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MANAGED ACCOUNTS SERVICES PORTFOLIO TRUST
PROSPECTUS DATED JUNE 21, 1995
1285 Avenue of the Americas, New York, New York 10019
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Managed Accounts Services Portfolio Trust (the "Trust") is an open-end,
management investment company currently composed of twelve separate no-load
investment portfolios (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 PaineWebber PACE
Program ("PACE Program"). The PACE Program and the Trust are designed to assist
you in devising an asset allocation strategy to meet your individual needs.
PaineWebber, through the PACE Program, provides investment advisory services in
connection with the allocation of assets among the Portfolios by: identifying
your risk tolerances and investment objectives based on information provided by
you; 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; providing performance data on a
quarterly basis; and providing a quarterly (optional) rebalancing service. See
"Purchases--General--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:
. PACE Money Market Investments
. PACE Government Securities Fixed Income Investments
. PACE Intermediate Fixed Income Investments
. PACE Strategic Fixed Income Investments
. PACE Municipal Fixed Income Investments
. PACE Global Fixed Income Investments
. PACE Large Company Value Equity Investments
. PACE Large Company Growth Equity Investments
. PACE Small/Medium Company Value Equity Investments
. PACE Small/Medium Company Growth Equity Investments
. PACE International Equity Investments
. 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.
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 June 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, and further inquiries can be made, by contacting the Trust, your
PaineWebber investment executive or by calling toll-free at 1-800-647-1568.
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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PROSPECTUS SUMMARY
This section summarizes certain terms and provisions of the PACE Program and
the Portfolios of the Trust. Please read the rest of this Prospectus for addi-
tional 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. 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 conve-
nient 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 MARKET Current income High quality money Mitchell Hutchins
INVESTMENTS consistent with market instruments Asset Management
preservation of Inc.
capital and
liquidity
PACE GOVERNMENT Current income Primarily U.S. Pacific Investment
SECURITIES FIXED government and Management Company
INCOME INVESTMENTS agency securities of
varying maturities,
as well as mortgage-
backed securities,
with a dollar-
weighted average
portfolio duration
of between two and
seven years
PACE INTERMEDIATE Current income, Fixed income Pacific Income
FIXED INCOME consistent with securities with a Advisers, Inc.
INVESTMENTS reasonable stability dollar-weighted
of principal average portfolio
duration of between
two and four and
one-half years
PACE STRATEGIC FIXED Total return Fixed income Pacific Investment
INCOME INVESTMENTS consisting of income securities of Management Company
and capital varying maturities
appreciation with a dollar-
weighted average
portfolio duration
of between three and
eight years
PACE MUNICIPAL FIXED High current income General obligation, Morgan Grenfell
INCOME INVESTMENTS exempt from federal revenue and private Capital Management,
income tax activity bonds and Incorporated
notes, the interest
on which is exempt
from federal income
tax, with a dollar-
weighted average
portfolio duration
of between three and
seven years
</TABLE>
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<TABLE>
<CAPTION>
INVESTMENT CORE PORTFOLIO INVESTMENT
PACE PORTFOLIO OBJECTIVE INVESTMENTS ADVISER
-------------- ---------- -------------- ----------
<S> <C> <C> <C>
PACE GLOBAL FIXED High total return High-grade fixed Rogge Global
INCOME INVESTMENTS income securities Partners plc
issued by domestic
and foreign
governments and
supranational
entities and private
issuers located
overseas, with a
dollar-weighted
average portfolio
duration of between
four and eight years
PACE LARGE COMPANY Capital appreciation Equity securities Brinson Partners,
VALUE EQUITY and dividend income with the majority of Inc.
INVESTMENTS the Portfolio
invested in common
stocks of companies
with total market
capitalization
(i.e., market value
of common stock
outstanding) of at
least $2.5 billion
PACE LARGE COMPANY Capital appreciation Equity securities of Chancellor Capital
GROWTH EQUITY companies Management, Inc.
INVESTMENTS characterized by an
earnings growth rate
which is faster than
that of the S&P 500
index and
with total market
capitalization
(i.e., market value
of common stock
outstanding) of at
least $2.5 billion
PACE SMALL/MEDIUM Capital appreciation Equity securities of Brandywine Asset
COMPANY VALUE EQUITY companies that have Management, Inc.
INVESTMENTS below-market average
price/earnings
ratios and with
total market
capitalization
(i.e., market value
of common stock
outstanding) of less
than $2.5 billion
PACE SMALL/MEDIUM Capital appreciation Equity securities of Westfield Capital
COMPANY GROWTH companies Management Company,
EQUITY INVESTMENTS characterized by Inc.
above-average growth
of earnings rates
with total market
capitalization
(i.e., market value
of common stock
outstanding) of less
than $2.5 billion
PACE INTERNATIONAL Capital appreciation Equity securities of Martin Currie Inc.
EQUITY INVESTMENTS issuers domiciled
outside the United
States
PACE INTERNATIONAL Capital appreciation Equity securities of Schroder Capital
EMERGING MARKETS issuers domiciled or Management
EQUITY INVESTMENTS doing business in International Inc.
emerging markets
</TABLE>
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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 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 emerging market 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. See "Investment Objectives and Policies of the
Portfolios and Risk Factors--Other Investment Policies and Risk Factors."
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. See "Investment Objectives and Policies of
the Portfolios and Risk Factors--Other Investment Policies and Risk Factors."
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 and Risk
Factors--Other Investment Policies and Risk Factors."
PACE Intermediate 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 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 its shares. See "Investment
Objectives and Policies of the Portfolios and Risk Factors--Other Investment
Policies and Risk Factors."
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. See "Investment Objectives and Policies of the Portfolios
and Risk Factors--Other Investment Policies and Risk Factors."
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
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fee, the amount of which depends on 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 the Trust's board of trustees
and separately by the trustees who are not affiliated with the Manager, any of
the Advisers or any of their 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 investment 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 are urged to
consider carefully PaineWebber's asset allocation recommendations in light of
your investment needs 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. The minimum initial
investment in the Trust is $25,000 ($10,000, if you become a participant in the
PACE Program at the commencement of Trust operations) and any subsequent
investment in the Trust must be at a minimum of $500. The minimum initial
investment in an individual retirement account is $10,000. 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. As stated above under "PACE Program,"
for 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 in the Program Fee. See "Purchases" and
"Redemptions."
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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 undistributed net realized gains from foreign currency
transactions, net capital gain (the excess of net long term capital gain over
net short-term capital loss) and undistributed net realized 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").
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TRUST EXPENSES
The following table lists the costs and expenses, including the separate fees
for the PACE Program, that you will incur either directly or indirectly as a
shareholder of each Portfolio based on the Portfolio's projected annual operat-
ing expenses.
<TABLE>
<CAPTION>
PACE
PACE GOVERNMENT PACE PACE PACE PACE
MONEY SECURITIES INTERMEDIATE STRATEGIC MUNICIPAL GLOBAL
MARKET FIXED INCOME FIXED INCOME FIXED INCOME FIXED INCOME FIXED INCOME
INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES............... None None None None None None
Maximum Program Fee (as
a percentage of average
value of Portfolio
shares held on the last
calendar day of the
previous quarter)...... 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
===== ===== ===== ===== ===== =====
ANNUAL PORTFOLIO
OPERATING EXPENSES*
(as a percentage of
average net assets)
Management Fees (Before
Fee Waivers)**......... 0.15% 0.50% 0.40% 0.50% 0.40% 0.60%
Distribution (Rule 12b-1)
Expenses............... None None None None None None
Other Expenses (Before
Expense Reimbursements)+ 1.22% 0.96% 0.74% 0.83% 1.06% 1.05%
----- ----- ----- ----- ----- -----
Total Portfolio
Operating Expenses
(Before Fee Waivers and
Expense Reimbursements)+ 1.37% 1.46% 1.14% 1.33% 1.46% 1.65%
===== ===== ===== ===== ===== =====
Total Portfolio
Operating Expenses
(Net of Fee Waivers and
Expense Reimbursements)*** 0.50% 0.85% 0.85% 0.85% 0.85% 0.95%
===== ===== ===== ===== ===== =====
</TABLE>
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* Does not include the Program Fee.
** "Management Fees" includes the amounts paid by Mitchell Hutchins to the Ad-
viser for each Portfolio.
*** Mitchell Hutchins has agreed to waive its management fees and then subsi-
dize certain operating expenses with respect to each Portfolio for the
fiscal year ending July 31, 1996, which will lower the overall expenses of
each Portfolio, to the levels noted above.
+ Based on estimated data for the Trust's fiscal year ending July 31, 1996
before the fee waivers and expense reimbursements and includes an
administration fee of 0.20% payable to Mitchell Hutchins by each Portfolio.
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<TABLE>
<CAPTION>
PACE PACE
PACE PACE SMALL/ SMALL/ PACE
LARGE LARGE MEDIUM MEDIUM INTERNATIONAL
COMPANY COMPANY COMPANY COMPANY PACE EMERGING
VALUE GROWTH VALUE GROWTH INTERNATIONAL MARKETS
EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY
INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS
----------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES............... None None None None None None
Maximum Program Fee (as
a percentage of average
value of Portfolio
shares held on the last
calendar day of the
previous quarter)...... 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
===== ===== ===== ===== ===== =====
ANNUAL PORTFOLIO
OPERATING EXPENSES*
(as a percentage of
average net assets)
Management Fees (Before
Fee Waivers)**......... 0.60% 0.60% 0.60% 0.60% 0.70% 0.90%
Distribution (Rule 12b-1)
Expenses............... None None None None None None
Other Expenses (Before
Expense Reimbursements)+ 0.67% 0.69% 0.81% 0.96% 0.82% 1.32%
----- ----- ----- ----- ----- -----
Total Portfolio
Operating Expenses
(Before Fee Waivers and
Expense Reimbursements)+ 1.27% 1.29% 1.41% 1.56% 1.52% 2.22%
===== ===== ===== ===== ===== =====
Total Portfolio
Operating Expenses
(Net of Fee Waivers and
Expense Reimbursements)*** 1.00% 1.00% 1.00% 1.00% 1.50% 1.50%
===== ===== ===== ===== ===== =====
</TABLE>
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See footnotes on previous page.
