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PAINEWEBBER PACE SELECT ADVISORS TRUST
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
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PROSPECTUS DATED DECEMBER 1, 1998
PaineWebber PACE Select Advisors Trust (the "Trust") is an open-end,
management investment company currently composed of twelve separate no-load
investment portfolios (each a "Portfolio" and collectively, the "Portfolios")
managed by Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins" or the
"Manager"), a wholly owned asset management subsidiary of PaineWebber
Incorporated ("PaineWebber"). Shares of the Portfolios currently are available
only to participants in the PaineWebber PACESM Program ("PACE Program"). The
PACE Program and the Trust are designed to assist you in devising an asset
allocation strategy to meet your individual needs. PaineWebber, through the PACE
Program, provides investment advisory services in connection with the allocation
of assets among the Portfolios by: identifying your risk tolerances and
investment objectives based on information provided by you; identifying and
recommending, in writing, a suggested allocation of assets among the Portfolios
that conforms to those tolerances and objectives; providing a monthly account
statement; providing performance data on a quarterly basis; and providing a
quarterly (optional) rebalancing service. See "Purchases--General--The PACE
Program."
For each Portfolio other than PACE Money Market Investments, investment
advisory services are provided by an investment adviser (each an "Adviser")
recommended, monitored and compensated by, and unaffiliated with, the Manager.
For PACE Money Market Investments, investment advisory services are provided by
Mitchell Hutchins. The Trust consists of the following twelve Portfolios:
/ /PACE MONEY MARKET INVESTMENTS
/ /PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
/ /PACE INTERMEDIATE FIXED INCOME INVESTMENTS
/ /PACE STRATEGIC FIXED INCOME INVESTMENTS
/ /PACE MUNICIPAL FIXED INCOME INVESTMENTS
/ /PACE GLOBAL FIXED INCOME INVESTMENTS
/ /PACE LARGE COMPANY VALUE EQUITY INVESTMENTS
/ /PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS
/ /PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS
/ /PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS
/ /PACE INTERNATIONAL EQUITY INVESTMENTS
/ /PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS
AN INVESTMENT IN PACE MONEY MARKET INVESTMENTS IS NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH PACE MONEY MARKET INVESTMENTS SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE
PORTFOLIO.
Under the PACE Program, you will pay PaineWebber a quarterly program fee
("Program Fee") at an annual rate of up to 1.50% of the value of shares of the
Portfolios held in your PaineWebber account. Certain participants are eligible
for a reduction of the Program Fee. See "Purchases." As a PACE Program
participant, you may incur greater total fees and expenses than investors
purchasing shares of similar investment companies without the benefit of these
professional asset allocation recommendations.
This Prospectus concisely sets forth information about the Trust that you
should know before investing. Please retain this Prospectus for future
reference. A Statement of Additional Information ("SAI"), dated December 1, 1998
(which information is incorporated by reference herein), is on file with the
Securities and Exchange Commission ("SEC"). You can obtain a free copy of the
SAI by calling toll-free at 1-800-647-1568, and further inquiries can be made by
contacting your PaineWebber investment executive. In addition, the SEC maintains
a website (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference, and other information regarding
registrants that file electronically with the SEC.
INVESTORS SHOULD RELY ON THE INFORMATION CONTAINED OR REFERRED TO IN THIS
PROSPECTUS. THE PORTFOLIOS AND THEIR DISTRIBUTOR HAVE NOT AUTHORIZED ANYONE TO
PROVIDE INVESTORS WITH INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN
OFFER TO SELL SHARES OF THE PORTFOLIOS IN ANY JURISDICTION WHERE THE PORTFOLIOS
OR THEIR DISTRIBUTOR MAY NOT LAWFULLY SELL THOSE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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Page
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Prospectus Summary..................... 3
Trust Expenses......................... 8
Investment Objectives and Policies of
the Portfolios and Risk Factors....... 12
Other Investment Policies and Risk
Factors............................... 21
Management............................. 39
Valuation of Shares.................... 45
Purchases.............................. 45
Redemptions............................ 46
Other Services and Information......... 47
Dividends and Taxes.................... 48
Performance Information................ 50
General Information.................... 50
Financial Highlights................... 52
Appendix A............................. 56
Appendix B ............................ 57
</TABLE>
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PROSPECTUS SUMMARY
This section summarizes certain terms and provisions of the PACE Program and
the Portfolios of the Trust. Please read the rest of this Prospectus for
additional important information.
