXCHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
DIVIDENDS AND TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 44
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 46
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 47
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
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<PAGE>
Under the PACE Program, you will pay PaineWebber a separate
investment advisory fee ("Program Fee") at an annual rate of up to 1.50%
of the value of shares of the Portfolios held in your PaineWebber account.
Certain participants are eligible for a reduction of the Program Fee. See
"Purchases." As a PACE Program participant, you may incur greater total
fees and expenses than investors purchasing shares of similar investment
companies without the benefit of these professional asset allocation
recommendations.
This Prospectus concisely sets forth information about the Trust
that you should know before investing. Please retain this Prospectus for
future reference. A Statement of Additional Information ("SAI"), dated
April 21, 1995 (which information is incorporated by reference herein), is
on file with the Securities and Exchange Commission ("SEC"). You can
obtain a free copy of the SAI by contacting the Trust, your PaineWebber
investment executive or PaineWebber's correspondent firms or by calling
toll-free at 1-800-______-________.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
PROSPECTUS SUMMARY
This section only summarizes certain terms and provisions of the
PACE Program and the Portfolios of the Trust. Please read the rest of
this Prospectus for additional important information.
PACE Program. The PACE Program is an investment advisory service
pursuant to which PaineWebber provides to you personalized asset
allocation recommendations and related services based on an evaluation of
your investment objectives and risk tolerances. The PACE Program is a
non-discretionary investment advisory service, and all investment
decisions rest with you alone. For the services provided to you under the
PACE Program, you pay PaineWebber a quarterly Program Fee at an annual
rate of up to 1.50% of the value of the shares of the Portfolios held in
your PaineWebber account. Certain participants are eligible for a
reduction of the Program Fee. See "Purchases."
The Trust. The Trust is a newly organized mutual fund which
provides a convenient means of investing in a number of professionally
managed portfolios. The Trust currently consists of twelve separate no-
load Portfolios. The following is a summary of important features of the
Portfolios.
<TABLE>
<CAPTION>
Investment Core Portfolio Investment
PACE Portfolio Objective Investments Adviser
-------------- ---------- -------------- ---------
<S> <C> <C> <C>
PACE Money Current income High grade money Mitchell
Market consistent with market instruments Hutchins Asset
Investments preservation of Management Inc.
capital and
liquidity
PACE Government Current income U.S. government Pacific
Securities Fixed securities of Investment
Income varying maturities Management
Investments with a dollar- Company
weighted average
portfolio duration
between two and
seven years
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<PAGE>
Investment Core Portfolio Investment
PACE Portfolio Objective Investments Adviser
-------------- ---------- -------------- ---------
PACE Current income, High quality fixed Pacific Income
Intermediate consistent with income securities Advisers, Inc.
Fixed Income reasonable with a dollar-
Investments stability of weighted average
principal portfolio duration
between two and
four and a half
years
PACE Strategic Total return Fixed income Pacific
Fixed Income consisting of securities of Investment
Investments capital varying maturities Management
appreciation and with a dollar- Company
income weighted average
portfolio duration
between three and
eight years
PACE Municipal High current General Morgan Grenfell
Fixed Income income exempt obligation, Capital
Investments from federal revenue and Management
income tax private activity Incorporated
bonds and notes
the interest on
which is exempt
from federal
income tax
PACE Global High current Fixed income Rogge Global
Fixed Income income securities issued Partners, plc
Investments by domestic and
foreign
governments and
supranational
entities and
private issuers
located overseas
PACE Large Total return Equity securities Brinson
Company Value consisting of of companies with Partners, Inc.
Equity capital total market
Investments appreciation and capitalization of
dividend income at least $2.5
billion
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<PAGE>
Investment Core Portfolio Investment
PACE Portfolio Objective Investments Adviser
-------------- ---------- -------------- ---------
PACE Large Capital Equity securities Chancellor
Company Growth appreciation of companies Capital
Equity characterized by a Management, Inc.
Investments growth of earnings
at a rate faster
than that of the
S&P 500 and with
total market
capital-ization of
at least $2.5
billion
PACE Capital Equity securities Brandywine Asset
Small/Medium appreciation of companies that Management, Inc.
Company Value have below-average
Equity price/earnings
Investments ratios and with
total market
capitalization of
less than $2.5
billion
PACE Capital Equity securities Westfield
Small/Medium appreciation of companies Capital
Company Growth characterized by Management
Equity above average Company, Inc.
Investments growth of earnings
rates with total
market
capitalization of
less than $2.5
billion
PACE Capital Equity securities Martin Currie
International appreciation of issuers Inc.
Equity domiciled outside
Investments the United States
PACE Capital Equity securities Schroder Capital
International appreciation of issuers Management
Emerging Markets domiciled in International,
Equity emerging markets Inc.
Investments
</TABLE>
Management. Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins" or the "Manager") acts as the Manager for each Portfolio and
also as the investment adviser for PACE Money Market Investments. All
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<PAGE>
other Portfolios are advised by an Adviser monitored and compensated by
and unaffiliated with the Manager. See "Management."
Risk Factors and Special Considerations. No assurance can be
given that any Portfolio will achieve its investment objective. Investing
in a Portfolio that invests in securities of companies and governments of
foreign countries, particularly developing countries, involves risks that
go beyond the usual risks inherent in a Portfolio that limits its holdings
to domestic investments. A substantial portion of the assets of certain
Portfolios may be held in securities denominated in one or more foreign
currencies, which will result in these Portfolios bearing the risk that
those currencies may lose value in relation to the U.S. dollar.
Certain Portfolios may use derivative instruments, investment
techniques and strategies such as entering into forward currency
contracts, repurchase agreements and interest rate protection transactions
and purchasing and selling (writing) options, futures contracts and
options on futures contracts, which can increase a Portfolio's risks.
PACE Government Securities Fixed Income Investments, PACE
Intermediate Fixed Income Investments and PACE Strategic Fixed Income
Investments may invest in U.S. government stripped mortgage-related
securities and zero coupon securities, which, due to changes in interest
rates, are more speculative and subject to greater fluctuations in value
than securities that pay interest currently. See "Investment Objectives
and Policies of the Portfolios -- Other Investments and Policies."
PACE Intermediate Fixed Income Investments, PACE Strategic Fixed
Income Investments and PACE Global Fixed Income Investments each are "non-
diversified" as that term is defined in the Investment Company Act of 1940
("1940 Act"). To the extent that a Portfolio's portfolio at times may
include the securities of a smaller number of issuers than if it were
"diversified" (as defined in the 1940 Act), that Portfolio will be subject
to greater risk with respect to its portfolio securities than if it had
invested in a broader range of securities, because changes in the
financial condition or market assessment of a single issuer may cause
greater fluctuation in the Portfolio's total return and the price of
Portfolio shares.
In addition, PACE Strategic Fixed Income Investments may invest
significantly in high yield, high risk securities (commonly known as "junk
bonds") that are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal.
PaineWebber provides advisory services to you as a participant in
the PACE Program, for which you pay a fee that does not vary based on the
Portfolios recommended for your investments. At the same time, Mitchell
Hutchins, a wholly owned subsidiary of PaineWebber, serves as the Trust's
Manager, which has responsibility for monitoring and compensating each
Adviser. As Manager, Mitchell Hutchins receives a fee from each Portfolio
and retains all or a portion of that fee, the amount of which depends on
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<PAGE>
the Portfolio involved. Consequently, PaineWebber, when making asset
allocation recommendations for you, may have a conflict of interest as to
the specific Portfolios recommended for investment. PaineWebber, however,
is required by applicable standards of fiduciary duty to act solely in
your best interest when making investment recommendations for you. You
also should be aware that the Manager may have various conflicts of
interest when making decisions regarding the retention and compensation of
particular Advisers. However, the Manager's compensation and decisions,
including the specific amount of the Manager's compensation to be paid to
the Adviser, are subject to review and approval by a majority of the
Trust's board of trustees and separately by a majority of the trustees who
are not affiliated with the Manager or any of its affiliates. See
"Management -- Manager" and "Purchases -- General -- The PACE Program."
The Portfolios are intended as vehicles for the implementation of
long-term asset allocation strategies rendered through the PACE Program
that are based on an evaluation of your investment objectives and risk
tolerances. Because these asset allocation strategies are designed to
spread investment risk across the various segments of the securities
markets through investment in a number of Portfolios, each individual
Portfolio generally intends to be fully invested in accordance with its
investment objective and policies during most market conditions. Although
the Adviser of a Portfolio may, upon the concurrence of the Manager, take
a temporary defensive position when the Adviser believes adverse market
conditions so warrant, it can be expected that a defensive posture will be
adopted less frequently than would be the case for other mutual funds.
This policy may impede an Adviser's ability to protect a Portfolio's
capital during declines in the particular segment of the market to which
the Portfolio's assets are committed. Consequently, no single Portfolio
should be considered a complete investment program, and an investment
among the Portfolios should be regarded as a long-term commitment that
should be held through several market cycles.
There can also be no assurance that PaineWebber's periodic
recommendations for adjustments in the allocation of assets among
Portfolios will be successful or can be developed, transmitted and acted
upon in a manner sufficiently timely to avoid market shifts, which can be
sudden and substantial. You should recognize that the PACE Program is a
non-discretionary investment advisory service and that all investment
decisions rest with you alone. Accordingly, you are urged to consider
carefully PaineWebber's asset allocation recommendations and to act
promptly upon any recommended reallocation of assets among the Portfolios.
See "Exchanges."
Purchase and Redemption of Shares. You may purchase shares of
the Portfolios only if you are a participant in the PACE Program. Shares
of the Portfolios are offered for purchase and redemption at their
respective net asset values next determined after receipt. You do not pay
a sales charge in connection with purchases or redemptions. See
"Purchases" and "Redemptions."
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<PAGE>
Dividends and Taxes. Dividends from the net investment income of
PACE Money Market Investments are declared daily and paid monthly.
Dividends from the net investment income of PACE Government Securities
Fixed Income Investments, PACE Intermediate Fixed Income Investments, PACE
Strategic Fixed Income Investments, PACE Municipal Fixed Income
Investments and PACE Global Fixed Income Investments are declared and paid
monthly, and may be accompanied by distributions of net realized short-
term capital gains and net realized gains from foreign currency
transactions, if any. Dividends from the net investment income of the six
equity Portfolios are declared and paid annually. Distributions of any
net gains from foreign currency transactions, net capital gain (the excess
of net long term capital gain over net short-term capital loss) and net
short-term capital gain, if any, earned by a Portfolio will be made
annually. See "Dividends and Taxes."
Custodian and Transfer Agent. State Street Bank and Trust
Company is custodian of each Portfolio's assets and employs foreign
subcustodians to provide custody of the Portfolio's foreign assets, if
any. PFPC Inc. is each Portfolio's transfer and dividend disbursing agent
(the "Transfer Agent").
TRUST EXPENSES
The following table lists the costs and expenses, including the separate
fees for the PACE Program (but not those for different investment advisory
services), that you will incur either directly or indirectly as a
shareholder of each Portfolio based on the Portfolio's projected annual
operating expenses.
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<PAGE>
<TABLE>
<CAPTION
PACE
Govern-
ment PACE Inter- PACE PACE
Securi- mediate Strategic Municipal PACE Large
PACE Money ties Fixed Fixed Fixed Fixed PACE Global Company
Market Income Income Income Income Fixed Value
Invest- Invest- Invest- Invest- Invest- Income Equity
ments ments ments ments ments Investments Investments
<S> <C> <C> <C> <C> <C> <C> <C>
(a) Shareholder None None None None None None None
Transaction Expenses
(b) Maximum Annual
PACE Fee applicable to
non Plan investors (as
a percentage of
average value of
Portfolio shares held 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
on the last calendar ===== ===== ===== ===== ===== ===== =====
day of the previous
quarter)
(c) Annual Portfolio
Operating Expenses (as
a percentage of
average net assets) .15% .50% .40% .50% .40% .60% .60%
Management Fees*/
(net of fee waivers)
(d) Distribution (Rule
12b-1) Expenses None None None None None None None
(e) Other 1.53% 1.11% .76% .86% 1.27% 1.20% .65%
expenses**/
(f) Total Operating
Expenses (c+d+e) 1.68% 1.61% 1.16% 1.36% 1.67% 1.80% 1.25%
Total (b+f) 3.18% 3.11% 2.66% 2.86% 3.17% 3.30% 2.75%
</TABLE>
*/ The sum of the management fees retained by Mitchell Hutchins
and the Advisers equals the total "Management Fees" paid by the Portfolio.
**/ Pursuant to the investment management and administration
agreement with the Trust, Mitchell Hutchins will be paid a fee
for administrative services provided to each Portfolio, at the
annual rate of .20% of each Portfolio's average daily net
assets. Mitchell Hutchins's administrative services fee is
not included in "Other Expenses."
- 10 -
<PAGE>
<TABLE>
<CAPTION
PACE Small/ PACE Small/ PACE
PACE Large Medium Medium PACE International
Company Company Value Company Growth International Emerging Markets
Growth Equity Equity Equity Equity Equity
Investments Investments Investments Investments Investments
<S> <C> <C> <C> <C> <C>
(a) Shareholder None None None None None
Transaction Expenses
(b) Maximum Annual
PACE Fee applicable to
non Plan investors (as
a percentage of
average value of
Portfolio shares held 1.50% 1.50% 1.50% 1.50% 1.50%
on the last calendar ===== ===== ===== ===== =====
day of the previous
quarter)
(c) Annual Portfolio
Operating Expenses (as
a percentage of
average net assets) .60% .60% .60% .70%
Management Fees*/ .90%
(net of fee waivers)
(d) Distribution (Rule
12b-1) Expenses None None None None None
(e) Other expenses**/ .69% .87% 1.11% .83% 1.62%
(f) Total Operating
Expenses (c+d+e) 1.29% 1.47% 1.71% 1.53% 2.52%
Total (b+f) 2.79% 2.97% 3.21% 3.03% 4.02%
</TABLE>
Management Fees; Expenses. Each Portfolio pays the Manager a fee for
its services that is computed daily and paid monthly on an annual rate
ranging among the Portfolios from 0.15% to 0.90% of the value of the
average daily net assets of the Portfolio. The fees of each Adviser are
paid by the Manager. The nature of the services provided to, and the
aggregate management fees paid by, each Portfolio are described under
"Management." "Other Expenses" include estimated fees for shareholder
services, custodial fees, legal and accounting fees, printing costs,
registration fees, the costs of regulatory compliance and a Portfolio's
allocated portion of the costs associated with maintaining the Trust's
legal existence and the costs involved in the Trust's communications with
shareholders. The Manager may voluntarily reimburse expenses of a
Portfolio or waive all or a portion of the fees otherwise payable to it,
or both. Before voluntary fee waivers and/or expense reimbursements by
the Manager, the "Total Operating Expenses" are projected to be the
following for each Portfolio: PACE Money Market Investments -- 1.68% of
average net assets, PACE Government Securities Fixed Income Investments --
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<PAGE>
1.61%, PACE Intermediate Fixed Income Investments -- 1.16%, PACE Strategic
Fixed Income Investments -- 1.36%, PACE Municipal Fixed Income Investments
-- 1.67%, PACE Global Fixed Income Investments -- 1.80%, PACE Large
Company Value Equity Investments -- 1.25%, PACE Large Company Growth
Equity Investments -- 1.29%, PACE Small/Medium Company Value Equity
Investments -- 1.47%, PACE Small/Medium Company Growth Equity
Investments -- 1.71%, PACE International Equity Investments -- 1.53% and
PACE International Emerging Markets Equity Investments -- 2.52%.
Example.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in the Portfolios through the PACE
Program. These amounts, which include the maximum fees for the PACE
Program, are based upon (i) payment by the Portfolios of operating
expenses at the levels set forth in the tables above and (ii) the specific
assumptions stated below:
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<PAGE>
<TABLE>
<CAPTION>
PACE
Government PACE PACE PACE
PACE Money Securities Intermediate Strategic Municipal PACE Global
Market Fixed Income Fixed Income Fixed Income Fixed Income Fixed Income
Investments Investments Investments Investments Investments Investments
1 3 1 3 1 3 1 3 1 3 1 3
Year Year Year Year Year Year Year Year Year Year Year Year
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A shareholder would
pay the following
expenses on a $1,000
investment, assuming
(i) a 5% annual $32 $98 $31 $96 $27 $83 $29 $89 $32 $98 $33 $102
return and (ii)
redemption at the
end of each time
period:
</TABLE>
<TABLE>
<CAPTION>
PACE Small/
PACE Small/ Medium PACE
PACE Large Medium Company PACE International
PACE Large Company Company Growth International Emerging
Company Growth Equity Value Equity Equity Equity Markets
Value Equity Investments Investments Investments Investments Equity
Investments Investments
1 3 1 3 1 3 1 3 1 3 1 3
Year Year Year Year Year Year Year Year Year Year Year Year
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A shareholder would
pay the following
expenses on a $1,000
investment, assuming
(i) a 5% annual $28 $85 $28 $87 $30 $92 $32 $99 $31 $94 $40 $122
return and (ii)
redemption at the
end of each time
period:
</TABLE>
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<PAGE>
This Example assumes that all dividends and other distributions
are reinvested and that the percentage amounts listed under Annual
Portfolio Operating Expenses remain the same in the years shown. The
above tables and the assumption in the Example of a 5% annual return are
required by regulations of the SEC applicable to all mutual funds; the
assumed 5% annual return is not a prediction of, and does not represent,
the projected or actual performance of the Portfolios' shares.
The Example should not be considered a representation of past or
future expenses, and a Portfolio's actual expenses may be more or less
than those shown. The actual expenses attributable to each Portfolio's
shares will depend upon, among other things, the level of average net
assets, the extent to which a Portfolio incurs variable expenses, such as
transfer agency costs, and whether the Manager reimburses all or a portion
of the Portfolio's expenses and/or waives all or a portion of its advisory
and other fees.
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
A description of the investment objective and policies of each
Portfolio follows. There can be no assurance that a Portfolio will
achieve its investment objective. The investment objective of a Portfolio
is a fundamental policy and may not be changed without the approval by
vote of the shareholders of that Portfolio. See the SAI for a further
definition of approval by vote of the shareholders. Unless otherwise
specified, the other investment policies of a Portfolio are not
fundamental and can be changed by the board of trustees acting alone.
Further information about the investment policies of each Portfolio,
including a list of those restrictions on its investment activities that
cannot be changed without shareholder approval, appears in the "Investment
Policies and Restrictions" section of the SAI.
PACE Money Market Investments
Adviser: Mitchell Hutchins Asset Management Inc.
Objective: Current income consistent with preservation of
capital and liquidity
PACE Money Market Investments seeks to achieve its investment
objective by investing in high grade money market instruments including
U.S. government securities, obligations of U.S. banks, commercial paper
and other short-term corporate obligations, corporate bonds and notes,
variable and floating rate securities and participation interests or
repurchase agreements involving any of the foregoing securities. The
Portfolio invests only in U.S. dollar-denominated securities that have
remaining maturities of 397 days or less at the time of purchase. The
Portfolio maintains a dollar-weighted average portfolio maturity of 90
days or less.
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The Portfolio may invest in obligations (including certificates
of deposit, bankers' acceptances and similar obligations) of U.S banks,
including foreign branches of domestic banks and domestic branches of
foreign banks, having total assets in excess of $1.5 billion at the time
of purchase. The Portfolio may also invest in interest-bearing savings
deposits in U.S. commercial and savings banks having total assets of $1.5
billion or less, provided that the principal amounts at each such bank are
fully insured by the Federal Deposit Insurance Corporation and the
aggregate amount of such deposits (plus interest earned) does not exceed
5% of the value of the Portfolio's assets.
The commercial paper and other short-term corporate obligations
purchased by the Portfolio consist only of obligations that Mitchell
Hutchins determines, pursuant to procedures adopted by the Trust's board
of trustees, present minimal credit risks and are either (1) rated in the
highest short-term rating category by at least two nationally recognized
statistical rating organizations ("NRSROs"), (2) rated in the highest
short-term rating category by a single NRSRO if only that NRSRO has
assigned the obligations a short-term rating or (3) unrated, but
determined by Mitchell Hutchins to be of comparable quality (collectively,
"First Tier Securities"). The Portfolio generally may invest no more than
5% of its total assets in the securities of a single issuer (other than
securities issued by the U.S. government, its agencies or
instrumentalities).
The Portfolio follows these policies to maintain a constant net
asset value of $1.00 per share, although there can be no assurance it will
be able to do so. The yield and value of Portfolio shares and the yield
and value of portfolio securities are also not insured or guaranteed by
the U.S. government. The yield attained by the Portfolio may not be as
high as that of other funds that invest in lower quality or longer term
securities. See "Investment Objectives and Policies of the Portfolios --
Other Investment Policies and Risk Factors" for other investment policies
of the Portfolio.