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Management and Administration Fees; Expenses. Each Portfolio pays the Manager
a fee for its services that is computed daily and paid monthly at 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. Each Portfolio also pays Mitchell Hutchins an administration fee
that is computed daily and paid monthly at an annual rate of 0.20% of the value
of the average daily net assets of the Portfolio. The nature of the services
provided to, and the aggregate management and administration fees paid by, each
Portfolio are described under "Management." "Other Expenses" include the
administration fee and 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. Through the Trust's first
fiscal year ending July 31, 1996, the Manager will voluntarily waive all or a
portion of the fees otherwise payable to it and then reimburse expenses of a
Portfolio, in order to have the Portfolios operate at the expense rates
indicated in the Expense Table above.
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 (net of fee waivers and
expense reimbursements) at the levels set forth in the tables above and (ii)
the specific assumptions stated below:
<TABLE>
<CAPTION>
PACE
GOVERNMENT PACE PACE PACE PACE
PACE SECURITIES INTERMEDIATE STRATEGIC MUNICIPAL GLOBAL
MONEY FIXED FIXED FIXED FIXED FIXED
MARKET INCOME INCOME INCOME INCOME INCOME
INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS
------------ ------------ ------------ ------------ ------------ ------------
1 3 1 3 1 3 1 3 1 3 1 3
YEAR YEARS YEAR YEARS YEAR YEARS YEAR YEARS YEAR YEARS YEAR YEARS
----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------
<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 return and (ii)
redemption at the end
of each time period: $20 $63 $24 $73 $24 $73 $24 $73 $24 $73 $25 $76
</TABLE>
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<TABLE>
<CAPTION>
PACE
PACE PACE SMALL/ PACE
PACE LARGE SMALL/ MEDIUM INTERNATIONAL
LARGE COMPANY MEDIUM COMPANY PACE EMERGING
COMPANY GROWTH COMPANY GROWTH INTERNATIONAL MARKETS
VALUE EQUITY EQUITY VALUE EQUITY EQUITY EQUITY EQUITY
INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS
------------ ------------ ------------ ------------ -------------- --------------
1 3 1 3 1 3 1 3 1 3 1 3
YEAR YEARS YEAR YEARS YEAR YEARS YEAR YEARS YEAR YEARS YEAR YEARS
----- ------ ----- ------ ----- ------ ----- ------ ------ ------- ------ -------
<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 return and (ii)
redemption at the end
of each time period: $25 $78 $25 $78 $25 $78 $25 $78 $30 $93 $30 $93
</TABLE>
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. It also assumes payment
of the maximum Program Fee of 1.50% of the value of the shares of the
Portfolios held in your PaineWebber account each year. 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.
THIS 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 management and administration fees.
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INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS AND RISK FACTORS
A description of the investment objective and policies of each Portfolio fol-
lows. 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 act-
ing 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 liquid-
ity
PACE Money Market Investments seeks to achieve its investment objective by
investing in high quality 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 or repurchase agreements involving any of the foregoing securities.
The Portfolio may also purchase participation interests in any of the securi-
ties in which it is permitted to invest. Participation interests are pro rata
interests in securities held by others (i.e., banks or brokers). The Portfolio
invests only in U.S. dollar-denominated securities that have remaining maturi-
ties of 397 days or less at the time of purchase. The Portfolio maintains a
dollar-weighted average portfolio maturity of 90 days or less.
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 mini-
mal credit risks and are either (1) rated in the highest short-term rating cat-
egory 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 instrumentali-
ties).
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 portfo-
lio securities are also not insured or guaran-
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teed 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 securi-
ties. See "Investment Objectives and Policies of the Portfolios and Risk
Factors--Other Investment Policies and Risk Factors" for other investment poli-
cies 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 in-
vestment objective by investing primarily in U.S. government and agency securi-
ties of varying maturities, as well as mortgage-backed securities, with a dol-
lar-weighted average portfolio duration of between two and seven years. Under
normal conditions, the Portfolio invests at least 65% of its total assets in
U.S. government fixed income securities, which include U.S. Treasury obliga-
tions and obligations issued or guaranteed by U.S. government agencies or in-
strumentalities and repurchase agreements with respect to these securities.
"Fixed Income Securities" include debt instruments the interest payment on
which may be fixed, variable or floating and also includes zero coupon securi-
ties which pay no interest until maturity.
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 Mort-
gage Association mortgage-backed securities ("GNMA certificates"), securities
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. gov-
ernment-related issuer, such as mortgage-backed securities issued by the Fed-
eral 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, in-
cluding Certificates of Accrual Treasury Securities ("CATS") and Treasury In-
come 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 se-
curities for purposes of the 65% investment requirement. See "Investment Objec-
tives and Policies of the Portfolios and Risk Factors--Other Investment Poli-
cies and Risk Factors--Risks of Mortgage- and Asset-Backed Securities" for fur-
ther 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 se-
curities that are issued by private issuers 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.
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<PAGE>
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 Ad-
viser to be of comparable quality). See the Appendix to the SAI for a descrip-
tion of Moody's and S&P's 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 Portfo-
lio's total assets would be invested in securities rated A.
The Portfolio may use options, futures contracts, options on futures con-
tracts and interest rate protection transactions for hedging and income and re-
turn enhancement purposes. See "Investment Objectives and Policies of the Port-
folios and Risk Factors--Other Investment Policies and Risk Factors" for fur-
ther discussion of hedging and related strategies and other investment policies
of the Portfolio.
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 Fixed Income Securities with a dollar-weighted average
portfolio duration of between two and four and one-half years. Under normal
conditions, the Portfolio invests at least 65% of its total assets in U.S. gov-
ernment securities, corporate bonds, debentures, non-convertible fixed income
securities, preferred stocks, mortgage-related securities, Eurodollar certifi-
cates of deposit, Eurodollar bonds and Yankee bonds. The Portfolio also may in-
vest up to 10% of its total 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 in
the lowest of those four categories, i.e., rated Baa by Moody's or BBB 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 and Risk Factors--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 and options on futures contracts for hedging
and income and return enhancement purposes. See "Investment Objectives and
Policies of the Portfolios and Risk Factors--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 be-
tween of two and four and one-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 duration of the Portfolio, as appropriate.
PACE STRATEGIC FIXED INCOME INVESTMENTS
Adviser: Pacific Investment Management Company
Objective: Total return consisting of income and capital appreciation
PACE Strategic Fixed Income Investments seeks to achieve its investment ob-
jective by in-
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<PAGE>
vesting in a portfolio of Fixed Income Securities of varying maturities with a
dollar-weighted average portfolio duration of between three and eight years.
Portfolio holdings will be invested in areas of the bond market (based on qual-
ity, sector, coupon or maturity) which the Adviser believes to be relatively
undervalued.
Under normal conditions, the Portfolio invests at least 65% of its assets in
Fixed Income Securities which include obligations issued or guaranteed by the
U.S. government, its agencies and instrumentalities, corporate and other debt
obligations, convertible securities, mortgage- and asset-backed securities, ob-
ligations of foreign governments or their subdivisions, agencies or instrumen-
talities, obligations of supranational and quasi-governmental entities, commer-
cial paper, certificates of deposit, money market instruments, foreign currency
exchange-related securities and loan participations. The Portfolio may invest
up to 35% of its total 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 com-
parable quality. In the event that, due to a downgrade of one or more debt se-
curities, an amount in excess of 20% of the Portfolio's total assets is held in
securities rated below investment grade and comparable unrated securities, the
Adviser will engage in an orderly disposition of such securities to the extent
necessary to reduce the Portfolio's holdings thereof. 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 and Risk Factors--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 total assets in securities denomi-
nated in foreign currencies and dollar denominated debt of any foreign issuer.
In addition, the Portfolio may invest up to 10% of its total assets in Yankee
bonds and Eurodollar bonds combined. The Portfolio may use forward currency
contracts, currency options, currency futures and options thereon to hedge
against unfavorable changes in currency exchange rates and for income and re-
turn enhancement purposes. The Portfolio also may use options, futures con-
tracts, options on futures contracts and interest rate protection transactions
for hedging and income and return enhancement purposes. See "Investment Objec-
tives and Policies of the Portfolios and Risk Factors--Other Investment Poli-
cies 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 ob-
jective through investment in general obligation, revenue and private activity
bonds and notes, the interest on which is exempt from federal income tax, with
a dollar-weighted portfolio duration of between three and seven years.
