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Managed Accounts Services Portfolio Trust
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
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STATEMENT OF ADDITIONAL INFORMATION
Managed Accounts Services Portfolio Trust ("Trust") is an open-end
management investment company currently composed of twelve separate no-load
investment portfolios (each a "Portfolio") professionally managed by Mitchell
Hutchins Asset Management Inc. ("Mitchell Hutchins" or the "Manager"), a wholly
owned subsidiary of PaineWebber Incorporated ("PaineWebber"). For each Portfolio
other than PACE MONEY MARKET INVESTMENTS, advisory services are provided by an
investment adviser (each an "Adviser") monitored by and unaffiliated with the
Manager. For PACE MONEY MARKET INVESTMENTS, advisory services are provided by
the Manager. Mitchell Hutchins also serves as distributor for the Portfolios.
This Statement of Additional Information ("SAI") is not a prospectus and should
be read only in conjunction with the Trust's current Prospectus, dated October
16, 1996. You may obtain a copy of the Prospectus by calling any PaineWebber
investment executive or by calling toll-free at 1-800-647-1568. This SAI is
dated October 16, 1996.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Portfolios' investment policies and limitations.
YIELD FACTORS AND RATINGS. Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's, a division of The McGraw Hill Companies, Inc. ("S&P") are
private services that provide ratings of the credit quality of debt obligations,
including issues of municipal securities. A description of the range of ratings
assigned to Portfolios by Moody's and S&P applicable to securities in which one
or more of the Portfolios may invest is included in the Appendix to this SAI.
The Portfolios may use these ratings in determining whether to purchase, sell or
hold a security. These ratings represent Moody's and S&P's opinions as to the
quality of the debt obligations that they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, obligations with the same maturity, interest rate and
rating may have different market prices. Credit ratings attempt to evaluate the
safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also rating agencies may fail to make timely
changes in credit ratings in response to subsequent events, so that an issuer's
current financial condition may be better or worse than the rating indicates. In
the event any security held by a Portfolio is downgraded below the rating
categories set forth for each Portfolio as discussed in the Prospectus, the
Portfolio's Adviser (or Mitchell Hutchins in the case of PACE MONEY MARKET
INVESTMENTS) will review the security and determine whether to retain or dispose
of that security, provided that a Portfolio will not invest, at any time, more
than 5% (except PACE STRATEGIC FIXED INCOME INVESTMENTS, which may invest up to
20%, and PACE GLOBAL FIXED INCOME INVESTMENTS AND PACE LARGE COMPANY VALUE
EQUITY INVESTMENTS, which each may invest up to 10%) of its net assets in
securities that are rated below investment grade.
The process by which S&P and Moody's determine ratings for mortgage- and
asset-backed securities includes consideration of the likelihood of the receipt
by security holders of all distributions, the nature of the underlying
securities, the credit quality of the guarantor, if any, and the structural,
legal and tax aspects associated with such securities. Neither of such ratings
represents an assessment of the likelihood that principal prepayments will be
made by mortgagors or the degree to which such prepayments may differ from
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those originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to prepayments.
The yields on the money market instruments in which PACE MONEY MARKET
INVESTMENTS invests (such as commercial paper and bank obligations) are
dependent on a variety of factors, including general money market conditions,
conditions in the particular market for the obligation, the financial condition
of the issuer, the size of the offering, the maturity of the obligation and the
ratings of the issue. The ratings of nationally recognized statistical rating
organizations ("NRSROs") represent their opinions as to the quality of the
obligations they undertake to rate. Because ratings are general and are not
absolute standards of quality, obligations with the same rating, maturity and
interest rate may have different market prices. Subsequent to its purchase by a
Portfolio, an issue may cease to be rated or its rating may be reduced. In the
event that a security in PACE MONEY MARKET INVESTMENTS' portfolio ceases to be a
"First Tier Security," as defined in the Prospectus, or the Portfolio's Adviser
becomes aware that a security has received a rating below the second highest
rating by Moody's, S&P or any other NRSRO, Mitchell Hutchins, and in certain
cases the Trust's board of trustees, will consider whether that Portfolio should
continue to hold the obligation. A First Tier Security rated in the highest
short-term rating category by a single NRSRO at the time of purchase that
subsequently receives a rating below the highest rating category from a
different NRSRO will continue to be considered a First Tier Security.
Opinions relating to the validity of municipal securities in PACE MUNICIPAL
FIXED INCOME INVESTMENTS and to the exemption of interest thereon from federal
income tax and also, when available, from the federal alternative minimum tax
are rendered by bond counsel to the respective issuing authorities at the time
of issuance. Neither the Portfolio nor its Adviser will review the proceedings
relating to the issuance of municipal securities or the basis for such opinions.
An issuer's obligations under its municipal securities are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors (such as the federal bankruptcy laws) and federal, state
and local laws that may be enacted that adversely affect the tax-exempt status
of interest on the municipal securities held by the Portfolio or of the
exempt-interest dividends received by that Portfolio's shareholders, extend the
time for payment of principal or interest, or both, or impose other constraints
upon enforcement of such obligations. There is also the possibility that, as a
result of litigation or other conditions, the power or ability of issuers to
meet their obligations for the payment of principal of, and interest on, their
municipal securities may be materially and adversely affected.
In addition to ratings assigned to individual bond issues, each Portfolio's
Adviser analyzes interest rate trends and developments that may affect
individual issuers, including factors such as liquidity, profitability and asset
quality. The yields on bonds and other debt securities in which the Portfolios
invest are dependent on a variety of factors, including general money market
conditions, general conditions on the bond market, the financial condition of
the issuer, the size of the offering, the maturity of the obligation and its
rating. There is a wide variation in the quality of bonds, both within a
particular classification and between classifications. An issuer's obligations
under its bonds are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of bond-holders or other creditors
of an issuer; litigation or other conditions may also adversely affect the power
or ability of issuers to meet their obligations for the payment of interest and
principal on their bonds.
OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS. PACE MONEY
MARKET INVESTMENTS may invest in obligations of domestic or foreign branches of
foreign banks and foreign branches of domestic
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banks. Such investments may involve risks that are different from investments in
securities of domestic branches of domestic banks. These risks may include
unfavorable political and economic developments, withholding taxes, seizure of
foreign deposits, currency controls, interest limitations or other governmental
restrictions which might affect the payment of principal or interest on the
securities held by PACE MONEY MARKET INVESTMENTS. Additionally, there may be
less publicly available information about foreign banks and their branches, as
these institutions may not be subject to the same regulatory requirements as
domestic banks.
ADJUSTABLE RATE AND FLOATING RATE MORTGAGE-BACKED SECURITIES. As set forth
in the Prospectus, PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE
INTERMEDIATE FIXED INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME
INVESTMENTS may invest in adjustable rate mortgage ("ARM") and floating rate
mortgage-backed securities. Because the interest rates on ARM and floating rate
mortgage-backed securities are reset in response to changes in a specified
market index, the values of such securities tend to be less sensitive to
interest rate fluctuations than the values of fixed-rate securities. As a
result, during periods of rising interest rates, ARMs generally do not decrease
in value as much as fixed-rate securities. Conversely, during periods of
declining interest rates, ARMs generally do not increase in value as much as
fixed-rate securities. ARM mortgage-backed securities represent a right to
receive interest payments at a rate that is adjusted to reflect the interest
earned on a pool of ARMs. ARMs generally provide that the borrower's mortgage
interest rate may not be adjusted above a specified lifetime maximum rate or, in
some cases, below a minimum lifetime rate. In addition, certain ARMs provide for
limitations on the maximum amount by which the mortgage interest rate may adjust
for any single adjustment period. ARMs also may provide for limitations on
changes in the maximum amount by which the borrower's monthly payment may adjust
for any single adjustment period. In the event that a monthly payment is not
sufficient to pay the interest accruing on the ARM, any such excess interest is
added to the mortgage loan ("negative amortization"), which is repaid through
future monthly payments. If the monthly payment exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment that
would have been necessary to amortize the outstanding principal balance over the
remaining term of the loan, the excess reduces the principal balance of the ARM.
Borrowers under ARMs experiencing negative amortization may take longer to build
up their equity in the underlying property and may be more likely to default.
The rates of interest payable on certain ARMs, and therefore on certain ARM
mortgage-backed securities, are based on indices, such as the one-year constant
maturity Treasury rate, that reflect changes in market interest rates. Others
are based on indices, such as the 11th District Federal Home Loan Bank Cost of
Funds index, that tend to lag behind changes in market interest rates. The
values of ARM mortgage-backed securities supported by ARMs that adjust based on
lagging indices tend to be somewhat more sensitive to interest rate fluctuations
than those reflecting current interest rate levels, although the values of such
ARM mortgage-backed securities still tend to be less sensitive to interest rate
fluctuations than fixed-rate securities.
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
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SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES. As set
forth in the Prospectus, PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS,
PACE INTERMEDIATE FIXED INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME
INVESTMENTS each are authorized to invest in mortgage-and asset-backed
securities. The yield characteristics of mortgage- and asset-backed securities
differ from those of traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other obligations generally may be prepaid at any time.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on
fixed-rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Similar factors
apply to prepayments on asset-backed securities, but the receivables underlying
asset-backed securities generally are of a shorter maturity and thus are less
likely to experience substantial prepayments. Such securities, however, often
provide that for a specified time period the issuers will replace receivables in
the pool that are repaid with comparable obligations. If the issuer is unable to
do so, repayment of principal on the asset-backed securities may commence at an
earlier date. Mortgage- and asset-backed securities may decrease in value as a
result of increases in interest rates and may benefit less than other fixed
income securities from declining interest rates because of the risk of
prepayment.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the issuer receives mortgage payments
from the servicer and the time the issuer makes the payments on the
mortgage-backed securities, and this delay reduces the effective yield to the
holder of such securities.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. Because prepayment rates of individual pools vary widely, it is not
possible to predict accurately the average life of a particular pool. In the
past, a common industry practice has been to assume that prepayments on pools of
fixed rate 30-year mortgages would result in a 12-year average life for the
pool. At present, mortgage pools, particularly those with loans with other
maturities or different characteristics, are priced on an assumption of average
life determined for each pool. In periods of declining interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising rates the
rate of prepayment tends to decrease thereby lengthening the actual average life
of the pool. However, these effects may not be present, or may differ in degree,
if the mortgage loans in the pools have
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adjustable interest rates or other special payment terms, such as a prepayment
charge. Actual prepayment experience may cause the yield of mortgage-backed
securities to differ from the assumed average life yield. Reinvestment of
prepayments may occur at lower interest rates than the original investment, thus
adversely affecting the yield of the Portfolios.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Portfolio purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities. A Portfolio maintains
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to is, in effect, secured by such securities. If the value of such securities is
less than the repurchase price, plus any agreed-upon additional amount, the
other party must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities and the price that was paid by a Portfolio upon
their acquisition is accrued as interest and included in the Portfolio's net
investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to a Portfolio if the other party
to a repurchase agreement becomes bankrupt. Each Portfolio intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
its Adviser (or Mitchell Hutchins in the case of PACE MONEY MARKET INVESTMENTS
or in the case of transactions pursuant to any joint repurchase arrangements) to
present minimal credit risks in accordance with guidelines established by the
Trust's board of trustees. The Adviser will review and monitor the
creditworthiness of those institutions under the board's general supervision.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse
repurchase agreements with banks up to an aggregate value of not more than 5% of
its total assets. These agreements involve the sale of securities held by a
Portfolio subject to the Portfolio's agreement to repurchase the securities at
an agreed-upon date and price reflecting a market rate of interest. These
agreements are considered to be borrowings and may be entered into only for
extraordinary or emergency purposes or arbitrage transactions. While a reverse
repurchase agreement is outstanding, a Portfolio will maintain with its
custodian in a segregated account, cash or liquid securities, marked to market
daily, in an amount at least equal to the Portfolio's obligations under the
reverse repurchase agreement.
ILLIQUID SECURITIES. PACE GLOBAL FIXED INCOME INVESTMENTS, PACE
SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS, PACE INTERNATIONAL EQUITY
INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS may each
invest up to 15% of its net assets in illiquid securities. PACE MONEY MARKET
INVESTMENTS, PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE
INTERMEDIATE FIXED INCOME INVESTMENTS, PACE STRATEGIC FIXED INCOME INVESTMENTS,
PACE MUNICIPAL FIXED INCOME INVESTMENTS, PACE LARGE COMPANY VALUE EQUITY
INVESTMENTS, PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS and PACE SMALL/MEDIUM
COMPANY GROWTH EQUITY INVESTMENTS may each invest up to 10% of its net assets in
illiquid securities. The term "illiquid securities" for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which a Portfolio has valued the
securities and includes, among other things, purchased over-the-counter ("OTC")
options, repurchase agreements maturing in more than seven days, non-marketable
or interest-bearing time deposits and
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restricted securities other than those the Adviser has determined are liquid
pursuant to guidelines established by the Trust's board of trustees.
Interest-only ("IO") and principal-only ("PO") mortgage-backed securities are
considered illiquid except that the Adviser may determine that IO and PO classes
of fixed-rate mortgage-backed securities issued by the U.S. government or one of
its agencies or instrumentalities are liquid pursuant to guidelines established
by the Trust's board of trustees. The assets used as cover for OTC options
written by a Portfolio will be considered illiquid unless the OTC options are
sold to qualified dealers who agree that the Portfolio may repurchase any OTC
option it writes at a maximum price to be calculated by a formula set forth in
the option agreement. The cover for an OTC option written subject to this
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Illiquid restricted securities may be sold only in privately negotiated
transactions or in public offerings with respect to which a registration
statement is in effect under the Securities Act of 1933 ("1933 Act"). Where
registration is required, a Portfolio may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell.
Commercial paper issues in which PACE MONEY MARKET INVESTMENTS may invest
include securities issued by major corporations without registration under the
1933 Act in reliance on the exemption from such registration afforded by Section
3(a)(3) thereof and commercial paper issued in reliance on the so-called
"private placement" exemption from registration which is afforded by Section
4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is restricted as
to disposition under the federal securities laws in that resale must similarly
be made in an exempt transaction. Section 4(2) paper is normally resold to other
institutional investors through or with the assistance of investment dealers who
make a market in Section 4(2) paper, thus providing liquidity.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. ("NASD"). An
insufficient number of qualified buyers interested in purchasing Rule
144A-eligible restricted securities held by a Portfolio, however, could affect
adversely the marketability of such securities, and a Portfolio might be unable
to dispose of such securities promptly or at favorable prices.
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The board of trustees has delegated the function of making day-to-day
determinations of liquidity to the appropriate Adviser or Mitchell Hutchins,
pursuant to guidelines approved by the board. The Adviser or Mitchell Hutchins,
as applicable, takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). Each Portfolio's Adviser or Mitchell Hutchins,
as applicable, will monitor the liquidity of restricted securities in each
Portfolio's portfolio and report periodically on such decisions to the board of
trustees.
In making determinations as to the liquidity of municipal lease obligations
purchased by PACE MUNICIPAL FIXED INCOME INVESTMENTS, the Adviser distinguishes
between direct investments in municipal lease obligations (or participations
therein) and investments in securities that may be supported by municipal lease
obligations or certificates of participation therein. Since these municipal
lease obligation-backed securities are based on a well-established means of
securitization, the Adviser does not believe that investing in such securities
presents the same liquidity issues as direct investments in municipal lease
obligations.