PACE Government Securities Fixed Income Investments
Adviser: Pacific Investment Management Company
Objective: Current income
PACE Government Securities Fixed Income Investments seeks to
achieve its investment objective by investing primarily in U.S. government
securities of varying maturities with a dollar-weighted average portfolio
duration between two and seven years. Under normal conditions, the
Portfolio invests at least 65% of its total assets in U.S. government
securities, which include U.S. Treasury obligations and obligations issued
or guaranteed by U.S. government agencies or instrumentalities and
repurchase agreements with respect to these securities. The Portfolio may
invest in U.S. government securities that are backed by the full faith and
credit of the U.S. government, such as Government National Mortgage
Association mortgage-backed securities ("GNMA certificates"), securities
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that are supported primarily or solely by the creditworthiness of the
issuer, such as securities issued by the Resolution Funding Corporation
("RFC") and the Tennessee Valley Authority ("TVA"), and securities that
are supported primarily or solely by specific pools of assets and the
creditworthiness of a U.S. government-related issuer, such as mortgage-
backed securities issued by the Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or the
Resolution Trust Corporation ("RTC").
The Portfolio also may invest in certain zero coupon securities
that are U.S. Treasury notes and bonds that have been stripped of their
unmatured interest coupon receipts or interests in such U.S. Treasury
securities or coupons, including Certificates of Accrual Treasury
Securities ("CATS") and Treasury Income Growth Receipts ("TIGRs"). The
SEC staff currently takes the position that "stripped" U.S. government
securities that are not issued through the U.S. Treasury STRIPS program
are not U.S. government securities. As long as the SEC takes this
position, CATS and TIGRs will not be considered U.S. government securities
for purposes of the 65% investment requirement. See "Investment
Objectives and Policies of the Portfolios -- Other Investment Policies and
Risk Factors -- Risks of Mortgage-Backed and Asset-Backed Securities" for
further discussion of the mortgage-backed and asset-backed securities in
which the Portfolio may invest.
The Portfolio may invest up to 35% of its total assets in
mortgage-backed securities that are issued by private issuers and
collateralized by securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities and in debt securities of other
corporate issuers. To maintain a dollar-weighted average portfolio
duration of between two and seven years, the Adviser monitors the
prepayment experience of the underlying mortgage pools of the Portfolio's
mortgage-related securities and will purchase and sell securities in the
Portfolio to shorten or lengthen the average duration of the Portfolio, as
appropriate.
The Portfolio's investments in fixed income securities are
limited to those that are rated at least A by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") (or, if
unrated, determined by the Adviser to be of comparable quality). See the
Appendix to the SAI for a description of the Moody's and S&P ratings. In
addition, the Portfolio will not acquire a security if, as a result, more
than 25% of the Portfolio's total assets would be invested in securities
rated below AAA, or if more than 10% of the Portfolio's total assets would
be invested in securities rated A.
The Portfolio may use options, futures contracts, options on
futures contracts and interest rate protection transactions for hedging,
income and return enhancement and risk management purposes. See
"Investment Objectives and Policies of the Portfolios -- Other Investment
Policies and Risk Factors" for further discussion of hedging and related
strategies and other investment policies of the Portfolio.
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PACE Intermediate Fixed Income Investments
Adviser: Pacific Income Advisers, Inc.
Objective: Current income, consistent with reasonable stability
of principal
PACE Intermediate Fixed Income Investments seeks to achieve its
objectives through investment in high quality fixed income securities with
a dollar-weighted average portfolio duration between two and four and a
half years. The Portfolio invests in U.S. government securities,
corporate bonds, debentures, non-convertible fixed income securities,
preferred stocks, mortgage-related securities, Eurodollar certificates of
deposit, Eurodollar bonds and Yankee bonds. The Portfolio also may invest
up to 10% of its assets in securities denominated in foreign currencies of
developed countries. The Portfolio limits its investments to investment
grade securities, which are securities rated within the four highest
categories established by at least one NRSRO (e.g., Moody's or S&P) and
unrated securities determined by the Adviser to be of comparable quality.
Securities rated Baa or lower by Moody's or BBB or lower by S&P have
speculative characteristics and are subject to greater risks. See the
Appendix to the SAI for a description of Moody's and S&P ratings and
"Investment Objectives and Policies of the Portfolios -- Other Investment
Policies and Risk Factors -- Debt Securities" for a description of certain
risks associated with securities in the fourth highest rating category.
The Portfolio may use options, futures contracts, options on futures
contracts with a fixed income security or interest rate as the underlying
instrument for hedging, income and return enhancement and risk management
purposes. See "Investment Objectives and Policies of the Portfolios --
Other Investment Policies and Risk Factors" for further discussion of
hedging and related strategies and other investment policies of the
Portfolio.
In an effort to maintain a dollar-weighted average portfolio
duration of between two and four and a half years, the Adviser monitors
the prepayment experience of the underlying mortgage pools of the
Portfolio's mortgage-related securities and will purchase and sell
securities in the Portfolio to shorten or lengthen the average life of the
Portfolio, as appropriate. The average duration of a mortgage related
security is calculated using the most recent twelve month prepayment
experience.
PACE Strategic Fixed Income Investments
Adviser: Pacific Investment Management Company
Objective: Total return consisting of capital appreciation and
income
PACE Strategic Fixed Income Investments seeks to achieve its
investment objective by investing in a diversified portfolio of fixed
income securities of varying maturities with a dollar-weighted average
portfolio duration between three and eight years. Portfolio holdings will
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be concentrated in areas of the bond market (based on quality, sector,
coupon or maturity) which the Adviser believes to be relatively
undervalued.
The fixed income securities in which the Portfolio may invest
include obligations issued or guaranteed by the U.S. government, its
agencies and instrumentalities, corporate and other debt obligations,
convertible securities, mortgage-backed securities, asset-backed
securities, obligations of foreign governments or their subdivisions,
agencies or instrumentalities, obligations of supranational and quasi-
governmental entities, commercial paper, certificates of deposit, money
market instruments, foreign currency exchange-related securities and loan
participations. The Portfolio may invest up to 35% of its assets in
privately issued mortgage-related securities. All of the securities
purchased for the Portfolio will be investment grade (rated at least Baa
by Moody's or BBB by S&P, or, if unrated, determined by the Adviser to be
of comparable quality), except that the Portfolio may invest up to 20% of
its total assets in securities rated below investment grade, but rated at
least B by Moody's or S&P, or determined by the Adviser to be of
comparable quality. Securities rated Baa or lower by Moody's or BBB or
lower by S&P have speculative characteristics and are subject to greater
risks. See "Investment Objectives and Policies of the Portfolios -- Other
Investment Policies and Risk Factors -- Debt Securities" below and the
Appendix in the SAI for a description of Moody's and S&P ratings.
The Portfolio may invest up to 10% of its assets in securities
denominated in foreign currencies and dollar denominated debt of foreign
issuers. In addition, the Portfolio may invest up to 10% in Yankee bonds
and Eurodollar bonds combined. The Portfolio may attempt to hedge against
unfavorable changes in currency exchange rates by engaging in forward
currency transactions and trading currency futures contracts and options
thereon. The Portfolio also may use options, futures contracts, options
on futures contracts and interest rate protection transactions for
hedging, income and return enhancement and risk management purposes. See
"Investment Objectives and Policies of the Portfolios -- Other Investment
Policies and Risk Factors" for further discussion of hedging and related
strategies and other investment policies of the Portfolio.
PACE Municipal Fixed Income Investments
Adviser: Morgan Grenfell Capital Management Incorporated
Objective: High current income exempt from federal income tax
PACE Municipal Fixed Income Investments seeks to achieve its
investment objective through investment in a diversified portfolio of
general obligation, revenue and private activity bonds and notes that are
issued by or on behalf of states, territories and possessions of the
United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, or multi-state agencies or
authorities, the interest on which, in the opinion of counsel to the
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issuer of the instrument, is exempt from federal income tax ("Municipal
Obligations").
Under normal conditions the Portfolio invests at least 80% of its
assets in Municipal Obligations. Municipal bonds include industrial
development bonds ("IDBs"), municipal lease obligations and certificates
of participation therein, put bonds and private activity bonds ("PABs").
The Portfolio will not invest more than 25% of its total assets in
Municipal Obligations whose issuers are located in the same state or more
than 25% of its total assets in Municipal Obligations that are secured by
revenues from entities in a particular industry category except that the
Portfolio may invest up to 50% of its assets in public housing
authorities, and state and local housing finance authorities, including
bonds that are secured or backed by the U.S. Treasury or other U.S.
government guaranteed securities. To the extent the Portfolio
concentrates its investments in single family and multi-family housing
obligations, the Portfolio will be subject to the peculiar risks
associated with investments in such obligations, including prepayment
risks and the risks of default on housing loans, which may be affected by
economic conditions and other factors relating to such obligations.
The Portfolio will include Municipal Obligations of varying
maturities with a dollar-weighted average portfolio duration between three
and seven years. Portfolio composition generally covers a range of
maturities with geographic and issuer diversification. The Portfolio may
invest in PABs collateralized by letters of credit issued by banks having
stockholders' equity in excess of $100 million as of the date of their
most recently published statement of financial condition. The Portfolio
may also invest in variable rate Municipal Obligations, most of which
permit the holder thereof to receive the principal amount on demand upon
seven days' notice. The Portfolio limits its investments to Municipal
Obligations that are rated at least A, MIG-2 or Prime 2 by Moody's or A,
SP-2 or A-2 by S&P at the time of investment or unrated securities
determined to be of comparable quality by the Adviser, except that up to
15% of its assets may be invested in municipal bonds that, at the time of
purchase, are rated Baa by Moody's, rated BBB by S&P, or unrated and
determined by the Adviser to be of comparable quality. Municipal
Obligations in the lowest investment grade category are considered medium
grade securities. See "Investment Objectives and Policies of the
Portfolios -- Other Investment Policies and Risk Factors -- Debt
Securities" for a discussion of certain risks associated with securities
rated in the fourth highest rating category.
The Portfolio may invest without limit in PABs, although it does
not currently expect to invest more than 25% of its total assets in PABs.
Dividends attributable to interest income on certain types of PABs issued
after August 15, 1986, to finance non-governmental activities are a tax
preference item for purposes of the federal alternative minimum tax
("AMT"). No more than 25% of the interest income will be subject to AMT.
Dividends derived from interest income on all Municipal Obligations are a
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component of the "current earnings" adjustment item for purposes of the
AMT as applied to corporations.
Under normal circumstances, the Portfolio may invest up to 20% of
its total assets in certain taxable securities to maintain liquidity. In
addition, for temporary defensive purposes during periods when the Adviser
determines that market conditions warrant, the Portfolio may invest
without limit in such taxable securities. See "Investment Objectives and
Policies of the Portfolios -- Other Investment Policies and Risk Factors"
for further discussion of other investment policies of the Portfolio.
PACE Global Fixed Income Investments
Adviser: Rogge Global Partners, plc
Objective: High current income
PACE Global Fixed Income Investments seeks to achieve its
investment objective by investing primarily in high-grade domestic and
foreign fixed-income securities. Under normal conditions, at least 65% of
the value of the Portfolio's total assets will be invested in domestic and
foreign bonds issued by governments, companies and supranational
organizations such as the International Bank for Reconstruction and
Development (commonly known as the World Bank), Asian Development Bank,
European Investment Bank and European Economic Community. Bonds are
viewed by the Portfolio to include fixed-income securities of any
maturity. Under normal market conditions, investments will be made in a
minimum of four countries, one of which may be the United States. For
temporary defensive purposes, the Portfolio may invest in securities of
only one country, including the United States. The Portfolio may invest
in non-U.S. dollar denominated securities.
The Portfolio will include fixed income securities of varying
maturities with a dollar-weighted average portfolio duration between four
and eight years. The Portfolio's quality standards limit its investments
to those rated within the three highest grades assigned by Moody's or S&P,
or unrated securities determined by the Adviser to be of comparable
quality, except for bonds issued by companies and governments in emerging
markets.
The Portfolio may invest up to 10% of its total assets in bonds
issued by companies and governments in emerging countries. The emerging
countries in which the Portfolio may invest currently include Argentina,
Brazil, Chile, China, Columbia, Indonesia, India, Malaysia, Mexico, the
Philippines, Poland, Singapore, Thailand and Venezuela. These markets
tend to be in the less economically developed regions of the world.
General characteristics of emerging countries also include lower degrees
of political stability, a high demand for capital investment, a high
dependence on export markets for their major industries, a need to develop
basic economic infrastructures and rapid economic growth. The Adviser
believes that investments in bonds issued in emerging countries offer the
opportunity for significant long-term investment returns, however, these
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investments are lower quality than the three highest rated securities and
involve certain risks. See "Other Investment Policies and Risk Factors --
Foreign Securities."
The Portfolio may attempt to hedge against unfavorable changes in
currency exchange rates by engaging in forward currency transactions and
trading currency futures contracts and options thereon. The Portfolio
also may use options, futures contracts, and options on futures contracts
for hedging, income and return enhancement and risk management purposes.
For a more detailed discussion of the risks in investing in foreign
securities, see "Investment Policies and Restrictions -- Special
Characteristics of Foreign and Emerging Market Securities" in the SAI.
See "Investment Objectives and Policies of the Portfolios -- Other
Investment Policies and Risk Factors" for further discussion of hedging
and related strategies and other investment policies of the Portfolio.
PACE Large Company Value Equity Investments
Adviser: Brinson Partners, Inc.
Objective: Total return consisting of capital appreciation and
dividend income
PACE Large Company Value Equity Investments seeks to achieve its
investment objective by investing primarily in equity securities that, in
the Adviser's opinion represent good value. Under normal circumstances,
substantially all of the Portfolio's total assets will be invested in a
wide range of equity securities of U.S. companies that are traded on major
stock exchanges as well as on the over-the-counter ("OTC") market. The
Portfolio may invest in a broad range of equity securities of U.S.
issuers, including common and preferred stocks, debt securities
convertible into or exchangeable for common stock and securities such as
warrants or rights that are convertible into common stock. The Portfolio
expects its equity investments to encompass both large and intermediate
capitalization companies, but under normal circumstances at least 65% of
the Portfolio's total assets will be invested in common stock of companies
with total market capitalization of $2.5 billion or greater at the time of
purchase.
The Adviser's approach to investing for the Portfolio is to
invest in the equity securities of U.S. companies believed to be
undervalued based upon internal research and proprietary valuation
systems. Investment decisions are based on fundamental research,
internally developed valuation systems and seasoned judgment. The
Adviser's research focuses on several levels of analysis; first, on
understanding wealth shifts that occur within the equity market, and
second, on individual company research. At the company level, the Adviser
quantifies expectations of a company's ability to generate profit and to
grow business into the future. For each stock under analysis, the Adviser
discounts to the present all of the future cash flows that it believes
will accrue to the Portfolio from the investment to calculate a present or
intrinsic value. This value estimate generated by the Adviser's
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proprietary valuation model is compared to observed market price and
ranked against other stocks accordingly. The rankings, in combination
with the Adviser's investment judgment, determine which securities are
included in the portfolio.
The Portfolio also may use options, futures contracts and options
on futures contracts for hedging, income and return enhancement and risk
management purposes. See "Investment Objectives and Policies of the
Portfolios -- Other Investment Policies and Risk Factors" for further
discussion of hedging and related strategies and other investment policies
of the Portfolio.
PACE Large Company Growth Equity Investments
Adviser: Chancellor Capital Management, Inc.
Objective: Capital appreciation
PACE Large Company Growth Equity Investments seeks to achieve its
investment objective by investing primarily in equity securities of
companies that, in the Adviser's opinion, are characterized by a growth of
earnings at a rate faster than that of the S&P 500 on average. Dividend
income is an incidental consideration in the selection of investments.
The securities held by the Portfolio can be expected generally to
experience greater volatility than those of PACE Large Company Value
Equity Investments. The Portfolio may invest in a broad range of equity
securities of U.S. issuers, including common and preferred stocks, debt
securities convertible into or exchangeable for common stock and
securities such as warrants or rights that are convertible into common
stock. In selecting securities for the Portfolio, the Adviser evaluates
factors believed to be favorable to long-term growth of capital, such as
the business outlook for the issuer's industry and the issuer's position
in that industry, as well as the issuer's background, historical profit
margins on equity and experience and qualifications of the issuer's
management. Under normal conditions, at least 65% of the Portfolio's
total assets will be invested in common stocks of companies with total
market capitalization of $2.5 billion or greater at the time of purchase.
See "Investment Objectives and Policies of the Portfolios -- Other
Investment Policies and Risk Factors" for further discussion of other
investment policies of the Portfolio.
The Adviser diversifies the Portfolio by industry with a defined
growth subset of both the S&P 500 and the Russell 1000 Growth indices,
which consists of companies expected to grow at least 50% faster than the
market. The Adviser divides the growth subset into 19 industry groups,
and their market capitalization weights define its normal or neutral
position. Based upon the Adviser's collective industry evaluation, it may
increase or decrease portfolio exposures on a weekly basis by a maximum 6%
relative to the normal weightings. This permits flexibility relative to
its growth benchmark, yet ensures against undue volatility associated with
overexposure to one industry.
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The Adviser's stock selection decisions are determined by:
(1) the Adviser's analysts' forecasts of the industry/company's relative
attractiveness; (2) the Adviser's research-driven dividend discount model
and (3) the Adviser's quantitative, fact-based Stock Selection Model that
ranks industries/stocks based primarily on earnings momentum, earnings
stability, relative value and relative strength. The Adviser ranks the
stocks in its large-capitalization universe on a normal bell-shaped curve,
purchasing stocks ranked in the top 30% of the combined ranked universe,
and must sell stocks ranked in the bottom 30%.
PACE Small/Medium Company Value Equity Investments
Adviser: Brandywine Asset Management, Inc.
Objective: Capital appreciation
PACE Small/Medium Company Value Equity Investments seeks to
achieve its investment objective by investing primarily in equity
securities that, in the Adviser's opinion, are undervalued or overlooked
in the marketplace at the time of purchase. In general, these securities
are characterized as having below market average price/earnings (P/E)
ratios. The Portfolio will only invest in companies with common stock
traded on the major stock exchanges as well as on the OTC market. The
Portfolio may invest in a broad range of equity securities of U.S.
issuers, including common and preferred stock, debt securities convertible
into or exchangeable for common stock and securities such as warrants or
rights that are convertible into common stock. Under normal conditions,
at least 65% of the Portfolio's total assets will be invested in common
stocks of issuers with total market capitalization of less than $2.5
billion at the time of purchase. The Portfolio defines a low P/E ratio as
a P/E (based on trailing twelve-month earnings) which places a firm among
the lowest P/E 25% for all exchange-traded and OTC stocks with positive
earnings and a capitalization greater than $10 million. See "Investment
Objectives and Policies of the Portfolios -- Other Investment Policies and
Risk Factors" for further discussion of other investment policies of the
Portfolio.
The Adviser performs a qualitative, fundamental review of
candidates to determine that they are appropriate candidates for the
Portfolio. This review identifies and avoids stocks undesirable for
investment: First, the Adviser adjusts all reported earnings for
extraordinary gains and losses so as to consider only true, low P/E stocks
for entry into the Portfolio. Second, the Adviser excludes stocks that
have pre-announced significant earnings changes which when formally
reported will raise their P/E ratios. Third, stocks that have had recent
strong price increases, and therefore are not truly undervalued, are
eliminated. Fourth, the fundamental review identifies and removes those
stocks that are suffering a severe or sudden fundamental deterioration.
The Portfolio intends to invest in the common stock only of
companies meeting these criteria. Each stock's weighting in the Portfolio
will be proportional to the stock's capitalization, except that the
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Portfolio will not purchase any stock such that it exceeds 2% of the
Portfolio. The Portfolio may also deviate from strict capitalization
weighting due to investing only in round lots, to illiquidity, or to block
purchases at favorable prices.
PACE Small/Medium Company Growth Equity Investments
Adviser: Westfield Capital Management Company, Inc.
Objective: Capital appreciation
PACE Small/Medium Company Growth Equity Investments seeks to
achieve its investment objective by investing primarily in the common
stock of "emerging growth" companies. Dividend income is an incidental
consideration in the selection of investments. The Portfolio may invest
in a broad range of equity securities of U.S. issuers, including common
and preferred stock, debt securities convertible into or exchangeable for
common stock and securities such as warrants or rights that are
convertible into common stock. Under normal conditions, at least 80% of
the Portfolio's total assets will be invested in common stocks of issuers
with total market capitalization of less than $2.5 billion that exhibit
the potential for high future earnings growth relative to the overall
market.