Under normal conditions, the Portfolio invests at least 80% of its total as-
sets in general obligation, revenue and private activity bonds and notes that
are issued by or on behalf of
15
<PAGE>
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 issuer of the instrument, is exempt from federal income tax
("Municipal Obligations"), including municipal bonds, industrial development
bonds ("IDBs"), municipal lease obligations and certificates of participation
therein, put bonds and private activity bonds ("PABs"). The Portfolio also will
not invest more than 25% of its total assets in Municipal Obligations whose is-
suers are located in the same state or more than 25% of its total assets in Mu-
nicipal Obligations that are secured by revenues from entities in a particular
industry category except that the Portfolio may invest up to 50% of its total
assets in public housing authorities, and state and local housing finance au-
thorities, including bonds that are secured or backed by the U.S. Treasury or
other U.S. government guaranteed securities. To the extent the Portfolio con-
centrates its investments in single family and multi-family housing obliga-
tions, the Portfolio will be subject to the peculiar risks associated with in-
vestments in such obligations, including prepayment risks and the risks of de-
fault 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 of 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 Obliga-
tions, most of which permit the holder thereof to receive the principal amount
on demand upon seven days' notice. The Portfolio limits its investments to Mu-
nicipal 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 deter-
mined to be of comparable quality by the Adviser, except that up to 15% of its
total assets may be invested in municipal bonds that, at the time of purchase,
are rated Baa by Moody's or BBB by S&P, or if unrated, are determined by the
Adviser to be of comparable quality. Municipal Obligations in the lowest in-
vestment grade category are considered medium grade securities and have specu-
lative characteristics. See "Investment Objectives and Policies of the Portfo-
lios and Risk Factors--Other Investment Policies and Risk Factors--Debt Securi-
ties" 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 cur-
rently 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"). Although no assurance
can be given, the Adviser will endeavor to manage the Portfolio so that no more
than 25% of the interest income will be a tax preference item. Dividends de-
rived from interest income on all Municipal Obligations are a component of the
"current earnings" adjustment for corporations for purposes of the AMT.
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 tax-
able securities. See "Investment Objectives and Policies
16
<PAGE>
of the Portfolios and Risk Factors--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 total return
PACE Global Fixed Income Investments seeks to achieve its investment objec-
tive by investing primarily in high-grade Fixed Income Securities issued by do-
mestic and foreign governments and supranational entities and private issuers
located overseas, with a dollar-weighted average duration of between four and
eight years. Under normal conditions, at least 65% of the value of the Portfo-
lio's total assets will be invested in domestic and foreign bonds issued by
governments, companies and supranational organizations such as the Interna-
tional 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 denom-
inated securities.
The Portfolio will include Fixed Income Securities of varying maturities with
a dollar-weighted average portfolio duration of 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 de-
termined 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 that at the time of purchase,
are rated Baa or Ba by Moody's or BBB or BB by S&P or are unrated but deter-
mined to be of comparable quality by the Adviser.
Bonds rated below investment grade are deemed by these agencies to be predom-
inantly 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." In the event that,
due to a downgrade of one or more debt securities, an amount in excess of 10%
of the total assets of the Portfolio is held in securities rated below invest-
ment grade and comparable unrated securities, the Adviser will engage in an or-
derly disposition of such securities to the extent necessary to reduce the
Portfolio's holdings thereof.
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 charac-
teristics of emerging countries also include lower degrees of political stabil-
ity, 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 is-
sued in emerging countries offer the opportunity for significant long-term in-
vestment returns, however, these investments are lower quality than the three
highest rated securities and involve certain risks. See "Investment Objectives
and Policies of the Portfolios and Risk Factors--Other Investment Policies and
Risk Factors--Foreign Securities."
17
<PAGE>
The Portfolio may use forward currency contracts, currency options, currency
futures and options thereon to hedge against unfavorable changes in currency
exchange rates and for income and return enhancement purposes. The Portfolio
also may use options, futures contracts, and options on futures contracts for
hedging and income and return enhancement purposes. For a more detailed discus-
sion of the risks in investing in foreign securities, see "Investment Policies
and Restrictions--Special Characteristics of Foreign and Emerging Market Secu-
rities" in the SAI. See "Investment Objectives and Policies of the Portfolios
and Risk Factors--Other Investment Policies and Risk Factors" for further dis-
cussion of hedging and related strategies and other investment policies of the
Portfolio.
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS
Adviser: Brinson Partners, Inc.
Objective: 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 are undervalued. 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. Up to 10% of
Portfolio's total assets may include convertible debt securities rated BB by
Moody's or Ba by S&P or, if unrated, determined to be of comparable quality by
the Adviser. 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 (i.e., market value of common
stock outstanding) 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 eq-
uity securities of U.S. companies believed to be undervalued based upon inter-
nal 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 Port-
folio from the investment to calculate a present or intrinsic value. This value
estimate generated by the Adviser's 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 and income and return enhancement purposes. See "Invest-
ment Objectives and Policies of the Portfolios and Risk Factors--Other Invest-
ment Policies and Risk Factors" for further discussion of hedging and related
strategies and other investment policies of the Portfolio.
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<PAGE>
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 an earnings growth rate which is faster
than that of the average growth rate of the companies included in the Standard
& Poor's 500 Composite Stock Price Index ("S&P 500 Index") and total market
capitalization (i.e., market value of common stock outstanding) of at least
$2.5 billion. 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 convert-
ible 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 "Invest-
ment Objectives and Policies of the Portfolios and Risk Factors--Other Invest-
ment Policies and Risk Factors" for further discussion of other investment pol-
icies of the Portfolio.
The Adviser manages the Portfolio by investing in companies from a defined
growth subset of both the S&P 500 Index and the Russell 1000 Growth indices,
which consists of companies expected to grow at least 50% faster than the mar-
ket. 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 port-
folio exposures on a weekly basis by a maximum 6% relative to the normal
weightings. This permits flexibility relative to its growth benchmark, yet en-
sures against undue volatility associated with overexposure to one industry.
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 quan-
titative, 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 com-
bined ranked universe, and selling 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 in-
vestment objective by investing primarily in equity securities that, in the Ad-
viser's opinion, are un-
19
<PAGE>
dervalued or overlooked in the marketplace at the time of purchase, which gen-
erally have below-market average price/earnings (P/E) ratios and with total
market capitalization (i.e., market value of common stock outstanding) of less
than $2.5 billion. 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, in-
cluding common and preferred stock, debt securities convertible into or ex-
changeable 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 to-
tal 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 an issuer among the lowest 25% based on P/E ratios for
all exchange-traded and OTC stocks with positive earnings and a capitalization
greater than $10 million. See "Investment Objectives and Policies of the Port-
folios and Risk Factors--Other Investment Policies and Risk Factors" for fur-
ther discussion of other investment policies of the Portfolio.
The Adviser performs a qualitative, fundamental review of candidates to de-
termine that they are appropriate candidates for the Portfolio. This review
identifies and avoids stocks undesirable for investment: First, the Adviser ad-
justs all reported earnings for extraordinary gains and losses so as to con-
sider only true, low P/E stocks for entry into the Portfolio. Second, the Ad-
viser 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 underval-
ued, 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 Portfolio will not purchase any
stock if it would exceed 2% of the Portfolio. The Portfolio may deviate from
strict capitalization weighting in order to invest only in round lots, for il-
liquidity considerations, 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 in-
vestment objective by investing primarily in the common stock of "emerging
growth" companies, companies characterized by above-average earnings growth
rates and total market capitalization (i.e., market value of common stock out-
standing) of less than $2.5 billion. Dividend income is an incidental consider-
ation in the selection of investments. The securities held by the Portfolio can
be expected generally to experience greater volatility than those of PACE
Small/Medium Company Value Equity Investments. The Portfolio may invest in a
broad range of equity securities of U.S. issuers, including common and pre-
ferred 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.
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<PAGE>
The Adviser uses a bottom-up, fundamental approach, including on-site company
visits, to uncover and analyze companies that exhibit the possibility of accel-
erating earnings growth because of management changes, new products, estab-
lished 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 con-
tracts for hedging and income and return enhancement purposes. See "Investment
Objectives and Policies of the Portfolios and Risk Factors--Other Investment
Policies and Risk Factors" for further discussion of hedging and related strat-
egies and other investment policies of the Portfolio.
PACE INTERNATIONAL EQUITY INVESTMENTS
Adviser: Martin Currie Inc.
Objective: Capital appreciation
PACE International Equity Investments seeks to achieve its objective by in-
vesting in equity securities of companies domiciled outside the United States.
Under normal market conditions, at least 65% of the Portfolio's total 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 of companies domiciled in three or more countries outside the
United States. "Domiciled," for these purposes, means companies (1) which are
organized under the laws of a country other than the United States, (2) for
which the principal securities trading market is in such a country, or (3)
which derive a significant proportion (at least 50 percent) of their revenues
or profits from goods produced or sold, investments made, or services performed
in the eponymous country or which have at least 50 percent of their assets sit-
uated in such a country. The Portfolio also may invest up to 10% of its total
assets in securities of investment companies, such as closed-end investment
management companies which invest in foreign markets.
The Portfolio will normally invest in the securities of three or more coun-
tries outside the United States. Particular consideration will be given to in-
vestments principally traded in Japanese, European, Pacific and Australian se-
curities markets, and in foreign securities of companies traded on United
States' securities markets. The Portfolio will also invest up to 10% of its to-
tal assets in emerging markets, including Asia, Latin America and other re-
gions, where markets may not yet fully reflect the potential of the developing
economy. For purposes of this Portfolio, "emerging markets" are markets in
countries 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 re-
strict the number of securities markets in which its assets will be invested,
although under normal market circumstances the Portfolio's investments will in-
volve securities principally traded in at least ten different countries. The
Portfolio will invest only in markets where, in the judgment of the Ad-
21
<PAGE>
viser, 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 temporarily 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, cor-
porate bonds and sponsored American Depository Receipts ("ADRs").
The Portfolio may use forward currency contracts, currency options, currency
future and options thereon to hedge against unfavorable changes in currency
and for income and return enhancement purposes. The Portfolio also may use op-
tions, futures contracts and options on futures contracts for hedging and in-
come and return enhancement purposes. See "Investment Objectives and Policies
of the Portfolios and Risk Factors--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 in-
vesting in foreign securities, see "Investment Policies and Restrictions--Spe-
cial Characteristics of Foreign and Emerging Market Securities" in the SAI.