PACE PROGRAM. The PACE Program is an investment advisory service pursuant
to which PaineWebber provides to you personalized asset allocation
recommendations and related services based on an evaluation of your investment
objectives and risk tolerances. For the services provided to you under the PACE
Program, you pay PaineWebber a quarterly Program Fee at an annual rate of up to
1.50% of the value of the shares of the Portfolios held in your PaineWebber
account. Certain participants are eligible for a reduction of the Program Fee.
See "Purchases."
THE TRUST. The Trust is a mutual fund which provides a convenient means of
investing in a number of professionally managed portfolios. The Trust currently
consists of twelve separate no-load Portfolios. The following is a summary of
important features of the Portfolios.
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INVESTMENT CORE PORTFOLIO INVESTMENT
PACE PORTFOLIO OBJECTIVE INVESTMENTS ADVISER
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PACE MONEY MARKET Current income consistent High quality money market Mitchell Hutchins Asset
INVESTMENTS with preservation of instruments Management Inc.
capital and liquidity
PACE GOVERNMENT SECURITIES Current income Primarily U.S. government Pacific Investment
FIXED INCOME INVESTMENTS and agency securities of Management Company
varying maturities, as well
as mortgage-backed
securities, with a dollar-
weighted average portfolio
duration, under normal
conditions, of between one
and seven years
PACE INTERMEDIATE FIXED Current income, consistent Fixed income securities Pacific Income Advisers,
INCOME INVESTMENTS with reasonable stability with a dollar-weighted Inc.
of principal average portfolio duration,
under normal conditions, of
between two and four and
one-half years
PACE STRATEGIC FIXED INCOME Total return consisting of Fixed income securities of Pacific Investment
INVESTMENTS income and capital varying maturities with a Management Company
appreciation dollar-weighted average
portfolio duration, under
normal conditions, of
between three and eight
years
PACE MUNICIPAL FIXED INCOME High current income exempt General obligation, revenue Morgan Grenfell Capital
INVESTMENTS from federal income tax and private activity bonds Management, Incorporated
and notes, the interest on
which is exempt from
federal income tax, with a
dollar-weighted average
portfolio duration, under
normal conditions, of
between three and seven
years
</TABLE>
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<TABLE>
<CAPTION>
INVESTMENT CORE PORTFOLIO INVESTMENT
PACE PORTFOLIO OBJECTIVE INVESTMENTS ADVISER
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<S> <C> <C> <C>
PACE GLOBAL FIXED INCOME High total return High-grade fixed income Rogge Global Partners plc
INVESTMENTS securities issued by
domestic and foreign
governments and
supranational entities and
private issuers located
overseas, with a dollar-
weighted average portfolio
duration, under normal
conditions, of between four
and eight years
PACE LARGE COMPANY VALUE Capital appreciation and Equity securities, with the Brinson Partners, Inc.
EQUITY INVESTMENTS dividend income majority of the Portfolio
invested in common stocks
of companies with total
market capitalization
(i.e., market value of
common stock outstanding)
of at least $2.5 billion
PACE LARGE COMPANY GROWTH Capital appreciation Equity securities, with the Alliance Capital Management
EQUITY INVESTMENTS majority of the Portfolio L.P.
invested in common stocks
of companies characterized
by an earnings growth rate
which is faster than that
of the S&P 500 Composite
Stock Price Index and with
total market capitalization
of at least $2.5 billion
PACE SMALL/MEDIUM COMPANY Capital appreciation Equity securities, with the Brandywine Asset
VALUE EQUITY INVESTMENTS majority of the Portfolio Management, Inc.
invested in common stocks
of companies that have
below-market average
price/earnings ratios and
with total market
capitalization of less than
$2.5 billion
PACE SMALL/MEDIUM COMPANY Capital appreciation Equity securities, with the Delaware Management
GROWTH EQUITY INVESTMENTS majority of the Portfolio Company, Inc.
invested in common stocks
of companies characterized
by above-average growth of
earnings rates with total
market capitalization of
less than $2.5 billion
PACE INTERNATIONAL EQUITY Capital appreciation Equity securities, of Martin Currie Inc.