The Adviser uses a bottom-up, fundamental approach, including on-
site company visits, to uncover and analyze companies that exhibit the
possibility of accelerating earnings growth because of management changes,
new products, established products exhibiting unit volume growth or
structural changes in the economy. The quality of the management team and
the strength of the company's finances and internal controls are also
factors in the investment decision. A 12 to 18 month time horizon is
employed in selecting stocks; however, selected issues may be held for
extended periods based on the Adviser's outlook.
The Adviser is exposed to and follows companies constituting a
full range of market sectors; nevertheless, it may focus on a limited
number of attractive industries. The securities of these companies may
have limited marketability and may be subject to more abrupt or erratic
market movements than securities of larger, more established companies or
the market averages in general. The Portfolio also may use options,
futures contracts and options on futures contracts for hedging, income and
return enhancement and risk management purposes. See "Investment
Objectives and Policies of the Portfolios -- Other Investment Policies and
Risk Factors" for further discussion of hedging and related strategies and
other investment policies of the Portfolio.
PACE International Equity Investments
Adviser: Martin Currie Inc.
Objective: Capital appreciation
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PACE International Equity Investments seeks to achieve its
objective by investing in equity securities of companies domiciled outside
the United States. Under normal market conditions, the Portfolio's assets
will be invested in common stocks, which may or may not pay dividends, as
well as convertible bonds, convertible preferred stocks, warrants, rights
or other equity securities. The Portfolio also may invest up to 10% of
its assets in securities of investment companies, such as closed-end
investment management companies which invest in foreign markets.
The Portfolio will normally invest in securities of companies
domiciled outside the United States. Particular consideration will be
given to investments principally traded in Japanese, European, Pacific and
Australian securities markets, and in foreign securities of companies
traded on United States' securities markets. The Portfolio will also
invest up to 10% of its assets in emerging markets, including Asia, Latin
America and other regions, where markets may not yet fully reflect the
potential of the developing economy. For purposes of this Portfolio, an
"emerging market" is one that is not included in the Morgan Stanley
Capital International World Index ("MSCI Index") of major world economies.
In allocating the Portfolio's assets among the various securities
markets of the world, the Adviser will consider such factors as the
condition and growth potential of the various economic and securities
markets, currency and taxation considerations and other pertinent
financial, social, national and political factors. Under certain adverse
investment conditions, the Portfolio may restrict the number of securities
markets in which its assets will be invested, although under normal market
circumstances the Portfolio's investments will involve securities
principally traded in at least ten different countries. The Portfolio
will invest only in markets where, in the judgment of the Adviser, there
exists an acceptable framework of market regulation and sufficient
liquidity.
When the Adviser believes that conditions in international
securities markets warrant a defensive investment strategy, the Portfolio
may invest up to 100% of its assets in domestic debt, foreign debt
principally traded in the United States, and in foreign debt securities
principally traded outside of the United States obligations issued or
guaranteed by the U.S. or a foreign government or their respective
agencies, authorities or instrumentalities, corporate bonds and sponsored
American Depository Receipts ("ADRs").
The Portfolio may attempt to hedge against unfavorable changes in
currency exchange rates by engaging in forward currency transactions and
trading currency futures contracts and options thereon. The Portfolio
also may use options, futures contracts and options on futures contracts
for hedging, income and return enhancement and risk management purposes.
See "Investment Objectives and Policies of the Portfolios -- Other
Investment Policies and Risk Factors" for further discussion of hedging
and related strategies and other investment policies of the Portfolio.
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PACE International Emerging Markets Equity Investments
Adviser: Schroder Capital Management International Inc.
Objective: Capital appreciation
PACE International Emerging Markets Equity Investments seeks to
achieve its investment objective by investing in equity securities of
issuers domiciled or doing business in emerging market countries.
"Emerging market" countries generally include all countries in the world
other than those contained in the MSCI Index of major world economies and
Malaysia. See "Investment Objectives and Policies of the Portfolios--
Other Investment Policies and Risk Factors." The Portfolio may invest in
a broad range of equity securities, including common and preferred stock,
debt securities convertible into or exchangeable for stock and securities
such as warrants or rights that are convertible into stock. The Portfolio
also may invest up to 10% of its assets in securities of investment
companies, such as closed-end investment management companies which invest
in foreign markets.
In recent years, many emerging market countries have begun
programs of economic reform: removing import tariffs, dismantling trade
barriers, deregulating foreign investment, privatizing state owned
industries, permitting the value of their currencies to float against the
dollar and other major currencies, and generally reducing the level of
state intervention in industry and commerce. Important intra-regional
economic integration also holds the promise of greater trade and growth.
At the same time, significant progress has been made in restructuring the
heavy external debt burden that certain emerging market countries
accumulated during the 1970s and 1980s. While there is no assurance that
these trends will continue, the Adviser will seek out attractive
investment opportunities in these countries.
The Portfolio will not necessarily seek to diversify investments
on a geographic basis within the emerging market category and to the
extent the Portfolio concentrates its investments in issuers located in
one country or area, the Portfolio is more susceptible to factors
adversely affecting that country or area.
The Portfolio may attempt to hedge against unfavorable changes in
currency exchange rates by engaging in forward currency transactions and
trading currency futures contracts and options thereon. The Portfolio may
acquire emerging market securities that are denominated in currencies
other than a currency of an emerging market country. The Portfolio also
may use options, futures contracts and options on futures contracts for
hedging, income and return enhancement and risk management purposes. See
"Investment Objectives and Policies of the Portfolios -- Other Investment
Policies and Risk Factors" for further discussion of hedging and related
strategies and other investment policies of the Portfolio. For a more
detailed discussion of the risks in investing in foreign securities, see
"Investment Policies and Restrictions -- Special Characteristics of
Foreign and Emerging Market Securities" in the SAI.
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OTHER INVESTMENT POLICIES AND RISK FACTORS
Money Market Instruments
All Portfolios other than PACE Money Market Investments also may
invest in high-quality money market instruments such as commercial paper
of a U.S. or foreign company or foreign government certificates of
deposit, bankers' acceptances and time deposits of domestic and foreign
banks, and obligations issued or guaranteed by the U.S. government, its
agencies and instrumentalities. These obligations will be generally U.S.
dollar-denominated. Commercial paper will be rated, at the time of
purchase, at least "Prime-2" by Moody's or "A-2" by S&P or, if not rated,
issued by an entity having an outstanding unsecured debt issue rated at
least "A" or "Prime-2" by Moody's or "A" or "A-2" by S&P. See the
Appendix to the SAI for a description of Moody's and S&P's ratings.
U.S. Government Securities
Each Portfolio may invest in some or all of the following U.S.
government securities that are backed by the full faith and credit of the
U.S. government: U.S. Treasury obligations, securities that are supported
primarily or solely by the creditworthiness of the government-related
issuer, such as securities issued by the RFC, the Student Loan Marketing
Association, the Federal Home Loan Banks and the TVA, and securities that
are supported primarily or solely by specific pools of assets and the
creditworthiness of a U.S. government-related issuer, such as U.S.
government mortgage-backed securities. For more information concerning
the types of mortgage-backed securities in which certain Portfolios may
invest, see "Investment Objectives and Policies of the Portfolios -- Other
Investment Policies and Risk Factors -- Mortgage-Backed Securities." In
addition, PACE Government Securities Fixed Income Investments, PACE
Intermediate Fixed Income Investments and PACE Strategic Fixed Income
Investments may invest in certain zero coupon securities that are
"stripped" U.S. Treasury notes and bonds. See "Investment Objectives and
Policies of the Portfolios -- Other Investment Policies and Risk Factors -
- Zero Coupon Securities.
Debt Securities
Each Portfolio may invest in corporate and other debt
obligations. The yield of a fixed income security depends on a variety of
factors, including general fixed income security market conditions, the
financial condition of the issuer, the size of the particular offering,
the maturity, credit quality and rating of the issue and expectations
regarding changes in tax rates. Generally, the longer the maturity of a
fixed income security, the higher the rate of interest paid and the
greater the volatility. Furthermore, the value of the securities held by
a Portfolio will rise when interest rates decline. Conversely, when
interest rates rise, the value of fixed income securities may be expected
to decline.
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Except where otherwise indicated, each Portfolio will invest in
securities rated A or better by any NRSRO or determined by the Adviser to
be of comparable quality. PACE Strategic Fixed Income Investments may
invest in medium-rated securities (i.e., rated Baa by Moody's or BBB by
S&P). Moody's considers securities rated Baa to have speculative
characteristics. PACE Strategic Fixed Income Investments also may invest
in lower-rated securities (i.e., rated lower than Baa by Moody's or lower
than BBB by S&P). PACE Strategic Fixed Income Investments, however, will
not purchase a security rated lower than B by Moody's or S&P. Changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity for such securities to make principal and interest
payments than is the case for higher grade debt securities. Debt
securities rated below investment grade are deemed by these agencies to be
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal and may involve major risk exposure to
adverse conditions. These securities are commonly referred to as "junk
bonds."
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 and PACE Global Fixed Income Investments are permitted to
purchase debt securities that are not rated by an NRSRO but that the
Portfolio's Adviser determines to be of comparable quality to that of
rated securities in which it may invest. These securities are included in
the computation of any percentage limitations applicable to comparably
rated securities.
Although the relevant Advisers will attempt to minimize the
speculative risks associated with investments in junk bonds through
diversification, credit analysis and attention to current trends in
interest rates and other factors, investors should carefully review the
objectives and policies of PACE Strategic Fixed Income Investments and
consider its ability to assume the investment risks involved before making
an investment.
Ratings of debt securities represent the rating agencies'
opinions regarding their quality, are not a guarantee of quality and may
be reduced after a Portfolio has acquired the security. The Advisers, and
in the case of PACE Money Market Investments, Mitchell Hutchins, would
consider such an event in determining whether the Portfolio should
continue to hold the security but may not be required to dispose of it.
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 affecting an issuer, so that an issuer's
current financial condition may be better or worse than the rating
indicates.
Lower rated debt securities generally offer a higher current
yield than that available from higher grade issues, but they involve
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higher risks in that they are especially subject to adverse changes in
general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price
fluctuation in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress, which could adversely affect their ability to
make payments of principal and interest and increase the possibility of
default. In addition, issuers of these securities may not have more
traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by
such issuers is significantly greater, because such securities frequently
are unsecured and subordinated to the prior payment of senior
indebtedness.
The market for lower rated securities has expanded in recent
years, and its growth paralleled a long economic expansion. In the past,
the prices of many lower rated debt securities declined substantially,
reflecting an expectation that many issuers of such securities might
experience financial difficulties. As a result, the yields on lower rated
debt securities rose dramatically. The higher yields did not reflect the
value of the income stream that holders of such securities expected, but
rather the risk that holders of such securities could lose a substantial
portion of their value as a result of the issuers' financial restructuring
or default. There can be no assurance that such declines will not recur.
The market for lower rated debt securities generally is thinner and less
active than that for higher quality securities, which may limit a
Portfolio's ability to sell the securities at fair value in response to
changes in the economy or the financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
also decrease the values and liquidity of lower rated securities,
especially in a thinly-traded market.
Duration
Duration is a measure of the expected life of a fixed income
security that was developed as a more precise alternative to the concept
of "term to maturity." Duration incorporates a bond's yield, coupon
interest payments, final maturity and call features into one measure.
Duration is one of the fundamental tools used by the Adviser in portfolio
selection for the PACE Government Securities Fixed Income Investments,
PACE Intermediate Fixed Income Investments, PACE Strategic Fixed Income
Investments, PACE Municipal Fixed Income Investments and PACE Global Fixed
Income Investments.
Traditionally, a debt security's "term to maturity" has been used
as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a
debt security provides its final payments, taking no account of the
pattern of the security's payments prior to maturity. Duration is a
measure of the expected life of a fixed income security on a present value
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basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each
future point in time. For any fixed income security with interest
payments occurring prior to the payment of principal, duration is always
less than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest of a fixed income security, the
longer the duration of the security; conversely, the higher the stated or
coupon rate of interest of a fixed income security, the shorter the
duration of the security.
Futures, options and options on futures have duration which, in
general are closely related to the duration of the securities which
underlie them. Holding long futures or call option positions (backed by a
segregated account of cash and cash equivalents) will lengthen a
Portfolio's duration by approximately the same amount that selling an
equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly
equal to the negative duration of the securities that underlie these
positions, and have the effect of reducing portfolio duration by
approximately the same amount that selling an equivalent amount of the
underlying securities would.
There are some situations where even the standard duration
calculation does not properly reflect the interest rate exposure of a
security. For example, floating and variable rate securities often have
final maturities of ten or more years; however, their interest rate
exposure corresponds to the frequency of the coupon reset. Another
example where the interest rate exposure is not properly captured by
duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current
prepayment rates are more critical in determining the securities' interest
rate exposure. In these and other similar situations, the Adviser will
use more sophisticated analytical techniques that incorporate the economic
life of a security into the determination of its interest rate exposure.
Municipal Obligations
Municipal Obligations include, but are not limited to, municipal
bonds, floating rate and variable rate municipal obligations, inverse
floaters, participation interests in municipal bonds, tax-exempt
commercial paper, tender option bonds and short-term municipal notes.
Municipal bonds include industrial development bonds ("IDBs"), municipal
lease obligations and certificates of participation therein, put bonds and
private activity bonds ("PABs").
PACE Municipal Fixed Income Investments may invest in a variety
of Municipal Obligations, as described below:
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Municipal Bonds. Municipal bonds are debt obligations issued to
obtain funds for various public purposes that pay interest that is exempt
from federal income tax in the opinion of issuer's counsel. The two
principal classifications of municipal bonds are "general obligation" and
"revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source such as from the user of the facility being financed. The term
"municipal bonds" also includes "moral obligation" issues, which are
normally issued by special purpose authorities. In the case of such
issues, an express or implied "moral obligation" of a related government
unit is pledged to the payment of the debt service, but is usually subject
to annual budget appropriations. The term "municipal bonds" also includes
municipal lease obligations, such as leases, installment purchase
contracts and conditional sales contracts and certificates of
participation therein. Municipal lease obligations are issued by state
and local governments and authorities to purchase land or various types of
equipment or facilities and may be subject to annual budget
appropriations. The Portfolio generally invests in municipal lease
obligations through certificates of participation. The Portfolio does not
presently intend to purchase municipal lease obligations that are not
rated by Moody's or S&P.
Industrial Development Bonds and Private Activity Bonds. IDBs
and PABs are issued by or on behalf of public authorities to finance
various privately operated facilities, such as airport or pollution
control facilities. These obligations are included within the term
"municipal bonds" if the interest paid thereon is exempt from federal
income tax in the opinion of the bond issuer's counsel. IDBs and PABs are
in most cases revenue bonds and thus are not payable from the unrestricted
revenues of the issuer. The credit quality of IDBs and PABs is usually
directly related to the credit standing of the user of the facilities
being financed. IDBs issued after August 15, 1986 generally are
considered PABs, and to the extent the Portfolio invests in such PABs,
shareholders generally will be required to include a portion of their
exempt-interest dividends from that Portfolio in calculating their
liability for the AMT. See "Dividends and Taxes." The Portfolio is
authorized to invest more than 25% of its net assets in IDBs and PABs.
Floating Rate and Variable Rate Obligations. See "Investment
Objectives and Policies of the Portfolios -- Other Investment Policies and
Risk Factors -- Floating Rate and Variable Rate Obligations."
Participation Interests. Participation interests are interests
in municipal bonds, including IDBs and PABs, and floating and variable
rate obligations that are owned by banks. These interests carry a demand
feature permitting the holder to tender them back to the bank, which
demand feature generally is backed by an irrevocable letter of credit or
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guarantee of the bank. The credit standing of such bank affects the
credit quality of the participation interests.
Tender Option Bonds. Tender option bonds are long-term Municipal
Obligations sold by a bank subject to a "tender option" that gives the
purchaser the right to tender them to the bank at par plus accrued
interest at designated times (the tender option). The tender option may
be exercisable at intervals ranging from bi-weekly to semi-annually, and
the interest rate on the bonds is typically reset at the end of the
applicable interval in order to cause the bonds to have a market value
that approximates their par value. The tender option generally would not
be exercisable in the event of a default on, or significant downgrading
of, the underlying Municipal Obligations. Therefore, the Portfolio's
ability to exercise the tender option will be affected by the credit
standing of both the bank involved and the issuer of the underlying
securities.
Put Bonds. A put bond is a municipal bond which gives the holder
the unconditional right to sell the bond back to the issuer or a
remarketing agent at a specified price and exercise date, which is
typically well in advance of the bond's maturity date. The obligation to
purchase the bond on the exercise date may be supported by a letter of
credit or other credit support arrangement from a bank, insurance company
or other financial institution, the credit standing of which affects the
credit quality of the obligation.
Tax-Exempt Commercial Paper and Short-Term Municipal Notes. Tax-
exempt commercial paper and short-term municipal notes include tax
anticipation notes, bond anticipation notes, revenue application notes and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements and other revenues.
Yields and Risk Factors. The yield of a municipal security
depends on a variety of factors, including general municipal and fixed
income security market conditions, the financial condition of the issuer,
the size of the particular offering, the maturity, credit quality and
rating of the issue and expectations regarding changes in tax rates.
Generally, the longer the maturity of a municipal security, the higher the
rate of interest paid and the greater the volatility. Further, if general
market interest rates are increasing, the prices of Municipal Obligations
ordinarily will decrease and, if rates decrease, the opposite generally
will be true. The Portfolio may invest in Municipal Obligations with a
broad range of maturities, based on the Adviser's judgment of current and
future market conditions as well as other factors, such as the Portfolio's
liquidity needs. Accordingly, the average dollar-weighted maturity of the
Portfolio's portfolio may vary.
Future federal, state and local laws may adversely affect the
tax-exempt status of interest on the Portfolio's portfolio securities or
of the exempt-interest dividends paid by the Portfolio, extend the time
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for payment of principal or interest or otherwise constrain enforcement of
such obligations. Opinions relating to the validity of Municipal
Obligations and the tax-exempt status of interest thereon are rendered by
the issuer's bond counsel at the time of issuance; the Adviser will rely
on such opinions without independent investigation. See "Investment
Objectives and Policies of the Portfolio -- Other Investment Policies and
Risk Factors -- Debt Securities" for further discussion of ratings.
Mortgage-Backed Securities
PACE Government Securities Fixed Income Investments, PACE
Intermediate Fixed Income Investments and PACE Strategic Fixed Income
Investments may each invest in mortgage-backed securities. Mortgage-
backed securities are securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage loans
secured by real property and include single- and multi-class pass-through
securities and collateralized mortgage obligations. Multi-class pass-
through securities and collateralized mortgage obligations are
collectively referred to herein as CMOs.
The U.S. government securities in which these three Portfolios
may invest include mortgage-backed securities issued or guaranteed as to
the payment of principal and interest (but not as to market value) by
GNMA, FNMA or the FHLMC. Other mortgage-backed securities in which these
three Portfolios may invest are issued by private issuers, generally
originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and
special purpose entities (collectively, "Private Mortgage Lenders").
Payments of principal and interest (but not the market value) of such
private mortgage-backed securities may be supported by pools of mortgage
loans or other mortgage-backed securities that are guaranteed, directly or
indirectly, by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any government guarantee
of the underlying mortgage assets but with some form of non-government
credit enhancement.
GNMA Certificates. GNMA guarantees certain mortgage pass-through
certificates ("GNMA certificates") that are issued by Private Mortgage
Lenders and that represent ownership interests in individual pools of
residential mortgage loans. These securities are designed to provide
monthly payments of interest and principal to the investor. Timely
payment of interest and principal is backed by the full faith and credit
of the U.S. government. Each mortgagor's monthly payments to his lending
institution on his residential mortgage are "passed through" to
certificateholders such as the Portfolios. Mortgage pools consist of
whole mortgage loans or participations in loans. The terms and
characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. Lending institutions which originate
mortgages for the pools are subject to certain standards, including credit
and other underwriting criteria for individual mortgages included in the
pools.
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FNMA Certificates. FNMA facilitates a national secondary market
in residential mortgage loans insured or guaranteed by U.S. government
agencies and in privately insured or uninsured residential mortgage loans
(sometimes referred to as "conventional mortgage loans" or "conventional
loans") through its mortgage purchase and mortgage-backed securities sales
activities. FNMA issues guaranteed mortgage pass-through certificates
("FNMA certificates"), which represent pro rata shares of all interest and
principal payments made and owed on the underlying pools. FNMA guarantees
timely payment of interest and principal on FNMA certificates. The FNMA
guarantee is not backed by the full faith and credit of the U.S.
government.
FHLMC Certificates. FHLMC also facilitates a national secondary
market for conventional residential and U.S. government-insured mortgage
loans through its mortgage purchase and mortgage-backed securities sales
activities. FHLMC issues two types of mortgage pass-through securities:
mortgage participation certificates ("PCs") and guaranteed mortgage
certificates ("GMCs"). Each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool.