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, under normal conditions, at least 65% of the
Portfolio's total assets in equity securities of issuers domiciled in three or
more emerging market countries. "Domiciled" for these purposes means companies
(1) which are organized under the laws of an emerging market country, (2) for
which the principal securities trading market is in such a country, or (3)
which derive a significant proportion (at least 50 percent) of their revenues
or profits from goods produced or sold, investments made, or services performed
in the eponymous country or which have at least 50 percent of their assets sit-
uated in such a country. For purposes of this Portfolio, "emerging market"
countries are all markets in all countries not included in the MSCI Index of
major world economies and Malaysia. 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 total 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 eco-
nomic 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 re-
structuring the heavy external debt burden that certain emerging market coun-
tries accumulated during the 1970s and 1980s. While there is no assurance that
these trends will continue, the Adviser will seek out attractive investment op-
portunities in these countries.
The Portfolio will not necessarily seek to diversify investments on a geo-
graphic basis within the emerging market category and to
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the extent the Portfolio concentrates its investments in issuers located in one
country or area, the Portfolio is more susceptible to factors adversely affect-
ing that country or area.
The Portfolio may use forward currency contracts, currency options, currency
futures and options thereon to hedge against unfavorable changes in currency
exchange rates and for income and return enhancement purposes. 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 op-
tions, futures contracts and options on futures contracts for hedging and in-
come and return enhancement purposes. See "Investment Objectives and Policies
of the Portfolios and Risk Factors--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 in-
vesting in foreign securities, see "Investment Policies and Restrictions--Spe-
cial Characteristics of Foreign and Emerging Market Securities" in the SAI.
OTHER INVESTMENT POLICIES AND RISK FACTORS
MONEY MARKET INSTRUMENTS
All Portfolios other than PACE Money Market Investments also may invest in
high-grade money market instruments such as commercial paper of a U.S. or for-
eign company or foreign government certificates of deposit, bankers' accept-
ances and time deposits of domestic and foreign banks, and obligations issued
or guaranteed by the U.S. government, its agencies and instrumentalities. These
obligations generally will be 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 is-
sue 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 se-
curities: securities that are backed by the full faith and credit of the U.S.
government, such as U.S. Treasury obligations (bills, notes and bonds), securi-
ties that are supported primarily or solely by the creditworthiness of the gov-
ernment-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 mort-
gage-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 and Risk Factors--Other Investment Policies and
Risk Factors 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
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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 in-
terest rates decline. Conversely, when interest rates rise, the value of Fixed
Income Securities may be expected to decline.
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, PACE Municipal Fixed Income
Investments and PACE Global Fixed Income Investments may invest in medium-rated
securities (i.e., rated Baa by Moody's or BBB by S&P). Moody's considers secu-
rities rated Baa to have speculative characteristics. PACE Strategic Fixed In-
come 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 In-
vestments, 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 inter-
est 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 and, as
previously stated, are commonly referred to as "junk bonds."
PACE Money Market Investments, PACE Government Securities Fixed Income In-
vestments, PACE Intermediate Fixed Income Investments, PACE Strategic Fixed In-
come 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 anal-
ysis and attention to current trends in interest rates and other factors, in-
vestors 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 Port-
folio has acquired the security. The Advisers, and in the case of PACE Money
Market Investments, Mitchell Hutchins, would consider such an event in deter-
mining 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 in-
dicates.
Lower rated debt securities generally offer a higher current yield than that
available from higher grade issues, but they involve 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 in-
terest rates. During periods of economic downturn or rising interest
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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 de-
fault by such issuers is significantly greater, because such securities fre-
quently are unsecured and subordinated to the prior payment of senior indebted-
ness.
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' fi-
nancial 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 percep-
tions, whether or not based on fundamental analysis, may also decrease the val-
ues and liquidity of lower rated securities, especially in a thinly-traded mar-
ket.
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 maturi-
ty." Duration incorporates a bond's yield, coupon interest payments, final ma-
turity and call features into one measure. Duration is one of the fundamental
tools used by the Adviser in portfolio selection for 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 pay-
ments, taking no account of the pattern of the security's payments prior to ma-
turity. Duration is a measure of the expected life of a fixed income security
on a present value basis. Duration takes the length of the time intervals be-
tween 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.
Duration allows an Adviser to make certain predictions regarding how the
value of a portfolio will generally respond to changes in the level of interest
rates. For example, a portfolio consisting entirely of treasury notes with
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a remaining maturity of five years would have a duration of 4.5 years. A 1%
change in the level of interest rates would cause a change of approximately
4.5% in the net asset value of the portfolio. A portfolio consisting entirely
of treasury notes with a remaining maturity of ten years would have a duration
of about 7.5 years and a 1% change in the level of interest rates would cause a
change of between 7% and 8% in the net asset value of the portfolio. This exam-
ple is intended for demonstration purposes only, however, and is not intended
to approximate how a Portfolio's investment portfolio will respond to changes
in interest rates. A Portfolio's investment portfolio may include securities
with differing maturities and quality levels, and interest rates on those in-
struments may not all change by the same amount at the same time as rates rise
or fall generally in the marketplace. Also, the treasury securities described
in the example cannot be retired prior to maturity, while some of the securi-
ties in the Portfolios' investment portfolios can. These factors among others
can cause a Portfolio's investment portfolio to respond somewhat differently to
changes in interest rates than shown in the example.
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 purchasing 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 so-
phisticated analytical techniques that incorporate the economic life of a secu-
rity 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, participation interests
in municipal bonds, tax-exempt commercial paper, tender option bonds and short-
term municipal notes. Municipal bonds include IDBs, municipal lease obligations
and certificates of participation therein, put bonds and PABs.
PACE Municipal Fixed Income Investments may invest in a variety of Municipal
Obligations, as described below:
MUNICIPAL BONDS. Municipal bonds are debt obligations issued to obtain funds
for various public purposes that pay interest that is exempt from federal in-
come tax in the opinion of issuer's counsel. The two principal classifications
of municipal bonds are "general obligation" and "revenue" bonds. General obli-
gation 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 pay-
able only from the revenues derived from a particular facility or class of fa-
cilities or,
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in some cases, from the proceeds of a special excise tax or other specific rev-
enue source such as from the user of the facility being financed. The term "mu-
nicipal bonds" also includes "moral obligation" issues, which are normally is-
sued 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 pay-
ment of the debt service, but is usually subject to annual budget appropria-
tions. 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 is-
sued by state and local governments and authorities to purchase land or various
types of equipment or facilities and may be subject to annual budget appropria-
tions. The Portfolio generally invests in municipal lease obligations through
certificates of participation. The Portfolio does not presently intend to pur-
chase municipal lease obligations, or certificates of participation therein,
that are not rated by Moody's or S&P.
MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
INTERESTS. A municipal lease is an obligation in the form of a lease or in-
stallment purchase contract which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally ex-
empt from state and local taxes in the state of issuance (as well as regular
federal income tax). Municipal leases frequently involve special risks not nor-
mally associated with general obligation or revenue bonds. Leases and install-
ment purchase or conditional sale contracts (which normally provide for title
to the leased asset to pass eventually to the governmental issuer) have evolved
as a means for governmental issuers to acquire property and equipment without
meeting the constitutional and statutory requirements for the issuance of debt.
The debt issuance limitations are deemed to be inapplicable because of the in-
clusion in many leases or contracts of "non-appropriation" clauses that relieve
the governmental issuer of any obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the appro-
priate legislative body on a yearly or other periodic basis. Thus, the Portfo-
lio's investment in municipal leases will be subject to the special risk that
the governmental issuer may not appropriate funds for lease payments.
In addition, such leases or contracts may be subject to the temporary abate-
ment of payments in the event the issuer is prevented from maintaining occu-
pancy of the leased premises or utilizing the leased equipment. Although the
obligations may be secured by the leased equipment or facilities, the disposi-
tion of the property in the event of nonappropriation or foreclosure might
prove difficult, time consuming and costly, and result in an unsatisfactory or
delayed recoupment of the Portfolio's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase contracts or other instruments. The certificates
are typically issued by a trust or other entity which has received an assign-
ment of the payments to be made by the state or political subdivision under
such leases or installment purchase contracts.
Certain municipal lease obligations and certificates of participation may be
deemed illiquid for purposes of the Portfolio's limitations on investments in
illiquid securities. Other municipal lease obligations and certificates of par-
ticipation acquired by the Portfolio may be determined by the Adviser, pursuant
to guidelines adopted by the Trustees of the Trust, to be liquid securities for
purposes of the Portfolio's limitation on investments in illiquid securities.
In determining the liquidity of municipal leases obligations and certificates
or participa-
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tion, the Adviser will consider a variety of factors including: (1) the will-
ingness of dealers to bid for the security; (2) the number of dealers willing
to purchase or sell the obligation and the number of other potential buyers;
(3) the frequency of trades or quotes for the obligation; and (4) the nature of
the marketplace trades. In addition, the Adviser will consider factors unique
to particular lease obligations and certificates of participation affecting the
marketability thereof. These include the general creditworthiness of the issu-
er, the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained through-
out the time the obligation is held by the Portfolio. The Portfolio may not in-
vest more than 5% of its net assets in municipal leases.
PACE Municipal Fixed Income Investments may purchase participations in munic-
ipal securities held by a commercial bank or other financial institution. Such
participations provide the Portfolio with the right to a pro rata undivided in-
terest in the underlying municipal securities. In addition, such participations
generally provide the Portfolio with the right to demand payment, on not more
than seven days notice, of all or any part of the Portfolio's participation in-
terest in the underlying municipal security, plus accrued interest.
INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS. IDBs and PABs are
issued by or on behalf of public authorities to finance various privately oper-
ated facilities, such as airport or pollution control facilities. These obliga-
tions 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 fa-
cilities being financed. IDBs issued after August 15, 1986 generally are con-
sidered PABs, and, to the extent the Portfolio invests in such PABs, sharehold-
ers 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 and Risk Factors--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 guarantee of the bank. The credit
standing of such bank affects the credit quality of the participation inter-
ests.
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 typi-
cally 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 Portfo-
lio's ability to exercise the tender op-
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tion 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 uncondi-
tional 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 com-
mercial 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 vari-
ety 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 munici-
pal security, the higher the rate of interest paid and the greater the volatil-
ity. Further, if general market interest rates are increasing, the prices of
Municipal Obligations ordinarily will decrease and, if rates decrease, the op-
posite generally will be true. The Portfolio may invest in Municipal Obliga-
tions with a broad range of maturities, based on the Adviser's judgment of cur-
rent and future market conditions as well as other factors, such as the Portfo-
lio's liquidity needs. Accordingly, the average dollar-weighted duration of the
Portfolio's portfolio may vary.
Future federal, state and local laws may adversely affect the tax-exempt sta-
tus of interest on the Portfolio's portfolio securities or of the exempt-inter-
est dividends paid by the Portfolio, extend the time 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 issu-
ance; the Adviser will rely on such opinions without independent investigation.
See "Investment Objectives and Policies of the Portfolio--Other Investment Pol-
icies 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 pay-
able from, mortgage loans secured by real property and include single- and mul-
ti-class pass-through securities and collateralized mortgage obligations. Mul-
ti-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 in-
clude 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,
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<PAGE>
commercial banks, investment bankers and special purpose entities (collective-
ly, "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 guaran-
teed, 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 en-
hancement.
GNMA CERTIFICATES. GNMA guarantees certain mortgage pass-through certificates
("GNMA certificates") that are issued by Private Mortgage Lenders and that rep-
resent ownership interests in individual pools of residential mortgage loans.
These securities are designed to provide monthly payments of interest and prin-
cipal 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 pay-
ments 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 characteris-
tics 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 cri-
teria for individual mortgages included in the pools.
FNMA CERTIFICATES. FNMA facilitates a national secondary market in residen-
tial 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 mort-
gage purchase and mortgage-backed securities sales activities. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA certificates"), which rep-
resent 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 cer-
tificates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC repre-
sents a pro rata share of all interest and principal payments made and owed on
the underlying pool. FHLMC generally guarantees timely monthly payment of in-
terest on PCs and the ultimate payment of principal, but it also has a PC pro-
gram under which it guarantees timely payment of both principal and interest.
GMCs also represent a pro rata interest in a pool of mortgages. These instru-
ments, 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 securi-
ties 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 guaran-
teed or insured) mortgage loans. Since such mortgage-backed
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<PAGE>
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 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 Mort-
gage 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 gov-
ernment 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 indi-
cates otherwise, references herein to CMOs include multi-class mortgage pass-
through securities. Payments of principal of, and interest on, the Mortgage As-
sets (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
(defined below)) 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 un-
til 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 securi-
ties are mortgage-backed securities that represent a right to receive interest
payments at a rate
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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 re-
ferred to as "ARMs"). 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. Because the interest rates on ARM floating rate mortgage-backed securi-
ties 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 Restric-
tions--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 ele-
ments of credit enhancement. Credit enhancement generally falls into two cate-
gories: (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 asso-
ciation 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 por-
tion of the assets in the pool. Such protection may be provided through guaran-
tees, insurance policies or letters of credit obtained by the issuer or spon-
sor, 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 transac-
tion 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 re-
serve against future losses) and "over-collateralization" (where the scheduled
payments on, or the principal amount of, the underlying assets exceed that re-
quired 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 ad-
versely affect the return on an investment in such a security.
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 in-
terest only ("IO"), principal only ("PO") and other specially structured CMO
classes. No Portfolio will invest more than 5% of its net assets in any combi-
nation of IOs, POs and inverse floating rate securities including those which
are not mortgage-backed and asset backed securities. See "Other Investment Pol-
icies and Risk Fac-
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tors--Risks of Mortgage- 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 ex-
pect to invest in those new types of mortgage-backed securities that the re-
spective 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.
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 character-
istics 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 vari-
ous 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 in-
terest 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 is-
sued by a financial institution unaffiliated with the issuer or other credit
enhancements may be present.
RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES
The yield characteristics of the mortgage- 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-
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 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 maturi-
ty. 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 pre-
mium 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- 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 par-
ticularly 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 re-
duced. These changes can result in volatility in the market value, and in some
instances reduced liquidity, of the CMO class.
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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 secu-
rities 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 mort-
gage 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 mort-
gage-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 under-
lying an IO experience greater than anticipated principal prepayments, an in-
vestor 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 attrac-
tive 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 in-
terest rates--i.e., the yield may increase as rates increase and decrease as
rates decrease--but may do so 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 charac-
teristics. For example, a CMO class may be an "inverse IO," on which the hold-
ers are entitled to receive no payments of principal and are entitled to re-
ceive 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 in-
vests may be volatile, or may become volatile under certain conditions, its
Adviser will seek to manage the Portfolio so that the volatility of the Port-
folio, taken as a whole, is consistent with the Portfolio's investment objec-
tive. If the Adviser incorrectly forecasts interest rate changes or other fac-
tors that may affect the volatility of securities held by the Portfolio, the
Portfolio's ability to meet its investment objective may be reduced.
CONVERTIBLE SECURITIES
PACE Strategic Fixed Income Investments, PACE Large Company Value Equity In-
vestments, PACE Large Company Growth Equity Investments, PACE Small/Medium
Company Value Equity Investments, PACE Small/ Medium Company Growth Equity In-
vestments, PACE International Equity Investments and PACE International Emerg-
ing Markets Equity Investments each may invest in convertible securities. A
convertible security is a bond, debenture, note, preferred stock or other se-
curity that may be converted into or exchanged for a prescribed amount of com-
mon 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 charac-
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teristics, 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 convert-
ible security sells above its value as a fixed income security.
LOWER RATED CONVERTIBLE SECURITIES
PACE Large Company Value Equity Investments may invest up to 10% of its total
assets in convertible securities that are rated below investment grade but no
lower than B by S&P or Moody's or comparably rated by another NRSRO, or if not
rated by an NRSRO, determined by its Adviser to be of comparable quality. Con-
vertible securities rated below investment grade are commonly referred to as
"junk bonds" and are deemed by the NRSROs to be predominantly speculative and
may involve significant risk exposure to adverse conditions.
Lower rated convertible securities generally offer a higher current yield
than that available from higher grade issues, but they involve higher risks, in
that they are especially subject to adverse changes in general economic condi-
tions and in the industries in which the issuers are engaged, to changes in the
financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising inter-
est rates, highly leveraged issuers may experience financial stress, which
could adversely affect their ability to make payments of principal and interest
(or, in the case of convertible preferred stock, dividends) and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them, and may be unable to repay debt at ma-
turity by refinancing. The risk of loss due to default by such issuers is sig-
nificantly greater, because such securities frequently are unsecured and subor-
dinated to the prior payment of senior indebtedness.
HEDGING AND RELATED STRATEGIES
Each Portfolio except PACE Money Market Investments, PACE Municipal Fixed In-
come Investments, PACE Large Company Growth Equity Investments and PACE
Small/Medium Company Value Equity Investments may use options (both exchange-
traded and OTC) 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. A Portfolio may
use these instruments to enhance income or return--for example, to change the
Portfolio's exposure from one interest rate to another or from one foreign cur-
rency to another. This can be seen as hedging or speculation depending on the
effect of the instrument, because the Portfolio is using these instruments to
change the underlying characteristic(s) of its portfolio or of particular posi-
tions in the portfolio. These 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 Invest-
ments, PACE International Equity Investments and PACE International Emerging
Markets Equity Investments may each enter into forward currency
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contracts, buy or sell foreign currency futures contracts, write (sell) and
purchase call or put options on securities, currencies and securities indices,
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 and purchase put and call options or write call or put op-
tions on such contracts for hedging and income and return enhancement purpos-
es. 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 that approximate (but do not exceed) the full value of the
Portfolio.
PACE Strategic Fixed Income Investments, PACE Global Fixed Income Invest-
ments, 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 transac-
tion 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 antic-
ipates there will be a correlation between the two and may use forward cur-
rency contracts to shift a Portfolio's exposure to foreign currency fluctua-
tions from one country to another. The primary 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, in-
cluding interest rate swaps and interest rate caps, collars and floors for
hedging and income and return enhancement 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 pur-
chasing 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 estab-
lished by the Trust's board of trustees. A Portfolio may enter into interest
rate protection transactions that approximate (but do not exceed) the full
value of the Portfolio.
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, currency exchange rates, market values
or other economic factors in utilizing a strategy for a Portfolio, the Portfo-
lio 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 move-
ments of the investments being hedged, (3) the fact that, while hedging strat-
egies can reduce the risk of loss, they can also reduce the opportunity for
gain, or even result in losses, by offsetting favorable
36
<PAGE>
price movements in hedged investments and (4) the possible inability of a Port-
folio 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 devel-
oped. Each Portfolio may use these instruments and techniques to the extent
consistent with its investment objectives and regulatory and federal tax con-
siderations.