SPECIAL CHARACTERISTICS OF FOREIGN AND EMERGING MARKET SECURITIES
FOREIGN AND EMERGING MARKET SECURITIES. Many of the foreign and emerging
market securities held by PACE INTERMEDIATE FIXED INCOME INVESTMENTS, PACE
STRATEGIC FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED INCOME INVESTMENTS, PACE
LARGE COMPANY VALUE EQUITY INVESTMENTS, PACE LARGE COMPANY GROWTH EQUITY
INVESTMENTS, PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS, PACE
INTERNATIONAL EQUITY INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS EQUITY
INVESTMENTS will not be registered with the Securities and Exchange Commission
("SEC"), nor will the issuers thereof be subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning foreign
issuers of securities held by these Portfolios than is available concerning U.S.
companies. Disclosure and regulatory standards in many respects are less
stringent in emerging market countries than in the U.S. and other major markets.
There also may be a lower level of monitoring and regulation of emerging markets
and the activities of investors in such markets, and enforcement of existing
regulations may be extremely limited. Foreign companies, and in particular,
companies in smaller and emerging capital markets are not generally subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those applicable to U.S. companies. Each
Portfolio's net investment income and capital gains from its foreign investment
activities may be subject to non-U.S. withholding taxes.
To the extent that these eight Portfolios invest in foreign securities, the
costs attributable to foreign investing that they must bear frequently are
higher than those attributable to domestic investing; this is particularly true
with respect to emerging capital markets. For example, the cost of maintaining
custody of foreign securities exceeds custodian costs for domestic securities,
and transaction and settlement costs of foreign investing also frequently are
higher than those attributable to domestic investing. Costs associated with the
exchange of currencies also make foreign investing more expensive than domestic
investing. Investment income on certain foreign securities in which the
Portfolios may invest may be subject to foreign withholding or other government
taxes that could reduce the return of these securities. Tax treaties between the
United States and foreign countries, however, may reduce or eliminate the amount
of foreign tax to which the Portfolios would be subject.
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Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of the Portfolio are uninvested and no return is earned thereon. The
inability of the Portfolio to make intended security purchases due to settlement
problems could cause the Portfolio to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Portfolio due to subsequent declines in the value
of such portfolio security or, if the Portfolio has entered into a contract to
sell the security, could result in possible liability to the purchaser.
SOVEREIGN DEBT. Investment by PACE INTERMEDIATE FIXED INCOME INVESTMENTS,
PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED INCOME INVESTMENTS,
PACE INTERNATIONAL EQUITY INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS
EQUITY INVESTMENTS in debt securities issued by foreign governments and their
political subdivisions or agencies ("Sovereign Debt") involves special risks.
The issuer of the debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal and/or
interest when due in accordance with the terms of such debt, and the Portfolio
may have limited legal recourse in the event of default.
Sovereign Debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore somewhat diminished. Political
conditions, especially a sovereign entity's willingness to meet the terms of its
debt obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank debt issued by the same sovereign
entity may not contest payments to the holders of Sovereign Debt in the event of
default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which a
sovereign debtor may be subject. Increased protectionism on the part of a
country's trading partners, or political changes in those countries, could also
adversely affect its exports. These events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency. Another factor bearing on the ability of a country to repay Sovereign
Debt is the level of the country's international reserves. Fluctuations in the
level of these reserves can affect the amount of foreign exchange readily
available for external debt payments and, thus, could have a bearing on the
capacity of the country to make payments on its Sovereign Debt.
To the extent that a country has a current account deficit (generally when
exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt obligations
can be affected by a change in international interest rates since the majority
of these obligations carry interest rates that are adjusted periodically based
upon international rates.
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With respect to Sovereign Debt of emerging market issuers, investors should
be aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt; such moratoria are currently in effect in certain Latin American
countries.
Certain emerging market countries have experienced difficulty in servicing
their Sovereign Debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds
(discussed below), and obtaining new credit to finance interest payments.
Holders of Sovereign Debt, including PACE STRATEGIC FIXED INCOME INVESTMENTS and
PACE GLOBAL FIXED INCOME INVESTMENTS, may be requested to participate in the
rescheduling of such debt and to extend further loans to sovereign debtors. The
interests of holders of Sovereign Debt could be adversely affected in the course
of restructuring arrangements or by certain other factors referred to below.
Furthermore, some of the participants in the secondary market for Sovereign Debt
may also be directly involved in negotiating the terms of these arrangements and
may therefore have access to information not available to other market
participants. Obligations arising from past restructuring agreements may affect
the economic performance and political and social stability of certain issuers
of Sovereign Debt. There are no bankruptcy proceedings by which Sovereign Debt
on which a sovereign has defaulted may be collected in whole or in part.
Foreign investment in certain Sovereign Debt is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in such Sovereign Debt and increase the costs and expenses of
the Portfolio. Certain countries in which the Portfolio will invest require
governmental approval prior to investments by foreign persons, limit the amount
of investment by foreign persons in a particular issuer, limit the investment by
foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than the classes available for purchase by
domiciliaries of the countries or impose additional taxes on foreign investors.
Certain issuers may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in a country's balance of
payments, the country could impose temporary restrictions on foreign capital
remittances. The Portfolio could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for repatriation of
capital, as well as by the application to the Portfolio of any restrictions on
investment. Investing in local markets may require the Portfolio to adopt
special procedures, seek local government approvals or take other actions, each
of which may involve additional costs to the Portfolio.
BRADY BONDS. PACE GLOBAL FIXED INCOME INVESTMENTS, PACE INTERNATIONAL
EQUITY INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS
may invest in Brady Bonds and other Sovereign Debt of countries that have
restructured or are in the process of restructuring Sovereign Debt pursuant to
the Brady Plan, an initiative announced by former U.S. Treasury Secretary
Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their
outstanding external commercial bank indebtedness. In restructuring its external
debt under the Brady Plan framework, a debtor nation negotiates with its
existing bank lenders as well as multilateral institutions such as the
International Monetary Fund ("IMF"). The Brady Plan framework, as it has
developed, contemplates the exchange of commercial bank debt for newly issued
Brady Bonds. Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
International Bank for Reconstruction and Development (more
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commonly known as the "World Bank") and the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.
Brady Plan debt restructurings totalling more than $139.3 billion have been
implemented to date in the Dominican Republic, Ecuador, Panama, Bulgaria,
Poland, Brazil, Mexico, Costa Rica, Venezuela, Uruguay, Nigeria, Argentina and
the Philippines and, in addition, Peru and Russia have announced intentions to
issue Brady Bonds. There can be no assurance that the circumstances regarding
the issuance of Brady Bonds by these countries will not change. Investors should
recognize that Brady Bonds have been issued only recently, and accordingly do
not have a long payment history. Agreements implemented under the Brady Plan to
date are designed to achieve debt and debt-service reduction through specific
options negotiated by a debtor nation with its creditors. As a result, the
financial packages offered by each country differ. The types of options have
included the exchange of outstanding commercial bank debt for bonds issued at
100% of face value of such debt, which carry a below-market stated rate of
interest (generally known as par bonds), bonds issued at a discount from the
face value of such debt (generally known as discount bonds), bonds bearing an
interest rate which increases over time and bonds issued in exchange for the
advancement of new money by existing lenders. Regardless of the stated face
amount and stated interest rate of the various types of Brady Bonds, the
Portfolios will purchase Brady Bonds in secondary markets, as described below,
in which the price and yield to the investor reflect market conditions at the
time of purchase.
Certain Brady Bonds have been collateralized as to principal due to maturity
by U.S. Treasury zero coupon bonds with maturities equal to the final maturity
of such Brady Bonds. Collateral purchases are financed by the IMF, the World
Bank and the debtor nations' reserves. In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations of the
issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have then
been due on the Brady Bonds in the normal course. In addition, interest payments
on certain types of Brady Bonds may be collateralized by cash or high-grade
securities in amounts that typically represent between 12 and 18 months of
interest accruals on these instruments with the balance of the interest accruals
being uncollateralized. Brady Bonds are often viewed as having several valuation
components: (1) the collateralized repayment of principal, if any, at final
maturity, (2) the collateralized interest payments, if any, (3) the
uncollateralized interest payments and (4) any collateralized repayment of
principal at maturity (these uncollateralized amounts constitute the "residual
risk"). In light of the residual risk of Brady Bonds and, among other factors,
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds, investments in Brady Bonds
are to be viewed as speculative. The Portfolios may purchase Brady Bonds with no
or limited collateralization, and will be relying for payment of interest and
(except in the case of principal collateralized Brady Bonds) repayment of
principal primarily on the willingness and ability of the foreign government to
make payment in accordance with the terms of the Brady Bonds. Brady Bonds issued
to date are purchased and sold in secondary markets through U.S. securities
dealers and other financial institutions and are generally maintained through
European transnational securities depositories.
STRUCTURED FOREIGN INVESTMENTS. PACE STRATEGIC FIXED INCOME INVESTMENTS,
PACE GLOBAL FIXED INCOME INVESTMENTS, PACE INTERNATIONAL EQUITY INVESTMENTS and
PACE INTERNATIONAL EMERGING MARKETS
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EQUITY INVESTMENTS may each invest a portion of its assets in interests in U.S.
and foreign entities organized and operated solely for the purpose of
securitizing or restructuring the investment characteristics of foreign
securities. This type of securitization or restructuring involves the deposit
with or purchase by a U.S. or foreign entity, such as a corporation or trust, or
specified instruments (such as commercial bank loans or Brady Bonds) and the
issuance by the entity of one or more classes of securities ("Structured Foreign
Investments") backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued Structured Foreign Investments to create securities with
different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Foreign Investments is dependent on the extent of the
cash flow on the underlying instruments.
The Structured Foreign Investments in which these Portfolios typically will
invest involve no credit enhancement. Accordingly, their credit risk generally
will be equivalent to that of the underlying instruments. The Portfolios are
permitted, however, to invest in classes of Structured Foreign Investments that
are subordinated to the right of payment of another class. Subordinated
Structured Foreign Investments typically have higher yields and present greater
risks than unsubordinated Structured Foreign Investments. Structured Foreign
Investments are typically sold in private placement transactions, and there
currently is no active trading market for Structured Foreign Investments.
FOREIGN CURRENCY TRANSACTIONS. Although PACE INTERMEDIATE FIXED INCOME
INVESTMENTS, PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED INCOME
INVESTMENTS, PACE LARGE COMPANY VALUE EQUITY INVESTMENTS and PACE LARGE COMPANY
GROWTH EQUITY INVESTMENTS, PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS,
PACE INTERNATIONAL EQUITY INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS
EQUITY INVESTMENTS value their assets daily in U.S. dollars, they do not intend
to convert their holdings of foreign currencies to U.S. dollars on a daily
basis. The Portfolio's foreign currencies may be held as "foreign currency call
accounts" at foreign branches of foreign or domestic banks. These accounts bear
interest at negotiated rates and are payable upon relatively short demand
periods. If a bank became insolvent, a Portfolio could suffer a loss of some or
all of the amounts deposited. Each of these Portfolios may convert foreign
currency to U.S. dollars from time to time. Although foreign exchange dealers
generally do not charge a stated commission or fee for conversion, the prices
posted generally include a "spread," which is the difference between the prices
at which the dealers are buying and selling foreign currencies.
CONVERTIBLE SECURITIES. As described in the Prospectus, PACE STRATEGIC
FIXED INCOME INVESTMENTS, PACE LARGE COMPANY VALUE EQUITY INVESTMENTS, PACE
LARGE COMPANY GROWTH EQUITY INVESTMENTS, PACE SMALL/MEDIUM COMPANY VALUE EQUITY
INVESTMENTS, PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS, PACE
INTERNATIONAL EQUITY INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS EQUITY
INVESTMENTS may each invest in convertible securities. Before conversion,
convertible securities have characteristics similar to non-convertible debt
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable non-convertible
securities. While no securities investment is without some risk, investments in
convertible securities generally entail less risk than the issuer's common
stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a Fixed Income Security. "Fixed Income Securities" include debt instruments
the interest payment on which may be fixed, variable or floating and also
includes zero coupon securities which pay no interest until maturity.
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The value of a convertible security is a function of its "investment value"
(determined by its yield comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value and
generally the conversion decreases as the convertible security approaches
maturity. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
security will be increasingly influenced by its conversion value. In addition, a
convertible security generally will sell at a premium over its conversion value
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding a Fixed Income Security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Portfolio is called for
redemption, the Portfolio will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party.
INVERSE FLOATERS. Inverse floaters are instruments whose interest rates
bear an inverse relationship to the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest rate paid on the inverse floater, with
the result that the inverse floater's price will be considerably more volatile
than that of a fixed-rate bond.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Each Portfolio may invest up to 10% of
its total assets in secured or unsecured variable or floating rate loans
("Loans") arranged through private negotiations between a borrowing corporation
and one or more banks ("Lenders"). A Portfolio's investments in Loans will be
primarily in the form of participations ("Participations") in Loans, although a
Portfolio may acquire assignments ("Assignments") of portions of Loans from
third parties. Participations typically will result in a Portfolio receiving
payments of principal, interest and any fees to which it is entitled from the
Lender selling the Participations and relying upon the Lender to collect those
payments from the borrower. In connection with purchasing Participations, a
Portfolio generally has no direct right to enforce compliance by the borrower
with the terms of the loan agreement relating to the Loan, and the Portfolio may
not directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, a Portfolio may assume the credit risk
of both the borrower and the Lender that is selling the Participation. In the
event of the insolvency of the Lender selling a Participation, a Portfolio may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower or receive the full benefit of any
collateral. A Portfolio will acquire Participations only if both the borrower
and the Lender interpositioned between the Portfolio and the borrower meet the
Portfolio's credit standards.
When the Portfolio purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. Under an Assignment, a Portfolio
generally will be able to collect payments and enforce remedies directly from or
against the borrower. Conversely, however, a Portfolio may not have the benefit
of the services of a lead or agent bank to administer the Loan on the
Portfolio's behalf.
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Assignments and Participations are generally not registered under the 1933
Act and thus are usually subject to the Portfolios' limitations on investments
in illiquid securities. Because there is no liquid market for such securities,
the Portfolios anticipate that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on the Portfolio's
ability to dispose of particular Assignments or Participations when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the borrower. Under
normal circumstances, the bank issuing the Participation will be considered the
issuer for purposes of concentration and diversification.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. A security purchased on a
when-issued or delayed delivery basis is recorded as an asset on the commitment
date and is subject to changes in market value, generally based upon changes in
the level of interest rates. Thus, fluctuation in the value of the security from
the time of the commitment date will affect the Portfolio's net asset value.
When the Portfolio commits to purchase securities on a when-issued or delayed
delivery basis, its custodian will set aside in a segregated account cash or
liquid securities with a market value equal to the amount of the commitment. If
necessary, additional assets will be placed in the account daily so that the
value of the account will equal or exceed the amount of the Portfolio's purchase
commitment. The Portfolio purchases when-issued securities only with the
intention of taking delivery, but may sell the right to acquire the security
prior to delivery if the Adviser or Mitchell Hutchins, as the case may be, deems
it advantageous to do so, which may result in capital gain or loss to a
Portfolio.