FHLMC generally guarantees timely monthly payment of interest on PCs and
the ultimate payment of principal, but it also has a PC program under
which it guarantees timely payment of both principal and interest. GMCs
also represent a pro rata interest in a pool of mortgages. These
instruments, however, pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The FHLMC guarantee is not backed
by the full faith and credit of the U.S. government.
Private, RTC and Similar Mortgage-Backed Securities. Mortgage-
backed securities issued by Private Mortgage Lenders are structured
similarly to the CMOs or single-class mortgage-backed securities issued or
guaranteed by GNMA, FNMA and the FHLMC. Such mortgage-backed securities
may be supported by pools of U.S. government or agency insured or
guaranteed mortgage loans or by other mortgage-backed securities issued by
a government agency or instrumentality, but they generally are supported
by pools of conventional (i.e., non-government guaranteed or insured)
mortgage loans. Since such mortgage-backed securities normally are not
guaranteed by an entity having the credit standing of GNMA, FNMA and the
FHLMC, they normally are structured with one or more types of credit
enhancement. See "-- Types of Credit Enhancement." Such credit
enhancements do not protect investors from changes in the market value of
CMOs.
The RTC, which was organized by the U.S. government in connection
with the savings and loan crisis, holds assets of failed savings
associations as either a conservator or receiver for such associations, or
it acquires such assets in its corporate capacity. These assets include,
among other things, single family and multi-family mortgage loans, as well
as commercial mortgage loans. In order to dispose of such assets in an
orderly manner, RTC has established a vehicle registered with the SEC
through which it sells mortgage-backed securities. RTC mortgage-backed
securities represent pro rata interests in pools of mortgage loans that
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RTC holds or has acquired, as described above and are supported by one or
more of the types of private credit enhancements used by Private Mortgage
Lenders.
Collateralized Mortgage Obligations and Multi-Class Mortgage
Pass-Throughs. CMOs are debt obligations that are collateralized by
mortgage loans or mortgage pass-through securities (such collateral
collectively being called "Mortgage Assets"). CMOs may be issued by
Private Mortgage Lenders or by government entities such as FNMA or the
FHLMC. Multi-class mortgage pass-through securities are interests in
trusts that are comprised of Mortgage Assets and that have multiple
classes similar to those in CMOs. Unless the context indicates otherwise,
references herein to CMOs include multi-class mortgage pass-through
securities. Payments of principal of, and interest on, the Mortgage
Assets (and in the case of CMOs, any reinvestment income thereon) provide
the funds to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMO, also referred to as a "tranche," is issued at
a specific fixed or floating coupon rate and has a stated maturity or
final distribution date. Principal repayments on the Mortgage Assets may
cause CMOs to be retired substantially earlier than their stated
maturities or final distribution dates. Interest is paid or accrues on
all classes of a CMO (other than any PO class) on a monthly, quarterly or
semi-annual basis. The principal and interest on the Mortgage Assets may
be allocated among the several classes of a CMO in many ways. In one
structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in the order of
their respective stated maturities or final distribution dates so that no
payment of principal will be made on any class of the CMO until all other
classes have an earlier stated maturity or final distribution date that
have been paid in full. In some CMO structures, all or a portion of the
interest attributable to one or more of the CMO classes may be added to
the principal amounts attributable to such classes, rather than passed
through to certificateholders on a current basis, until other classes of
the CMO are paid in full.
Parallel pay CMOs are structured to provide payments of principal
on each payment date to more than one class. These simultaneous payments
are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must
be retired by its stated maturity date or final distribution date but may
be retired earlier.
ARM and Floating Rate Mortgage-Backed Securities. ARM mortgage-
backed securities are mortgage-backed securities that represent a right to
receive interest payments at a rate that is adjusted to reflect the
interest earned on a pool of mortgage loans bearing variable or adjustable
rates of interest (such mortgage loans are referred to as "ARMs").
Floating rate mortgage-backed securities are classes of mortgage-backed
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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. Because the interest rates on ARM 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. See "Investment
Policies and Restrictions -- ARM and Floating Rate Mortgage-Backed
Securities" in the SAI for further information on these securities.
Types of Credit Enhancement. To lessen the effect of failures by
obligors on Mortgage Assets to make payments, mortgage-backed securities
may contain elements of credit enhancement. Credit enhancement generally
falls into two categories: (1) liquidity protection and (2) protection
against losses resulting after default by an obligor on the underlying
assets and collection of all amounts recoverable directly from the obligor
and through liquidation of the collateral. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool
of assets (usually the bank, savings association or mortgage banker that
transferred the underlying loans to the issuer of the security), to ensure
that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting after default and
liquidation ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by
the issuer or sponsor, from third parties, through various means of
structuring the transaction or through a combination of such approaches.
The Portfolios will not pay any additional fees for such credit
enhancement, although the existence of credit enhancement may increase the
price of a security.
Examples of credit enhancement arising out of the structure of
the transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "spread accounts" or "reserve funds"
(where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future
losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed that required to
make payment of the securities and pay any servicing or other fees). The
degree of credit enhancement provided for each issue generally is based on
historical information regarding the level of credit risk associated with
the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.
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Specially Structured CMOs and New Types of Mortgage-Backed Securities
PACE Government Securities Fixed Income Investments, PACE
Intermediate Fixed Income Investments and PACE Strategic Fixed Income
Investments each may invest in interest only ("IO"), principal only ("PO")
and other specially structured CMO classes. See "Other Investment
Policies and Risk Factors -- Risks of Mortgage-Backed and Asset-Backed
Securities."
New types of mortgage-backed securities are developed and
marketed from time to time and, consistent with their investment
limitations, the Portfolios expect to invest in those new types of
mortgage-backed securities that the respective Portfolio's Adviser
believes may assist the Portfolio in achieving its investment objective.
Similarly, the Portfolios may invest in mortgage-backed securities issued
by new or existing governmental or private issuers other than those
identified above. This Prospectus or the SAI will be supplemented to the
extent that new types of mortgage-backed securities or those issued by
issuers other than those identified above involve materially different
risks than the securities or issuers described herein.
Asset-Backed Securities
PACE Government Securities Fixed Income Investments, PACE
Intermediate Fixed Income Investments and PACE Strategic Fixed Income
Investments may each invest in asset-backed securities. Asset-backed
securities have structural characteristics similar to mortgage-backed
securities. However, the underlying assets are not first lien mortgage
loans or interests therein, but include assets such as motor vehicle
installment loan contracts, home equity loans, leases of various types of
real and personal property and receivables from revolving credit (credit
card) agreements. Such assets are securitized through the use of trusts
or special purpose corporations. Payments or distributions of principal
and interest on asset-backed securities may be guaranteed up to certain
amounts and for a certain time period by a letter of credit or a pool
insurance policy issued by a financial institution unaffiliated with the
issuer or other credit enhancements may be present.
Risks of Mortgage-Backed and Asset-Backed Securities
The yield characteristics of the mortgage-backed and asset-backed
securities in which PACE Government Securities Fixed Income Investments,
PACE Intermediate Fixed Income Investments and PACE Strategic Fixed Income
Investments may invest differ from those of traditional debt securities.
Among the major differences are that interest and principal payments are
made more frequently on mortgage-backed and asset-backed securities
(usually monthly) and that principal may be prepaid at any time because
the underlying mortgage loans or other assets generally may be prepaid at
any time. As a result, if a Portfolio purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield
to maturity, while a prepayment rate that is slower than expected will
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have the opposite effect of increasing yield to maturity. Conversely, if
a Portfolio purchases these securities at a discount faster than expected
prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Amounts available for reinvestment by a
Portfolio are likely to be greater during a period of declining interest
rates and, as a result, are likely to be reinvested at lower interest
rates than during a period of rising interest rates. Accelerated
prepayments on securities purchased by a Portfolio at a premium also
impose a risk of loss of principal because the premium may not have been
fully amortized at the time the principal is prepaid in full. The market
for privately issued mortgage-backed securities and asset-backed
securities is smaller and less liquid than the market for U.S. government
mortgage-backed securities.
CMO classes may be specially structured in a manner that provides
any of a wide variety of investment characteristics, such as yield,
effective maturity and interest rate sensitivity. As market conditions
change, however, and particularly during periods of rapid or unanticipated
changes in market interest rates, the attractiveness of the CMO classes
and the ability of the structure to provide the anticipated investment
characteristics may be significantly reduced. These changes can result in
volatility in the market value, and in some instances reduced liquidity,
of the CMO class.
The rate of interest payable on CMO classes may be set at levels
that are either above or below market rates at the time of issuance, so
that the securities will be sold at a substantial premium to, or at a
discount from, par value. In the most extreme case, one class will be
entitled to receive all or a portion of the interest but none of the
principal from the underlying mortgage assets (the interest-only or "IO"
class) and one class will be entitled to receive all or a portion of the
principal but none of the interest (the principal-only or "PO" class).
IOs and POs may also be created from mortgage-backed securities that are
not CMOs. The yields on IOs, POs and other mortgage-backed securities
that are purchased at a substantial premium or discount generally are
extremely sensitive to the rate of principal payments (including
prepayments) on the underlying mortgage assets. If the mortgage assets
underlying an IO experience greater than anticipated principal
prepayments, an investor may fail to recoup fully its initial investment
even if the security is government issued or guaranteed or is rated AAA or
the equivalent.
Some CMO classes are structured to pay interest at rates that are
adjusted in accordance with a formula, such as a multiple or fraction of
the change in a specified interest rate index, so as to pay at a rate that
will be attractive in certain interest rate environments but not in
others. For example, an inverse floating rate CMO class pays interest at
a rate that increases as a specified interest rate index decreases but
decreases as that index increases. For other CMO classes, the yield may
move in the same direction as market interest rates--i.e. the yield may
increase as rates increase and decrease as rates decrease--but may do so
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more rapidly or to a greater degree. The market value of such securities
generally is more volatile than that of a fixed rate obligation. Such
interest rate formulas may be combined with other CMO characteristics.
For example, a CMO class may be an "inverse IO," on which the holders are
entitled to receive no payments of principal and are entitled to receive
interest at a rate that will vary inversely with a specified index or a
multiple thereof.
While the market values of particular securities in which a
Portfolio invests may be volatile, or may become volatile under certain
conditions, the Adviser will seek to manage the Portfolio so that the
volatility of the Portfolio, taken as a whole, is consistent with the
Portfolio's investment objective. If the Adviser incorrectly forecasts
interest rate changes or other factors that may affect the volatility of
securities held by the Portfolio, the Portfolio's ability to meet its
investment objective may be reduced. In addition, no Portfolio will
invest more than 5% of its net assets in any combination of IOs, POs and
inverse floating rate securities.
Convertible Securities
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 each may invest in
convertible securities. A convertible security is a bond, debenture,
note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price
or formula. A convertible security entitles the holder to receive
interest paid or accrued on debt or dividends paid on preferred stock
until the convertible security matures or is redeemed, converted or
exchanged. Convertible securities have unique investment characteristics
in that they generally (1) have higher yields than common stocks, but
lower yields than comparable non-convertible securities, (2) are less
subject to fluctuation in value than the underlying stock because they
have fixed income characteristics, and (3) provide the potential for
capital appreciation if the market price of the underlying common stock
increases. 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.
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Hedging and Related Strategies
Each Portfolio except PACE Money Market Investments, PACE
Municipal Fixed Income Investments, PACE Large Company Growth Equity
Investments and PACE Small/Medium Company Value Equity Investments, may
use options (both exchange-traded and over-the-counter) and futures
contracts to attempt to enhance income and return, and may attempt to
reduce the overall risk of its investments (hedge) by using options,
options on futures contracts, and futures contracts. Hedging strategies
may be used by certain Portfolios in an attempt to manage their foreign
currency exposure, the average duration of PACE Government Securities
Fixed Income Investments, PACE Intermediate Fixed Income Investments, PACE
Strategic Fixed Income Investments and PACE Global Fixed Income
Investments, and other risks of a Portfolio's investments that can cause
fluctuations in its net asset value. Each Portfolio's ability to use
these strategies may be limited by market conditions, regulatory limits
and tax considerations. Appendix A to this Prospectus describes the
hedging instruments that these Portfolios may use and the SAI contains
further information on these strategies.
PACE Strategic Fixed Income Investments, PACE Global Fixed Income
Investments, PACE International Equity Investments and PACE International
Emerging Markets Equity Investments may each enter into forward currency
contracts, buy or sell foreign currency futures contracts, write (sell)
covered call or put options and buy or sell interest rate futures
contracts and (except for PACE Strategic Fixed Income Investments and PACE
Global Fixed Income Investments) stock index futures contracts, purchase
put and call options or write covered call or put options on such
contracts, and write covered call or put options and buy put or call
options on securities indices. Each Portfolio except PACE Money Market
Investments, PACE Municipal Fixed Income Investments, PACE Large Company
Growth Equity Investments and PACE Small/Medium Company Value Equity
Investments, may enter into options and futures contracts under which up
to 100% of its portfolio is at risk.
PACE Strategic Fixed Income Investments, PACE Global Fixed Income
Investments, PACE International Equity Investments, and PACE International
Emerging Market Equity Investments may enter into forward currency
contracts for the purchase or sale of a specified currency at a specified
future date either with respect to specific transactions or with respect
to portfolio positions. For example, when the Adviser anticipates making
a currency exchange transaction in connection with the purchase or sale of
a security, a Portfolio may enter into a forward contract in order to set
the exchange rate at which the transaction will be made. A Portfolio also
may enter into a forward contract to sell an amount of a foreign currency
approximating the value of some or all of the Portfolio's securities
denominated in such currency. Each Portfolio may use forward contracts in
one currency or a basket of currencies to hedge against fluctuations in
the value of another currency when the Adviser anticipates there will be a
correlation between the two and may use forward currency contracts to
shift a Portfolio's exposure to foreign currency fluctuations from one
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country to another. The purpose of entering into these contracts is to
minimize the risk to the Portfolios from adverse changes in the
relationship between the U.S. dollar and foreign currencies.
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, for hedging purposes. For example, a Portfolio 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 the Portfolio
anticipates purchasing at a later date. 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.
The Portfolios might not employ any of the strategies described
above, and there can be no assurance that any strategy used will succeed.
If its Adviser incorrectly forecasts interest rates, market values or
other economic factors in utilizing a strategy for a Portfolio, the
Portfolio might have been in a better position had it not hedged at all.
The use of these strategies involves certain special risks, including (1)
the fact that skills needed to use hedging instruments are different from
those needed to select the Portfolio's securities, (2) possible imperfect
correlation, or even no correlation, between price movements of hedging
instruments and price movements of the investments being hedged, (3) the
fact that, while hedging strategies can reduce the risk of loss, they can
also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged investments and (4) the
possible inability of a Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for the Portfolio to maintain
"cover" or to segregate securities in connection with hedging transactions
and the possible inability of a Portfolio to close out or to liquidate its
hedged position.
New financial products and risk management techniques continue to
be developed. Each Portfolio may use these instruments and techniques to
the extent consistent with its investment objectives and regulatory and
federal tax considerations.
Foreign Securities
PACE Strategic Fixed Income Investments, PACE Global Fixed Income
Investments, PACE International Equity Investments and PACE International
Emerging Markets Equity Investments may each invest in foreign equity and
debt securities, including securities of foreign corporations, obligations
of foreign branches of U.S. banks and securities issued by foreign
governments. PACE Small/Medium Company Growth Equity Investments may
invest up to 5% of its assets in foreign securities.
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Investments in foreign securities involve risks relating to
political and economic developments abroad, as well as those that result
from the differences between the regulations to which U.S. and foreign
issuers and markets are subject. These risks may include expropriation,
confiscatory taxation, limitations on the use or transfer of Portfolio
assets and political or social instability or diplomatic developments.
Moreover, individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments positions. Securities of many foreign
issuers may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies. These risks are often heightened
for investments in emerging countries.
In addition, substantial limitations may exist in certain
countries with respect to a Portfolio's ability to repatriate investment
income, capital or the proceeds of sales of securities by foreign
investors. The Portfolio could be adversely affected by delays in, or a
refusal to grant, any required government approval for repatriation of
capital, as well as by the application to the Portfolio of any
restrictions on investments.
The securities markets of many of the emerging countries in which
a Portfolio may invest are substantially smaller, less developed, less
liquid and more volatile than the securities markets of the United States
and other more developed countries. Disclosure and regulatory standards
in many respects are less stringent 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 has been extremely limited.
Many of the foreign securities held by a Portfolio will not be
registered with the 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 a Portfolio
than is available concerning U.S. companies. Foreign companies, and in
particular, companies in smaller and emerging countries 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. A Portfolio's net investment income and/or capital gains from
its foreign investment activities may be subject to non-U.S. withholding
taxes that, if not recoverable by a Portfolio, may reduce the Portfolio's
return.
Additionally, because foreign securities ordinarily will be
denominated in currencies other than the U.S. dollar, changes in foreign
currency exchange rates will affect a Portfolio's net asset value, the
value of dividends and interest earned, gains and losses realized on the
sale of securities and net investment income to be distributed to
shareholders by a Portfolio. If the value of a foreign currency rises
against the U.S. dollar, the value of Portfolio assets denominated in such
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currency will increase; correspondingly, if the value of a foreign
currency declines against the U.S. dollar, the value of Portfolio assets
denominated in such currency will decrease. The exchange rates between
the U.S. dollar and other currencies can be volatile and are determined by
factors such as supply and demand in the currency exchange markets,
international balances of payments, government intervention, speculation
and other economic and political conditions. Any of these factors could
affect a Portfolio.
The costs attributable to foreign investing that a Portfolio must
bear frequently are higher than those attributable to domestic investing.
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 a
Portfolio 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 a Portfolio would
be subject. Foreign markets 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 a Portfolio are
uninvested and no return is earned thereon. The inability of a 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 a Portfolio due to subsequent declines in the value of
such portfolio security or, if a Portfolio has entered into a contract to
sell the security, could result in possible liability to the purchaser.
In addition to purchasing securities of foreign issuers in
foreign markets, a Portfolio may invest in ADRs, European Depository
Receipts ("EDRs") or other securities convertible into securities of
corporations based in foreign countries. These securities may not
necessarily be denominated in the same currency as the securities into
which they may be converted. Generally, ADRs, traded in registered form,
are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, and EDRs, in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs
are receipts typically issued by a U.S. bank or trust company evidencing
ownership of underlying securities. EDRs are European receipts evidencing
a similar arrangement. For purposes of a Portfolio's investment policies,
ADRs and EDRs are deemed to have the same classification as the underlying
securities they represent. Thus, an ADR or EDR evidencing ownership of
common stock will be treated as common stock.
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Foreign Government Securities
PACE Strategic Fixed Income Fund, PACE Global Fixed Income
Investments, PACE International Equity Investments and PACE International
Emerging Markets Equity Investments may each invest in foreign government
securities. The foreign government securities in which the Portfolios may
invest generally consist of obligations supported by national, state or
provincial governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational
entities, which include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government
agencies. Examples include the World Bank, the European Coal and Steel
Community, the Asian Development Bank and the Inter-American Development
Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in
multinational currency units of an issuer (including supranational
issuers). An example of a multinational currency unit is the European
Currency Unit ("ECU"). An ECU represents specified amounts of the
currencies of certain member states of the European Community. Debt
securities of quasi-governmental agencies are issued by entities owned by
either a national, state or equivalent government or are obligations of a
political unit that is not backed by the national government's full faith
and credit and general taxing powers. Foreign government securities also
include mortgage-related securities issued or guaranteed by national,
state or provincial governmental instrumentalities, including quasi-
governmental agencies.
Investments in foreign government debt securities involve special
risks. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to pay
interest or repay principal when due in accordance with the terms of such
debt, and the Portfolios may have limited legal recourse in the event of
default. Political conditions, especially a sovereign entity's
willingness to meet the terms of its debt obligations, are of considerable
significance.
Repurchase Agreements
Each Portfolio may use repurchase agreements. Repurchase
agreements are transactions in which a Portfolio purchases securities from
an approved bank or 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. Repurchase agreements carry certain
risks not associated with direct investments in securities, including
possible decline in the market value of the underlying securities and
delays and costs to each Portfolio if the other party to the repurchase
agreement becomes insolvent. Each Portfolio intends to enter into
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repurchase agreements only with banks and dealers in transactions believed
by its Adviser (or Mitchell Hutchins in the case of PACE Money Market
Investments) to present minimum credit risks in accordance with guidelines
established by the Trust's board of trustees.