INVESTMENTS issuers domiciled outside
the United States
PACE INTERNATIONAL EMERGING Capital appreciation Equity securities, of Schroder Capital Management
MARKETS EQUITY INVESTMENTS issuers domiciled or doing International Inc.
business in emerging
markets
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MANAGEMENT. Mitchell Hutchins acts as the Manager for each Portfolio and
also as the investment adviser for PACE MONEY MARKET INVESTMENTS. All other
Portfolios are advised by an Adviser recommended, monitored and compensated by,
and unaffiliated with, the Manager. See "Management."
RISK FACTORS AND SPECIAL CONSIDERATIONS. No assurance can be given that any
Portfolio will achieve its investment objective. Investing in a Portfolio that
invests in securities of companies and governments of foreign countries,
particularly emerging market countries, involves risks that go beyond the usual
risks inherent in a Portfolio that limits its holdings to domestic investments.
A substantial portion of the assets of certain Portfolios may be held in
securities denominated in one or more foreign currencies, which will result in
these Portfolios bearing the risk that those currencies may lose value in
relation to the U.S. dollar. See "Other Investment Policies and Risk Factors."
Certain Portfolios may use derivative instruments as well as investment
techniques and strategies such as entering into forward currency contracts,
repurchase agreements and interest rate protection transactions and purchasing
and selling (writing) options, futures contracts and options on futures
contracts, that can increase a Portfolio's risks. See "Other Investment Policies
and Risk Factors."
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED
INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME INVESTMENTS may invest in
U.S. government stripped mortgage-related securities and zero coupon securities,
which are more sensitive to changes in interest rates, and, therefore, are more
speculative and subject to greater fluctuations in value than securities that
pay interest currently. See "Other Investment Policies and Risk Factors."
PACE INTERMEDIATE FIXED INCOME INVESTMENTS and PACE GLOBAL FIXED INCOME
INVESTMENTS each is "non-diversified" as that term is defined in the Investment
Company Act of 1940, as amended ("1940 Act"). To the extent that a Portfolio at
times may include the securities of a smaller number of issuers than if it were
"diversified" (as defined in the 1940 Act), each will be subject to greater risk
with respect to its portfolio securities than if it had invested in a broader
range of securities, because changes in the financial condition or market
assessment of a single issuer may cause greater fluctuation in the Portfolio's
total return and the price of its shares. See "Other Investment Policies and
Risk Factors."
In addition, PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED
INCOME INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESMTENTS
may invest in high yield, high risk securities (commonly known as "junk bonds")
that are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. Similarly, PACE LARGE COMPANY VALUE EQUITY
INVESTMENTS may invest in convertible securities that are rated below investment
grade and considered to be junk bonds. See "Other Investment Policies and Risk
Factors."
PaineWebber provides advisory services to you as a participant in the PACE
Program, for which you pay a fee that does not vary based on the Portfolios
recommended for your investments. At the same time, Mitchell Hutchins, a wholly
owned asset management subsidiary of PaineWebber, serves as the Trust's Manager
and has responsibility for monitoring and compensating each Adviser. As Manager,
Mitchell Hutchins receives a fee from each Portfolio and retains all or a
portion of that fee, the amount of which depends on the Portfolio involved.
Consequently, PaineWebber, when making asset allocation recommendations for you,
may have a conflict of interest as to the specific Portfolios recommended for
investment. PaineWebber, however, is required by applicable standards of
fiduciary duty to act solely in your best interest when making investment
recommendations for you. You also should be aware that the Manager may have
various conflicts of interest when making decisions regarding the retention and
compensation of particular Advisers. However, the Manager's compensation and
decisions, including the specific amount of the Manager's compensation to be
paid
5
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to the Adviser, are subject to review and approval by the Trust's board of
trustees and separately by the trustees who are not affiliated with the Manager,
any of the Advisers or any of their affiliates. See "Management--Manager" and
"Purchases--General--The PACE Program."