LEVERAGE
Each Portfolio may borrow up to 33 1/3% of its total assets and may borrow
in excess of its 33 1/3% limitation for extraordinary or emergency purposes, but
not in excess of an additional 5% of its total assets. Borrowing constitutes
leverage, a speculative technique. No Portfolio currently expects to leverage,
other than through the techniques described above and in the Prospectus during
the first year of operations. A Portfolio will only use leverage when its
Adviser believes that such leverage will benefit the Portfolio after taking
leverage risks into consideration.
The net asset value of a Portfolio and its yield may be more volatile due to
the Portfolio's use of leverage. Leverage also creates interest expenses for a
Portfolio, which will reduce its net income. To the extent the income derived
from securities purchased with funds obtained through leverage exceeds the
interest and other expenses that a Portfolio will have to pay in connection with
such leverage, the Portfolio's net income will be greater than if leverage were
not used. Conversely, if the income from the assets obtained through leverage is
not sufficient to cover the cost of leverage, the net income of a Portfolio will
be less than if leverage were not used, and therefore the amount available for
distribution to stockholders will be reduced.
TYPES OF MUNICIPAL SECURITIES
The types of municipal securities identified in the Prospectus as eligible
for purchase by PACE MUNICIPAL FIXED INCOME INVESTMENTS may include obligations
of issuers whose revenues are primarily derived from mortgage loans on housing
projects for moderate to low income families. The Portfolio also may purchase
mortgage subsidy bonds that are normally issued by special purpose public
authorities. In some cases the repayment of such bonds depends upon annual
legislative appropriations; in other cases repayment is a legal obligation of
the issuer and, if the issuer is unable to meet its obligations, repayment
becomes a moral commitment of a related government unit (subject, however, to
such appropriations).
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STAND-BY COMMITMENTS. The Portfolio may acquire stand-by commitments
pursuant to which a bank or other municipal bond dealer agrees to purchase
securities that are held in the Portfolio's portfolio or that are being
purchased by the Portfolio, at a price equal to (1) the acquisition cost
(excluding any accrued interest paid on acquisition), less any amortized market
premium or plus any accrued market or original issue discount, plus (2) all
interest accrued on the securities since the last interest payment date or the
date the securities were purchased by the Portfolio, whichever is later.
Although the Portfolio does not currently intend to acquire stand-by commitments
with respect to municipal securities held in their portfolios, the Portfolio may
acquire such commitments under unusual market conditions to facilitate portfolio
liquidity.
The Portfolio will enter into stand-by commitments only with those banks or
other dealers that, in the opinion of the Portfolio's Adviser, present minimal
credit risk. The Portfolio's right to exercise stand-by commitments would be
unconditional and unqualified. A stand-by commitment would not be transferable
by the Portfolio, although it could sell the underlying securities to a third
party at any time. The Portfolio may pay for stand-by commitments either
separately in cash or by paying a higher price for the securities that are
acquired subject to such a commitment (thus reducing the yield to maturity
otherwise available for the same securities). The acquisition of a stand-by
commitment would not ordinarily affect the valuation or maturity of the
underlying municipal securities. Stand-by commitments acquired by the Portfolio
would be valued at zero in determining net asset value. Whether the Portfolio
paid directly or indirectly for a stand-by commitment, its cost would be treated
as unrealized depreciation and would be amortized over the period the commitment
is held by the Portfolio.
PUT BONDS. The Portfolio may invest in put bonds that have a fixed rate of
interest and a final maturity beyond the date on which the put may be exercised.
If the put is a "one time only" put, the Portfolio ordinarily will either sell
the bond or put the bond, depending upon the more favorable price. If the bond
has a series of puts after the first put, the bond will be held as long as, in
the judgment of the Portfolio's Adviser, it is in the best interest of the
Portfolio to do so. There is no assurance that the issuer of a put bond acquired
by the Portfolio will be able to repurchase the bond upon the exercise date, if
the Portfolio chooses to exercise its right to put the bond back to the issuer.
MUNICIPAL LEASE OBLIGATIONS. Although municipal lease obligations do not
constitute general obligations of the municipality for which its taxing power is
pledged, they ordinarily are backed by its covenant to budget for, appropriate,
and make the payments due under the lease obligation. The leases underlying
certain municipal lease obligations, however, provide that lease payments are
subject to partial or full abatement if, because of material damage or
destruction of the leased property, there is substantial interference with the
lessee's use or occupancy of such property. This "abatement risk" may be reduced
by the existence of insurance covering the leased property, the maintenance by
the lessee of reverse funds or the provision of credit enhancements such as
letters of credit.
Certain municipal lease obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. In the case of a "non-appropriation" lease, a
Portfolio's ability to recover under the lease in the event of a
non-appropriation or default will be limited solely to the repossession of
leased property without recourse to the general credit of the lessee, and
disposition of the property in the event of foreclosure might prove difficult.
The Portfolio does not intend to invest a significant portion of its assets in
such "non-appropriation" municipal lease obligations. There is no limitation on
the Portfolio's ability to invest in other municipal lease obligations.
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PARTICIPATION INTERESTS. The Portfolio also may invest in participation
interests in municipal bonds, including industrial development bonds ("IDBs"),
private activity bonds ("PABs") and floating and variable rate securities. A
participation interest gives the Portfolio an undivided interest in a municipal
bond owned by a bank. The Portfolio has the right to sell the instrument back to
the bank. Such right generally is backed by the bank's irrevocable letter of
credit or guarantee and permits the Portfolio to draw on the letter of credit on
demand, after specified notice, for all or any part of the principal amount of
the Portfolio's participation interest plus accrued interest. Generally, the
Portfolio intends to exercise the demand under the letters of credit or other
guarantees only (1) upon a default under the terms of the underlying bond, (2)
to maintain the Portfolio's portfolio in accordance with its investment
objective and policies, or (3) as needed to provide liquidity to the Portfolio
in order to meet redemption requests. The ability of a bank to fulfill its
obligations under a letter of credit or guarantee might be affected by possible
financial difficulties of its borrowers, adverse interest rate or economic
conditions, regulatory limitations, or other factors. The Portfolio's Adviser
will monitor the pricing, quality, and liquidity of the participation interests
held by the Portfolio, and the credit standing of banks issuing letters of
credit or guarantees supporting such participation interests, on the basis of
published financial information reports of NRSROs and bank analytical services.
FLOATING RATE AND VARIABLE RATE MUNICIPAL SECURITIES. As noted in the
Prospectus, the Portfolio may invest in floating rate and variable rate
municipal securities with or without demand features. A demand feature gives the
Portfolio the right to sell the securities back to a specified party, usually a
remarketing agent, on a specified date. A demand feature is often backed by a
letter of credit or guarantee from a bank. As discussed under "Participation
Interests," to the extent that payment of an obligation is backed by a bank's
letter of credit or guarantee, such payment may be subject to the bank's ability
to satisfy that commitment. The interest rate on floating rate or variable rate
securities ordinarily is readjusted on the basis of the prime rate of the bank
that originated the financing or some other index or published rate, such as the
90-day U.S. Treasury Bill rate. Generally, these interest rate adjustments cause
the market value of floating rate and variable rate municipal securities to
fluctuate less than the market value of fixed-rate obligations. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
capital depreciation is less than for fixed-rate obligations.
HEDGING AND RELATED STRATEGIES
As discussed in the Prospectus, each Portfolio (except PACE MONEY MARKET
INVESTMENTS, PACE MUNICIPAL FIXED INCOME INVESTMENTS, PACE SMALL/MEDIUM COMPANY
VALUE EQUITY INVESTMENTS and PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS) may
use a variety of financial instruments ("Instruments"), which may include
certain options, futures contracts (sometimes referred to as "futures"), options
on futures contracts, forward currency contracts and interest rate protection
transactions, to attempt to hedge the portfolio of the Portfolio and to attempt
to enhance the Portfolio's income or return. The particular Instruments are
described in Appendix A to the Prospectus.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges." A short hedge is a purchase or sale of an Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held in a Portfolio's portfolio. Thus, in a short hedge a Portfolio takes a
position in an Instrument whose price is expected to move in the opposite
direction of the price of the investment being hedged. For example, a Portfolio
might purchase a put option on a security to hedge against a potential decline
in the value of that security. If the price of the security declined below the
exercise price of the put, the Portfolio could exercise the put and thus limit
its loss below the exercise price to the premium paid plus
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transaction costs. In the alternative, because the value of the put option can
be expected to increase as the value of the underlying security declines, the
Portfolio might be able to close out the put option and realize a gain to offset
the decline in the value of the security.
Conversely, a long hedge is a purchase or sale of an Instrument intended
partially or fully to offset potential increases in the acquisition cost of one
or more investments that a Portfolio intends to acquire. Thus, in a long hedge a
Portfolio takes a position in an Instrument whose price is expected to move in
the same direction as the price of the prospective investment being hedged. For
example, a Portfolio might purchase a call option on a security it intends to
purchase in order to hedge against an increase in the cost of the security. If
the price of the security increased above the exercise price of the call, the
Portfolio could exercise the call and thus limit its acquisition cost to the
exercise price plus the premium paid and transaction costs. Alternatively, the
Portfolio might be able to offset the price increase by closing out an
appreciated call option and realizing a gain.
Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Portfolio owns
or intends to acquire. Instruments on indices of equity or debt securities, in
contrast, generally are used to hedge against price movements in broad equity or
debt market sectors in which the Portfolio has invested or expects to invest.
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
The use of Instruments is subject to applicable regulations of the SEC, the
several options and futures exchanges upon which they are traded, the Commodity
Futures Trading Commission ("CFTC") and various state regulatory authorities. In
addition, a Portfolio's ability to use Instruments will be limited by tax
considerations. See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, the Advisers expect to discover additional opportunities in
connection with options, futures contracts, forward currency contracts and other
techniques. These new opportunities may become available as an Adviser develops
new techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts, forward currency contracts
or other techniques are developed. An Adviser may utilize these opportunities to
the extent that they are consistent with the Portfolio's investment objective
and permitted by the Portfolio's investment limitations and applicable
regulatory authorities. The Prospectus or SAI will be supplemented to the extent
that new products or techniques involve materially different risks than those
described below or in the Prospectus.
SPECIAL RISKS OF THESE STRATEGIES. The use of these Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Instruments are described in the sections that follow.
(1)Successful use of most Instruments depends upon the Adviser's ability to
predict movements of the overall securities, currency and interest rate
markets, which require different skills than predicting changes in the prices of
individual securities. While each Adviser is experienced in the use of
Instruments, there can be no assurance that any particular strategy adopted will
succeed.
(2)There might be imperfect correlation, or even no correlation, between
price movements of an Instrument and price movements of the investments
being hedged. For example, if the value of an Instrument used in a short hedge
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of
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the investments being hedged, such as speculative or other pressures on the
markets in which Instruments are traded. The effectiveness of hedges using
Instruments on indices will depend on the degree of correlation between price
movements in the index and price movements in the securities being hedged.
(3)Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements
in the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Portfolio entered in a
short hedge because the Adviser projected a decline in the price of a security
in the Portfolio's portfolio, and the price of that security increased instead,
the gain from that increase might be wholly or partially offset by a decline in
the price of the Instrument. Moreover, if the price of the Instrument declined
by more than the increase in the price of the security, the Portfolio could
suffer a loss. In either such case, the Portfolio would have been in a better
position had it not hedged at all.
(4) As described below, a Portfolio might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Instruments involving obligations to third parties (i.e.,
Instruments other than purchased options). If a Portfolio were unable to close
out its positions in such Instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair a Portfolio's ability to
sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that a Portfolio sell a portfolio
security at a disadvantageous time. A Portfolio's ability to close out a
position in an Instrument prior to expiration or maturity depends on the
existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the other party to the transaction ("contra party")
to enter into a transaction closing out the position. Therefore, there is no
assurance that any position can be closed out at a time and price that is
favorable to the Portfolio.
COVER FOR THESE STRATEGIES. Transactions using Instruments, other than
purchased options, expose a Portfolio to an obligation to another party. A
Portfolio will not enter into any such transactions unless it owns either (1) an
offsetting (covered) position in securities, currencies or other options,
futures contracts or forward contracts, or (2) cash or liquid securities, with a
value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. Each Portfolio will comply with SEC
guidelines regarding cover for these Instruments and will, if the guidelines so
require, set aside cash or liquid securities in a segregated account with its
custodian in the prescribed amount as determined daily on a mark-to-market
basis.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Instrument is open, unless they are replaced
with other appropriate assets. As a result, the commitment of a large portion of
a Portfolio's assets to cover or segregated accounts could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
OPTIONS. The Portfolios may purchase put and call options, and write (sell)
and purchase call options on debt and equity securities, foreign currencies and
indices of debt or equity securities. The purchase of call options serves as a
long hedge, and the purchase of put options serves as a short hedge. Writing
covered put or call options can enable a Portfolio to enhance income by reason
of the premiums paid by the purchasers of such options. However, if the market
price of the security underlying a put option declines to less than the exercise
price on the option, minus the premium received, the Portfolio would expect to
suffer a loss. Writing call options serves as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a
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price higher than the exercise price of the call option, it can be expected that
the option will be exercised and the Portfolio will be obligated to sell the
security at less than its market value. If the call option is an OTC option, the
securities or other assets used as cover would be considered illiquid to the
extent described under "Investment Policies and Restrictions--Illiquid
Securities."
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options that expire unexercised have
no value.
A Portfolio may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Portfolio may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, a Portfolio may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit a Portfolio to
realize profits or limit losses on an option position prior to its exercise or
expiration.
The Portfolios may purchase or write both exchange-traded and OTC options.
Currently, many options on equity securities are exchange-traded. Exchange
markets for options on debt securities and foreign currencies exist, but these
instruments are primarily traded on the OTC market. Exchange-traded options in
the United States are issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect, guarantees completion of
every exchange-traded option transaction. In contrast, OTC options are contracts
between a Portfolio and its contra party (usually a securities dealer or a bank)
with no clearing organization guarantee. Thus, when a Portfolio purchases or
writes an OTC option, it relies on the party from whom it purchased the option
or to whom it has written the option to make or take delivery of the underlying
investment upon exercise of the option. In the case of purchased options,
failure by the contra party to do so would result in the loss of any premium
paid by the Portfolio as well as the loss of any expected benefit of the
transaction.
Generally, the OTC debt and foreign currency options used by the Portfolios
are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
A Portfolio's ability to establish and close out positions in
exchange-traded options depends on the existence of a liquid market. Each
Portfolio intends to purchase or write only those exchange-traded options for
which there appears to be a liquid secondary market. However, there can be no
assurance that such a market will exist at any particular time. Closing
transactions can be made for OTC options only by negotiating directly with the
contra party, or by a transaction in the secondary market if any such market
exists. Although a Portfolio will enter into OTC options only with contra
parties that are expected to be capable of entering into closing transactions
with the Portfolio, there is no assurance that the Portfolio will be able to
close out an OTC option position at a favorable price prior to expiration. In
the event of insolvency of the contra party, the Portfolio might be unable to
close out an OTC position at any time prior to its expiration.
If the Portfolio were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a call option
written by a Portfolio could cause material losses because the Portfolio would
be unable to sell the investment used as cover for the written option until the
option expires or is exercised.