Dollar Rolls and Reverse Repurchase Agreements
PACE Government Securities Fixed Income Investments and PACE
Strategic Fixed Income Investments may enter into dollar rolls, in which a
Portfolio sells mortgage-backed or other securities for delivery in the
current month and simultaneously contracts to purchase substantially
similar securities on a specified future date. In the case of dollar
rolls involving mortgage-backed securities, the mortgage-backed securities
that are purchased will be of the same type and will have the same
interest rate as those sold, but will be supported by different pools of
mortgages. The Portfolio forgoes principal and interest paid during the
roll period on the securities sold, but the Portfolio is compensated by
the difference between the current sales price and the lower price for the
future purchase as well as by any interest earned on the proceeds of the
securities sold. The Portfolio also could be compensated through the
receipt of fee income equivalent to a lower forward price.
The Portfolios may also enter into reverse repurchase agreements
in which the Portfolio sells securities to a bank or dealer and agrees to
repurchase them at a mutually agreed date and price. The market value of
securities sold under reverse repurchase agreements typically is greater
than the proceeds of the sale, and, accordingly, the market value of the
securities sold is likely to be greater than the value of the securities
in which the Portfolio invests those proceeds. Thus, reverse repurchase
agreements involve the risk that the buyer of the securities sold by the
Portfolio might be unable to deliver them when the Portfolio seeks to
repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the buyer
or its trustee or receiver may receive an extension of time to determine
whether to enforce the Portfolio's obligation to repurchase the
securities, and the Portfolio's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision.
The dollar rolls and reverse repurchase agreements entered into
by the Portfolios normally will be arbitrage transactions in which a
Portfolio will maintain an offsetting position in securities or repurchase
agreements that mature on or before the settlement date on the related
dollar roll or reverse repurchase agreement. Since the Portfolio will
receive interest on the securities or repurchase agreements in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since these securities or repurchase agreements will mature on or
before the settlement date of the related dollar roll or reverse
repurchase agreement, the Advisers believe that these arbitrage
transactions do not present the risks to the Portfolio that are associated
with other types of leverage.
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Dollar rolls and reverse repurchase agreements will be considered
to be borrowings and, accordingly, will be subject to the respective
Portfolios' limitations on borrowings, which will restrict the aggregate
of such transactions (plus any other borrowings) to 331/3% of a
Portfolio's total assets. A Portfolio will not enter into dollar rolls or
reverse repurchase agreements other than in arbitrage transactions as
described above, in an aggregate amount in excess of 5% of the Portfolio's
total assets. Neither Portfolio currently intends to enter into dollar
rolls other than in such arbitrage transactions, and neither Portfolio
currently intends to enter into reverse repurchase agreements other than
in such arbitrage transactions or for temporary or emergency purchases. A
Portfolio may borrow in excess of its 33 % limitation for temporary or
emergency purchases, but not in excess of an
additional 5% of its total assets.
Floating Rate and Variable Rate Obligations
Floating rate and variable rate obligations bear interest at
rates that are not fixed, but that vary with changes in specified market
rates or indices. Accordingly, as interest rates decrease or increase,
the potential for capital appreciation or capital depreciation is less
than for fixed rate obligations. Floating rate or variable rate
obligations typically permit the holder to demand payment of principal
from the issuer or remarketing agent at par value prior to maturity and
may permit the issuer to prepay principal, plus accrued interest, at its
discretion after a specified notice period. Frequently, floating rate or
variable rate obligations and/or the demand features thereon are secured
by letters of credit or other credit support arrangements provided by
banks, the credit standing of which affects the credit quality of the
obligations.
Illiquid Securities
Each Portfolio, except PACE Money Market Investments, may invest
up to 15% of its net assets in illiquid securities; PACE Money Market
Investments may invest up to 10% of its net assets in illiquid securities.
Illiquid securities include certain cover for OTC options, repurchase
agreements with maturities in excess of seven days and securities whose
disposition is restricted under the federal securities laws (other than
"Rule 144A securities" that the Portfolio's Adviser has determined to be
liquid under procedures approved by the Trust's board of trustees). Rule
144A establishes a "safe harbor" from the registration requirements of the
Securities Act of 1933 ("1933 Act"). Institutional markets for restricted
securities have developed as a result of Rule 144A, providing both readily
ascertainable values for restricted securities and the ability to
liquidate an investment to satisfy share redemption orders. An
insufficient number of qualified institutional buyers interested in
purchasing Rule 144A eligible restricted securities held by a Portfolio,
however, could affect adversely the marketability of such portfolio
securities, and the Portfolio might be unable to dispose of such
securities promptly or at favorable prices.
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When-Issued and Delayed Delivery Securities
Each Portfolio may purchase debt securities, including mortgage-
and asset-backed securities, on a "when-issued" basis or may purchase or
sell securities on a "delayed delivery" basis, i.e., for issuance or
delivery to the Portfolio later than the normal settlement date for such
securities at a stated price and yield. The Portfolio generally would not
pay for such securities or start earning interest on them until they are
received. However, when a Portfolio undertakes a when-issued or delayed
delivery purchase commitment, it immediately assumes the risks of
ownership, including the risk of price fluctuation. Failure of a counter
party to deliver a security purchased by a Portfolio on a when-issued or
delayed delivery basis may result in the Portfolio's incurring a loss or
missing an opportunity to make an alternative investment. Depending on
market conditions, a Portfolio's when-issued and delayed delivery purchase
commitments could cause its net asset value per share to be more volatile,
because these securities may increase the amount by which the Portfolio's
total assets, including the value of when-issued and delayed delivery
securities held by the Portfolio, exceeds its net assets.
Zero Coupon Securities
PACE Government Securities Fixed Income Investments, PACE
Intermediate Fixed Income Investments, PACE Strategic Fixed Income
Investments and PACE Global Fixed Income Investments may invest in certain
zero coupon securities that are "stripped" U.S. Treasury notes and bonds.
PACE Strategic Fixed Income Investments also may invest in zero coupon
securities of corporate issuers and other securities that are issued with
original issue discount ("OID") and payment-in-kind ("PIK") securities.
Federal tax law requires that a holder of a security with OID accrue a
portion of the OID on the security as income each year, even though the
holder may receive no interest payment on the security during the year.
Accordingly, although the investing Portfolio will receive no payments on
its zero coupon securities prior to their maturity or disposition, it will
have income attributable to such securities. Similarly, while PIK
securities may pay interest in the form of additional securities rather
than cash, that interest must be included in the annual income of PACE
Strategic Fixed Income Investments.
Companies such as the Portfolios, which seek to qualify for pass-
through federal income tax treatment as regulated investment companies
("RIC"), must distribute substantially all of their net investment income
each year, including non-cash income. Accordingly, each Portfolio will be
required to include in its dividends an amount equal to the income
attributable to its zero coupon, other OID and PIK securities. Those
dividends will be paid from the cash assets of a Portfolio or by
liquidation of portfolio securities, if necessary, at a time when the
Portfolio otherwise might not have done so. Zero coupon and PIK
securities usually trade at a substantial discount from their face or par
value and will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
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maturities that make current distributions of interest in cash. See
"Taxes" in the SAI.
Lending of Portfolio Securities
Each Portfolio is authorized to lend up to 33% of the total value
of its portfolio securities to broker-dealers or institutional investors
that its Adviser or the Manager deems qualified. Lending securities
enables a Portfolio to earn additional income, but could result in a loss
or delay in recovering the Portfolio's securities. See the section
"Investment Policies and Restrictions -- Lending of Portfolio Securities"
in the SAI.
Portfolio Turnover
The portfolio turnover rate for each of the Portfolios may exceed
100%, although the rate is not expected to exceed 200%. High portfolio
turnover may involve correspondingly greater brokerage commissions and
other transaction costs, which will be borne directly by each Portfolio.
See "Portfolio Transactions" in the SAI. In addition, high portfolio
turnover may result in increased short-term capital gains, which when
distributed to shareholders, are treated as ordinary income. See
"Dividends and Taxes." PACE Money Market Investments' portfolio turnover
is expected to be zero for regulatory reporting purposes.
Temporary Defensive Investments
When the Adviser believes unusual circumstances warrant a
defensive posture, each Portfolio temporarily may commit all or any
portion of its assets to cash (U.S. dollars or foreign currencies) or
money market instruments of U.S. or foreign issuers, including repurchase
agreements. The Portfolios (except PACE Money Market Investments and PACE
Municipal Fixed Income Investments) also may engage in short sales of
securities "against the box" to defer realization of gains and losses for
tax or other purposes. Each Portfolio may lend its portfolio securities.
Each Portfolio may borrow money for temporary or emergency purchases, but
not in excess of 10% of its total assets.
Non-Diversification
PACE Intermediate Fixed Income Investments, PACE Strategic Fixed
Income Investments and PACE Global Fixed Income Investments are "non-
diversified," as that term is defined in the 1940 Act, but each intends to
qualify as a RIC for federal income tax purposes. See "Dividends and
Taxes." This means, in general, that more than 5% of each Portfolio's
total assets may be invested in securities of one issuer (including a
foreign government), but only if, at the close of each quarter of its
taxable year, the aggregate amount of such holdings does not exceed 50% of
the value of its total assets and no more than 25% of the value of its
total assets is invested in the securities of a single issuer. To the
extent that the Portfolio's portfolio at times may include the securities
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of a smaller number of issuers than if it were "diversified" (as defined
in the 1940 Act), the Portfolio will be subject to greater risk with
respect to its portfolio securities than if it had invested in a broader
range of securities, because changes in the financial condition or market
assessment of a single issuer may cause greater fluctuation in the
Portfolio's total return and the price of Portfolio shares.
MANAGEMENT
The overall management of the business and affairs of the Trust
and the Portfolios rests with the Trust's board of trustees. The trustees
approve all significant agreements between the Trust and the persons that
furnish services to the Trust and the Portfolios, including the agreements
with the Manager, the Advisers, the Trust's distributor, custodian and
transfer agent. As the Trust's Manager, Mitchell Hutchins is responsible
for the day-to-day business operations of the Trust.
Manager
Mitchell Hutchins, 1285 Avenue of the Americas, New York, New
York 10019, is the Manager of the Trust. Mitchell Hutchins is a wholly
owned subsidiary of PaineWebber, which is a wholly owned subsidiary of
Paine Webber Group Inc. ("PW Group"), a publicly held financial services
holding company. Mitchell Hutchins provides investment advisory and
portfolio management services to investment companies, pension funds and
other institutional, corporate and individual clients. As of March 31,
1995, total assets under Mitchell Hutchins' management were approximately
$41.7 billion. As of that date, Mitchell Hutchins served as investment
adviser or sub-adviser to 42 registered investment companies with 77
separate portfolios having aggregate assets of approximately $26.9
billion.
Pursuant to a Management Agreement with the Trust ("Management
Agreement"), Mitchell Hutchins manages the investment operations of the
Trust, administers the Trust's affairs, provides investment advisory
services for PACE Money Market Investments and is responsible for the
selection, subject to review and approval of the trustees, of Advisers for
each of the Portfolios (other than PACE Money Market Investments) and the
review of the Advisers' continued performance. See "Manager" in the SAI.
Pursuant to a separate Sub-Advisory Agreement (the "Advisory
Agreement") between Mitchell Hutchins and each Adviser, the Advisers
furnish investment advisory services in connection with the investment
management of the respective Portfolios other than PACE Money Market
Investments. Each Adviser is paid a fee for its services by the Manager
out of the fee its collects from the applicable Portfolio. No additional
fee is paid by the investor.
Subject to the supervision and direction of the trustees, the
Manager provides to the Trust investment management evaluation services
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principally by performing initial review of prospective Advisers for each
Portfolio other than PACE Money Market Investments and thereafter
monitoring Adviser performance. In evaluating prospective Advisers, the
Manager considers, among other factors, each Adviser's level of expertise,
relative performance, consistency of performance and investment discipline
or philosophy. The Manager is responsible for communicating performance
expectations and evaluations to the Advisers and for ultimately
recommending to the trustees whether Advisers' contracts should be
renewed, modified or terminated. The Manager reports to the trustees
regarding the results of its evaluation and monitoring functions. For
PACE Money Market Investments, the Manager is responsible for furnishing
investment advisory services to the Portfolio, subject to the supervision
of the trustees.
The Manager is also responsible for conducting all operations of
the Trust except those operations performed by the Advisers, custodian and
transfer agent. Pursuant to the Management Agreement, each Portfolio pays
the Manager a fee comprised of two components: one, for administrative
services provided to each Portfolio, computed daily and paid monthly at
the annual rate of 0.20% of each Portfolio's average daily net assets; and
the other, for investment management services provided to each Portfolio,
computed daily and paid monthly at the annual rate specified below based
on the value of the Portfolio's average daily net assets. The Manager
pays each Adviser, out of the investment management services fee it
receives from the applicable Portfolio, a fee that is computed daily and
paid monthly at the annual rate specified below based on the value of the
Portfolio's average daily net assets:
<TABLE>
<CAPTION>
Fee Rate Paid Fee Rate Paid by the
By Portfolio Manager to
Portfolio to the Manager the Adviser
-------------- ---------------------
(as a % of average (as a % of average net
net assets) assets)
<S> <C> <C>
PACE Money Market Investments . . . . . . . . . . . . . 0.15% 0.00%
PACE Government Securities Fixed Income Investments . . 0.50% 0.25%
PACE Intermediate Fixed Income Investments . . . . . . 0.40% 0.20%
PACE Strategic Fixed Income Investments . . . . . . . . 0.50% 0.25%
PACE Municipal Fixed Income Investments . . . . . . . . 0.40% 0.20%
PACE Global Fixed Income Investments . . . . . . . . . 0.60% 0.35%
PACE Large Company Value Equity Investments . . . . . . 0.60% 0.30%
PACE Large Company Growth Equity Investments . . . . . 0.60% 0.30%
PACE Small/Medium Company Value Equity Investments . . 0.60% 0.30%
PACE Small/Medium Company Growth Equity Investments . . 0.60% 0.30%
PACE International Equity Investments . . . . . . . . . 0.70% 0.40%
PACE International Emerging Markets Equity Investments 0.90% 0.50%
</TABLE>
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Investors should be aware that the Manager may be subject to a
conflict of interest when making decisions regarding the retention and
compensation of particular Advisers. However, the Manager's compensation
and the Manager's decisions, including the identity of an Adviser and the
specific amount of the Manager's compensation to be paid to the Adviser,
are subject to review and approval by a majority of the board of trustees
and separately by a majority of the trustees who are not affiliated with
the Manager or any of its affiliates. In addition, the Manager is subject
to certain standards of fiduciary duty required by law. Certain of these
decisions are also subject to approval of shareholders of the Portfolio
involved.
Advisers
The Advisers have agreed to the foregoing fees, which are
generally lower than the fees they charge to institutional accounts for
which they serve as investment adviser, in recognition of the reduced
administrative and other responsibilities they have undertaken with
respect to the Portfolios. Subject to the monitoring and direction of the
Manager and, ultimately, the supervision and control of the trustees, each
Adviser's responsibilities are limited to making investment decisions for
the Portfolio and placing orders to purchase and sell securities on behalf
of the Portfolio in accordance with the Portfolio's stated investment
objective and policies. The Advisers are paid their fees for management
of the Portfolios by Mitchell Hutchins, not the Trust.
The Trust has filed an exemptive application with the SEC that
would permit the Trust's board of trustees to, without the approval of
shareholders: (a) employ a new Adviser pursuant to the terms of a new
Advisory Agreement, either as a replacement for an existing Adviser or as
an additional Adviser; (b) change the terms of an Advisory Agreement; and
(c) continue the employment of an existing Adviser on the same advisory
contract terms where a contract has been assigned because of a change in
control of the Adviser. Any such change will only be made upon not less
than 30 days prior written notice to shareholders of the Portfolio, which
shall include substantially the information concerning the Adviser that
would have normally been included in a proxy statement. And, any such
change will be submitted for the approval of shareholders no later than
twelve months from the date of the change. There can be no assurance that
the SEC will grant the Trust's application.
The following sets forth certain information about each of the
Advisers:
PACE Money Market Investments
Mitchell Hutchins is located at 1285 Avenue of the Americas, New
York, New York 10019. It is a wholly owned subsidiary of PaineWebber,
which is in turn wholly owned by PW Group, a publicly owned financial
services holding company. As of March 31, 1995, Mitchell Hutchins was
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adviser or subadviser of 42 investment companies with 77 separate
portfolios and aggregate assets of approximately $26.9 billion.
PACE Government Securities Fixed Income Investments and PACE Strategic
Fixed Income Investments
Pacific Investment Management Company ("PIMCO") is located at 840
Newport Center Drive, Suite 360, Newport Beach, California 92660. It is a
subsidiary partnership of PIMCO Advisors L.P. ("PIMCO Advisors"), a
publicly held investment advisory firm. A majority interest in PIMCO
Advisors is held by PIMCO Partners, G.P. ("PIMCO Partners") a general
partnership between Pacific Financial Asset Management Corporation, an
indirect wholly owned subsidiary of Pacific Mutual Life Insurance Company
("Pacific Mutual"), and PIMCO Partners, L.P., a limited partnership
controlled by the PIMCO Managing Directors. As of February 28, 1995,
PIMCO had over $59.8 billion in assets under management and was adviser or
subadviser of 12 investment companies with 33 portfolios and aggregate
assets of approximately $13.1 billion. It has become, since its founding
in 1971, one of the largest fixed income management firms in the nation.
________ is primarily responsible for the day-to-day management of PACE
Government Securities Fixed Income Investments. [state the person's
business experience during the last five years]. ________ is primarily
responsible for the day-to-day management of PACE Strategic Fixed Income
Investments. [state the person's business experience for the last five
years].
PACE Intermediate Fixed Income Investments
Pacific Income Advisers, Inc. ("PIA") is located at 1299 Ocean
Avenue, Suite 210, Santa Monica, California 90401. Lloyd McAdams and
Heather U. Baines, who serve as Chairman and Chief Investment Officer of
PIA and President and Chief Executive Officer, respectively, own PIA's
voting securities, which makes each of them controlling persons of PIA.
As of April 1, 1995, PIA had over $1.7 billion in assets under management.
Mr. McAdams is primarily responsible for the day-to-day management of PACE
Intermediate Fixed Income Investments. Since 1986, he has served as
Chairman and Chief Investment Officer of PIA and Chairman and Chief
Executive Officer of Syndicated Capital, Inc.
PACE Municipal Fixed Income Investments
Morgan Grenfell Capital Management Incorporated ("MGCM") is
located at 1435 Walnut Street, Philadelphia, Pennsylvania 19102. All of
the outstanding voting stock of MGCM is owned by Morgan Grenfell Asset
Management, Ltd., which is a wholly owned subsidiary of Morgan Grenfell
Group plc. Morgan Grenfell Group plc is an indirect wholly owned
subsidiary of Deutsche Bank AG, an international commercial and investment
banking group. As of ________, 1995, MGCM had over $_____ billion assets
under management. It has been active in managing portfolios of securities
since 1989 and has developed an expertise in fixed income investments.
David W. Baldt is primarily responsible for the day-to-day management of
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PACE Municipal Fixed Income Investments. [State the persons' business
experience during the last five years]. Mr. Baldt joined MGCM in 1989 to
establish MGCM's fixed income group.
PACE Global Fixed Income Investments
Rogge Global Partners plc ("Rogge Global") is located at 5-6 St.
Andrew's Hill, London, England EC4V 5BY. Olaf Rogge owns 60% of the
voting securities of Rogge Global, which makes him a controlling person of
Rogge Global. As of March 31, 1995, Rogge Global had over $2.9 billion
assets under management. It was organized in 1984 and specializes in
global fixed-income management. Olaf Rogge, John Graham, Richard Bell and
Adrian James are primarily responsible for the day-to-day management of
PACE Global Fixed Income Investments. [State the persons' business
experience during past five years.] Mr. Rogge, who founded Rogge Global
in 1984, has been managing global investments for approximately twenty-two
years.
PACE Large Company Value Equity Investments
Brinson Partners, Inc. ("Brinson Partners") is located at 209
South LaSalle Street, Chicago Illinois 60604. Gary P. Brinson is
President and Managing Partner of Brinson Partners. Brinson Holdings,
Inc., which owns all of the outstanding stock of Brinson Partners, is
wholly owned by Swiss Bank Corporation ("Swiss Bank"). Swiss Bank, with
headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services
industry. As of December 31, 1994, Brinson Partners had over $36.5
billion in assets under management. It and its predecessor entities have
managed domestic and international investment assets since December 31,
1981. Mr. Jeffrey J. Diermeier, Managing Partner of U.S. Equities, mr.
Robert C. Moore, Partner and Director of Equity Research, and Mr. John C.
Leonard, Partner and Equity Portfolio Strategy Analyst are the team
responsible for the day-to-day management of PACE Large Company Value
Equity Investments. Mr. Diermeier was formerly managing Director of Asset
Allocation. In addition, both Mr. Diermeier and Mr. Moore played a key
role in the research, design and implementation of Brinson Partners'
proprietary equity valuation model. Prior to joining the firm, Mr.