The Portfolios are intended as vehicles for the implementation of long-term
asset allocation strategies rendered through the PACE Program that are based on
an evaluation of your investment objectives and risk tolerances. Because these
asset allocation strategies are designed to spread investment risk across the
various segments of the securities markets through investment in a number of
Portfolios, each individual Portfolio generally intends to be fully invested in
accordance with its investment objective and policies during most market
conditions. Although the Adviser of a Portfolio may, upon the concurrence of the
Manager, take a temporary defensive position when the Adviser believes adverse
market conditions so warrant, it can be expected that a defensive posture will
be adopted less frequently than would be the case for other mutual funds. This
policy may impede an Adviser's ability to protect a Portfolio's capital during
declines in the particular segment of the market to which the Portfolio's assets
are committed. Consequently, no single Portfolio should be considered a complete
investment program, and an investment among the Portfolios should be regarded as
a long-term investment that should be held through several market cycles.
There can also be no assurance that PaineWebber's periodic recommendations
for adjustments in the allocation of assets among Portfolios will be successful
or can be developed, transmitted and acted upon in a manner sufficiently timely
to avoid market shifts, which can be sudden and substantial. You are urged to
consider carefully PaineWebber's asset allocation recommendations in light of
your investment needs and to act promptly upon any recommended reallocation of
assets among the Portfolios.
PURCHASE AND REDEMPTION OF SHARES. You may purchase shares of the
Portfolios only if you are a participant in the PACE Program. The minimum
initial investment in the Trust for all accounts is $10,000 and any subsequent
investment in the Trust must be at a minimum of $500. Shares of the Portfolios
are offered for purchase and redemption at their respective net asset values
next determined after receipt. You do not pay a sales charge in connection with
purchases or redemptions. As stated above under "PACE Program," for services
provided to you under the PACE Program, you pay PaineWebber a quarterly Program
Fee at an annual rate of up to 1.50% of the value of the shares of the
Portfolios held in your PaineWebber account. Certain participants are eligible
for a reduction in the Program Fee. See "Purchases" and "Redemptions."
DIVIDENDS AND TAXES. Dividends from the net investment income of PACE MONEY
MARKET INVESTMENTS are declared daily and paid monthly. Dividends from the net
investment income of PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE
INTERMEDIATE FIXED INCOME INVESTMENTS, PACE STRATEGIC FIXED INCOME INVESTMENTS,
PACE MUNICIPAL FIXED INCOME INVESTMENTS and PACE GLOBAL FIXED INCOME INVESTMENTS
are declared and paid monthly and may be accompanied by distributions of net
realized short-term capital gains and net realized gains from foreign currency
transactions, if any. Dividends from the net investment income of the six equity
Portfolios are declared and paid annually. Distributions of any undistributed
net realized gains from foreign currency transactions, net capital gain (the
excess of net long-term capital gain over net short-term capital loss) and
undistributed net realized short-term capital gain, if any, earned by a
Portfolio will be made annually. See "Dividends and Taxes."
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company is
custodian of each Portfolio's assets and employs foreign sub-custodians to
provide custody of any Portfolio's foreign assets. PFPC Inc. is each Portfolio's
transfer and dividend disbursing agent (the "Transfer Agent").
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7
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TRUST EXPENSES
The following table lists the costs and expenses, including the separate
fees for the PACE Program, that you will incur either directly or indirectly as
a shareholder of each Portfolio based on the Portfolio's operating expenses for
the fiscal year ended July 31, 1998.