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GUIDELINES FOR OPTIONS. Each Portfolio's use of options is governed by the
following guidelines, which can be changed by the Trust's board of trustees
without shareholder vote:
(1) A Portfolio may purchase a put or call option, including any straddles
or spreads, only if the value of its premium, when aggregated with the premiums
on all other options held by the Portfolio, does not exceed 5% of the
Portfolio's total assets.
(2) The aggregate value of securities underlying put options written by a
Portfolio, determined as of the date the put options are written, will not
exceed 50% of the Portfolio's net assets.
(3) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on futures
contracts) purchased by the Portfolio are held at any time will not exceed 20%
of the Portfolio's total net assets.
FUTURES. The purchase of futures or call options thereon can serve as long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing call options on futures contracts can serve as a
limited short hedge, using a strategy similar to that used for writing call
options on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge.
Futures strategies also can be used to manage the average duration of a
Portfolio's portfolio. If its Adviser wishes to shorten the average duration of
a Portfolio, the Portfolio may sell a futures contract or a call option thereon,
or purchase a put option on that futures contract. If its Adviser wishes to
lengthen the average duration of a Portfolio, the Portfolio may buy a futures
contract or a call option thereon, or sell a put option thereon.
PACE GLOBAL FIXED INCOME INVESTMENTS may also write put options on foreign
currency futures contracts while at the same time purchasing call options on the
same futures contracts in order synthetically to create a long futures contract
position. Such options would have the same strike prices and expiration dates.
The Portfolio will engage in this strategy only when it is more advantageous to
the Portfolio than is purchasing the futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit in a
segregated account with its custodian, in the name of the futures commission
merchant ("FCM") through whom the transaction was effected, "initial margin"
consisting of cash or liquid securities, in an amount generally equal to 10% or
less of the contract value. Margin must also be deposited when writing an option
on a futures contract, in accordance with applicable exchange rules. Unlike
margin in securities transactions, initial margin on futures contracts does not
represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Portfolio at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Portfolio may be required
by an exchange to increase the level of its initial margin payment, and initial
margin requirements might be increased generally in the future by regulatory
action.
Subsequent "variation margin" payments are made to and from the FCM daily as
the value of the futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing, but represents a daily
settlement of a Portfolio's obligations to or from a FCM. When a Portfolio
purchases an option on a futures contract, the premium paid plus transaction
costs is all that is at risk. In contrast, when a Portfolio purchases or sells a
futures contract or writes an option thereon, it is subject to daily variation
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margin calls that could be substantial in the event of adverse price movements.
If the Portfolio has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous.
Purchasers and sellers of futures contracts and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, a futures contract or option
identical to the instrument purchased or sold. Positions in futures and options
on futures may be closed only on an exchange or board of trade that provides a
secondary market. Each Portfolio intends to enter into these transactions only
on exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on
the amount that the price of a future or option can vary from the previous day's
settlement price; once that limit is reached, no trades may be made that day at
a price beyond the limit. Daily price limits do not limit potential losses
because prices could move to the daily limit for several consecutive days with
little or no trading, thereby preventing liquidation of unfavorable positions.
If a Portfolio were unable to liquidate a futures or related options
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Portfolio would continue to
be subject to market risk with respect to the position. In addition, except in
the case of purchased options, the Portfolio would continue to be required to
make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option or to maintain cash or
securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
GUIDELINES FOR FUTURES AND RELATED OPTIONS. Each Portfolio's use of futures
and related options is governed by the following guidelines, which can be
changed by the Trust's board of trustees without shareholder vote:
(1) To the extent a Portfolio enters into futures contracts, options on
futures contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case that are not for bona fide hedging purposes (as defined
by the CFTC), the aggregate initial margin and premiums required to establish
these on those positions (excluding the amount by which options are
"in-the-money") may not exceed 5% of the Portfolio's net assets.
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(2) The aggregate premiums paid on all options (including options on
securities, foreign currencies and stock or bond indices and options on futures
contracts) purchased by a Portfolio that are held at any time will not exceed
20% of the Portfolio's total net assets.
(3) The aggregate margin deposits on all futures contracts and options
thereon held at any time by a Portfolio will not exceed 5% of the Portfolio's
total assets.
FOREIGN CURRENCY HEDGING STRATEGIES--SPECIAL CONSIDERATIONS. PACE STRATEGIC
FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED INCOME INVESTMENTS, PACE
INTERNATIONAL EQUITY INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS EQUITY
INVESTMENTS each may use options and futures on foreign currencies, as described
above, and forward currency forward contracts, as described below, to hedge
against movements in the values of the foreign currencies in which the
Portfolios' securities are denominated. Such currency hedges can protect against
price movements in a security that a Portfolio owns or intends to acquire that
are attributable to changes in the value of the currency in which it is
denominated. Such hedges do not, however, protect against price movements in the
securities that are attributable to other causes.
The Portfolios might seek to hedge against changes in the value of a
particular currency when no Instruments in that currency are available or such
Instruments are more expensive than certain other Instruments. In such cases, a
Portfolio may hedge against price movements in that currency by entering into
transactions using Instruments on another foreign currency or a basket of
currencies, the values of which the Adviser believes will have a positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the Instrument will not correlate perfectly with movements in
the price of the currency being hedged is magnified when this strategy is used.
The Portfolios may also use options and futures on foreign currencies,
options on currency futures and forward currency contracts for income and return
enhancement, for example, by shifting a Portfolio's exposure from one foreign
currency (or the U.S. dollar) to another foreign currency.
The value of Instruments in foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such Instruments, the
Portfolios could be disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Instruments until they reopen.
Settlement of transactions involving foreign currencies might be required to
take place within the country issuing the underlying currency. Thus, a Portfolio
might be required to accept or make delivery of the underlying foreign currency
in accordance with any U.S. or foreign regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and might be required to pay any
fees, taxes and charges associated with such delivery assessed in the issuing
country.
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FORWARD CURRENCY CONTRACTS. PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE
GLOBAL FIXED INCOME INVESTMENTS, PACE INTERNATIONAL EQUITY INVESTMENTS and PACE
INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed amount of
U.S. dollars or another foreign currency. Such transactions may serve as long
hedges--for example, a Portfolio may purchase a forward currency contract to
lock in the U.S. dollar price of a security denominated in a foreign currency
that the Portfolio intends to acquire. Forward currency contracts may also serve
as short hedges--for example, a Portfolio may sell a forward currency contract
to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale
of a security denominated in a foreign currency.
As noted above, each of these Portfolios may seek to hedge against changes
in the value of a particular currency by using forward contracts on another
foreign currency or a basket of currencies, the value of which its Adviser
believes will have a positive correlation to the values of the currency being
hedged. In addition, the Portfolios may use forward currency contracts to shift
exposure to foreign currency fluctuations from one country to another. For
example, if a Portfolio owns securities denominated in a foreign currency and
its Adviser believes that currency will decline relative to another currency, it
might enter into a forward contract to sell an appropriate amount of the first
foreign currency, with payment to be made in the second foreign currency.
Transactions that use two foreign currencies are sometimes referred to as "cross
hedging." Use of a different foreign currency magnifies the risk that movements
in the price of the Instrument will not correlate or will correlate unfavorably
with the foreign currency being hedged.
The cost to the Portfolios of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are entered into on a principal basis, no fees or commissions are involved. When
a Portfolio enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of the
contract. Failure by the contra party to do so would result in the loss of any
expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, a
forward contract identical to the forward contract purchased or sold. Secondary
markets generally do not exist for forward currency contracts, with the result
that closing transactions generally can be made for forward currency contracts
only by negotiating directly with the contra party. Thus, there can be no
assurance that a Portfolio will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the contra party, the Portfolio might be unable to close out a
forward currency contract at any time prior to maturity. In either event, the
Portfolio would continue to be subject to market risk with respect to the
position, and would continue to be required to maintain a position in the
securities or currencies that are the subject of the hedge or to maintain cash
or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, a Portfolio might need to purchase
or sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
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INTEREST RATE PROTECTION TRANSACTIONS. PACE GOVERNMENT SECURITIES FIXED
INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME INVESTMENTS may enter into
interest rate protection transactions, including interest rate swaps and
interest rate caps, collars and floors. Interest rate swap transactions involve
an agreement between two parties to exchange payments that are based, for
example, on variable and fixed rates of interest and that are calculated on the
basis of a specified amount of principal (the "notional principal amount") for a
specified period of time. Interest rate cap and floor transactions involve an
agreement between two parties in which the first party agrees to make payments
to the contra party when a designated market interest rate goes above (in the
case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. An interest rate collar
combines elements of buying a cap and selling a floor.
These Portfolios may enter into interest rate protection transactions to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. These Portfolios may also use interest
rate protection transactions for income and return enhancement purposes.
Each of these Portfolios may enter into interest rate swaps, caps, collars
and floors on either an asset- or liability-based basis, depending on whether it
is hedging its assets or its liabilities, and will usually enter into interest
rate swaps on a net basis, I.E., the two payment streams are netted out, with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments. Mitchell Hutchins and each Portfolio's Adviser believe such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to the Portfolio's borrowing restrictions. The net amount
of the excess, if any, of the Portfolio's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash, U.S. government securities or other liquid high-grade debt
obligations having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that satisfies
the requirements of the Investment Company Act of 1940 ("1940 Act"). A Portfolio
also will establish and maintain such segregated accounts with respect to its
total obligations under any interest rate swaps that are not entered into on a
net basis and with respect to any interest rate caps, collars and floors that
are written by the Portfolio.
A Portfolio will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by its Adviser to present
minimal credit risks in accordance with guidelines established by the Trust's
board of trustees. If there is a default by the other party to such a
transaction, the Portfolio will have to rely on its contractual remedies (which
may be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
SHORT SALES "AGAINST THE BOX". Each Portfolio may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to defer realization of gains or losses for tax or other purposes. To make
delivery to the purchaser in a short sale, the executing broker borrows the
securities being sold short on behalf of the Portfolio, and the Portfolio is
obligated to replace the securities borrowed at a date in the future. When a
Portfolio sells short, it will establish a margin account with the broker
effecting the short sale, and will deposit collateral with the broker. In
addition, the Portfolio will maintain with its custodian, in a segregated
account, the securities that could be used to cover the short sale. A Portfolio
will incur transaction costs, including interest expense, in connection with
opening, maintaining and closing short sales against the box. None of the
Portfolios currently intend to have obligations under short-sales that at any
time during the coming year exceed 5% of the Portfolio's net assets.
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A Portfolio might make a short sale "against the box" in order to hedge
against market risks when Mitchell Hutchins or an Adviser believes that the
price of a security may decline, thereby causing a decline in the value of a
security owned by the Portfolio or a security convertible into or exchangeable
for a security owned by the Portfolio, or when Mitchell Hutchins or an Adviser
want to sell a security that the Portfolio owns at a current price, but also
wishes to defer recognition of gain or loss for federal income tax purposes. In
such case, any loss in the Portfolio's long position after the short sale should
be reduced by a gain in the short position. Conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which
gains or losses in the long position are reduced will depend upon the amount of
the securities sold short relative to the amount of the securities the Portfolio
owns, either directly or indirectly, and in the case where the Portfolio owns
convertible securities, changes in the investment values or conversion premiums
of such securities.
INVESTMENT RESTRICTIONS
The Trust has adopted investment restrictions numbered 1 through 11 below as
fundamental policies of the Portfolios. Under the 1940 Act, a fundamental policy
may not be changed without the vote of a majority of the outstanding voting
securities of a Portfolio, which is defined in the 1940 Act as the lesser of (1)
67% or more of the shares present at a Portfolio meeting, if the holders of more
than 50% of the outstanding shares of the Portfolio are present or represented
by proxy or (2) more than 50% of the outstanding shares of the Portfolio.
Investment restrictions 12 through 22 may be changed by a vote of a majority of
the board of trustees at any time.
Under the investment restrictions adopted by the Portfolios:
1. A Portfolio, other than PACE INTERMEDIATE FIXED INCOME INVESTMENTS
and PACE GLOBAL FIXED INCOME INVESTMENTS, may not purchase securities
(other than U.S. government securities) of any issuer if, as a result of the
purchase, more than 5% of the value of the Portfolio's total assets would be
invested in such issuer, except that up to 25% of the value of the
Portfolio's total assets may be invested without regard to this 5%
limitation.
2. A Portfolio will not purchase more than 10% of the outstanding voting
securities of any one issuer, except that this limitation is not
applicable to the Portfolio's investments in U.S. government securities and
up to 25% of the Portfolio's assets may be invested without regard to these
limitations.
3. A Portfolio, other than PACE MUNICIPAL FIXED INCOME INVESTMENTS,will
invest no more than 25% of the value of its total assets in
securities of issuers in any one industry, the term industry being deemed to
include the government of a particular country other than the United States.
This limitation is not applicable to a Portfolio's investments in U.S.
government securities.
4. A Portfolio will not issue senior securities (including borrowing
money from banks and other entities and through reverse repurchase
agreements and mortgage dollar rolls) in excess of 33 1/3% of its total
assets (including the amount of senior securities issued, but reduced by any
liabilities and indebtedness not constituting senior securities), except
that a Portfolio may borrow up to an additional 5% of its total assets (not
including the amount borrowed) for extraordinary or emergency purposes.
5. A Portfolio will not pledge, hypothecate, mortgage, or otherwise
encumber its assets, except to secure permitted borrowings or in
connection with its use of forward contracts, futures contracts, options,
swaps, caps, collars and floors.
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6. A Portfolio will not lend any funds or other assets, except through
purchasing debt obligations, lending portfolio securities and
entering into repurchase agreements consistent with the Portfolio's
investment objective and policies.
7. A Portfolio will not purchase securities on margin, except that a
Portfolio may obtain any short-term credits necessary for the
clearance of purchases and sales of securities. For purposes of this
restriction, the deposit or payment of initial or variation margin in
connection with futures contracts or options on futures contracts will not
be deemed to be a purchase of securities on margin.
8. A Portfolio will not make short sales of securities or maintain a
short position, unless at all times when a short position is open it
owns an equal amount of the securities or securities convertible into or
exchangeable for, without payment of any further consideration, securities
of the same issue as, and equal in amount to, the securities sold short
("short sales against the box"), and unless not more than 10% of the
Portfolio's net assets (taken at market value) is held as collateral for
such sales at any one time.
9. A Portfolio will not purchase or sell real estate or real estate
limited partnership interests, except that it may purchase and sell
mortgage related securities and securities of companies that deal in real
estate or interests therein.
10. A Portfolio will not purchase or sell commodities or commodity
contracts (except currencies, forward currency contracts, futures
contracts and options and other similar contracts).
11. A Portfolio will not act as an underwriter of securities, except that
a Portfolio may acquire restricted securities under circumstances in
which, if the securities were sold, the Portfolio might be deemed to be an
underwriter for purposes of the 1933 Act.
12. A Portfolio will not invest in oil, gas or other mineral leases or
exploration or development programs.
13. A Portfolio will not make investments for the purpose of exercising
control of management.
14. A Portfolio will not purchase any securities if as a result (unless
the security is acquired pursuant to a plan of reorganization or an
offer of exchange) the Portfolio would own any securities of a registered
open-end investment company or more than 3% of the total outstanding voting
stock of any registered closed-end investment company or more than 5% of the
total value of the Portfolio's total assets would be invested in securities
of any one or more registered closed-end investment companies.