Leonard worked as an investment analyst at a real estate management
company and as a financial advisor with two investment management firms.
PACE Large Company Growth Equity Investments
Chancellor Capital Management, Inc. ("Chancellor") is located at
1166 Avenue of the Americas, New York, New York 10036. Chancellor
Partners, L.P. ("Chancellor Partners"), of which Chancellor Partners, Inc.
("Chancellor PI") is the General Partner, is the beneficial owner of at
least 51% of Chancellor's common stock on a fully diluted and converted
basis, while USF&G Investment Management Group, Inc. ("USF&G") is the
beneficial owner of 100% of Chancellor's convertible preferred stock which
is convertible into and up to 49% of Chancellor's common stock.
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Chancellor Partners is a limited partnership controlled by Chancellor
employees to hold their investment in Chancellor. Robert G. Wade Jr., who
is Chairman of Chancellor's Board of Directors, is the sole shareholder of
Chancellor PI. Accordingly, Mr. Wade, Chancellor Partners and USF&G are
controlling persons of Chancellor. USF&G is a wholly owned subsidiary of
United States Fidelity and Guarantee Company, which is in turn wholly
owned by USF&G Corporation. USF&G is a publicly-held company with
interests in, among other things, the insurance industry. As of March 31,
1995, Chancellor and its subsidiaries had over $28 billion in assets under
management. It is one of the largest employee-owned investment management
firms in the nation. Valerie Malter is primarily responsible for the day-
to-day management of PACE Large Company Growth Equity Investments. Ms.
Malter has been a senior equity portfolio manager at Chancellor since 1991
and an equity analyst for Chancellor and its predecessor, Citicorp
Investment Management, Inc., since 1984.
PACE Small/Medium Company Value Equity Investments
Brandywine Asset Management, Inc. ("Brandywine") is located at
Three Christina Centre, Suite 1200, 201 N. Walnut Street, Wilmington,
Delaware 19801. William Anthony Hitschler owns 32.5% of Brandywine's
voting securities, which makes him a controlling person of Brandywine.
Mr. Hitschler is the President and Chief Executive Officer of Brandywine.
As of March 31, 1995, Brandywine had approximately $3.0 billion assets
under management. It uses a value-oriented approach when investing in
both domestic and international markets. Brandywine uses a team approach
in the management of PACE Small/Medium Company Value Equity Investments.
PACE Small/Medium Company Growth Equity Investments
Westfield Capital Management Company, Inc. ("Westfield Capital")
is located at One Financial Center, Boston, Massachusetts 02111. Charles
Michael Hazard, who serves as President and Chief Investment Officer of
Westfield Capital, owns ___% of its voting securities, which makes him a
controlling person of Westfield Capital. As of _________, 1995, Westfield
Capital had over $_____ million assets under management. It has developed
an expertise in growth oriented portfolios since its founding in Boston,
Massachusetts in 1989. Michael J. Chapman is primarily responsible for
the day-to-day management of PACE Small/Medium Company Growth Equity
Investments. Since 1990, Mr. Chapman has served as Executive Vice
President, Director of Research and Portfolio Manager of Westfield
Capital.
PACE International Equity Investments
Martin Currie Inc. ("Martin Currie") is located at Saltire Court,
20 Castle Terrace, Edinburgh, Scotland EHI 2ES. It is a wholly owned
subsidiary of Martin Currie Limited, a UK money manager. As of ________,
1995, Martin Currie had over $____ billion assets under management. It is
one of Scotland's leading independent investment management companies, and
since its founding in 1881, has developed an expertise in equity
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investments. Martin Currie uses a team approach in the management of PACE
International Equity Investments. See "Investment Objectives and Policies
of the Portfolios -- PACE International Equity Investments" for a further
description of the Adviser's team approach.
PACE International Emerging Markets Equity Investments
Schroder Capital Management International Inc. ("SCMI") is
located at 787 Seventh Avenue, New York, New York 10019. It is a wholly
owned U.S. subsidiary of Schroders Incorporated, the wholly owned U.S.
holding company subsidiary of Schroders plc. Schroders plc, which is
listed on the London Stock Exchange, is the holding parent of a large
worldwide group of banks and financial services companies (referred to as
the "Schroder Group"), with associated companies and branch and
representative offices located in seventeen countries worldwide. The
financial services companies of the Schroder Group had $90 billion in
assets under management. As of December 31, 1994, SCMI had $14 billion
assets under management. Since its founding in 1980, SCMI has developed
an expertise in emerging markets investments. Laura E. Luckyn-Malone,
John A. Troiano and Thomas Melendez, with the assistance of an emerging
markets investment committee, are primarily responsible for the day-to-day
management of PACE International Emerging Markets Equity Investments. Ms.
Luckyn-Malone has been a Senior Vice President and Director of SCMI since
February 1990. Mr. Troiano, a Senior Vice President of SCMI since 1991,
is also a Director and President of the Company, and has been employed by
various Schroder Group companies in the portfolio management area since
1988. Mr. Melendez has been with SCMI since 1994. Prior to joining the
Schroder Group he was a vice president for Latin America with NatWest
Securities since 1992, prior to which he attended Columbia Business
School.
Fee Waivers and Subsidies
Mitchell Hutchins has agreed to waive all or a portion of its
management fee and/or to subsidize certain operating expenses of the
Portfolios to the extent necessary to assure competitiveness. See "Trust
Expenses." Fee waivers and/or expense subsidies will increase a
Portfolio's yield or total return. See "Performance Information."
Distributor
Mitchell Hutchins is the distributor of each Portfolio's shares.
Portfolio Transactions
PaineWebber, and any of the Advisers or an affiliated person
thereof (an affiliated broker), each may act as a broker or futures
commission merchant ("FCM") for a Portfolio. In order for an affiliated
broker to effect any portfolio transactions for a Portfolio on an exchange
or board of trade, the commissions, fees or other remuneration received by
the affiliated broker must be reasonable and fair compared to the
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commissions, fees or other remuneration paid to other brokers or FCMs in
connection with comparable transactions involving similar securities being
purchased or sold on an exchange or board of trade during a comparable
period of time. This standard would allow an affiliated broker to receive
only that remuneration which would be expected to be received by an
unaffiliated broker or FCM in a similar arm's-length transaction.
VALUATION OF SHARES
The net asset value of each Portfolio's shares, except PACE Money
Market Investments, fluctuates and is determined as of the close of
regular trading on the NYSE (currently 4:00 p.m., eastern time) each
Business Day. The net asset value of PACE Money Market Investments'
shares is determined as of 12:00 p.m. each Business Day. Each Portfolio's
net asset value per share is determined by dividing the value of the
securities held by the Portfolio plus any cash or other assets minus all
liabilities by the total number of Portfolio shares outstanding.
Each Portfolio values its assets based on their current market
value when market quotations are readily available. If this value cannot
be established, assets are valued at fair value as determined in good
faith by or under the direction of the Trust's board of trustees. The
amortized cost method of valuation is used to value all portfolio
securities held by PACE Money Market Investments and short-term dollar-
denominated debt obligations of the other Portfolios with 60 days or less
remaining to maturity, unless the board of trustees determines that this
does not represent fair value. All investments denominated in foreign
currencies are valued daily in U.S. dollars based on the then-prevailing
exchange rate. It should be recognized that judgment plays a greater role
in valuing lower rated debt securities held by any of the Portfolios
because there is less reliable, objective data available.
PURCHASES
General
Purchases of shares of a Portfolio by a PACE Program participant
must be made through a securities account maintained with PaineWebber.
Payment for Portfolio shares must be made by check made payable to
PaineWebber or one of its correspondent firms. No brokerage account or
inactivity fee is charged in connection with a brokerage account through
which an investor purchases shares of a Portfolio.
The PACE Program. Shares of the Portfolios currently are
available only to participants in the PACE Program. The PACE Program and
the Trust are designed to assist investors in devising an asset allocation
strategy to meet their individual needs. PaineWebber, through the PACE
Program, provides investment advisory services in connection with
allocations of assets among the Portfolios principally by: identifying
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the investor's risk tolerances and investment objectives based on
information provided by the investor; identifying and recommending in
writing a suggested allocation of assets among the Portfolios that
conforms to those tolerances and objectives; providing a monthly account
statement; and providing performance data on a quarterly basis.
PaineWebber will not have any investment discretion over the investor's
PACE Program account; all investment decisions ultimately rest with the
investor.
Under the PACE Program, PaineWebber investment executives provide
services to the investor that include assisting the investor to identify
his or her financial characteristics, including risk tolerances and
investment objectives in the context of the Portfolios, and to complete an
investor questionnaire. PaineWebber uses an investment profile evaluation
and asset allocation methodology to assist it in translating investor
needs, preferences and attitudes identified from the questionnaire into
suggested portfolio allocations. A PaineWebber investment executive
presents the recommended allocation to the investor and may also review
with the investor monthly account statements and other information such as
the performance data provided on a quarterly basis, monitors identified
changes in the investor's financial characteristics and assists the
investor in preparing a revised questionnaire or otherwise communicating
changes to PaineWebber for re-evaluation. In addition, for any investor
who so directs his or her PaineWebber investment executive, the investor's
holdings in the PACE Program will be automatically rebalanced on a
periodic basis to maintain the investor's designated allocation among the
Portfolios. Screening will be performed quarterly with respect to
accounts for which the investor has elected the rebalancing service, and
rebalancing will be performed for each such account where the deviation
from the allocation prescribed by the investor exceeds the agreed-upon
uniform threshold. Also, the PACE Program participant and his/her
PaineWebber investment executive will discuss the participant's
investments in the PACE Program at least annually.
PACE Program participants will pay PaineWebber a quarterly
Program Fee at an annual rate of up to 1.50% of the value of the shares of
the Portfolios held in the participant's PaineWebber account.
The quarterly fee will be charged to the participant's securities account.
Qualified plans may make prior arrangements to pay the quarterly fee. The
advisory fee may be reduced at various levels of assets and for
participation by certain individual retirement accounts ("IRAs"),
retirement plans for self-employed individuals and employee benefit plans
subject to the Employee Retirement Income Security Act of 1974
(collectively "Plans"). For certain Plans, PaineWebber may provide
different services than those described above for different fees. Fees
may be subject to negotiation and fees may differ based upon a number of
factors, including, but not limited to, the type of account, the size of
the account, the amount of PACE Program assets and the number and range of
supplemental advisory services to be provided by PaineWebber investment
executives. PaineWebber investment executives receive a portion of any
PACE Program fee paid in consideration of providing services to
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participants in the PACE Program. Investors who are fiduciaries or
otherwise make investment decisions with respect to Plans should consider,
in a prudent manner, the relationship of the fees to be paid by the Plan
along with the level of services provided by PaineWebber. The minimum
initial investment in the Trust is $25,000, any subsequent investment in
the Trust must be at a minimum of $500, and the minimum investment in any
individual Portfolio is $100. The Trust reserves the right at any time to
vary the initial and subsequent investment minimums.
Trustees of the Trust, employees of PaineWebber and Mitchell
Hutchins and their subsidiaries, and family members of these persons who
maintain an "employee related" account at PaineWebber may participate in
the PACE Program at a reduced, or without the imposition of the, PACE
Program fee.
Payment for shares of the Trust is due at PaineWebber or a
correspondent firm no later than the third Business Day after the order is
placed (the "Settlement Date"). No order may be placed until the investor
has completed a questionnaire, reviewed the resulting analysis and
executed necessary PACE Program documentation. Investors who make payment
prior to the Settlement Date may permit the payment to be held in their
brokerage accounts or may designate a temporary investment (such as a non-
PACE PaineWebber money market fund) for the payment until the Settlement
Date. When an investor makes payment before the Settlement Date and does
not designate a temporary investment, the funds will be held as a free
credit balance on which interest is not paid in the investor's brokerage
account, and PaineWebber will benefit from the temporary use of the funds.
REDEMPTIONS
Redemptions in General
As described below, Portfolio shares may be redeemed at their net
asset value, and redemption proceeds will be paid within three Business
Days of the receipt of a redemption request. Investors may redeem shares
through PaineWebber or its correspondent firms.
Investors may submit redemption requests to their PaineWebber
investment executives or correspondent firms in person or by telephone,
mail or wire. As each Portfolio's agent, PaineWebber may honor a
redemption request by repurchasing Portfolio shares from a redeeming
shareholder at the shares' net asset value next determined after receipt
of the request by PaineWebber's New York City offices. Within three
Business Days, repurchase proceeds will be paid by check or credited to
the investor's brokerage account at the election of the investor.
PaineWebber investment executives and correspondent firms are responsible
for promptly forwarding redemption requests to PaineWebber's New York City
offices.
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PaineWebber reserves the right not to honor any redemption
request, in which case PaineWebber promptly will forward the request to
the Transfer Agent for treatment as described below.
A redemption request will be executed by the Transfer Agent at
the net asset value next computed after it is received in "good order."
"Good order" means that the request must be accompanied by the following:
(1) a letter of instruction or a stock assignment specifying the number of
shares or amount of investment to be redeemed (or that all shares credited
to a Portfolio account by redeemed), signed by all registered owners of
the shares in the exact names in which they are registered, (2) a
guarantee of the signature of each registered owner by an eligible
institution acceptable to the Transfer Agent and in accordance with SEC
rules, such as a commercial bank trust company or member of a recognized
stock exchange, (3) other supporting legal documents for estates, trusts,
guardianships, custodianships, partnerships and corporations and (4) duly
endorsed share certificates, if any. Investors are responsible for
ensuring that a request for redemption is received in "good order."
Additional Information on Redemptions
An investor in the PACE Program may have redemption proceeds of
$1 million or more wired to the investor's PaineWebber brokerage account
or a commercial bank account designated by the investor. Questions about
this option, or redemption requirements generally, should be referred to
the investor's PaineWebber investment executive or correspondent firm. If
an investor requests redemption of shares which were purchased recently,
the Trust may delay payment until it is assured that good payment has been
received. In the case of purchases by check, this can take up to 15 days.
Because the Trust incurs certain fixed costs in maintaining
shareholder accounts, the Trust reserves the right to redeem all Portfolio
shares in any PACE Program account of less than $7,500 net asset value.
If the Trust elects to do so, it will notify the investor and provide the
investor the opportunity to increase the amount invested to $7,500 or more
within 30 days of the notice. The Trust will not redeem accounts that
fall below $7,500 solely as a result of a reduction in net asset value per
share or redemptions to pay PACE Program fees. Proceeds of an involuntary
redemption will be deposited in the investor's brokerage account unless
the PACE Program is instructed to the contrary.
OTHER SERVICES AND INFORMATION
Investors interested in the services described below should
consult their PaineWebber investment executive or correspondent firms.
Automatic Investment Plan. Certain shareholders may purchase
shares of a Portfolio through an automatic investment plan, under which
shareholders may authorize PaineWebber to place a purchase order each
month or quarter for Portfolio shares in an amount not less than $500 per
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month or quarter. The purchase price is paid automatically from cash held
in the shareholder's PaineWebber brokerage account through the automatic
redemption of the shareholder's shares of a PaineWebber money market fund
account or through the liquidation of other securities held in the
investor's PaineWebber brokerage account. If the PACE Program assets are
held in a PaineWebber RMA account, the shareholder may arrange for
preauthorized automatic fund transfer on a regular basis, from the
shareholder's bank account to the shareholder's RMA account. Shareholders
may utilize this service in conjunction with the automatic investment plan
to facilitate regular PACE investments. This service, however, is not
available for retirement plan shareholders. For further information
regarding the automatic investment plan, the RMA account or the automatic
funds transfer service, shareholders should contact their PaineWebber
investment executive or correspondent firm.
Automatic Redemption Plan. Shareholders may have PaineWebber
redeem a portion of their shares in the PACE Program monthly or quarterly
under the automatic redemption plan. Quarterly redemptions are made in
March, June, September and December. The amount to be redeemed must be at
least $500 per month or quarter. Shareholders who receive dividends or
other distributions in cash may not participate in the automatic
redemption plan. Purchases of additional shares of a Portfolio concurrent
with redemption are ordinarily disadvantageous to shareholders because of
tax liabilities. For retirement plan shareholders, special limitations
apply. For further information regarding the automatic redemption plan,
shareholders should contact their PaineWebber investment executive or
correspondent firm.
Individual Retirement Accounts. Shares of the Portfolios may be
purchased through IRAs. In addition, a Self-Directed IRA is available
through PaineWebber under which investments may be made in the Portfolios
as well as in other investments available through PaineWebber. The
minimum initial investment in an IRA is $10,000. Investors considering
establishing an IRA should review applicable tax laws and should consult
their tax advisers.
EXCHANGES
Shares of a Portfolio may be exchanged without payment of any
exchange fee for shares of another Portfolio at their respective net asset
values. Portfolio shares are not exchangeable with shares of other funds
in the PaineWebber mutual funds.
Whether pursuant to a particular request or automatic
rebalancing, an exchange of shares is treated for federal income tax
purposes as a redemption (sale) of shares given in exchange by the
shareholder, and an exchanging shareholder may, therefore, realize a
taxable gain or loss in connection with the exchange.
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For further information regarding the exchange privilege,
investors should contact their PaineWebber investment executive.
PaineWebber reserves the right to reject any exchange request and the
exchange privilege may be modified or terminated after 60 days' written
notice to shareholders.
DIVIDENDS AND TAXES
Dividends
Net investment income, net realized long- and short-term capital
gains, and net realized gains from foreign currency transactions will be
determined separately for each Portfolio. Dividends from the net
investment income of PACE Money Market Investments are declared daily and
paid monthly. Shareholders of this Portfolio receive dividends from the
day following the purchase up to and including the date of redemption.
Dividends from the net investment income of PACE Government Securities
Fixed Income Investments, PACE Intermediate Fixed Income Investments, PACE
Strategic Fixed Income Investments, PACE Municipal Fixed Income
Investments and PACE Global Fixed Income Investments are declared and paid
monthly. Dividends from the net investment income of the Equity
Portfolios are declared and paid annually. Net investment income includes
dividends and accrued interest and discount, less amortization of premium
(except for PACE Global Fixed Income Investments) and accrued expenses.
Each of PACE Global Fixed Income Investments, PACE International Equity
Investments and PACE International Emerging Markets Equity Investments
may, but is not required to, distribute with any dividend all or a portion
of any net realized gain from foreign currency transactions. While PACE
Strategic Fixed Income Investments, PACE Intermediate Fixed Income
Investments, and PACE Global Fixed Income Investments may declare
dividends that may be accompanied by distributions of net realized short-
term capital gains and net realized gains from foreign currency
transactions, it is possible that, due to currency related losses or
short-term capital losses, all or a portion of its dividends may be
treated as a non-taxable return of capital to shareholders for tax
purposes.
Substantially all of each Portfolio's net capital gain (the
excess of net long-term capital gain over net short-term capital loss) and
net short-term capital gain, if any, together with any undistributed net
realized gains from foreign currency transactions, is distributed
annually. A Portfolio may make additional distributions if necessary to
avoid a 4% excise tax on certain undistributed income and capital gain.
Each Portfolio's dividends and other distributions are paid in
additional Portfolio shares at net asset value unless the shareholder has
requested cash payments. Shareholders who wish to receive dividends and/or
other distributions in cash, either mailed to the shareholder by check or
credited to the shareholder's PaineWebber account, should contact their
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PaineWebber investment executive or correspondent firm or complete the
appropriate section of the application form.
Taxes
Each Portfolio intends to qualify for treatment as a RIC under
the Internal Revenue Code so that it will be relieved of federal income
tax on that part of its investment company taxable income (consisting
generally of taxable net investment income, net gains from certain foreign
currency transactions, and net short-term capital gain) and net capital
gain that is distributed to its shareholders.
Dividends from a Portfolio's investment company taxable income
(whether paid in cash or in additional Portfolio shares) generally are
taxable to its shareholders as ordinary income. Distributions of a
Portfolio's net capital gain (whether paid in cash or in additional
Portfolio shares), when designated as such, are taxable to its
shareholders as long-term capital gain, regardless of how long they have
held their Portfolio shares. Shareholders not subject to tax on their
income will not be required to pay tax on amounts distributed to them.
Distributions by PACE Municipal Fixed Income Investments that it
designates as "exempt-interest dividends" generally may be excluded from
gross income by a shareholder. These dividends constitute the portion of
the Portfolio's aggregate dividends (excluding capital gain distributions)
equal to the excess of the excludable interest over certain amounts
disallowed as deductions. In order to pay exempt-interest dividends to
its shareholders, that Portfolio must (and intends to) satisfy the
requirement that, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets consists of securities the
interest on which is exempt from federal income tax.