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 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. See "Investment Policies and Restrictions--Special Characteristics
of Foreign and Emerging Market Securities" in the SAI.
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 sub-
ject. 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 is-
suers may be less liquid and their prices more volatile than those of securi-
ties of comparable U.S. companies. These risks are often heightened for invest-
ments in emerging countries.
In addition, substantial limitations may exist in certain countries with re-
spect 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 vol-
atile than the securities markets of the United States and other more developed
countries. Disclosure and regulatory standards in many respects are less strin-
gent 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 invest-
ors 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 require-
ments. 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 compara-
ble to those applicable to U.S. companies. A
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Portfolio's net investment income and/or capital gains from its foreign invest-
ment activities may be subject to non-U.S. withholding taxes that, if not re-
coverable 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 in-
terest earned, gains and losses realized on the sale of securities and net in-
vestment 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 as-
sets denominated in such 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 fac-
tors 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 fre-
quently 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 in-
vesting also frequently are higher than those attributable to domestic invest-
ing. Costs associated with the exchange of currencies also make foreign invest-
ing more expensive than domestic investing. Investment income on certain for-
eign securities in which a Portfolio may invest may be subject to foreign with-
holding or other government taxes that could reduce the return of these secu-
rities. 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 peri-
ods 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 settle-
ment problems could cause the Portfolio to miss attractive investment opportu-
nities. 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 companies 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 regis-
tered 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 ar-
rangement. For purposes of a Portfolio's investment policies, ADRs and EDRs are
deemed to have the same classification as the underlying securities they rep-
resent. 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 Investments, PACE Global Fixed Income Invest-
ments, 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
Brady Bonds and debt obligations of supranational entities, which include in-
ternational organizations designated or supported by governmental entities to
promote economic reconstruction or development, international banking institu-
tions and related government agencies. Examples include the World Bank, the Eu-
ropean Coal and Steel Community, the Asian Development Bank and the Inter-Amer-
ican Development Bank. See "Investment Policies and Restrictions--Brady Bonds"
in the SAI for further discussion of risks involved when investing in Brady
Bonds.
Foreign government securities also include debt securities of "quasi-govern-
mental agencies" and debt securities denominated in multinational currency
units of an issuer (including supranational issuers). An example of a multina-
tional 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 enti-
ties owned by either a national, state or equivalent government or are obliga-
tions 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 agen-
cies.
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 lim-
ited 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 in-
terest unrelated to the coupon rate or maturity of the purchased securities.
Repurchase agreements carry certain risks not associated with direct invest-
ments in securities, including possible decline in the market value of the un-
derlying securities and delays and costs to each Portfolio if the other party
to the repurchase agreement becomes insolvent. Each Portfolio intends to enter
into repurchase agreements only with banks and dealers in transactions believed
by its Adviser (or Mitchell Hutchins in the case of PACE Money Market Invest-
ments or in the case of transactions pursuant to any joint repurchase agreement
arrangements) to present minimum credit risks in accordance with guidelines es-
tablished 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
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<PAGE>
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 re-
ceipt of fee income equivalent to a lower forward price. At the time a Portfo-
lio enters into a dollar roll, the Trust's custodian will segregate cash or
liquid, high grade debt securities having a value not less than the forward
purchase 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 re-
verse 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 ef-
fectively be restricted pending such decision.
The dollar rolls and reverse repurchase agreements entered into by the Port-
folios normally will be arbitrage transactions in which a Portfolio will main-
tain an offsetting position in securities or repurchase agreements that mature
on or before the settlement date on the related dollar roll or reverse repur-
chase agreement. Since the Portfolio will receive interest on the securities or
repurchase agreements in which it invests the transaction proceeds, such trans-
actions 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.
Dollar rolls and reverse repurchase agreements will be considered to be
borrowings and, accordingly, will be subject to the respective Portfolios' lim-
itations on borrowings, which will restrict the aggregate of such transactions
(plus any other borrowings) to 33 1/3% of a Portfolio's total assets. A Portfo-
lio 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 in-
tends 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 pur-
chases. See "Investment Policies and Restrictions--Reverse Repurchase Agree-
ments" in the SAI.
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. Ac-
cordingly, as interest rates decrease
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or increase, the potential for capital appreciation or capital depreciation is
less than for fixed rate obligations. Floating rate or variable rate obliga-
tions typically permit the holder to demand payment of principal from the is-
suer 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 af-
fects the credit quality of the obligations.
ILLIQUID SECURITIES
PACE Global Fixed Income Investments, PACE Small/Medium Company Growth Equity
Investments and PACE International Emerging Markets Equity Investments may each
invest up to 15% of its net assets in illiquid securities; PACE Money Market
Investments, PACE Government Securities Fixed Income Investments, PACE Interme-
diate Fixed Income Investments, PACE Strategic Fixed Income Investments, PACE
Municipal Fixed Income Investments, PACE Large Company Value Equity Invest-
ments, PACE Large Company Growth Equity Investments and PACE Small/Medium Com-
pany Value Equity Investments may each invest up to 10% of its net assets in
illiquid securities. Illiquid securities include certain cover for OTC options,
repurchase agreements and non-marketable interest bearing time deposits with
maturities in excess of seven days and securities whose disposition is re-
stricted under the federal securities laws (other than "Rule 144A securities"
that the Portfolio's Adviser has determined to be liquid under procedures ap-
proved 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 securi-
ties and the ability to liquidate an investment to satisfy share redemption or-
ders. An insufficient number of qualified institutional buyers interested in
purchasing Rule 144A eligible restricted securities held by a Portfolio, howev-
er, could affect adversely the marketability of such portfolio securities, and
the Portfolio might be unable to dispose of such securities promptly or at fa-
vorable prices. See "Investment Policies and Restrictions--Illiquid Securities"
in the SAI.
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 earn-
ing interest on them until they are received. However, when a Portfolio under-
takes a when-issued or delayed delivery purchase commitment, it immediately as-
sumes 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-is-
sued or delayed delivery basis may result in the Portfolio's incurring a loss
or missing an opportunity to make an alternative investment. Depending on mar-
ket conditions, a Portfolio's when-issued and delayed delivery purchase commit-
ments 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. See "Investment Policies and Restrictions--
When-Issued and Delayed Delivery Securities" in the SAI.
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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 Invest-
ments 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 as income each year, even though the
holder may receive no interest payment on the security during the year. Accord-
ingly, 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 prior to that time. Similarly, while PIK secu-
rities 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 In-
come Investments.
Companies such as the Portfolios, which seek to qualify for pass-through fed-
eral income tax treatment as regulated investment companies ("RICS"), must dis-
tribute 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 secu-
rities 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 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 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that its Ad-
viser 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. The borrower must maintain with the Portfolio's custo-
dian collateral either in cash or money market instruments in an amount at
least equal to the market value of the securities loaned, plus accrued interest
and dividends, determined on a daily basis and adjusted accordingly. In deter-
mining 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.
PORTFOLIO TURNOVER
The portfolio turnover rate for each of the Portfolios may exceed 100%, al-
though the rate is not expected to exceed 200%. A high portfo-
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lio turnover rate (i.e., 100% or more), 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 an Adviser believes unusual circumstances warrant a defensive posture,
and with the concurrence of the Manager, 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.
PACE Municipal Fixed Income Investments may invest temporarily without limit
in certain taxable securities for defensive purposes. PACE Global Fixed Income
Investments may invest temporarily in securities of only one country, including
the United States, for such purposes. PACE International Equity Investments
also may invest temporarily up to 100% of its assets in domestic debt, foreign
debt principally traded in the United States and in foreign securities princi-
pally 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 ADRs for such purposes.
OTHER INVESTMENT POLICIES
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 borrow money for temporary or emergency purchases, but not in ex-
cess of 10% of its total assets, however, no Portfolio will purchase securities
when its borrowings exceed 5% of its total assets.
NON-DIVERSIFICATION
PACE Intermediate Fixed Income Investments and PACE Global Fixed Income In-
vestments 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 "Divi-
dends 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 either Portfolio at times may
include the securities of a smaller number of issuers than if it were "diversi-
fied" (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 mar-
ket assessment of a single issuer may cause greater fluctuation in the Portfo-
lio's total return and the price of Portfolio shares.
MANAGEMENT
The overall management of the business and affairs of the Trust and the Port-
folios rests with the Trust's board of trustees. The trustees approve all sig-
nificant agreements between the Trust and the persons that furnish services to
the Trust and the Portfolios, including the agreements with the Manager, the
Advisers,
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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 Asset Management Inc., 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 hold-
ing company. Mitchell Hutchins provides investment advisory and portfolio man-
agement services to investment companies, pension funds and other institution-
al, 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 reg-
istered investment companies with 77 separate portfolios having aggregate as-
sets 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 Mar-
ket Investments and is responsible for the selection, subject to review and ap-
proval of the trustees, of Advisers for each of the Portfolios (other than PACE
Money Market Investments) and the review of the Advisers' continued perfor-
mance. See "Manager" in the SAI.
Pursuant to a separate Sub-Advisory Agreement (the "Advisory Agreement") be-
tween Mitchell Hutchins and each Adviser, the Advisers furnish investment advi-
sory 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 appli-
cable Portfolio. No additional fee is paid by the investor.
Subject to the supervision and direction of the trustees, the Manager pro-
vides to the Trust investment management evaluation services principally by (1)
performing initial review of prospective Advisers for each Portfolio other than
PACE Money Market Investments and (2) monitoring Adviser performance. In evalu-
ating 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 commu-
nicating performance expectations and evaluations to the Advisers and for ulti-
mately 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.