15. A Portfolio will not purchase any security if as a result the
Portfolio would then have more than 5% of its total assets invested
in securities of companies (including predecessors) that have been in
continuous operation for fewer than three years.
16. A Portfolio will not purchase or retain securities of any company if,
to the knowledge of the Trust after reasonable inquiry, any of the
Trust's officers or trustees or any officer or director of Mitchell Hutchins
or the Adviser for that Portfolio individually owns more than 1/2 of 1% of
the outstanding securities of the company and together they own beneficially
more than 5% of the securities.
17. A Portfolio will not invest in excess of 5% of the value of its net
assets in warrants, valued at the lower of cost or market value.
Included within this amount, but not to exceed 2% of the value of a
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Portfolio's net assets, may be warrants that are not listed on the New York
Stock Exchange, Inc. ("NYSE") or the American Stock Exchange, Inc. Warrants
acquired by a Portfolio in units or attached to securities may be deemed to
be without value.
18. A Portfolio may not purchase securities of other investment
companies, except to the extent permitted by the 1940 Act in the open
market at no more than customary brokerage commission rates. This limitation
does not apply to securities received or acquired as dividends, through
offers of exchange, or as a result of reorganization, consolidation or
merger.
19. A Portfolio (other than PACE SMALL/MEDIUM COMPANY GROWTH EQUITY
INVESTMENTS) will not purchase the securities of any issuer which,
together with its predecessors, has a record of less than three years of
continuous operation, or in securities which are restricted as to
disposition (including Rule 144A securities) if, as a result of such
purchase, more than 15% of the Portfolio's total assets would be invested in
such securities.
20. PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS will not invest
more than 10% of its net assets in (i) securities of any issuer
which, together with its predecessors, has a record of less than three years
of continuous operation, (ii) illiquid securities, and (iii) securities of
issuers that are restricted from being sold to the public without
registration under the 1933 Act. This restriction does not apply to
restricted securities eligible for resale pursuant to Rule 144A under the
1933 Act determined to be liquid under guidelines approved by the Trust's
board of trustees.
21. PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS will not engage
in short-term trading.
22. PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS will not invest
in puts, calls, straddles, spreads, and any combination thereof
unless such investments are for hedging purposes or are covered by cash or
securities.
The Trust may make commitments more restrictive than the restrictions listed
above so as to permit the sale of shares of a Portfolio in certain states.
Should the Trust determine that a commitment is no longer in the best interests
of the Portfolio and its shareholders, the Trust will revoke the commitment by
terminating the sale of shares of the Portfolio in the state involved. If a
percentage restriction is adhered to at the time of an investment or
transaction, a later increase or decrease in percentage resulting from a change
in values of portfolio securities or amount of total assets will not be
considered a violation of any of the foregoing limitations, except that with
regard to the borrowings limitation in investment restriction number 4, the
Portfolios will comply with the applicable restrictions of Section 18 of the
1940 Act.
26
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, their ages, business
addresses and principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- -------------------------------- --------------------- --------------------------------------------------
<S> <C> <C>
Margo N. Alexander**; 49 Trustee and Mrs. Alexander is president, chief executive of-
President ficer and a director of Mitchell Hutchins, a
director of Mitchell Hutchins Institutional In-
vestors Inc. and an executive vice president and
director of PaineWebber. Mrs. Alexander is
president and a director or trustee of 30 other
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
David J. Beaubien; 61 Trustee Mr. Beaubien is chairman of Yankee Environmental
101 Industrial Road Systems, Inc., a manufacturer of meteorological
Turners Falls, MA 01376 measuring systems. Prior to January 1991, he was
senior vice president of EG&G, Inc., a company
which makes and provides a variety of scientific
and technically oriented products and services.
He is also a director of IEC, Inc., a
manufacturer of electronic assemblies, and
Belfort Instruments, Inc., a manufacturer of
environmental instruments. From 1985 to January
1995, Mr. Beaubien served as a director or
trustee on the boards of the Kidder, Peabody &
Co. Incorporated mutual funds.
E. Garrett Bewkes, Jr.**; 69 Trustee Mr. Bewkes is a director of PaineWebber Group Inc.
("PW Group") (holding company of PaineWebber and
Mitchell Hutchins). Prior to December 1995, he
was a consultant to PW Group. Prior to 1988, he
was chairman of the board, president and chief
executive officer of American Bakeries Company.
Mr. Bewkes is also a director of Interstate
Bakeries Corporation and NaPro BioTherapeutics,
Inc. and a director or trustee of 30 other
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Bruce A. Bursey**; 46 Trustee Mr. Bursey is a senior vice president of
PaineWebber and director of Managed Accounts
Services.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- -------------------------------- --------------------- --------------------------------------------------
<S> <C> <C>
William W. Hewitt, Jr.; 67 Trustee Mr. Hewitt is retired. Since 1988, he has served
P.O. Box 2359 as a director or trustee on the boards of the
Princeton, New Jersey Guardian Life Insurance Company mutual funds.
08543-2359 From 1990 to January 1995, Mr. Hewitt served as a
director or trustee on the boards of the Kidder,
Peabody & Co. Incorporated mutual funds. From
1986-1988, he was an executive vice president and
director of mutual funds, insurance and trust
services of Shearson Lehman Brothers Inc.
Morton L. Janklow; 66 Trustee Mr. Janklow is senior partner of Janklow & Nesbit
598 Madison Avenue Associates, an international literary agency
New York, New York representing leading authors in their relation-
10022 ships with publishers and motion picture, tele-
vision and multi-media companies, and of counsel
to the law firm of Janklow, Newborn & Ashley. Mr.
Janklow is also a director of Marvel
Entertainment Group Inc., a leading youth en-
tertainment company.
J. Richard Sipes**; 49 Trustee Mr. Sipes is director of Products and Trading in
1200 Harbor Boulevard Private Client Group for PaineWebber. Mr. Sipes
Weehawken, New Jersey is also a director of PW Trust Co., PaineWebber
07087 Futures Management Corp., PaineWebber Properties
Inc., Puerto Rico Investors Tax-Free Fund and
Puerto Rico Investors Tax-Free Fund II.
William D. White; 61 Trustee Mr. White is retired. From February 1989 through
P.O. Box 199 March 1994, he was president of the National
Upper Black Eddy, PA League of Professional Baseball Clubs. Prior to
1989, he was a television sportscaster for
WPIX-TV, New York. Mr. White is also a director
or trustee of nine other investment companies for
which PaineWebber or Mitchell Hutchins serves as
investment adviser.
M. Cabell Woodward, Jr.; 67 Trustee Mr. Woodward is retired. From July 1985 until his
retirement in February 1993, Mr. Woodward was
vice chairman and chief financial officer of ITT
Corporation. Mr. Woodward is also a director of
Melville Corporation and Black & Decker
Corporation.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- -------------------------------- --------------------- --------------------------------------------------
<S> <C> <C>
Teresa M. Boyle; 37 Vice President Ms. Boyle is a first vice president and manag-
er--advisory administration of Mitchell Hutchins.
Prior to November 1993, she was compliance
manager of Hyperion Capital Management, Inc., an
investment advisory firm. Prior to April 1993,
Ms. Boyle was a vice president and manager--legal
administration of Mitchell Hutchins. Ms. Boyle is
also a vice president of 30 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Joan L. Cohen; 32 Vice President and Ms. Cohen is a vice president and attorney of
Assistant Secretary Mitchell Hutchins. Prior to December 1993, she
was an associate at the law firm of Seward &
Kissel.
C. William Maher; 35 Vice President and Mr. Maher is a first vice president and a senior
Assistant Treasurer manager of the mutual funds finance division of
Mitchell Hutchins. Mr. Maher is also a vice
president and assistant treasurer of 30 other
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.
Ann E. Moran; 39 Vice President and Ms. Moran is a vice president of Mitchell Hutch-
Assistant Treasurer ins. Ms. Moran is also a vice president and
assistant treasurer of 30 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Emil Polito; 36 Vice President Mr. Polito is a senior vice president and director
of operations and control for Mitchell Hutchins.
From March 1991 to September 1993, he was
director of the Mutual Funds Sales Support and
Service Center for Mitchell Hutchins and
PaineWebber. Mr. Polito is also senior vice
president of 30 investment companies, for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Victoria E. Schonfeld; 45 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins. Prior to May 1994,
she was a partner in the law firm of Arnold &
Porter. Ms. Schonfeld is also a vice president of
30 other investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- -------------------------------- --------------------- --------------------------------------------------
<S> <C> <C>
Paul H. Schubert; 33 Vice President and Mr. Schubert is a first vice president and a
Assistant Treasurer senior manager of the mutual fund finance
division of Mitchell Hutchins. From August 1992
to August 1994, he was a vice president at
BlackRock Financial Management, L.P. Prior to
August 1992, he was an audit manager with Ernst &
Young LLP. Mr. Schubert is also a vice president
and assistant treasurer of 30 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.
Julian F. Sluyters; 36 Vice President and Mr. Sluyters is a senior vice president and the
Treasurer director of the mutual fund finance division of
Mitchell Hutchins. Prior to 1991, he was an audit
senior manager with Ernst & Young LLP. Mr.
Sluyters is also a vice president and treasurer
of 30 other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
Gregory K. Todd; 39 Vice President and Mr. Todd is a first vice president and senior
Secretary associate general counsel of Mitchell Hutchins.
Prior to 1993, he was a partner in the law firm
of Shereff, Friedman, Hoffman & Goodman.
</TABLE>
- ------------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Messrs. Bewkes, Bursey, Sipes and Mrs. Alexander are "interested persons" of
the Trust as defined in the 1940 Act by virtue of their positions with
PaineWebber, PW Group and/or Mitchell Hutchins.
The Trust pays trustees who are not "interested persons" of the Trust
$35,000 annually and $5,000 per meeting of the board or any committee thereof.
Trustees are reimbursed for any expenses incurred in attending meetings.
Trustees of the Trust who are "interested persons" of the Trust as defined in
the 1940 Act receive no compensation from the Trust. Trustees and officers of
the Trust own in the aggregate less than 1% of the shares of each Portfolio.
Because Mitchell Hutchins, the Advisers and PaineWebber perform substantially
all of the services necessary for the operation of the Trust and the Portfolios,
the Trust requires no employees. No officer, director or employee of Mitchell
Hutchins, an Adviser or PaineWebber presently receives any compensation from the
Trust for acting as a trustee or officer. The table below includes certain
information relating to the compensation of the Trust's trustees.
30
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE FROM THE TRUST**
COMPENSATION AND THE
FROM THE PAINEWEBBER FUND
NAME OF PERSON, POSITION TRUST* COMPLEX+
- -------------------------------------------------------------------------------- ------------- ----------------
<S> <C> <C>
David J. Beaubien, Trustee...................................................... $ 32,500 $ 116,800
William W. Hewitt, Trustee...................................................... $ 32,500 $ 116,800
Morton L. Janklow, Trustee...................................................... $ 32,500 $ 5,000
William D. White, Trustee....................................................... $ 32,500 $ 33,125
M. Cabell Woodward, Jr., Trustee................................................ $ 13,750 $ -0-
Robert Douglass, former Trustee................................................. $ 13,750 $ -0-
</TABLE>
- ------------------------
Only independent members of the board of trustees are compensated by the Trust
and identified above; trustees who are "interested persons", as defined in the
1940 Act, do not receive compensation.
* Represents fees paid to each trustee during the fiscal year ended July 31,
1996.
** During the fiscal year ended July 31, 1996, Mitchell Hutchins waived a
portion of its management fee and subsidized certain operating expenses,
including the payment of trustees' fees, with respect to each Portfolio in
order to lower the overall expenses of each Portfolio to certain designated
levels.
+ Represents total compensation paid to each trustee during the calendar year
ended December 31, 1995; no fund within the complex has a bonus, pension,
profit sharing or retirement plan.
INVESTMENT MANAGEMENT, ADVISORY AND DISTRIBUTION ARRANGEMENTS
INVESTMENT MANAGEMENT ARRANGEMENTS. Mitchell Hutchins acts as the investment
manager to the Trust pursuant to an Investment Management and Administration
Agreement with the Trust ("Management Agreement") dated as of June 15, 1995.
Pursuant to the Management Agreement with the Trust, Mitchell Hutchins, subject
to the supervision of the Trust's board of trustees and in conformity with the
stated policies of the Trust, manages both the investment operations of the
Trust and the composition of the Trust's Portfolios, including the purchase,
retention, disposition and lending of securities. Mitchell Hutchins is
authorized to enter into advisory agreements for investment advisory services
("Advisory Agreement") in connection with the management of the Trust and the
Portfolios. Mitchell Hutchins will have responsibility for monitoring the
investment advisory services furnished pursuant to any such Advisory Agreements.
Mitchell Hutchins reviews the performance of all Advisers and makes
recommendations to the trustees of the Trust with respect to the retention and
renewal of Advisory Agreements. In connection therewith, Mitchell Hutchins is
obligated to keep certain books and records of the Trust. Mitchell Hutchins also
administers the Trust's business affairs and, in connection therewith, furnishes
the Trust with office facilities, together with those ordinary clerical and
bookkeeping services which are not being furnished by the Trust's custodian and
the Transfer Agent, the Trust's transfer and dividend disbursing agent. The
management services of Mitchell Hutchins for the Trust are not exclusive under
the terms of the Management Agreement, and Mitchell Hutchins is free to, and
does, render management services to others.
31
<PAGE>
In connection with its management of the business affairs of the Trust,
Mitchell Hutchins bears the following expenses:
(1)the salaries and expenses of all of its and the Trust's personnel except
the fees and expenses of trustees who are not affiliated persons of
Mitchell Hutchins or the Trust's Advisers;
(2)all expenses incurred, by Mitchell Hutchins or by the Trust in connection
with managing the ordinary course of the Trust's business, other than
those assumed by the Trust as described below; and
(3)the fees payable to each Adviser pursuant to the Advisory Agreements
between Mitchell Hutchins and each Adviser.
Under the terms of the Management Agreement, each Portfolio bears all
expenses incurred in its operation that are not specifically assumed by Mitchell
Hutchins or the Portfolio's Adviser. General expenses of the Trust not readily
identifiable as belonging to a Portfolio or to the Trust's other Portfolios are
allocated among series by or under the direction of the board of trustees in
such manner as the board deems to be fair and equitable. Expenses borne by each
Portfolio include the following (or a Portfolio's share of the following): (1)
the cost (including brokerage commissions) of securities purchased or sold by a
Portfolio and any losses incurred in connection therewith, (2) fees payable to
and expenses incurred on behalf of a Portfolio by Mitchell Hutchins, (3)
organizational expenses, (4) filing fees and expenses relating to the
registration and qualification of a Portfolio's shares and the Trust under
federal and state securities laws and maintenance of such registrations and
qualifications, (5) fees and salaries payable to trustees who are not interested
persons (as defined in the 1940 Act) of the Trust, Mitchell Hutchins or the
Adviser, (6) all expenses incurred in connection with trustees' services,
including travel expenses, (7) taxes (including any income or franchise taxes)
and governmental fees, (8) costs of any liability, uncollectible items of
deposit and other insurance or fidelity bonds, (9) any costs, expenses or losses
arising out of a liability of or claim for damages or other relief asserted
against the Trust or a Portfolio for violation of any law, (10) legal,
accounting and auditing expenses, including legal fees of special counsel for
the independent trustees, (11) charges of custodians, transfer agents and other
agents, (12) costs of preparing share certificates, (13) expenses of setting in
type and printing prospectuses and supplements thereto, statements of additional
information and supplements thereto, reports and proxy materials for existing
shareholders, and costs of mailing such materials to existing shareholders, (14)
any extraordinary expenses (including fees and disbursements of counsel)
incurred by the Trust or a Portfolio, (15) fees, voluntary assessments and other
expenses incurred in connection with membership in investment company
organizations, (16) costs of mailing and tabulating proxies and costs of
meetings of shareholders, the board and any committees thereof, (17) the cost of
investment company literature and other publications provided to trustees and
officers and (18) costs of mailing, stationery and communications equipment.