<TABLE>
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PACE
GOVERNMENT PACE PACE PACE PACE
PACE MONEY SECURITIES INTERMEDIATE STRATEGIC MUNICIPAL GLOBAL
MARKET FIXED INCOME FIXED INCOME FIXED INCOME FIXED INCOME FIXED INCOME
INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Annual Program Fee (as a
percentage of average value of
Portfolio shares held on the last
calendar day of the previous
quarter).......................... 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
--- --- --- --- --- ---
--- --- --- --- --- ---
ANNUAL PORTFOLIO OPERATING
EXPENSES*
(as a percentage of average net
assets)
Management Fees (Before Fee
Waivers)**........................ 0.15% 0.50% 0.40% 0.50% 0.40% 0.60%
Distribution (Rule 12b-1)
Expenses.......................... none none none none none none
Other Expenses (Before Expense
Reimbursements)+.................. 1.05% 0.45% 0.44% 0.44% 0.53% 0.63%
--- --- --- --- --- ---
Total Portfolio Operating Expenses
(Net of Fee Waivers and Expense
Reimbursements)***................ 0.50% 0.85% 0.84% 0.85% 0.85% 0.95%
--- --- --- --- --- ---
--- --- --- --- --- ---
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* Does not include the Program Fee.
** "Management Fees" is the total amount paid by the Portfolio including the
amounts paid by Mitchell Hutchins to the Adviser for each Portfolio.
*** Mitchell Hutchins has voluntarily agreed to waive all or a portion of its
management fees and reimburse certain operating expenses with respect to the
Portfolios through July 31, 1999, which will lower the overall expenses of
the Portfolios to the levels noted above, except that for PACE Intermediate
Fixed Income Investments, PACE Large Company Value Equity Investments, PACE
Small/Medium Company Value Equity Investments and PACE International Equity
Investments, the overall expenses will not exceed 0.85%, 1.00%, 1.00% and
1.35% respectively. For the fiscal year ended July 31, 1998, without such
waivers and reimbursements, "Total Portfolio Operating Expenses," including
an administration fee of 0.20% payable to Mitchell Hutchins by each
Portfolio, for each Portfolio would have been 1.20%, 0.95%, 0.84%, 0.94%,
0.93%, 1.23%, 0.98%, 1.02%, 1.00%, 1.03%, 1.21% and 1.79%, respectively.
+ Includes an administration fee of 0.20% payable to Mitchell Hutchins by each
Portfolio.
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PACE
PACE PACE SMALL/ PACE
PACE LARGE LARGE SMALL/ MEDIUM INTERNATIONAL
COMPANY COMPANY MEDIUM COMPANY PACE EMERGING
VALUE GROWTH COMPANY GROWTH INTERNATIONAL MARKETS
EQUITY EQUITY VALUE EQUITY EQUITY EQUITY EQUITY
INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS INVESTMENTS
----------- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Annual Program Fee (as a
percentage of average value of
Portfolio shares held on the last
calendar day of the previous
quarter)......................... 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
--- --- --- --- --- ---
--- --- --- --- --- ---
ANNUAL PORTFOLIO OPERATING
EXPENSES*
(as a percentage of average net
assets)
Management Fees (Before Fee
Waivers)**....................... 0.60% 0.60% 0.60% 0.60% 0.70% 0.90%
Distribution (Rule 12b-1)
Expenses......................... none none none none none none
Other Expenses (Before Expense
Reimbursements)+................. 0.38% 0.42% 0.40% 0.43% 0.51% 0.89%
--- --- --- --- --- ---
Total Portfolio Operating Expenses
(Net of Fee Waivers and Expense
Reimbursements)***............... 0.98% 1.00% 0.99% 1.00% 1.21% 1.50%
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
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See footnotes on previous page.
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MANAGEMENT AND ADMINISTRATION FEES; EXPENSES. Each Portfolio pays the
Manager a fee for its services that is computed daily and paid monthly at an
annual rate ranging among the Portfolios from 0.15% to 0.90% of the value of the
average daily net assets of the Portfolio. The fees of each Adviser are paid by
the Manager. Each Portfolio also pays Mitchell Hutchins an administration fee
that is computed daily and paid monthly at an annual rate of 0.20% of the value
of the average daily net assets of the Portfolio. The nature of the services
provided to, and the aggregate management and administration fees paid by, each
Portfolio are described under "Management." Through July 31, 1999, the Manager
has voluntarily agreed to waive all or a portion of the fees otherwise payable
to it and reimburse certain operating expenses of a Portfolio, in order to have
the Portfolios operate at the expense ratios indicated in the Expense Table
above.