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The Manager is also responsible for conducting the general operation of the
Trust except those functions 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 man-
agement 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 manage-
ment services fee it receives from the applicable Portfolio, a fee that is com-
puted 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
BY PORTFOLIO THE MANAGER TO
PORTFOLIO TO THE MANAGER THE ADVISER
--------- -------------- ----------------
(AS A % OF (AS A % OF
AVERAGE NET AVERAGE NET
ASSETS) ASSETS)
<S> <C> <C>
PACE Money Market Investments.................. 0.15% N/A
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>
Investors should be aware that the Manager may be subject to a conflict of
interest when making decisions regarding the retention and compensation of par-
ticular Advisers. However, the Manager's compensation and the Manager's deci-
sions, including the identity of an Adviser and the specific amount of the Man-
ager's compensation to be paid to the Adviser, are subject to review and ap-
proval by the board of trustees and separately by the trustees who are not af-
filiated with the Manager, any of the Advisers or any of their affiliates. In
addition, the Manager is subject to certain standards of fiduciary duty re-
quired by law.
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 in-
vestment adviser, partially in recognition of the reduced administrative and
other responsibilities they have undertaken with respect to the Portfolios.
Subject to the monitoring of the Manager and, ultimately, the supervision and
control of the trustees, each Adviser's responsibilities are focused on making
investment decisions for the Portfolio and placing orders to purchase and sell
securities on behalf of the Portfolio in accordance with
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<PAGE>
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 without the approval of shareholders: (a) to em-
ploy 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) to
change the terms of an Advisory Agreement; and (c) to 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. Shareholders would
receive notice of such action, including the information concerning the Adviser
that normally is provided in the Prospectus. 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 adviser or subadviser of 42 invest-
ment companies with 77 separate portfolios and aggregate assets of approxi-
mately $26.9 billion, of which approximately $17.7 billion consisted of assets
in money market funds. Susan Messina, a senior vice president of Mitchell
Hutchins is primarily responsible for the day-to-day management of PACE Money
Market Investments. Since 1987, Ms. Messina has been a portfolio manager at
Mitchell Hutchins for taxable money market funds.
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 invest-
ment advisory firm. A majority interest in PIMCO Advisors is held by PIMCO
Partners, G.P. ("PIMCO Partners"), a general partnership between Pacific Finan-
cial Asset Management Corporation, an indirect wholly owned subsidiary of Pa-
cific 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 ag-
gregate assets of approximately $13.1 billion. It has become, since its found-
ing in 1971, one of the largest fixed in come management firms in the nation.
William C. Powers, a PIMCO Managing Director, is primarily responsible for the
day-to-day management of PACE Government Securities Fixed Income Investments.
Since 1991, Mr. Powers has been associated with PIMCO as a senior member of the
fixed income portfolio management group. He was previously associated with Bear
Stearns & Co. as Senior Managing Director specializing in mortgage-backed secu-
rities. Frank B. Rabinovitch, a PIMCO Managing Director, is primarily responsi-
ble for the day-to-day management of PACE Strategic Fixed Income Investments.
Mr. Rabinovitch has been associated with PIMCO for eleven years as a senior
member of the fixed income portfolio management group.
PACE INTERMEDIATE FIXED INCOME INVESTMENTS
Pacific Income Advisers, Inc. ("PIA") is located at 1299 Ocean Avenue, Suite
210, Santa
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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 March 31, 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 March 31, 1995, MGCM had over $6
billion in assets under management. It has been active in managing portfolios
of securities at MGCM since 1989 and over 20 years experience in the management
of tax-exempt fixed income investment. David W. Baldt is primarily responsible
for the day-to-day management of PACE Municipal Fixed Income Investments. Since
June 1989, Mr. Baldt has been Executive Vice President and Chief Investment Of-
ficer for fixed income at MGCM.
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 in excess of 85% of the voting
securities of Rogge Global, which makes him a controlling person of Rogge Glob-
al. As of March 31, 1995, Rogge Global had over $2.9 billion in assets under
management. It was organized in 1984 and specializes in global fixed income
management. Olaf Rogge, John Graham and Richard Bell are primarily responsible
for the day-to-day management of PACE Global Fixed Income Investments. Mr.
Rogge, who founded Rogge Global in 1984, has been managing global investments
for approximately twenty-three years. Mr. Graham joined Rogge Global Partners,
Inc. in February 1994 and is currently a Director, Portfolio Manager and Ana-
lyst. Prior thereto, he served as a Senior Manager of the Multi-currency Fixed
Income Investment Team at JP Morgan. Mr. Bell joined Rogge Global Partners,
Inc. in June 1990 and serves as a Director, Portfolio Manager and Analyst.
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 Part-
ner of Brinson Partners. Brinson Holdings, Inc., which owns all of the out-
standing stock of Brinson Partners, is wholly owned by Swiss Bank Corporation
("Swiss Bank"). Swiss Bank, with headquarters in Basel, Switzerland, is an in-
ternationally diversified organization with operations in many aspects of the
financial services industry. As of March 31, 1995, Brinson Partners had $40.0
billion in assets under management. It and its predecessor entities have man-
aged 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, Mr. Diermeier and
Mr. Moore have been working together for
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<PAGE>
over 20 years and both played a key role in the research, design and implemen-
tation of Brinson Partners' proprietary equity valuation model. Prior to join-
ing the firm in 1991, Mr. Leonard worked as a Financial Advisor with Sheffield
Financial Management for 4 years.
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. ("Chancel-
lor 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 convert-
ible 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 share-
holder 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 $29.2 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 portfo-
lio 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 in assets under management. It uses a value-oriented
approach when investing in both domestic and international markets. Henry Otto,
a Managing Director of Brandywine, Michael Jamison, a Managing Director of
Brandywine, and Stephen Tonkovich, a Vice President of Brandywine, are primar-
ily responsible for the day-to-day management of the PACE Small/Medium Company
Value Equity Investments. Mr. Otto is the primary portfolio manager for
Brandywine's small capitalization portfolios and has assisted in designing
quantitative evaluation tools at Brandywine since 1989. Mr. Jamison is Chief
Investment Officer of Brandywine's individual management program, responsible
for managing both equity and balanced portfolios at Brandywine since 1993. From
1988 to 1993, Mr. Jamison was a managing director of Mitchell Hutchins Asset
Management Inc. Mr. Tonkovich is assistant portfolio manager for Brandywine's
low price/earnings, small capitalization portfolios and is also responsible for
the on-going development of quantitative tools for value investing since 1987.
PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS
Westfield Capital Management Company, Inc. ("Westfield Capital") is located
at One
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Financial Center, Boston, Massachusetts 02111. Charles Michael Hazard, who
serves as President and Chief Investment Officer of Westfield Capital, owns
54.67% of its voting securities, which makes him a controlling person of West-
field Capital. As of March 31, 1995, Westfield Capital had over $629 million in
assets under management. It has developed an expertise in growth oriented port-
folios 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 Execu-
tive 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. As of March 31, 1995, Martin Currie had over $5 billion in as-
sets under management. It is one of Scotland's leading independent investment
management companies, and, since its founding in 1881, has developed an expert-
ise in equity investments. Martin Currie uses a team approach in the management
of PACE International Equity Investments. See "Investment Objectives and Poli-
cies of the Portfolios--PACE International Equity Investments" for a descrip-
tion 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 approximately $80 bil-
lion in assets under management as of December 31, 1994. As of March 31, 1995,
SCMI had over $13.7 billion in 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 during the
first fiscal year of the Trust to the extent necessary to assure competitive-
ness. See "Trust Expenses." Fee waivers and/or expense subsidies will increase
a Portfolio's yield or total return. See "Performance Information." Fee waivers
and expense subsidies are not guaranteed to continue in future years.
DISTRIBUTOR
Mitchell Hutchins is the distributor of each Portfolio's shares. PaineWebber
is the exclusive
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dealer pursuant to a contract with Mitchell Hutchins.
PORTFOLIO TRANSACTIONS
PaineWebber, and any of the Advisers or an affiliated person thereof (an "af-
filiated broker"), each may act as a broker or futures commission merchant
("FCM") for a Portfolio. In order for an affiliated broker to effect any port-
folio transactions for a Portfolio on an exchange or board of trade, the com-
missions, fees or other remuneration received by the affiliated broker must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers or FCMs in connection with comparable transactions in-
volving similar securities being purchased or sold on an exchange or board of
trade during a comparable period of time. This standard would allow an affili-
ated broker to receive only that remuneration which would be expected to be re-
ceived 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 fluctuates and is determined
as of the close of regular trading on the NYSE (currently 4:00 p.m., eastern
time) each Business Day. Each Portfolio's net asset value per share is deter-
mined 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 di-
rection of the Trust's board of trustees. The amortized cost method of valua-
tion is used to value all portfolio securities held by PACE Money Market In-
vestments and short-term dollar-denominated debt obligations of the other Port-
folios 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-pre-
vailing exchange rate. It should be recognized that judgment plays a greater
role in valuing lower rated debt securities and restricted or illiquid securi-
ties 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. 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 in-
dividual needs. PaineWebber, through the PACE Program, provides investment ad-
visory services in connection with allocations of assets among the Portfolios
principally by: identifying the investor's risk tolerances and investment ob-
jectives based on information provided by the investor; identifying and recom-
mending in writing a suggested allocation of assets among the Portfolios that
conforms to those tolerances and objectives; providing a monthly account state-
ment; and pro viding performance data on a quarterly basis.