Under the Management Agreement, Mitchell Hutchins will not be liable for any
error or judgment or mistake of law or for any loss suffered by a Portfolio in
connection with the performance of the contract, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Mitchell
Hutchins in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. The Management Agreement terminates
automatically upon its assignment and is terminable at any time without penalty
by the Trust's board of trustees or by vote of the holders of a majority of a
Portfolio's outstanding voting securities, on 60 days' written notice to
Mitchell Hutchins or by Mitchell Hutchins on 60 days' written notice to the
Portfolio.
32
<PAGE>
The following table shows the approximate net assets as of August 31, 1996,
sorted by category of investment objective, of the investment companies as to
which Mitchell Hutchins serves as adviser or sub-adviser. An investment company
may fall into more than one of the categories below.
<TABLE>
<CAPTION>
INVESTMENT CATEGORY
- ------------------------------------------------------------------------------------------------ NET ASSETS
-----------
($MIL)
<S> <C>
Domestic (excluding Money Market)............................................................... $ 5,585.3
Global.......................................................................................... 2,826.1
Equity/Balanced................................................................................. 3,118.7
Fixed Income (excluding Money Market)........................................................... 5,292.7
Taxable Fixed Income.......................................................................... 3,653.2
Tax-Free Fixed Income......................................................................... 1,639.5
Money Market Funds.............................................................................. 21,656.6
</TABLE>
ADVISORY ARRANGEMENTS. As noted in the Prospectus, subject to the
monitoring of the Manager and, ultimately, the trustees, each Adviser manages
the securities held by the Portfolio it serves in accordance with the
Portfolio's stated investment objectives and policies, makes investment
decisions for the Portfolio and places orders to purchase and sell securities on
behalf of the Portfolio.
The Advisory Agreements were approved by the board of trustees including a
majority of the Trustees who are not parties to such contract or interested
persons of any such parties, on June 15, 1995 and was approved by Mitchell
Hutchins, as sole shareholder of the Trust on June 19, 1995. Mitchell Hutchins
and Rogge Global Partners plc ("Rogge Global") entered into a new Advisory
Agreement on August 28, 1996, which was approved by the Trust's board of
trustees at a meeting held on July 24, 1996, including a majority of the
Trustees who are not parties to such contract or interested persons of any such
parties. The original Advisory Agreement terminated as a result of the
acquisition of Rogge Global by United Asset Management Corporation; the terms of
the new Advisory Agreement are identical in all material respects to the
original Advisory Agreement.
Each Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement. Each Advisory Agreement may be terminated by the Trust
upon not more than 60 days' written notice. Each Advisory Agreement may be
terminated by Mitchell Hutchins or the Adviser upon not more than 120 days'
written notice. Each Advisory Agreement provides that it will continue in effect
for a period of more than two years from its execution only so long as such
continuance is specifically approved at least annually in accordance with the
requirements of the 1940 Act.
Under the Advisory Agreements, the Advisers will not be liable for any error
or judgment or mistake of law or for any loss suffered by a Portfolio in
connection with the performance of the contract, except a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Advisers
in the performance of their duties or from reckless disregard of their duties
and obligations thereunder. Each Adviser has agreed to its fees as described in
the Prospectus and which are generally lower than the fees it charges to
institutional accounts for which it serves as investment adviser and performs
all administrative functions associated with serving in that capacity in
recognition of the reduced administrative responsibilities it has undertaken
with respect to the Portfolio. By virtue of the management, monitoring and
administrative functions performed by Mitchell Hutchins, and the fact that
Advisers are not required to make decisions regarding the allocation of assets
among the major sectors of the securities markets, each Adviser serves in a
subadvisory capacity to the Portfolio. Subject to the monitoring by the Manager
and, ultimately, the board of
33
<PAGE>
trustees, each Adviser's responsibilities are limited to managing the securities
held by the Portfolio it serves in accordance with the Portfolio's stated
investment objective and policies, making investment decisions for the Portfolio
and placing orders to purchase and sell securities on behalf of the Portfolio.
The following table shows the advisory and administration fees earned (or
accrued) by Mitchell Hutchins, the advisory and administration fees waived by
Mitchell Hutchins and the sub-advisory fees paid by Mitchell Hutchins (not the
Portfolio) to each Adviser for the period August 24, 1995 (commencement of
operations) through July 31, 1996.
<TABLE>
<CAPTION>
ADVISORY FEES PAID
ADVISORY FEES BY
ADVISORY FEES EARNED WAIVED MITCHELL HUTCHINS
(OR ACCRUED) BY BY MITCHELL (NOT THE PORTFOLIO)
PORTFOLIO MITCHELL HUTCHINS HUTCHINS TO ADVISER
- ------------------------------------------------ -------------------- ------------------- --------------------
<S> <C> <C> <C>
PACE Money Market Investments................... $ 19,992 $ 19,992 $ N/A
PACE Government Securities Fixed Income
Investments.................................... 218,140 92,619 77,907
PACE Intermediate Fixed Income Investments...... 138,291 82,160 46,071
PACE Strategic Fixed Income Investments......... 154,381 106,919 55,109
PACE Municipal Fixed Income Investments......... 57,596 57,596 19,188
PACE Global Fixed Income Investments............ 177,669 138,050 75,569
PACE Large Company Value Equity Investments..... 350,054 170,745 131,205
PACE Large Company Growth Equity Investments.... 285,409 115,140 107,028
PACE Small/Medium Company Value Equity
Investments.................................... 302,383 179,172 113,332
PACE Small/Medium Company Growth Equity
Investments.................................... 325,385 109,433 122,019
PACE International Equity Investments........... 190,817 54,634 84,808
PACE International Emerging Markets Equity
Investments.................................... 151,151 109,656 68,672
</TABLE>
DISTRIBUTION ARRANGEMENTS. Mitchell Hutchins acts as the distributor of the
shares of each Portfolio under a distribution contract with the Trust dated as
of June 15, 1995 ("Distribution Contract") that requires Mitchell Hutchins to
use its best efforts, consistent with its other businesses, to sell shares of
the Portfolios. Shares of the Portfolios are offered continuously. Under a
dealer agreement between Mitchell Hutchins and PaineWebber dated as of June 15,
1995 ("Dealer Agreement"), PaineWebber sells the Portfolios' shares.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for a Portfolio other than PACE MONEY
MARKET INVESTMENTS are made by the Adviser, subject to the overall review of the
Manager and the board of trustees. Decisions to buy and sell securities for PACE
MONEY MARKET INVESTMENTS are made by Mitchell Hutchins, subject to the overall
review of the board of trustees. Although investment decisions for the
Portfolios are made independently from those of the other accounts managed by
the Adviser or Mitchell Hutchins, as applicable, investments of the type that
the Portfolio may make also may be made by those other accounts. When a
Portfolio and one or more other accounts managed by the Adviser or Mitchell
Hutchins, as applicable, are prepared to invest in, or
34
<PAGE>
desire to dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by the Adviser or Mitchell
Hutchins, as applicable, to be equitable to each. In some cases, this procedure
may adversely affect the price paid or received by a Portfolio or the size of
the position obtained or disposed of by a Portfolio.
Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. No stated
commission is generally applicable to securities traded in U.S. OTC markets, but
the prices of those securities include undisclosed commissions or mark-ups. The
cost of securities purchased from underwriters include an underwriting
commission or concession and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down. U.S. government
securities generally are purchased from underwriters or dealers, although
certain newly-issued U.S. government securities may be purchased directly from
the U.S. Treasury or from the issuing agency or instrumentality.
For the period August 24, 1995 (commencement of operations) through July 31,
1996, the Portfolios paid the brokerage commissions set forth below:
<TABLE>
<CAPTION>
PORTFOLIO TOTAL BROKERAGE COMMISSIONS
- -------------------------------------------------------------------------------- ---------------------------
<S> <C>
PACE Money Market Investments................................................... $ 0
PACE Government Securities Fixed Income Investments............................. 0
PACE Intermediate Fixed Income Investments...................................... 0
PACE Strategic Fixed Income Investments......................................... 0
PACE Municipal Fixed Income Investments......................................... 0
PACE Global Fixed Income Investments............................................ 0
PACE Large Company Value Equity Investments..................................... 96,437
PACE Large Company Growth Equity Investments.................................... 53,077
PACE Small/Medium Company Value Equity Investments.............................. 307,395
PACE Small/Medium Company Growth Equity Investments............................. 100,645
PACE International Equity Investments........................................... 192,164
PACE International Emerging Markets Equity Investments.......................... 136,615
</TABLE>
In selecting brokers or dealers to execute securities transactions on behalf
of a Portfolio, its Adviser or Mitchell Hutchins, as applicable, seeks the best
overall terms available. In assessing the best overall terms available for any
transactions, the Adviser or Mitchell Hutchins, as applicable, will consider the
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer and the amount of the commission, if any, for the specific
transaction and on a continuing basis. In addition, each Advisory Agreement
between the Trust and an Adviser authorizes the Adviser, in selecting brokers or
dealers to execute a particular transaction, and in evaluating the best overall
terms available, to consider the brokerage and research services (as those terms
are defined in Section 28(e) of the Securities Exchange Act of 1934) provided to
the Portfolio and/or other accounts over which the Adviser or its affiliates
exercise investment discretion. The fees under the Management Agreement and the
Advisory Agreements, respectively, are not reduced by reason of a Portfolio's
Adviser receiving brokerage and research services. The board of trustees of the
Trust will periodically review the commissions paid by a Portfolio to determine
if the commissions paid over representative periods of time were reasonable in
relation to the benefits inuring to the Portfolio. OTC purchases and sales by a
Portfolio are transacted directly with principal market makers except in those
cases in which better prices and executions may be obtained elsewhere.
35
<PAGE>
For the period August 24, 1995 (commencement of operations) through July 31,
1996, the Portfolios directed portfolio transactions to brokers chosen because
they provide research and analysis, for which the Portfolios paid the brokerage
commissions indicated below:
<TABLE>
<CAPTION>
AMOUNT OF
PORFOLIO BROKERAGE
PORTFOLIO TRANSACTIONS COMMISSIONS PAID
- -------------------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
PACE Money Market Investments....................................... $ 0 $ 0
PACE Government Securities Fixed Income Investments................. 0 0
PACE Intermediate Fixed Income Investments.......................... 0 0
PACE Strategic Fixed Income Investments............................. 0 0
PACE Municipal Fixed Income Investments............................. 0 0
PACE Global Fixed Income Investments................................ 0 0
PACE Large Company Value Equity Investments......................... 93,279,524 90,203
PACE Large Company Growth Equity Investments........................ 3,967,720 5,904
PACE Small/Medium Company Value Equity Investments.................. 4,695,962 21,746
PACE Small/Medium Company Growth Equity Investments................. 0 0
PACE International Equity Investments............................... 0 0
PACE International Emerging Markets Equity Investments.............. 0 0
</TABLE>
To the extent consistent with applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC under the 1940 Act, the board of
trustees has determined that transactions for a Portfolio may be executed
through PaineWebber and other affiliated broker-dealers if, in the judgment of
the Adviser, the use of an affiliated broker-dealer is likely to result in price
and execution at least as favorable as those of other qualified broker-dealers,
and if, in the transaction, the affiliated broker-dealer charges the Portfolio a
fair and reasonable rate.
For the period August 24, 1995 (commencement of operations) through July 31,
1996, the Portfolios paid to PaineWebber the brokerage commissions set forth
below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE DOLLAR
TOTAL AMOUNT OF TRANSACTIONS
BROKERAGE COMMISSIONS COMMISSIONS PAID INCLUDING THE PAYMENT
PORTFOLIO TO PAINEWEBBER BY PORTFOLIO OF COMMISSIONS
- ----------------------------------------- ---------------------- ------------------ ----------------------
<S> <C> <C> <C>
PACE Money Market Investments............ $ 0 0% 0%
PACE Government Securities Fixed Income
Investments............................. 0 0 0
PACE Intermediate Fixed Income
Investments............................. 0 0 0
PACE Strategic Fixed Income
Investments............................. 0 0 0
PACE Municipal Fixed Income
Investments............................. 0 0 0
PACE Global Fixed Income Investments..... 0 0 0
PACE Large Company Value Equity
Investments............................. 0 0 0
PACE Large Company Growth Equity
Investments............................. 1,026 1.90 0.45
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE DOLLAR
TOTAL AMOUNT OF TRANSACTIONS
BROKERAGE COMMISSIONS COMMISSIONS PAID INCLUDING THE PAYMENT
PORTFOLIO TO PAINEWEBBER BY PORTFOLIO OF COMMISSIONS
- ----------------------------------------- ---------------------- ------------------ ----------------------
<S> <C> <C> <C>
PACE Small/Medium Company Value Equity
Investments............................. $ 0 0% 0%
PACE Small/Medium Company Growth Equity
Investments............................. 660 0.65 1.41
PACE International Equity Investments.... 0 0 0
PACE International Emerging Markets
Equity Investments...................... 0 0 0
</TABLE>
No Portfolio will purchase any security, including U.S. government
securities or municipal securities, during the existence of any underwriting or
selling group relating thereto of which PaineWebber is a member, except to the
extent permitted by the SEC.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs") who receive brokerage commissions for their services. The
Portfolios' procedures in selecting FCMs to execute transactions in futures
contracts, including procedures permitting the use of an affiliated FCM,
including PaineWebber and its affiliates, are similar to those in effect with
respect to brokerage transactions in securities. For the period August 24, 1995
(commencement of operations) through July 31, 1996, PACE GOVERNMENT SECURITIES
FIXED INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME INVESTMENTS paid $644
and $914, respectively, in commissions to FCMs. During the same period, with
respect to the other Portfolios, no commissions were paid to FCMs.
Research services furnished by dealers or brokers with or through which a
Portfolio effects securities transactions may be used by Mitchell Hutchins or an
Adviser in advising other funds or accounts and, conversely, research services
furnished to Mitchell Hutchins or an Adviser by dealers or brokers in connection
with other funds or accounts Mitchell Hutchins or an Adviser advises may be used
by Mitchell Hutchins or an Adviser in advising the Portfolios over which
Mitchell Hutchins or the Adviser has investment discretion. Information and
research received from such brokers or dealers will be in addition to, and not
in lieu of, the services required to be performed by Mitchell Hutchins or the
Advisers under the Management Agreement and Advisory Agreements.
PORTFOLIO TURNOVER
PACE MONEY MARKET INVESTMENTS may attempt to increase yields by trading to
take advantage of short-term market variations, which results in high portfolio
turnover. Because purchases and sales of money market instruments are usually
effected as principal transactions, this policy does not result in high
brokerage commissions to the Portfolio. The other Portfolios do not intend to
seek profits through short-term trading. Nevertheless, the Portfolios will not
consider portfolio turnover rate a limiting factor in making investment
decisions.