EXAMPLE.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Portfolios through the PACE Program. These
amounts, which include the maximum fees for the PACE Program, are based upon (i)
payment by the Portfolios of operating expenses (net of fee waivers and expense
reimbursements) at the levels set forth in the Expense Table above and (ii) the
specific assumptions stated below.
A shareholder would pay the following expenses on a $1,000 investment,
assuming (i) a 5% annual return and (ii) redemption at the end of each time
period:
<TABLE>
<CAPTION>
PACE MONEY MARKET PACE GOVERNMENT SECURITIES PACE INTERMEDIATE FIXED
INVESTMENTS FIXED INCOME INVESTMENTS INCOME INVESTMENTS
---------------------------- ---------------------------- ----------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$20 $63 $108 $233 $24 $73 $126 $269 $24 $73 $125 $268
</TABLE>
<TABLE>
<CAPTION>
PACE STRATEGIC FIXED PACE MUNICIPAL FIXED PACE GLOBAL FIXED
INCOME INVESTMENTS INCOME INVESTMENTS INCOME INVESTMENTS
---------------------------- ---------------------------- ----------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$24 $73 $126 $269 $24 $73 $126 $269 $25 $76 $131 $279
</TABLE>
<TABLE>
<CAPTION>
PACE SMALL/
PACE LARGE COMPANY VALUE PACE LARGE COMPANY GROWTH MEDIUM COMPANY VALUE
EQUITY INVESTMENTS EQUITY INVESTMENTS EQUITY INVESTMENTS
---------------------------- ---------------------------- ----------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$25 $77 $132 $282 $25 $78 $133 $284 $25 $78 $133 $283
</TABLE>
<TABLE>
<CAPTION>
PACE SMALL/
MEDIUM COMPANY GROWTH EQUITY PACE INTERNATIONAL EQUITY PACE INTERNATIONAL EMERGING
INVESTMENTS INVESTMENTS MARKETS EQUITY INVESTMENTS
---------------------------- ---------------------------- ----------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$25 $78 $133 $284 $27 $84 $143 $304 $30 $93 $158 $332
</TABLE>
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This Example assumes that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Portfolio
Operating Expenses remain the same in the years shown. It also assumes payment
of the maximum PACE Program Fee of 1.50% of the value of the shares of the
Portfolios held in your PaineWebber account each year. The above tables and the
assumption in the Example of a 5% annual return are required by regulations of
the SEC applicable to all mutual funds; the assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual performance of
the Portfolios' shares.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND A PORTFOLIO'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE
SHOWN. The actual expenses attributable to each Portfolio's shares will depend
upon, among other things, the level of average net assets, the extent to which a
Portfolio incurs variable expenses, such as transfer agency costs, and whether
the Manager reimburses all or a portion of the Portfolio's expenses and/or
waives all or a portion of its management and administration fees.
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INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS AND RISK FACTORS
A description of the investment objective and policies of each Portfolio
follows. There can be no assurance that a Portfolio will achieve its investment
objective. The investment objective of a Portfolio is a fundamental policy and
may not be changed without the approval by vote of the shareholders of that
Portfolio. Unless otherwise specified, the other investment policies of a
Portfolio are not fundamental and can be changed by the board of trustees acting
alone. Further information about the investment policies of each Portfolio,
including a list of those restrictions on its investment activities that cannot
be changed without shareholder approval, appears in the "Investment Policies and
Restrictions" section of the SAI.
PACE MONEY MARKET INVESTMENTS
Adviser: Mitchell Hutchins Asset
Management Inc.
Objective: Current income consistent with preservation of capital and
liquidity
PACE MONEY MARKET INVESTMENTS seeks to achieve its investment objective by
investing in high quality money market instruments, including (1) U.S.
government securities, (2) obligations of U.S. and foreign banks, (3) commercial
paper and other short-term obligations of U.S. and foreign companies,
governments and similar entities, including variable and floating rate
securities, and (4) repurchase agreements involving any of the foregoing. The
Portfolio may also purchase participation interests in any of the securities in
which it is permitted to invest. Participation interests are pro rata interests
in securities held by others. The Portfolio invests only in U.S.
dollar-denominated securities that have remaining maturities of 397 days or less
at the time of purchase. The Portfolio maintains a dollar-weighted average
portfolio maturity of 90 days or less.