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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 finan-
cial characteristics, including risk tolerances and investment objectives in
the context of the Portfolios, and assisting the investor to complete an In-
vestor Profile Questionnaire, that can be updated periodically upon the invest-
or's request. PaineWebber uses an investment profile evaluation and asset allo-
cation methodology to assist it in translating investor needs, preferences and
attitudes identified from the questionnaire into suggested portfolio alloca-
tions. A PaineWebber investment executive presents the recommended allocation
to the investor initially and may also review later with the investor monthly
account statements and other information such as the performance data provided
on a quarterly basis, monitor identified changes in the investor's financial
characteristics and assist 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 pre-
scribed by the investor exceeds the 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 arrangements to pay
the quarterly fee separately. The Program 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 (collec-
tively "Plans"). For certain Plans, PaineWebber may provide different services
than those described above for different fees. Fees may be subject to negotia-
tion 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 execu-
tives receive a portion of any PACE Program fee paid in consideration of pro-
viding services to participants in the PACE Program. Investors who are fiducia-
ries or otherwise make investment decisions with respect to Plans should con-
sider, 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 ($10,000, if the investor becomes a partici-
pant in the PACE Program at the commencement of Trust operations), and any sub-
sequent investment in the Trust must be at a minimum of $500. The Trust re-
serves the right at any time to vary the initial and subsequent investment min-
imums.
Trustees of the Trust, employees of PaineWebber and Mitchell Hutchins and
their subsidiaries, and family members of these persons who maintain an "em-
ployee related" ac-
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count at PaineWebber may participate in the PACE Program at a reduced, or with-
out the imposition of the, PACE Program fee.
Payment for shares of the Trust is due at PaineWebber 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, made the asset allocation decision and executed necessary PACE Pro-
gram documentation. Investors who make payment prior to the Settlement Date
will designate a temporary investment (such as a non-PACE PaineWebber money
market fund) for the payment until the Settlement Date.
REDEMPTIONS
REDEMPTIONS IN GENERAL
As described below, Portfolio shares may be redeemed at their net asset val-
ue, and redemption proceeds will be paid within three Business Days of the re-
ceipt of a redemption request. Investors may redeem shares through PaineWebber.
Investors may submit redemption requests to their PaineWebber investment ex-
ecutives in person or by telephone, mail or wire. As each Portfolio's agent,
PaineWebber will honor a redemption request by repurchasing Portfolio shares
from a redeeming shareholder at the shares' net asset value next determined af-
ter receipt of the request by PaineWebber's New York City offices. Within three
Business Days, repurchase proceeds will be credited to the investor's brokerage
account or paid by check at the election of the investor. PaineWebber reserves
the right not to honor any redemption request, in which case PaineWebber
promptly will forward the request to the Transfer Agent for redemption as de-
scribed below. The redeeming shareholders will be advised by their account ex-
ecutives if PaineWebber chooses not to honor a redemption request. PaineWebber
investment executives firms are responsible for promptly forwarding redemption
requests to PaineWebber's New York City offices.
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 instruc-
tion or a stock assignment specifying the number of shares or amount of invest-
ment to be redeemed (or that all shares credited to a Portfolio account by re-
deemed), 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 accor-
dance 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 ensur-
ing 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 in-
vestment executive. If an investor requests redemption of shares which were
purchased recently, the Trust may delay
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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 ac-
counts, 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 no-
tice. 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.
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 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 share-
holder's shares of a PaineWebber money market fund account or through the liq-
uidation of other securities held in the investor's PaineWebber brokerage ac-
count. 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 in-
vestment plan to facilitate regular PACE investments. This automatic fund
transfer service, however, is not available for retirement plan shareholders.
For further information regarding the automatic investment plan, the RMA ac-
count or the automatic funds transfer service, shareholders should contact
their PaineWebber investment executive.
AUTOMATIC REDEMPTION PLAN. Shareholders may have PaineWebber redeem a por-
tion of their shares in the PACE Program monthly or quarterly under the auto-
matic redemption plan. Quarterly redemptions are made in March, June, Septem-
ber and December. The amount to be redeemed must be at least $500 per month or
quarter. Purchases of additional shares of a Portfolio concurrent with redemp-
tion are ordinarily disadvantageous to shareholders because of tax liabili-
ties. For retirement plan shareholders, special limitations apply. For further
information regarding the automatic redemption plan, shareholders should con-
tact their PaineWebber investment executive.
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 in-
vestment 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
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net asset values. Portfolio shares are not exchangeable with shares of other
PaineWebber mutual funds.
Whether pursuant to a particular request or automatic rebalancing, an ex-
change of shares is treated for federal income tax purposes as a redemption
(sale) of shares given in exchange by the shareholder, and an exchanging share-
holder may, therefore, realize a taxable gain or loss in connection with the
exchange.
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 sepa-
rately 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 Port-
folios 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 Stra-
tegic Fixed Income Investments, PACE Intermediate Fixed Income Investments,
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 gains
from foreign currency transactions. While PACE Strategic Fixed Income Invest-
ments, PACE Intermediate Fixed Income Investments and PACE Global Fixed Income
Investments may accompany dividends with 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 after such a distribution, all or a portion of its distributions 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) if any, together with
any undistributed net realized short-term capital gain and 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 share-
holder's PaineWebber account, should contact their PaineWebber investment exec-
utive or complete the appropriate section of the application form.
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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 in-
vestment income, net gains from certain foreign currency transactions and net
short-term capital gain) and net capital gain that is distributed to its share-
holders.
Dividends from a Portfolio's investment company taxable income (whether paid
in cash or in additional Portfolio shares) generally are taxable to its share-
holders 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 aggre-
gate 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 securi-
ties 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 the por-
tion of their exempt-interest dividends from that Portfolio attributable to
those PABs in calculating their liability for the AMT. Corporate shareholders
must include all of their exempt-interest dividends in calculating their lia-
bility for that tax. If that Portfolio realizes capital gains as a result of
market transactions, any distribution of those gains is taxable to its share-
holders. All or a portion of the exempt-interest dividends paid by that Portfo-
lio also may be subject to state or local taxes, or both. Moreover, when a
shareholder redeems shares of that Portfolio, the portions of the redemption
proceeds attributable to undistributed excludable interest will lose its char-
acter as such and may be taxable as part of the redemption proceeds (see be-
low).
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 no-
tice 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 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) redemp-
tion proceeds payable to any individuals and certain other noncorporate share-
holders who do not provide the Trust with a correct taxpayer identification
number. Withholding at that rate is also required from taxable dividends and
capital gain distributions payable to such shareholders who otherwise are sub-
ject to backup withholding.
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A redemption of shares of a Portfolio may result in taxable gain or loss to
the redeeming shareholder, depending upon whether the redemption proceeds pay-
able 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 Portfo-
lio 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 their filing status.
The foregoing is only a summary of some of the important federal tax consid-
erations generally affecting each Portfolio and its shareholders; see the SAI
for a further discussion. There may be other federal, state or local tax con-
siderations 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. Standard-
ized 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 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 In-
come Investments, PACE Intermediate Fixed Income Investments, PACE Strategic
Fixed Income Investments and PACE Global Fixed Income Investments also may ad-
vertise their yield. Yield (except with regard to PACE Money Market Invest-
ments) 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 In-
vestments is the income on an investment in the Portfolio over a specified sev-
en-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
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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 share-
holder'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 Dela-
ware 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 unlim-
ited 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 pur-
pose. The trustees are required to call a meeting of shareholders for the pur-
pose of voting upon the question of removal of any trustee when so required in
writing by the shareholders of record holding at least 10% of the Trust's out-
standing 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 ag-
gregate vote of all series is required by the 1940 Act.
As of the date of the Prospectus, Mitchell Hutchins owned all of the out-
standing shares of beneficial interest of each separate series and, until such
time as the Trust issues shares to the public, Mitchell Hutchins will be deemed
to control the Trust under the 1940 Act.
To avoid additional operating costs and for investor convenience, the Portfo-
lios 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, Mas-
sachusetts 02171, is custodian of each Portfolio's assets and employs foreign
sub-custodians approved by the Trust's board of trustees in accordance with ap-
plicable requirements under the 1940 Act, to provide custody of the Portfolio's
foreign assets, if any. PFPC Inc., a subsidiary of PNC Bank, National Associa-
tion, whose principal business address is 400 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 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 re-
turn 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 secu-
rity or currency against payment of the exercise price. A put option is a simi-
lar 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 obliga-
tion, 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 securities option, except that exercise of an index option is ef-
fected 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.
INDEX FUTURES CONTRACTS--An 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 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 securities 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 for-
eign currency futures contracts are bilateral agreements pursuant to which one
party agrees to make, and the other party agrees to accept, delivery of a spec-
ified 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 con-
tracts 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 op-
tions 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 po-
sition if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exer-
cise 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 repre-
sents 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 as-
sume 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 obliga-
tion 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 par-
ties, at a price set at the time the contract is entered into.
A-1
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PAINEWEBBER
MANAGED ACCOUNTS SERVICES
PORTFOLIO TRUST
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PAINEWEBBER
PACE/SM/
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY......................................................... 2
TRUST EXPENSES............................................................. 8
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS AND RISK FACTORS...... 12
OTHER INVESTMENT POLICIES AND RISK FACTORS................................. 23
MANAGEMENT................................................................. 43
VALUATION OF SHARES........................................................ 50
PURCHASES.................................................................. 50
REDEMPTIONS................................................................ 52
OTHER SERVICES AND INFORMATION............................................. 53
EXCHANGES.................................................................. 53
DIVIDENDS AND TAXES........................................................ 54
PERFORMANCE INFORMATION.................................................... 56
GENERAL INFORMATION........................................................ 57
APPENDIX A................................................................. A-1
</TABLE>
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PROSPECTUS
JUNE 21, 1995
LOGO Recycled Paper
(C) 1995 PaineWebber Incorporated