A Portfolio's turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year by the monthly
average value of the portfolio securities. Securities or options with remaining
maturities of one year or less on the date of acquisition are excluded from the
calculation. Under certain market conditions, a Portfolio authorized to engage
in transactions in options may experience increased portfolio turnover as a
result of its investment strategies. For instance, the exercise of a substantial
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number of options written by a Portfolio (due to appreciation of the underlying
security in the case of call options or depreciation of the underlying security
in the case of put options) could result in a turnover rate in excess of 100%. A
portfolio turnover rate of 100% would occur if all of a Portfolio's securities
that are included in the computation of turnover were replaced once during a
period of one year.
Certain other practices that may be employed by a Portfolio also could
result in high portfolio turnover. For example, portfolio securities may be sold
in anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another comparable quality purchased at
approximately the same time to take advantage of what an Adviser believes to be
a temporary disparity in the normal yield relationship between the two
securities. These yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or supply of, various
types of securities.
Portfolio turnover rates may vary greatly from year to year as well as
within a particular year and may be affected by cash requirements for
redemptions of a Portfolio's shares as well as by requirements that enable the
Portfolio to receive favorable tax treatment.
The following table sets forth the portfolio turnover rates for each
Portfolio for the period August 24, 1995 (commencement of operations) through
July 31, 1996.
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO TURNOVER RATES
- ------------------------------------------------------------------------------------- --------------------------
<S> <C>
PACE Money Market Investments........................................................ 0%
PACE Government Securities Fixed Income Investments.................................. 978%
PACE Intermediate Fixed Income Investments........................................... 36%
PACE Strategic Fixed Income Investments.............................................. 166%
PACE Municipal Fixed Income Investments.............................................. 78%
PACE Global Fixed Income Investments................................................. 197%
PACE Large Company Value Equity Investments.......................................... 38%
PACE Large Company Growth Equity Investments......................................... 65%
PACE Small/Medium Company Value Equity Investments................................... 30%
PACE Small/Medium Company Growth Equity Investments.................................. 115%
PACE International Equity Investments................................................ 25%
PACE International Emerging Markets Equity Investments............................... 22%
</TABLE>
The high portfolio turnover rates for PACE GOVERNMENT SECURITIES FIXED
INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME INVESTMENTS are attributed
primarily to the Portfolios' use of mortgage dollar rolls. Mortgage dollar rolls
involve the simultaneous sale and repurchase of specific mortgage-backed
securities. These transactions, if executed at attractive levels, allow the
Portfolios to invest the realized proceeds in higher-yielding short-term
securities. Such opportunities occurred repeatedly throughout the fiscal period
ended July 31, 1996, resulting in the Portfolios' high portfolio turnover rates.
The high portfolio turnover rate for PACE SMALL/MEDIUM COMPANY GROWTH EQUITY
INVESTMENTS is attributed primarily to the continued cash inflows since
inception, as well as greater than average Nasdaq volatility. The high portfolio
turnover rate for PACE GLOBAL FIXED INCOME INVESTMENTS is attributed primarily
to the buying and selling of fixed income securities, in conjunction with the
execution of the Portfolio's currency hedging strategies.
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ADDITIONAL EXCHANGE AND REDEMPTION INFORMATION
As discussed in the Prospectus, shares of each Portfolio may be exchanged
without payment of any exchange fee for shares of another Portfolio at their
respective net asset values. Portfolio shares, however, are not exchangeable
with shares of other PaineWebber mutual funds. Shareholders will receive at
least 60 days' notice of any termination or material modification of the
exchange offer, except no notice need be given if, under extraordinary
circumstances, either redemptions are suspended under the circumstances
described below or a Portfolio temporarily delays or ceases the sales of its
shares because it is unable to invest amounts effectively in accordance with the
Portfolio's investment objectives, policies and restrictions.
If conditions exist that make cash payments undesirable, each Portfolio
reserves the right to honor any request for redemption by making payment in
whole or in part in securities chosen by the Portfolio and valued in the same
way as they would be valued for purposes of computing the Portfolio's net asset
value. If payment is made in securities, a shareholder may incur brokerage
expenses in converting these securities into cash. The Trust has elected,
however, to be governed by Rule 18f-1 under the 1940 Act, under which a
Portfolio is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Portfolio during any 90-day period
for one shareholder. This election is irrevocable unless the SEC permits its
withdrawal. A Portfolio may suspend redemption privileges or postpone the date
of payment during any period (1) when the NYSE is closed or trading on the NYSE
is restricted as determined by the SEC, (2) when an emergency exists, as defined
by the SEC, that makes it not reasonably practicable for the Portfolio to
dispose of securities owned by it or fairly to determine the value of its assets
or (3) as the SEC may otherwise permit. The redemption price may be more or less
than the shareholder's cost, depending on the market value of a Portfolio's
portfolio at the time.
VALUATION OF SHARES
Each Portfolio determines its net asset value per share as of the close of
regular trading (currently 4:00 p.m., eastern time) on the NYSE on each Monday
through Friday when the NYSE is open. Currently, the NYSE is closed on the
observance of the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are being valued or, lacking any
sales on such day, at the last available bid price. In cases where securities
are traded on more than one exchange, the securities are generally valued on the
exchange considered by Mitchell Hutchins as the primary market. Securities
traded in the OTC market and listed on the The Nasdaq Stock Market, Inc.
("Nasdaq") are valued at the last available sale price on Nasdaq at 4:00 p.m.,
eastern time; other OTC securities are valued at the last bid price available
prior to valuation. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Trust's board of trustees. It should be recognized
that judgment often plays a greater role in valuing non-investment grade debt
securities than is the case with respect to securities for which a broader range
of dealer quotations and last-sale information is available. All investments
quoted in foreign currency are valued daily in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the time such valuation is
determined by the Portfolios' custodian. The amortized cost method of valuation
generally is used to value debt obligations with 60 days or less remaining until
maturity, unless the board of trustees determines that this does not represent
fair value.
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Foreign currency exchange rates are generally determined prior to the close
of trading on the NYSE. Occasionally events affecting the value of foreign
investments and such exchange rates occur between the time at which they are
determined and the close of trading on the NYSE, which events will not be
reflected in a computation of a Portfolio's net asset value on that day. If
events materially affecting the value of such investments or currency exchange
rates occur during such time period, the investments will be valued at their
fair value as determined in good faith by or under the direction of the Trust's
board of trustees. The foreign currency exchange transaction of a Portfolio
conducted on a spot (that is, cash) basis are valued at the spot rate for
purchasing or selling currency prevailing on the foreign exchange market. This
rate under normal market conditions differs from the prevailing exchange rate in
an amount generally less than one-tenth of one percent due to the costs of
converting from one currency to another.
PACE MONEY MARKET INVESTMENTS values its portfolio securities in accordance
with the amortized cost method of valuation under Rule 2a-7 (the "Rule") under
the 1940 Act. To use amortized cost to value its portfolio securities, the
Portfolio must adhere to certain conditions under the Rule relating to the
Portfolio's investments, some of which are discussed in the Prospectus.
Amortized cost is an approximation of market value of an instrument, whereby the
difference between its acquisition cost and value at maturity is amortized on a
straight-line basis over the remaining life of the instrument. The effect of
changes in the market value of a security as a result of fluctuating interest
rates is not taken into account and thus the amortized cost method of valuation
may result in the value of a security being higher or lower than its actual
market value. In the event that a large number of redemptions take place at a
time when interest rates have increased, the Portfolio might have to sell
portfolio securities prior to maturity and at a price that might not be
desirable.
The board of trustees of the Trust has established procedures ("Procedures")
for the purpose of maintaining a constant net asset value of $1.00 per share for
PACE MONEY MARKET INVESTMENTS, which include a review of the extent of any
deviation of net asset value per share, based on available market quotations,
from the $1.00 amortized cost per share. Should that deviation exceed 1/2 of 1%
for any Portfolio, the board of trustees will promptly consider whether any
action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redeeming shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. PACE MONEY MARKET INVESTMENTS will maintain a
dollar-weighted average portfolio maturity of 90 days or less and will not
purchase any instrument with a remaining maturity greater than 13 months (as
calculated under the Rule), will limit portfolio investments, including
repurchase agreements, to those U.S. dollar-denominated instruments that are of
eligible quality under the Rule and that the Portfolio's Adviser, acting
pursuant to the Procedures, determine present minimal credit risks, and will
comply with certain reporting and recordkeeping procedures. There is no
assurance that a constant net asset value per share will be maintained. In the
event amortized cost ceases to represent fair value per share, the board will
take appropriate action.
In determining the approximate market value of portfolio investments, each
Portfolio may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves and
other specific adjustments. This may result in the securities being valued at a
price different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current payables are
carried at their face value. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the board of trustees.
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PERFORMANCE INFORMATION
Each Portfolio's performance data quoted in advertising and other
promotional materials ("Performance Advertisements") represent past performance
and are not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in a Portfolio's Performance Advertisements are
calculated according to the following formula:
<TABLE>
<S> <C> <C>
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of a
Portfolio
T = average annual total return of shares of that Portfolio
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of that period.
</TABLE>
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. All dividends and other distributions are assumed to
have been reinvested at net asset value.
Each Portfolio also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). A Portfolio calculates Non-Standardized
Return for specified periods of time by assuming an investment of $1,000 in
Portfolio shares and assuming the reinvestment of all dividends and other
distributions. The rate of return is determined by subtracting the initial value
of the investment from the ending value and by dividing the remainder by the
initial value.
YIELD. Yields used in a Portfolio's Performance Advertisements, except for
those given for PACE MONEY MARKET INVESTMENTS, are calculated by dividing the
Portfolio's interest and dividend income attributable to the Portfolio's shares
for a 30-day period ("Period"), net of expenses attributable to such Portfolio,
by the average number of shares of such Portfolio entitled to receive dividends
during the Period and expressing the result as an annualized percentage
(assuming semi-annual compounding) of the net asset value per share at the end
of the Period. Yield quotations are calculated according to the following
formula:
YIELD = 2[( a - b + 1)(6) - 1]
- -----
cd
<TABLE>
<S> <C> <C> <C>
interest and other income earned during the period attributable to a
where: a = Portfolio
expenses accrued for the Period attributable to a Portfolio (net of
b = reimbursements)
the average daily number of shares of a Portfolio outstanding during the
c = period that were entitled to receive dividends
d = the net asset value per share on the last day of the Period
</TABLE>
Except as noted below, in determining interest and dividend income earned
during the Period (a variable in the above formula), a Portfolio calculates
interest earned on each debt obligation held by it during
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<PAGE>
the Period by (1) computing the obligation's yield to maturity, based on the
market value of the obligation (including actual accrued interest) on the last
Business Day of the Period or, if the obligation was purchased during the
Period, the purchase price plus accrued interest and (2) dividing the yield to
maturity by 360, and multiplying the resulting quotient by the market value of
the obligation (including actual accrued interest) to determine the interest
income on the obligation for each day of the subsequent period that the
obligation is in the portfolio. Once interest earned is calculated in this
fashion for each debt obligation held by the Portfolio, interest earned during
the Period is then determined by totalling the interest earned on all debt
obligations. For purposes of these calculations, the maturity of an obligation
with one or more call provisions is assumed to be the next date on which the
obligation reasonably can be expected to be called or, if none, the maturity
date.
Tax exempt-yield for PACE MUNICIPAL FIXED INCOME INVESTMENTS is calculated
according to the same formula except the variable "a" equals interest exempt
from federal income tax earned during the Period. This tax-exempt yield may then
be translated into tax-equivalent yield according to the following formula:
- ----TAX EQUIVALENT YIELD = ( e ) + t
1-p
<TABLE>
<S> <C> <C>
E = tax-exempt yield of the Portfolio
p = stated income tax rate
t = taxable yield of the Portfolio
</TABLE>
The tax-equivalent yield of PACE MUNICIPAL FIXED INCOME INVESTMENTS assumes
a 39.6% effective federal tax rate.
PACE MONEY MARKET INVESTMENTS computes its yield and effective yield
quotations using standardized methods required by the SEC. The Portfolio from
time to time advertises (1) its current yield based on a recently ended
seven-day period, computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from that shareholder account, dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7), with the
resulting yield figure carried to at least the nearest hundredth of one percent,
and (2) its effective yield based on the same seven-day period by compounding
the base period return by adding 1, raising the sum to a power equal to (365/7),
and subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7] - 1
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of each Portfolio fluctuates, it cannot be
compared with yields on savings accounts or other investment alternatives that
provide an agreed-upon or guaranteed fixed yield for a stated period of time.
However, yield information may be useful to an investor considering temporary
investments in money market instruments. In comparing the yield of one money
market fund to another, consideration should be given to each Portfolio's
investment policies, including the types of investments made, the average
maturity of the portfolio securities and whether there are any special account
charges that may reduce the yield.
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<PAGE>
OTHER INFORMATION. In Performance Advertisements, each Portfolio may
compare its Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies Services
("Wiesenberger"), Investment Company Data, Inc. ("ICD"), or Morningstar Mutual
Funds ("Morningstar") or with the performance of appropriate recognized stock
and other indices, including (but not limited to) the Standard & Poor's 500
Composite Stock Price Index, the Dow Jones Industrial Average, the Wilshire 5000
Index, other Wilshire Associates equities indices, Frank Russell Company equity
indices, the Morgan Stanley Capital International Perspective Indices, the
Salomon Brothers World Government bond indices, the Lehman Brothers Bond
indices, Municipal Bond Buyers Indices, 90 day Treasury Bills, 30-year and
10-year U.S.Treasury Bonds and changes in the Consumer Price Index as published
by the U.S. Department of Commerce. The Portfolio also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD or Morningstar. Performance Advertisements also may refer to
discussions of a Portfolio and comparative mutual fund data and ratings reported
in independent periodicals, including (but not limited to) THE WALL STREET
JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S,
FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE
KIPLINGER LETTERS. Ratings may include criteria relating to portfolio
characteristics in addition to performance information. In connection with a
ranking, a Portfolio may also provide additional information with respect to the
ranking, such as the particular category to which it relates, the number of
funds in the category, the criteria on which the ranking is based, and the
effect of sales charges, fee waivers and/or expense reimbursements. Each
Portfolio may include discussions or illustrations of the effects of compounding
in Performance Advertisements. "Compounding" refers to the fact that, if
dividends or other distributions on a Portfolio investment are reinvested by
being paid in additional Portfolio shares, any future income or capital
appreciation of the Portfolio would increase the value, not only of the original
Portfolio investment, but also of the additional Portfolio shares received
through reinvestment. As a result, the value of the Portfolio investment would
increase more quickly than if dividends or other distributions had been paid in
cash.