Interest on indebtedness incurred or continued by a shareholder
to purchase or carry shares of PACE Municipal Fixed Income Investments is
not deductible. If that Portfolio invests in certain PABs, shareholders
must include a portion of their exempt-interest dividends from that
Portfolio in calculating their liability for the AMT. Corporate
shareholders must include all of their exempt-interest dividends in
calculating their liability for that tax. If that Portfolio realizes
capital gains as a result of market transactions, any distribution of
those gains is taxable to its shareholders.
The Trust notifies its shareholders following the end of each
calendar year of the amounts of dividends and capital gain distributions
paid (or deemed paid) that year by each Portfolio and of any portion of
those dividends that qualifies for the corporate dividends-received
deduction or, in the case of PACE Municipal Fixed Income Investments, any
portion thereof that is a tax preference item for purposes of the AMT.
Under certain circumstances, the notice also will specify the
shareholder's share of any foreign taxes paid by the Portfolio, in which
event the shareholder would be required to include in his gross income his
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pro rata share of those taxes but might be entitled to claim a credit or
deduction for those taxes.
The Trust is required to withhold 31% of all taxable dividends,
capital gain distributions and (except in the case of PACE Money Market
Investments) redemption proceeds payable to any individuals and certain
other noncorporate shareholders who do not provide the Trust with a
correct taxpayer identification number. Withholding at that rate from
taxable dividends and capital gain distributions is also required for such
shareholders who otherwise are subject to backup withholding.
A redemption of shares of a Portfolio may result in taxable gain
or loss to the redeeming shareholder, depending upon whether the
redemption proceeds payable to the shareholder are more or less than the
shareholder's adjusted basis for the redeemed shares. An exchange of
Portfolio shares for shares of another Portfolio generally will have
similar tax consequences. If shares of a Portfolio are purchased within
30 days before or after redeeming that Portfolio's shares at a loss, all
or a portion of that loss will not be deductible and will increase the
basis of the newly purchased shares.
As noted above, shareholders will pay a PACE Program Fee. For
most shareholders who are individuals, this fee will be treated as a
"miscellaneous itemized deduction" for federal income tax purposes. An
individual's miscellaneous itemized deductions for any taxable year are
allowable only to the extent the aggregate of those deductions exceeds 2%
of adjusted gross income. The deductibility of this fee also is subject
to the overall limitation on itemized deductions for individuals having
adjusted gross income in excess of specified levels which vary depending
on filing status.
The foregoing is only a summary of some of the important federal
tax considerations generally affecting each Portfolio and its
shareholders; see the SAI for a further discussion. There may be other
federal, state, or local tax considerations applicable to a particular
investor. Prospective investors are urged to consult their tax advisers.
PERFORMANCE INFORMATION
Each Portfolio performs a standardized computation of annualized
total return and may show this return in advertisements or promotional
materials. Standardized return shows the change in value of a Portfolio
investment as a steady compound annual rate of return. Actual year-by-
year returns fluctuate and may be higher or lower than standardized
return. Total return calculations assume reinvestment of dividends and
other distributions.
Each Portfolio may use other total return presentations in
conjunction with standardized return. These may cover the same or
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different periods as those used for standardized return and may include
cumulative returns, average annual rates, actual year-by-year rates or any
combination thereof.
PACE Municipal Fixed Income Investments, PACE Government
Securities Fixed Income Investments, PACE Intermediate Fixed Income
Investments, PACE Strategic Fixed Income Investments and PACE Global Fixed
Income Investments also may advertise their yield. Yield (except with
regard to PACE Money Market Investments) reflects investment income net of
expenses over a 30-day (or one-month) period on a Portfolio share,
expressed as an annualized percentage of the net asset value per share at
the end of the period. PACE Money Market Investments may advertise its
yield and effective yield. The yield of PACE Money Market Investments is
the income on an investment in the Portfolio over a specified seven-day
period. This income is then "annualized" (that is, assumed to be earned
each week over a 52-week period) and shown as a percentage of the
investment. The effective yield is calculated similarly but, when
annualized, the income earned is assumed to be reinvested. The effective
yield will be higher than the yield because of the compounding effect of
this assumed reinvestment.
In addition to the Portfolio's yield, PACE Municipal Fixed Income
Investments may also show tax-equivalent yield. Tax-equivalent yield
shows the yield that would produce the same income after a stated rate of
taxes as the Portfolio tax-exempt yield (yield excluding taxable income).
Yield computations differ from other accounting methods and therefore may
differ from dividends actually paid or reported net income.
Total return and yield information reflects past performance and
does not necessarily indicate future results. Investment return and
principal values will fluctuate, and proceeds upon redemption may be more
or less than a shareholder's cost. See "Performance Information" in the
SAI.
GENERAL INFORMATION
Organization
The Trust, Managed Accounts Services Portfolio Trust, is
registered with the SEC as an open-end management investment company and
was organized as a Delaware business trust under the laws of the State of
Delaware by Certificate of Trust dated September 9, 1994. The trustees
have authority to issue an unlimited number of shares of beneficial
interest of separate series, par value $.001 per share.
The Trust does not hold annual shareholder meetings.
Shareholders of record holding at least two-thirds of the outstanding
shares of the Trust may remove a trustee by votes cast in person or by
proxy at a meeting called for that purpose. The trustees are required to
call a meeting of shareholders for the purpose of voting upon the question
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of removal of any trustee when so required in writing by the shareholders
of record holding at least 10% of the Trust's outstanding shares. Each
share of each Portfolio has equal voting rights, except as noted above.
Each share of each Portfolio is entitled to participate equally in
dividends and other distributions and the proceeds of any liquidation.
The shares of each series of the Trust will be voted separately except
when an aggregate vote of all series is required by the 1940 Act.
To avoid additional operating costs and for investor convenience,
the Portfolios will not issue share certificates. Ownership of shares of
each Portfolio is recorded on a stock register by the Transfer Agent and
shareholders have the same rights of ownership with respect to such shares
as if certificates had been issued.
Custodian and Transfer Agent
State Street Bank and Trust Company, 1776 Heritage Drive, North
Quincy, Massachusetts 02171, is custodian of each Portfolio's assets and
employs foreign sub-custodians approved by the Trust's board of trustees
in accordance with applicable requirements under the 1940 Act, to provide
custody of the Portfolio's foreign assets, if any. PFPC Inc., a
subsidiary of PNC Bank, National Association, whose principal business
address is 103 Bellevue Parkway, Wilmington, Delaware 19809, is the
Portfolios' transfer and dividend disbursing agent.
Confirmations and Statements
Shareholders receive confirmations of their purchases and
redemptions of shares of the Portfolios. Participants in the PACE Program
will receive a statement at least monthly that reports all of their
Portfolio activity and a consolidated year-end statement that shows all
their Portfolio transactions for that year. Shareholders also receive
audited annual and unaudited semi-annual financial statements of the
applicable Portfolios.
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APPENDIX A
The Portfolios may use some or all of the following hedging instruments:
Options on Equity and Debt Securities and Foreign Currencies--A
call option is a short-term contract pursuant to which the purchaser of
the option, in return for a premium, has the right to buy the security or
currency underlying the option at a specified price at any time during the
term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option
term, to deliver the underlying security or currency against payment of
the exercise price. A put option is a similar contract that gives its
purchaser, in return for a premium, the right to sell the underlying
security or currency at a specified price during the option term. The
writer of the put option, who receives the premium, has the obligation,
upon exercise of the option during the option term, to buy the underlying
security or currency at the exercise price.
Options on Securities Indices--A securities index assigns
relative values to the securities included in the index and fluctuates
with changes in the market values of those securities. An index option
operates in the same way as a more traditional stock option, except that
exercise of an index option is effected with cash payment and does not
involve delivery of securities. Thus, upon exercise of an index option,
the purchaser will realize, and the writer will pay, an amount based on
the difference between the exercise price and the closing price of the
index.
Stock Index Futures Contracts--A stock index futures contract is
a bilateral agreement pursuant to which one party agrees to accept, and
the other party agrees to make, delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the stocks
comprising the index is made. Generally, contracts are closed out prior
to the expiration date of the contract.
Interest Rate and Foreign Currency Futures Contracts--Interest
rate and foreign currency futures contracts are bilateral agreements
pursuant to which one party agrees to make, and the other party agrees to
accept, delivery of a specified type of debt security or currency at a
specified future time and at a specified price. Although such futures
contracts by their terms call for actual delivery or acceptance of debt
securities or currency, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery.
Options on Futures Contracts--Options on futures contracts are
similar to options on securities or currency, except that an option on a
futures contract gives the purchaser the right, in return for the premium,
to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put), rather than to
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purchase or sell a security or currency, at a specified price at any time
during the option term. Upon exercise of the option, the delivery of the
futures position to the holder of the option will be accompanied by
delivery of the accumulated balance that represents the amount by which
the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on
the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
Forward Currency Contracts--A forward currency contract involves
an obligation to purchase or sell a specified currency at a specified
future date, which may be any fixed number of days from the contract date
agreed upon by the parties, at a price set at the time the contract is
entered into.
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TABLE OF CONTENTS
INVESTMENT POLICIES AND RESTRICTIONS . . . . . . . . . . . . . . . . 1
HEDGING AND RELATED STRATEGIES . . . . . . . . . . . . . . . . . . . 19
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . 33
INVESTMENT MANAGEMENT, ADVISORY AND DISTRIBUTION
ARRANGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 38
ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION . . . . . . . . . . . 40
VALUATION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . 41
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 43
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 51
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 21, 1995
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
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. This
Statement of Additional Information ("SAI") is not a prospectus and should
be read only in conjunction with the Portfolios' current Prospectus, dated
________, 1995. You may obtain a copy of the Prospectus by calling any
PaineWebber investment executive or correspondent firm or by calling toll-
free at 1-800-___-____. This SAI is dated __________, 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
<PAGE>
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 hold, at any time, more than 5% (except PACE Strategic
Fixed Income Investments, which may hold up to 10%) of its net assets in
securities that are rated below investment grade.
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 that 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
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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, the
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 Portfolio invests 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 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
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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 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
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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
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
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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
to the agreement 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 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.
Lending of Portfolio Securities. As set forth in the Prospectus,
each Portfolio is authorized to lend up to 33-1/3% of the total value of
its portfolio securities to broker-dealers or institutional investors that
its Adviser or Mitchell Hutchins, as the case may be, deems qualified, but
only when the borrower maintains with the Portfolio's custodian collateral
either in cash or money market instruments in an amount at least equal to
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the market value of the securities loaned, plus accrued interest and
dividends, determined on a daily basis and adjusted accordingly. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, the Adviser will consider, and during the period
of the loan will monitor, all relevant facts and circumstances, including
the creditworthiness of the borrower. Each Portfolio will retain
authority to terminate any loans at any time. A Portfolio may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money
market instruments held as collateral to the borrower or placing broker.
A Portfolio will receive reasonable interest on the loan or a flat fee
from the borrower and amounts equivalent to any dividends, interest or
other distributions on the securities loaned. A Portfolio will retain
record ownership of loaned securities to exercise beneficial rights, such
as voting and subscription rights and rights to dividends, interest or
other distributions, when retaining such rights is considered to be in the
Portfolio's interest.
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. These agreements are considered to be borrowings and may be
entered into only for temporary or emergency purposes. 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. As indicated in the Prospectus, each Portfolio
except PACE Money Market Investments may invest up to 15% of its net
assets in illiquid securities. PACE Money Market Investments may 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 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
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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 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 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 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
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such portfolio 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
Emerging Market Securities. Many of the foreign and emerging market
securities held by PACE Strategic Fixed Income Fund, 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 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.
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The costs attributable to foreign investing that these three
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 Global Fixed Income Investments,
PACE International Equity Investments, PACE International Emerging Markets
Equity Investments and PACE Strategic Fixed Income 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,
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its cash flow situation, the extent of its foreign 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
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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 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 to
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,
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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 Portfolio 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 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
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secondary markets through U.S. securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories.
Structured Foreign Investments. PACE Global Fixed Income Investments,
PACE International Equity Investments and PACE International Emerging
Markets Equity Investments may 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 of the type in which these
Portfolios typically will invest will 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 Global Fixed Income
Investments, PACE International Equity Investments, PACE International
Emerging Markets Equity Investments and PACE Strategic Fixed Income
Investments value their assets daily in U.S. dollars, they do not intend
to 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.
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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 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.
No Portfolio has a current intention of converting any convertible
securities it may own into equity or holding them as equity upon
conversion, although it may do so for temporary purposes. 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.
Loan Participation and Assignments. Each Portfolio may invest up to
10% of its total assets in secured or unsecured variable or floating rate
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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
investment 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.
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
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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.
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
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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
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
("Hedging 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 use
options and futures to attempt to enhance the Portfolio's income. The
particular Hedging 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 a Hedging
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 a Hedging 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
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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 a Hedging 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 a Hedging
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.
Hedging 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. Hedging Instruments on stock
indices, in contrast, generally are used to hedge against price movements
in broad equity market sectors in which the Portfolio has invested or
expects to invest. Hedging Instruments on debt securities may be used to
hedge either individual securities or broad fixed income market sectors.
The use of Hedging 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
Hedging 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 hedging 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.
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Special Risks of Hedging Strategies. The use of Hedging Instruments
involves special considerations and risks, as described below. Risks
pertaining to particular Hedging Instruments are described in the sections
that follow.
(1) Successful use of most Hedging 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 Hedging Instruments, there can be no assurance
that any particular hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Hedging Instrument and price movements of the
investments being hedged. For example, if the value of a Hedging
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 Hedging Instruments are traded. The
effectiveness of hedges using Hedging 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 offset by a decline in the price of the Hedging
Instrument. Moreover, if the price of the Hedging 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 Hedging Instruments involving obligations to
third parties (i.e., Hedging Instruments other than purchased options).
If a Portfolio were unable to close out its positions in such Hedging
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 a Hedging Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a
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market, the ability and willingness of a contra party to enter into a
transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to the Portfolio.
Cover for Hedging Strategies. Transactions using Hedging 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 or futures 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 hedging transactions 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.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Hedging Instrument is open, unless
they are replaced with similar 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) covered call options on debt securities, foreign currencies and, in
some Portfolios, stock indices. 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 covered 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
covered 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 covered 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."
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 normally
have expiration dates of up to nine months. Options that expire
unexercised have no value.
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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 normally
have expiration dates of up to nine months. 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 option that it had written by
purchasing an identical call 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. The Portfolios may write put
options, but the Portfolios currently intend to write put options only to
effect closing sale transactions. 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 are relatively new, and 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 which, 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 (the
"contra party") to make or take delivery of the underlying investment upon
exercise of the option. 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
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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 in fact 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 coverall 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.
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 covered call options on futures
contracts can serve as a limited short hedge, using a strategy similar to
that used for writing covered call options on securities or indices.
Similarly, writing covered 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 of 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
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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, U.S. government securities or other
liquid, high-grade debt securities, in an amount generally equal to 10% or
less of the contract value. Margin must also be deposited when writing a
call 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
rather represents a daily settlement of a Portfolio's obligations to or
from a FCM. 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 a call 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.
Holders and writers of futures positions and options on futures can
enter into offsetting closing transactions, similar to closing
transactions on options, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. 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 futures 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. Secondary markets for options on futures are currently
in the development stage, and no Portfolio will trade options on futures
on any exchange or board of trade unless, in the Adviser's opinion, the
markets for such options have developed sufficiently that the liquidity
risks for such options are not greater than the corresponding risks for
futures.
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Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or related 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 positions and options on foreign currencies traded on a
commodities exchange that are not for bona fide hedging purposes (as
defined by the CFTC), the aggregate initial margin and premiums on those
positions (excluding the amount by which options are "in-the-money") may
not exceed 5% of the Portfolio's net total assets.
(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.
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(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
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 Hedging Instruments on that currency are
available or such Hedging Instruments are more expensive than certain
other Hedging Instruments. In such cases, a Portfolio may hedge against
price movements in that currency by entering into transactions using
Hedging 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 Hedging Instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of Hedging 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 Hedging 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 Hedging Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might
be required to take place within the country issuing the underlying
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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 Global Fixed Income Investments,
PACE International Equity Investments, PACE International Emerging Markets
Equity Investments and PACE Strategic Fixed Income 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 contract transactions 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 Hedging 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 usually 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, holders and writers of forward
currency contracts can enter into offsetting closing transactions, similar
to closing transactions on futures, by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Secondary markets generally do not exist for forward currency contracts,
with the result that closing transactions generally can be made for
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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.
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.
Limitations on the Use of Forward Currency Contracts. A Portfolio may
enter into forward currency contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate
the Portfolio to deliver an amount of foreign currency in excess of the
value of the position being hedged by such contracts or (2) the Portfolio
maintains cash, U.S. government securities or liquid, high-grade debt
securities in a segregated account in an amount not less than the value of
its total assets committed to the consummation of the contract and not
covered as provided in (1) above, as marked to market daily.
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 counterparty 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. Interest rate collar transactions
involve an agreement between two parties in which the payments are made
when a designated market interest rate either goes above a designated
ceiling level or goes below a designated floor on predetermined dates or
during a specified time period.
These Portfolios expect to enter into interest rate protection
transactions to preserve a return or spread on a particular investment or
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portion of its portfolio or to protect against any increase in the price
of securities it anticipates purchasing at a later date. These Portfolios
intend to use these transactions as a hedge and not as a speculative
investment.
Each of these Portfolios may enter into interest rate swaps, caps,
collars and floors on either an asset-based 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. Inasmuch as
these interest rate protection transactions are entered into for good
faith hedging purposes, and inasmuch as segregated accounts will be
established with respect to such transactions, 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.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. Caps, collars and
floors are more recent innovations for which documentation is less
standardized, and, accordingly, they are less liquid than swaps.
Investment Restrictions
The Trust has adopted investment restrictions numbered 1 through 12
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
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than 50% of the outstanding shares of the Portfolio. Investment
restrictions 13 through 17 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 Government Securities Fixed
Income Investments, PACE Intermediate Fixed Income Investments, PACE
Strategic 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, other than PACE Government Securities Fixed
Income Investments, PACE Intermediate Fixed Income Investments, PACE
Strategic Fixed Income Investments and PACE Global Fixed Income
Investments, 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.
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 331/3%
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 temporary or emergency purposes.
5. A Portfolio will not pledge, hypothecate, mortgage, or
otherwise encumber its assets, except to secure permitted borrowings.
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
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<PAGE>
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.
It is the Portfolios' present intention to make short sales against
the box only for the purpose of deferring realization of gain or loss
for federal income tax purposes.
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, stock index
and interest rate futures contracts and related 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.
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.
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<PAGE>
16. A Portfolio will not purchase or retain securities of any
company if, to the knowledge of the Trust, 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 or American Stock Exchanges. Warrants acquired by a
Portfolio in units or attached to securities may be deemed to be
without value.
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. The percentage limitations contained in the
restrictions listed above apply at the time of purchases of securities.
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
Name and Address* Position with Trust Business Experience;
Other Directorships
<S> <C> <C>
[Trustees and officers
to be named]
</TABLE>
_______
* Unless otherwise indicated, the business address of each listed
person is 1285 Avenue of the Americas, New York, New York 10019.
** 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.
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The Trust pays trustees who are not "interested persons" of the Trust
$_____ annually and $_____ per meeting of the board or any committee
thereof. Trustees are reimbursed for any expenses incurred in attending
meetings. 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.
<TABLE>
<CAPTION>
Compensation Table
Pensions or
Retirement Total Compensation
Benefits Estimated from The Trust and
Aggregate Accrued as Annual the Fund Complex
Compensation Part of a Benefits Upon Paid
From the Portfolio's to Trustees
Name of Person, Position Trust Expenses Retirement
<S> <C> <C> <C> <C>
</TABLE>
INVESTMENT MANAGEMENT, ADVISORY AND DISTRIBUTION
ARRANGEMENTS
Investment Management Arrangements. Mitchell Hutchins acts as the
investment manager to the Trust pursuant to a management agreement with
the Trust ("Management Agreement") dated __________________, 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 in connection with the
management of the Trust and the Portfolios. Mitchell Hutchins will
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<PAGE>
continue to have responsibility for all investment advisory services
furnished pursuant to any such investment subadvisory 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 contracts. 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 costs and expenses payable to each Adviser pursuant to the
advisory agreements between Mitchell Hutchins and each Adviser ("Advisory
Agreement").
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
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
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<PAGE>
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 __________
__, 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.
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<PAGE>
Investment Net
Category Assets
($ mil)
Domestic (excluding Money Market) . . . . . . . . $
Global . . . . . . . . . . . . . . . . . . . . .
Equity/Balanced . . . . . . . . . . . . . . . . .
Fixed Income (excluding Money Market) . . . . . .
Taxable Fixed Income . . . . . . . . . . . .
Tax-Free Fixed Income . . . . . . . . . . .
Money Market Funds . . . . . . . . . . . . . . .