The Portfolio may invest in obligations (including certificates of deposit,
bankers' acceptances, time deposits, and similar obligations) of U.S and foreign
banks having total assets at the time of purchase in excess of $1.5 billion. The
Portfolio may invest in non-negotiable time deposits of U.S. Banks, savings
associations and similar depository institutions having total assets in excess
of $1.5 billion at the time of purchase only if the time deposits have
maturities of seven days or less.
The commercial paper and other short-term obligations purchased by the
Portfolio consist only of obligations that are "First Tier Securities" as
defined in Rule 2a-7 under the 1940 Act. As so defined, First Tier Securities
include securities that are rated in the highest short-term rating category by
at least two nationally recognized statistical rating organizations ("NRSROs")
or by one NRSRO if only one NRSRO has assigned the obligation a short-term
rating. The Portfolio also may rely on the short-term rating and credit quality
of a guarantee of a security (including bond insurance, letters of credit or
unconditional demand features or the issuer of the guarantee) to determine
whether security is eligible for purchase. First Tier Securities also include
unrated securities if Mitchell Hutchins has determined the obligations to be of
comparable quality to rated securities that so qualify. The Portfolio generally
may invest no more than 5% of its total assets in the securities of a single
issuer (other than securities issued by the U.S. government, its agencies or
instrumentalities).
The Portfolio follows these policies to maintain a constant net asset value
of $1.00 per share, although there can be no assurance it will be able to do so.
An investment in the Portfolio is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any government agency. See "Other Investment
Policies and Risk Factors" for other investment policies of the Portfolio.
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS
Adviser: Pacific Investment Management Company
Objective: Current income
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS seeks to achieve its
investment objective by investing primarily in U.S. government and agency
securities of varying maturities, as well as mortgage-backed securities, with a
dollar-weighted average portfolio duration, under normal conditions, of between
one and seven years. Under normal conditions, the Portfolio invests at least 65%
of its total assets in U.S. government Fixed Income Securities, which include
U.S. Treasury obligations and obligations issued or guaranteed
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by U.S. government agencies or instrumentalities and repurchase agreements with
respect to these securities. "Fixed Income Securities" include debt instruments
the interest payment on which may be fixed, variable or floating and also
includes zero coupon securities which pay no interest until maturity.
The Portfolio may invest in U.S. government securities that are backed by
the full faith and credit of the U.S. government, such as Government National
Mortgage Association ("GNMA") mortgage-backed securities, securities that are
supported primarily or solely by the creditworthiness of the issuer, such as
securities issued by the Resolution Funding Corporation ("RFC") and the
Tennessee Valley Authority ("TVA"), and securities that are supported primarily
or solely by specific pools of assets and the creditworthiness of a U.S.
government-related issuer, such as mortgage-backed securities issued by the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Resolution Trust Corporation ("RTC").
The Portfolio also may invest in certain zero coupon securities that are
U.S. Treasury notes and bonds that have been stripped of their unmatured
interest coupon receipts or interests in such U.S. Treasury securities or
coupons, including Certificates of Accrual Treasury Securities ("CATS") and
Treasury Income Growth Receipts ("TIGRs"). The SEC staff currently takes the
position that "stripped" U.S. government securities that are not issued through
the U.S. Treasury STRIPS program are not U.S. government securities. As long as
the SEC takes this position, CATS and TIGRs will not be considered U.S.
government securities for purposes of the 65% investment requirement. See "Other
Investment Policies and Risk Factors--Risks of Mortgage- and Asset-Backed
Securities" for further discussion of the mortgage- and asset-backed securities
in which the Portfolio may invest.