TAXES
ALL PORTFOLIOS. Each Portfolio is treated as a separate corporation for
federal income tax purposes. In order to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code, each Portfolio must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of taxable net
investment income, net short-term capital gain and, for certain Portfolios, net
gains from certain foreign currency transactions) plus, in the case of PACE
MUNICIPAL FIXED INCOME INVESTMENTS, its net interest income excludable from
gross income under section 103(a) of the Internal Revenue Code ("Distribution
Requirement") and must meet several additional requirements. With respect to
each Portfolio, these requirements include the following: (1) the Portfolio must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward currency contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Portfolio must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months--options or
futures (other than those on foreign currencies), or foreign currencies (or
options, futures or forward contracts thereon) that are not directly related to
the Portfolio's principal business of investing in securities (or options and
futures with respect to securities) ("Short-Short
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<PAGE>
Limitation"); (3) at the close of each quarter of the Portfolio's taxable year,
at least 50% of the value of its total assets must be represented by cash and
cash items, U.S. government securities, securities of other RICs and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Portfolio's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities; and (4) at the close of each quarter of the Portfolio's
taxable year, not more than 25% of the value of its total assets may be invested
in securities (other than U.S. government securities or the securities of other
RICs) of any one issuer. Proposed legislation would repeal the Short-Short
Limitation.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in any of those months will be deemed to have been paid by the Portfolio and
received by the shareholders on December 31 of that year if the distributions
are paid by the Portfolio during the following January. Accordingly, those
distributions will be taxed to shareholders for the year in which that December
31 falls.
A portion of the dividends from a Portfolio's investment company taxable
income (whether paid in cash or in additional Portfolio shares) may be eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the aggregate dividends received by a Portfolio from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
If shares of a Portfolio are sold at a loss after being held for six months
or less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.
Dividends and interest received by certain Portfolios may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on their securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors. If more than 50%
of the value of a Portfolio's total assets at the close of its taxable year
consists of securities of foreign corporations, the Portfolio will be eligible
to, and may, file an election with the Internal Revenue Service that will enable
its shareholders, in effect, to receive the benefit of the foreign tax credit
with respect to any foreign and U.S. possessions income taxes paid by it.
Pursuant to the election, the Portfolio would treat those taxes as dividends
paid to its shareholders and each shareholder would be required to (1) include
in gross income, and treat as paid by the shareholder, the shareholder's
proportionate share of those taxes, (2) treat the shareholder's share of those
taxes and of any dividend paid by the Portfolio that represents income from
foreign or U.S. possessions sources as the shareholder's own income from those
sources, and (3) either deduct the taxes deemed paid by the shareholder in
computing the shareholder's taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against the shareholder's
federal income tax. Each Portfolio will report to its shareholders shortly after
each taxable year their respective shares of the Portfolio's income from sources
within, and taxes paid to, foreign countries and U.S. possessions if it makes
this election.
Each Portfolio will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
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<PAGE>
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of the gains and losses a Portfolio realizes in
connection therewith. Income from the disposition of foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options, futures and forward contracts derived by a
Portfolio with respect to its business of investing in securities or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures (other than those on
foreign currencies) will be subject to the Short-Short Limitation if they are
held for less than three months. Income from the disposition of foreign
currencies, and options, futures and forward contracts on foreign currencies,
that are not directly related to a Portfolio's principal business of investing
in securities (or options and futures with respect to securities) also will be
subject to the Short-Short Limitation if they are held for less than three
months.
If a Portfolio satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Portfolio will consider whether it should seek to qualify for this treatment for
its hedging transactions. To the extent a Portfolio does not qualify for this
treatment, it may be forced to defer the closing out of certain options, futures
and forward currency contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Portfolio to qualify as a RIC.
Certain Portfolios may acquire zero coupon Treasury securities, zero coupon
securities of corporate issuers, other securities issued with original issue
discount ("OID") and payment-in-kind ("PIK") securities. As the holder of such
securities, each such Portfolio would have to include in its gross income (1)
the OID that accrues on the securities during the taxable year, even if it
receives no corresponding payment on the securities during the year, and (2) the
securities it receives as "interest" on PIK securities. With respect to clause
(1) above, each Portfolio will elect similar treatment for securities purchased
at a discount from their face value ("market discount"). Because each Portfolio
annually must distribute substantially all of its investment company taxable
income, including any accrued OID, market discount and other non-cash income, in
order to satisfy the Distribution Requirement and avoid imposition of the Excise
Tax, a Portfolio may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions will be made from a Portfolio's cash assets or
from the proceeds of sales of portfolio securities, if necessary. A Portfolio
may realize capital gains or losses from those sales, which would increase or
decrease the Portfolio's investment company taxable income and/or net capital
gain (the excess of net long-term capital gain over net short-term capital
loss). In addition, any such gains may be realized on the disposition of
securities held for less than three months. Because of the Short-Short
Limitation, any such gains would reduce a Portfolio's ability to sell other
securities, or certain options, futures or forward currency contracts, held for
less than three months that it might wish to sell in the ordinary course of its
portfolio management.
PACE INTERNATIONAL EQUITY INVESTMENTS AND PACE INTERNATIONAL EMERGING
MARKETS EQUITY INVESTMENTS. Each of these Portfolios may invest in the stock of
"passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, a Portfolio will be subject to federal income tax on a portion of
any "excess distribution" received on the stock of a PFIC or of any gain on
disposition of such
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<PAGE>
stock (collectively "PFIC income"), plus interest thereon, even if the Portfolio
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Portfolio's investment
company taxable income and, accordingly, will not be taxable to it to the extent
that income is distributed to its shareholders. If a Portfolio invests in a PFIC
and elects to treat the PFIC as a "qualified electing fund" ("QEF") then in lieu
of the foregoing tax and interest obligation, the Portfolio will be required to
include in income each year its pro rata share of the QEF's annual ordinary
earnings and net capital gain, even if they are not distributed by the QEF to
the Portfolio; those amounts likely would have to be distributed by the
Portfolio to satisfy the Distribution Requirement and avoid imposition of the
Excise Tax. In most instances it will be very difficult, if not impossible, to
make this election because of certain requirements thereof.
Pursuant to proposed regulations, open-end RICs, such as the Portfolios,
would be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each taxable
year the excess, as of the end of that year, of the fair market value of each
such PFIC's stock over the owner's adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
PACE MUNICIPAL FIXED INCOME INVESTMENTS. Entities or other persons who are
"substantial users" (or persons related to "substantial users") of facilities
financed by IDBs or PABs should consult their tax advisers before purchasing
shares of this Portfolio because, for users of certain of these facilities, the
interest on those bonds is not exempt from federal income tax. For these
purposes, "substantial user" is defined to include a "non-exempt person" who
regularly uses in a trade or business a part of a facility financed from the
proceeds of IDBs or PABs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Portfolio) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from the Portfolio still
are tax-exempt to the extent described in the Prospectus; they are only included
in the calculations of whether a recipient's income exceeds the established
amounts.
If shares of the Portfolio are sold at a loss after being held for six
months or less, the loss will be disallowed to the extent of any exempt-interest
dividends received on those shares and will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received thereon.
Although the Portfolio does not currently expect to invest in instruments
that generate taxable interest income, if it does so, under the circumstances
described in the Prospectus, the portion of any Portfolio dividend attributable
to the interest earned thereon will be taxable to the Portfolio's shareholders
as ordinary income to the extent of the Portfolio's earnings and profits, and
only the remaining portion will qualify as an exempt-interest dividend. The
respective portions will be determined by the "actual earned" method, under
which the portion of any dividend that qualifies as an exempt-interest dividend
may vary, depending on the relative proportions of tax-exempt and taxable
interest earned during the dividend period. Moreover, if the Portfolio realizes
capital gain as a result of market transactions, any distributions of the gain
will be taxable to its shareholders.
OTHER INFORMATION
The name of the Trust is Managed Accounts Services Portfolio Trust. The
Trust is organized as a Delaware business trust. Although Delaware law
statutorily limits the potential liabilities of a Delaware business trust's
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shareholders to the same extent as it limits the potential liabilities of
shareholders of a Delaware corporation, shareholders of a Portfolio could, under
certain conflicts of laws jurisprudence in various states, be held personally
liable for the obligations of the Trust or a Portfolio. However, the Trust's
Trust Instrument disclaims shareholder liability for acts or obligations of the
Trust or its Portfolios and requires that notice of such disclaimer be given in
each written obligation made or issued by the trustees or by any officers or
officer by or on behalf of the Trust, the Portfolios, the trustees or any of
them in connection with the Trust. The Trust Instrument provides for
indemnification from a Portfolio's property for all losses and expenses of any
Portfolio shareholder held personally liable for the obligations of a Portfolio.
Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which a Portfolio itself
would be unable to meet its obligations, a possibility which Mitchell Hutchins
believes is remote and not material. Upon payment of any liability incurred by a
shareholder solely by reason of being or having been a shareholder of a
Portfolio, the shareholder paying such liability will be entitled to
reimbursement from the general assets of the Portfolio. The trustees intend to
conduct the operations of the Portfolios in such a way as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the
Portfolios.
In the event any of the initial shares of a Portfolio are redeemed during
the five-year amortization period, the redemption proceeds will be reduced by a
PRO RATA portion of any unamortized deferred organizational expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of redemption.
COUNSEL. The law firm of Willkie Farr & Gallagher, 153 East 53rd Street,
New York, New York serves as counsel to the Trust. Willkie Farr & Gallagher also
acts as counsel to Mitchell Hutchins and PaineWebber in connection with other
matters.
INDEPENDENT AUDITORS. Ernst & Young LLP, 787 Seventh Avenue, New York, New
York, serves as the Trust's independent auditors.
FINANCIAL STATEMENTS
The Trust's Annual Report to Shareholders for the period August 24, 1995
(commencement of operations) through July 31, 1996 is a separate document
supplied with this Statement of Additional Information and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated by reference in this Statement of Additional
Information.
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APPENDIX
DESCRIPTION OF MOODY'S LONG-TERM DEBT RATINGS
AAA. Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues; Aa. Bonds which are rated "Aa"
are judged to be of high quality by all standards. Together with the "Aaa" group
they comprise what are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in
"Aaa" securities or fluctuation of protective elements may be of greater
amplitude, or there may be other elements present which make the long-term risks
appear somewhat greater than the "Aaa" securities; A. Bonds which are rated "A"
possess many favorable investment attributes and are considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future; Baa. Bonds which are rated
"Baa" are considered as medium-grade obligations (i.e., they are neither highly
protected nor poorly secured). Interest payments and principal security appear
adequate for the present, but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; Ba. Bonds which are rated "Ba" are judged to have
speculative elements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B. Bonds which are
rated "B" generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "B" in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong; AA. Debt rated "AA" has a
very strong capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree; A. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated "BBB" is
regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
higher rated categories; BB, B. Debt rated "BB" and "B" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
least degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions; BB. Debt rated "BB" has less near-term
vulnerability to default than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which
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could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB-" rating; B. Debt rated "B" has
a greater vulnerability to default but currently has the capacity to meet
interest payments and principal repayments. Adverse business, financial or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. The "B" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BB" or "BB-" rating.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information in which to base a rating or that S&P does not rate a
particular type of obligation as matter of policy.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
"AAA". An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks; "aa". An issue
which is rated "aa" is considered a high-grade preferred stock. This rating
indicates that there is reasonable assurance that earnings and asset protection
will remain relatively well maintained in the foreseeable future; "a". An issue
which is rated "a" is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the "aaa" and "aa"
classification, earnings and asset protection are nevertheless expected to be
maintained at adequate levels; "baa". An issue which is rated "baa" is
considered to be medium grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate at present but may
be questionable over any great length of time; "ba". An issue which is rated
"ba" is considered to have speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very moderate and
not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class; "b". An issue which is rated "b"
generally lacks the characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue over any long
period of time may be small; "caa". An issue which is rated "caa" is likely to
be in arrears on dividend payments. This rating designation does not purport to
indicate the future status of payments; "ca". An issue which is rated "ca" is
speculative in a high degree and is likely to be in arrears on dividends with
little likelihood of eventual payments; "c". This is the lowest rated class of
preferred or preference stock. Issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
DESCRIPTION OF S&P PREFERRED STOCK RATINGS
"AAA". This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations. "AA". A preferred stock issue rated "AA" also
qualifies as a high-quality fixed income security. The capacity to pay preferred
stock obligations is very strong, although not as overwhelming as for issues
rated "AAA"; "A". An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions; "BBB". An
issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate
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protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category; "BB", "B", "CCC".
Preferred stocks rated "BB", "B" and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
PRIME-1. Issuers (or supporting institutions) rated PRIME-1 (P-1) have a
superior capacity for repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by many of the following
characteristics: Leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity. PRIME-2. Issuers (or supporting institutions) rated PRIME-2
(P-2) have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety. A-1. This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation. A-2. Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1". A-3. Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. B. Issues rated "B" are regarded as having only an adequate
capacity for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
DESCRIPTION OF MOODY'S FOUR HIGHEST MUNICIPAL BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
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AA. Bonds which are rated Aa are judged to be of high quality by all
standards. They are rated lower than the Aaa bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which made
the long-term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A are judged to be upper medium grade obligations.
Security for principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
DESCRIPTION OF S&P'S FOUR HIGHEST MUNICIPAL BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree. The AA
rating may be modified by the addition of a plus or minus sign to show relative
standing within the AA rating category.
A. Debt rated A is regarded as safe. This rating differs from the two
higher ratings because, with respect to general obligation bonds, there is some
weakness which, under certain adverse circumstances, might impair the ability of
the issuer to meet debt obligations at some future date. With respect to revenue
bonds, debt service coverage is good but not exceptional and stability of
pledged revenues could show some variations because of increased competition or
economic influences in revenues.
BBB. Bonds rated BBB are regarded as having adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in the A category.
DESCRIPTION OF MOODY'S HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER
SHORT-TERM LOANS
Moody's ratings for state and municipal notes and other short-term loans are
designated "Moody's Investment Grade" ("MIG" or, for variable or floating rate
obligations, "VMIG"). Such ratings recognize the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the borrower
and short-term cyclical elements are critical in short-term ratings. Symbols
used will be as follows:
MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing or both.
MIG-2/VMIG-2. Loans bearing this designation are of high quality, with
margins of protection that are ample although not so large as in the
preceding group.
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DESCRIPTION OF S&P RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS
S&P TAX EXEMPT NOTE RATINGS ARE GENERALLY GIVEN TO SUCH NOTES THAT
MATURE IN THREE YEARS OR LESS. THE TWO HIGHER RATING CATEGORIES ARE AS
FOLLOWS:
SP-1. Very strong or strong capacity to pay principal and interest.
These issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIOS OR THEIR DISTRIBUTOR. THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN
OFFERING BY THE PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
INVESTMENT POLICIES AND RESTRICTIONS........... 1
HEDGING AND RELATED STRATEGIES................. 15
TRUSTEES AND OFFICERS.......................... 27
INVESTMENT MANAGEMENT, ADVISORY AND
DISTRIBUTION ARRANGEMENTS..................... 31
PORTFOLIO TRANSACTIONS......................... 34
ADDITIONAL EXCHANGE AND REDEMPTION
INFORMATION................................... 39
VALUATION OF SHARES............................ 39
PERFORMANCE INFORMATION........................ 41
TAXES.......................................... 43
OTHER INFORMATION.............................. 46
FINANCIAL STATEMENTS........................... 47
APPENDIX....................................... 48
</TABLE>
- -RECYCLE SYMBOL- Recycled Paper
- -C- 1996 PaineWebber Incorporated
Managed Accounts Services
Portfolio Trust
PAINEWEBBER
PACESM
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 16, 1996
PAINEWEBBER
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