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 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 _______________________ and
was approved by Mitchell Hutchins, as sole shareholder of the Trust on
__________________, 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.
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.
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<PAGE>
Distribution Arrangements. Mitchell Hutchins acts as the distributor
of the shares of each Portfolio under a distribution contract with the
Trust dated _____________, 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 _____________, 1995 ("Dealer Agreement"),
PaineWebber and its correspondent firms sell 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 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 reasonableness of the commission, if any, for the specific transaction
and on a continuing basis. In addition, each Advisory Agreement between
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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(c) 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 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.
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
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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.
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 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
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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 New York Stock Exchange, Inc.
("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, except PACE Money Market Investments, 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.
PACE Money Market Investments' net asset value per share is
determined as of 12:00 noon, eastern time, on each Business Day. As
defined in the Prospectus, "Business Day" means any day on which the
custodian's offices, PaineWebber's New York City offices and the New York
City offices of PaineWebber's bank, are all open for business. One or
more of these institutions will be closed on the observance of the
following days: New Year's Day, Martin Luther King, Jr. Day, Washington's
Birthday, Good Friday, Patriot's Day, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans' 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
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currency are valued daily in U.S. dollars on the basis of the foreign
currency exchange rate prevailing at the time such valuation is 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
("Rule") under the 1940 Act. To use amortized cost to value its portfolio
securities, the Portfolio must adhere to certain conditions under that
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-
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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 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:
n
P(1 + T) = 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.
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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 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 6
YIELD = 2 [ (----- + 1) - 1 ]
cd
where: a = interest 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
Except as noted below, in determining interest income earned during
the Period (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 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.
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<PAGE>
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
1 - p
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:
365/7
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) ]- 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-to or guaranteed fixed yield for a
stated period of time. However, yield information may be useful to an
investor considering temporary 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
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<PAGE>
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, 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.
Each Portfolio may also compare its performance with the performance
of bank certificates of deposit (CDs) as measured by the CDA Investment
Technologies, Inc. Certificate of Deposit Index, the Bank Rate Monitor
National Index and the averages of yields of CDs of major banks published
by Banxquote Money Markets. In comparing a Portfolio's performance to
CD performance, investors should keep in mind that bank CDs are insured in
whole or in part by an agency of the U.S. government and offer fixed
principal and fixed or variable rates of interest, and that bank CD yields
may vary depending on the financial institution offering the CD and
prevailing interest rates. Shares of the Portfolios are not insured or
guaranteed by the U.S. government and returns thereon and net asset value
will fluctuate. The securities held by the Portfolios generally have
longer maturities than most CDs and may reflect interest rate fluctuations
for longer term securities.
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<PAGE>
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 ("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 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 reinvested 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
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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 distribution, the
shareholder will pay full price for the shares and receive some portion of
the price back as a taxable dividend or capital gain 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
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
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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 an
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 concluded 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 continue 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 Distribution Requirement
and to 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. 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,
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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 (the excess of net long-term capital gain over net short-term capital
loss), even if they are not distributed by the QEF to the Portfolio; those
amounts would have to be distributed by the Portfolio to satisfy the
Distribution Requirement and to 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.
Three bills passed by Congress in 1991 and 1992 and vetoed by
President Bush would have substantially modified the taxation of U.S.
shareholders of foreign corporations, including eliminating the provisions
described above dealing with PFICs and replacing them (and other
provisions) with a regulatory scheme involving entities called "passive
foreign corporations." The "Tax Simplifications and Technical Corrections
Bill of 1993," passed in May 1994 by the House of Representatives contains
the same modifications. It is unclear at this time whether, and in what
form, the proposed modifications may be enacted into law.
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
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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.
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. Investors also should be aware that
if shares are purchased shortly before the record date for a capital gain
distribution, the shareholder will pay full price for the shares and
receive some portion of the price back as a taxable distribution.
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
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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.
Counsel. The law firm of Kirkpatrick & Lockhart, 1800 M Street, N.W.,
Washington, D.C. 20036-5891, counsel to the Trust, has passed upon the
legality of the shares offered by the Prospectus. Kirkpatrick & Lockhart
also acts as counsel to Mitchell Hutchins and PaineWebber in connection
with other matters.
Independent Accountants. , New York, New
York, serves as the Trust's independent accountants.
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REPORT OF , INDEPENDENT ACCOUNTANTS
[TO BE COMPLETED]
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MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
Statement of Assets and Liabilities
, 1995
[TO BE COMPLETED]
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<PAGE>
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
- 55 -
<PAGE>
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 lowest degree of speculation. While such debt will likely
have some quality and 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
- 56 -
<PAGE>
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.
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.
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<PAGE>
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 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
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<PAGE>
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.
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:
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<PAGE>
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.
- 60 -
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements - [to be supplied]
(b) Exhibits:
(1) (a) Certificate of Business Trust1/
(b) Certificate of Amendment1/
(c) Trust Instrument1/
(2) By-Laws1/
(3) Voting trust agreement - None
(4) Specimen Security - None
(5) (a) Management Agreement [to be supplied]
(b) Sub-Advisory Agreements [to be supplied]
(6) (a) Distribution Agreement [to be supplied]
(b) Dealer Agreement [to be supplied]
(7) Bonus, profit sharing or pension plans - None
(8) Custodian Agreement [to be supplied]
(9) Transfer Agency Agreement [to be supplied]
(10) Opinion and consent of Kirkpatrick & Lockhart, counsel to the
Registrant [to be supplied]
(11) Consent of Independent Auditors [to be supplied]
(12) Financial statements omitted from prospectus - None
(13) Letter of investment intent [to be supplied]
(14) Prototype Retirement Plan - None
(15) Plan pursuant to Rule 12b-1 - None
(16) Schedule for Computation of Performance Quotations [to be
supplied]
Item 25. Persons Controlled By or Under Common Control with Registrant
--------------------------------------------------
None.
_______________
1/ Incorporated by reference to Registration Statement on Form N-1A, File
No. 33-87254, filed December 9, 1994.
<PAGE>
Item 26. Number of Holders of Securities
-------------------------------
Number of Record Shareholders
Title of Class as of April 15, 1995
-------------- ----------------------------
Shares of beneficial interest, par value
$0.001 per share, in
PACE Money Market Investments None
PACE Municipal Fixed Income Investments None
PACE Government Securities Fixed Income None
Investments
PACE Intermediate Fixed Income None
Investments
PACE Strategic Fixed Income Investments None
PACE Global Fixed Income Investments None
PACE Large Company Value Equity None
Investments
PACE Large Company Growth Equity None
Investments
PACE Small/Medium Company Value Equity None
Investments
PACE Small/Medium Company Growth Equity None
Investments
PACE International Equity Investments None
PACE International Emerging Markets None
Equity Investments
- 62 -
<PAGE>
Item 27. Indemnification
---------------
Article IX, Section 2 of the Managed Accounts Services Portfolio Trust
Trust Instrument ("Trust Instrument") provides that the Registrant will
indemnify its trustees and officers to the fullest extent permitted by law
against claims and expenses asserted against or incurred by them by virtue
of being or having been a trustee or officer; provided that (i) no such
person shall be indemnified where there has been an adjudication or other
determination, as described in Article IX, that such person is liable to
the Registrant or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in
the conduct of his or her office, or did not act in good faith in the
reasonable belief that his or her action was in the best interest of the
Registrant, or (ii) no such person shall be indemnified where there has
been a settlement, unless there has been a determination that such person
did not engage in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her
office; such determination shall be made (A) by the court or other body
approving the Settlement, (B) by the vote of at least a majority of those
trustees who are neither Interested Persons of the trust nor are parties
to the proceeding based upon a review of readily available facts (as
opposed to a full trial-type inquiry), or (C) by written opinion of
independent legal counsel based upon a review of readily available facts
(as opposed to a full trial-type inquiry).
"Interested Person" has the meaning provided in the Investment Company
Act of 1940, as amended from time to time. Article IX, Section 2(c) of
the Trust Instrument also provides that the Registrant may maintain
insurance policies covering such rights of indemnification.
Article IX, Section 1 of the Trust Instrument provides that the
trustees and officers of the Registrant (i) shall not be personally liable
to any person contracting with, or having a claim against, the Trust, and
(ii) shall not be liable for neglect or wrongdoing by them or any officer,
agent, employee or investment adviser of the Registrant, provided they
have exercised reasonable care and have acted under the reasonable belief
that their actions are in the best interest of the Registrant.
Article X, Section 2 of the Trust Instrument provides that, subject to
the provisions of Article IX, the trustees shall not be liable for (i)
errors of judgment or mistakes of fact or law, or (ii) any act or omission
made in accordance with advice of counsel or other experts, or (iii)
failure to follow such advice, with respect to the meaning and operation
of the Trust Instrument.
Registrant undertakes to carry out all indemnification provisions of
its Trust Instrument and By-laws in accordance with Investment Company Act
Release No. 11330 (September 4, 1980) and successor releases.
- 63 -
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be provided to trustees, officers
and controlling persons of the Trust, pursuant to the foregoing provisions
or otherwise, the Trust has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the Trust of expenses incurred or paid by a trustee,
officer or controlling person of the Trust in connection with the
successful defense of any action, suit or proceeding or payment pursuant
to any insurance policy) is asserted against the Trust by such trustee,
officer or controlling person in connection with the securities being
registered, the Trust will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Brinson Partners, Inc. ("Brinson Partners") is a registered investment
adviser. Gary P. Brinson is President and Managing Partner of Brinson
Partners. Brinson Holdings, Inc., which owns all of the outstanding stock
of Brinson Partners, is wholly-owned by Swiss Bank Corporation ("Swiss
Bank"). Swiss Bank, with headquarters in Basel, Switzerland, is an
internationally diversified organization with operations in many aspects
of the financial services industry. Information on the officers and
directors of Brinson Partners is included in its Form ADV filed with the
Securities and Exchange Commission (registration number 801-34910) and is
incorporated herein by reference.
Brandywine Asset Management, Inc. ("Brandywine") is a registered
investment adviser. William Anthony Hitschler owns 32.5% of Brandywine's
voting securities, which makes him a controlling person of Brandywine.
Information on the officers and directors of Brandywine is included in its
Form ADV filed with the Securities and Exchange Commission (registration
number 801-27797) and is incorporated herein by reference.
Chancellor Capital Management, Inc. ("Chancellor") is a registered
investment adviser. Chancellor Partners, L.P. ("Chancellor Partners"), of
which Chancellor Partners, Inc. ("Chancellor PI") is the General Partner,
is the beneficial owner of at least 51% of Chancellor's common stock on a
fully diluted and converted basis, while USF&G Investment Management
Group, Inc. ("USF&G") is the beneficial owner of 100% of Chancellor's
convertible preferred stock which is convertible into and up to 49% of
Chancellor's common stock. Chancellor Partners is a limited partnership
controlled by Chancellor employees to hold their investment in Chancellor.
Robert G. Wade Jr., who is Chairman of Chancellor's Board of Directors, is
the sole shareholder of Chancellor PI. Accordingly, Mr. Wade, Chancellor
- 64 -
<PAGE>
Partners and USF&G are controlling persons of Chancellor. USF&G is a
wholly owned subsidiary of United States Fidelity and Guarantee Company,
which is in turn wholly owned by USF&G Corporation, a holding company with
interests in, among other things, the insurance industry. Information on
the officers and directors of Chancellor is included in its Form ADV filed
with the Securities and Exchange Commission (registration number 801-9087)
and is incorporated herein by reference.
Martin Currie Inc. ("Martin Currie") is a registered investment
adviser. It is a wholly owned subsidiary of Martin Currie Limited, a UK
money manager. Information on the officers and directors of Martin Currie
is included in its Form ADV filed with the Securities and Exchange
Commission (registration number 801-14261) and is incorporated herein by
reference.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") is a
registered investment adviser and is a wholly owned subsidiary of
PaineWebber Incorporated ("PaineWebber"), which is in turn wholly owned by
PW Group, a publicly owned financial services holding company. Mitchell
Hutchins is primarily engaged in the investment advisory business.
Information on the officers and directors of Mitchell Hutchins is included
in its Form ADV filed with the Securities and Exchange Commission
(registration number 801-13219) and is incorporated herein by reference.
Morgan Grenfell Capital Management Incorporated ("MGCM") is a
registered investment adviser. All of the outstanding voting stock of
MGCM is owned by Morgan Grenfell Asset Management, Ltd., which is a wholly
owned subsidiary of Morgan Grenfell Group plc. Morgan Grenfell Group plc
is an indirect wholly owned subsidiary of Deutsche Bank AG, an
international commercial and investment banking group. Information on the
officers and directors of MGCM is included in its Form ADV filed with the
Securities and Exchange Commission (registration number 801-27291) and is
incorporated herein by reference.
Pacific Income Advisers, Inc. ("PIA") is a registered investment
adviser. Lloyd McAdams and Heather U. Baines, who serve as Chairman and
Chief Investment Officer of PIA and President and Chief Executive Officer,
respectively, own PIA's voting securities, which makes each of them
controlling persons of PIA. Information on the officers and directors of
PIA is included in its Form ADV filed with the Securities and Exchange
Commission (registration number 801-27828) and is incorporated herein by
reference.
Pacific Investment Management Company ("PIMCO") is a registered
investment adviser. It is a subsidiary partnership of PIMCO Advisors L.P.
("PIMCO Advisors"), a publicly held investment advisory firm. A majority
interest in PIMCO Advisors is held by PIMCO Partners, G.P., ("PIMCO
Partners") a general partnership between Pacific financial Asset
Management Corporation, an indirect wholly owned subsidiary of Pacific
Mutual Life Insurance Company ("Pacific Mutual"), and PIMCO Partners,
L.P., a limited partnership controlled by the PIMCO Managing Directors.
- 65 -
<PAGE>
Information on the officers and directors of PIMCO is included in its Form
ADV filed with the Securities and Exchange Commission (registration number
801-7260) and is incorporated herein by reference.
Rogge Global Partners plc ("Rogge Global") is a registered investment
adviser. Olaf Rogge owns 60% of the voting securities of Rogge Global,
which makes him a controlling person of Rogge Global. Information on the
officers and directors of Rogge Global is included in its Form ADV filed
with the Securities and Exchange Commission (registration number 801-
25482) and is incorporated herein by reference.
Schroder Capital Management International Inc. ("SCMI") is a
registered investment adviser. It is a wholly owned U.S. subsidiary of
Schroders Incorporated, the wholly owned U.S. holding company subsidiary
of Schroders plc. Schroders plc, which is listed on the London Stock
Exchange, is the holding parent of a large worldwide group of banks and
financial services companies (referred to as the "Schroder Group"), with
associated companies and branch and representative offices located in
seventeen countries worldwide. Information on the officers and directors
of SCMI is included in its Form ADV filed with the Securities and Exchange
Commission (registration number 801-15834) and is incorporated herein by
reference.
Westfield Capital Management Company, Inc. ("Westfield Capital") is a
registered investment adviser. Charles Michael Hazard, who serves as
President and Chief Investment Officer of Westfield Capital, owns more
than 25% of its voting securities, which makes him a controlling person of
Westfield Capital. Information on the officers and directors of Westfield
Capital is included in its Form ADV filed with the Securities and Exchange
Commission (registration number 801-34350) and is incorporated herein by
reference.
Item 29. Principal Underwriters
----------------------
(a) Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins")
serves as principal underwriter and/or investment adviser for the
following investment companies:
.ALL-AMERICAN TERM TRUST INC.
.GLOBAL HIGH INCOME DOLLAR FUND INC.
.GLOBAL INCOME PLUS FUND, INC.
.GLOBAL SMALL CAP FUND INC.
.INFINITY MUTUAL FUNDS, INC. (CORRESPONDENT CASH RESERVES - MONEY
MARKET PORTFOLIO)
.INSTITUTIONAL SERIES TRUST
.LIQUID INSTITUTIONAL RESERVES
.MITCHELL HUTCHINS/KIDDER, PEABODY EQUITY INCOME FUND, INC.
.MITCHELL HUTCHINS/KIDDER, PEABODY GOVERNMENT INCOME FUND, INC.
.MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST
- 66 -
<PAGE>
.MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST II
.MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST III
.PAINEWEBBER AMERICA FUND
.PAINEWEBBER ATLAS FUND
.PAINEWEBBER CASHFUND, INC.
.PAINEWEBBER INVESTMENT SERIES
.PAINEWEBBER/KIDDER, PEABODY CALIFORNIA TAX EXEMPT MONEY FUND
.PAINEWEBBER/KIDDER, PEABODY CASH RESERVE FUND, INC.
.PAINEWEBBER/KIDDER, PEABODY GOVERNMENT MONEY FUND, INC.
.PAINEWEBBER/KIDDER, PEABODY MUNICIPAL MONEY MARKET SERIES
.PAINEWEBBER/KIDDER, PEABODY PREMIUM ACCOUNT FUND
.PAINEWEBBER/KIDDER, PEABODY TAX EXEMPT MONEY FUND, INC.
.PAINEWEBBER MANAGED ASSETS TRUST
.PAINEWEBBER MANAGED INVESTMENTS TRUST
.PAINEWEBBER MANAGED MUNICIPAL TRUST
.PAINEWEBBER MASTER SERIES, INC.
.PAINEWEBBER MUNICIPAL SERIES
.PAINEWEBBER MUTUAL FUND TRUST
.PAINEWEBBER OLYMPUS FUND
.PAINEWEBBER PREMIER HIGH INCOME TRUST INC.
.PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
.PAINEWEBBER PREMIER INTERMEDIATE TAX-FREE INCOME FUND INC.
.PAINEWEBBER PREMIER TAX-FREE INCOME FUND INC.
.PAINEWEBBER REGIONAL FINANCIAL GROWTH FUND INC.
.PAINEWEBBER RMA MONEY FUND, INC.
.PAINEWEBBER RMA TAX-FREE FUND, INC.
.PAINEWEBBER SECURITIES TRUST
.PAINEWEBBER SERIES TRUST
.STRATEGIC GLOBAL INCOME FUND, INC.
.THE LEGENDS FUND, INC. (GLOBAL GROWTH PORTFOLIO, GLOBAL INCOME
PORTFOLIO, MONEY MARKET PORTFOLIO, and FIXED INCOME PORTFOLIO)
.TRIPLE A AND GOVERNMENT SERIES - 1995, INC.
.TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
.2002 TARGET TERM TRUST INC.
- 67 -
<PAGE>
(b) Mitchell Hutchins is the principal underwriter for the
Registrant. PaineWebber acts as a dealer for the shares of the
Registrant. The directors and officers of Mitchell Hutchins, their
principal business addresses and their positions and offices with Mitchell
Hutchins are identified in its Form ADV filed February 22, 1995, with the
Securities and Exchange Commission (registration number 801-13219). The
directors and officers of PaineWebber, their principal business addresses
and their positions and offices with PaineWebber are identified in its
Form ADV filed March 31, 1995, with the Securities and Exchange Commission
(registration number 801-7163). The foregoing information is hereby
incorporated by reference. The information set forth below is furnished
for those directors and officers of Mitchell Hutchins or PaineWebber who
also serve as trustees or officers of the Registrant:
Position and
Offices With
Name and Principal Position With Underwriter or
Business Address Registrant Dealer
------------------ ------------- --------------
Gregory K. Todd Trustee and First Vice
1285 Avenue of the Americas President President and
New York, New York 10019 Associate General
Counsel of
Mitchell Hutchins
Peter Kennedy Trustee, Vice Associate General
1200 Harbor Boulevard President Counsel, Senior of
Weehawken, New Jersey 07087 and Secretary PaineWebber
Incorporated
Bruce A. Bursey Vice President and Senior Vice
1200 Harbor Boulevard Treasurer President of
Weehawken, New Jersey 07087 PaineWebber
Incorporated
(c) None
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by paragraphs (b)(4), (c) and
(d) of Rule 31a-1 under the Investment Company Act of 1940 are maintained
in the physical possession of Mitchell Hutchins Asset Management Inc.,
1285 Avenue of the Americas, New York, New York 10019. All other
accounts, books and documents required by Rule 31a-1 are maintained in the
physical possession of Registrant's transfer agent and custodian.
Item 31. Management Services
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Not applicable.
Item 32. Undertakings
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Registrant hereby undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six
months from the effective date of Registrant's 1933 Act Registration
Statement.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and the State of New
York, on the 21st day of April 1995.
MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
By: /s/ Gregory K. Todd
----------------------------
Gregory K. Todd
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gregory K. Todd Trustee and President April 21, 1995
Gregory K. Todd (Chief Executive Officer)
/s/ Peter Kennedy Trustee, Vice President April 21, 1995
Peter Kennedy and Secretary
/s/ Bruce A. Bursey Vice President and Treasurer April 21, 1995
Bruce A. Bursey (Principal Financial and
Accounting Officer)
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