The Portfolio may invest up to 35% of its total assets in mortgage-backed
securities that are issued by private issuers and in debt securities of other
corporate issuers. In an effort to maintain a dollar-weighted average portfolio
duration, under normal conditions, of between one and seven years, the Adviser
monitors the prepayment experience of the underlying mortgage pools of the
Portfolio's mortgage-related securities and will purchase and sell securities in
the Portfolio to shorten or lengthen the average duration of the Portfolio, as
appropriate.
The Portfolio's investments in Fixed Income Securities are limited to those
that are rated at least A by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") (or, if
unrated, determined by the Adviser to be of comparable quality). See the
Appendix to the SAI for a description of Moody's and S&P's ratings. In addition,
the Portfolio will not acquire a security if, as a result, more than 25% of the
Portfolio's total assets would be invested in securities rated below AAA, or if
more than 10% of the Portfolio's total assets would be invested in securities
rated A.
The Portfolio may use options, futures contracts, options on futures
contracts and interest rate protection transactions, dollar rolls and reverse
repurchase agreements for hedging and income and return enhancement purposes.
See "Other Investment Policies and Risk Factors" for further discussion of
hedging and related strategies and other investment policies of the Portfolio.
PACE INTERMEDIATE FIXED INCOME INVESTMENTS
Adviser: Pacific Income Advisers, Inc.
Objective: Current income, consistent with reasonable stability of principal
PACE INTERMEDIATE FIXED INCOME INVESTMENTS seeks to achieve its objectives
through investment in Fixed Income Securities with a dollar-weighted average
portfolio duration, under normal conditions, of between two and four and
one-half years. Under normal conditions, the Portfolio invests at least 65% of
its total assets in U.S. government securities, corporate bonds, debentures,
non-convertible Fixed Income Securities, preferred stocks, mortgage-related
securities, Eurodollar certificates of deposit, Eurodollar bonds and Yankee
bonds. ("Eurodollar Bonds" are U.S. dollar-denominated obligations of issuers
that are located outside the United States, primarily in Europe. "Yankee bonds"
are U.S. dollar-denominated obligations of foreign issuers.) The Portfolio also
may invest up to 10% of its total assets in securities denominated in foreign
currencies of developed countries. The Portfolio limits its investments to
investment grade securities, which are securities rated within the four highest
categories established by at least
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one NRSRO (e.g., Moody's or S&P) and unrated securities determined by the
Adviser to be of comparable quality. Securities in the lowest of those four
categories, i.e., rated Baa by Moody's or BBB by S&P, have speculative
characteristics and are subject to greater risks. See the Appendix to the SAI
for a description of Moody's and S&P ratings and "Other Investment Policies and
Risk Factors--Debt Securities" for a description of certain risks associated
with securities in the fourth highest rating category. The Portfolio may use
options, futures contracts and options on futures contracts for hedging and for
income and return enhancement purposes. See "Other Investment Policies and Risk
Factors" for further discussion of hedging and related strategies and other
investment policies of the Portfolio.
In an effort to maintain a dollar-weighted average portfolio duration, under
normal conditions, of between two and four and one-half years, the Adviser
monitors the prepayment experience of the underlying mortgage pools of the
Portfolio's mortgage-related securities and will purchase and sell securities in
the Portfolio to shorten or lengthen the duration of the Portfolio, as
appropriate.
PACE STRATEGIC FIXED INCOME INVESTMENTS
Adviser: Pacific Investment Management Company
Objective: Total return consisting of income and capital appreciation
PACE STRATEGIC FIXED INCOME INVESTMENTS seeks to achieve its investment
objective by investing in a portfolio of Fixed Income Securities of varying
maturities with a dollar-weighted average portfolio duration, under normal
conditions, of between three and eight years. Portfolio holdings will be
invested in areas of the bond market (based on quality, sector, coupon or
maturity) which the Adviser believes to be relatively undervalued.
Under normal conditions, the Portfolio invests at least 65% of its assets in
Fixed Income Securities, which include obligations issued or guaranteed by the
U.S. government, its agencies and instrumentalities, corporate and other debt
obligations, convertible securities, mortgage- and asset-backed securities,
obligations of foreign governments or their subdivisions, agencies or
instrumentalities, obligations of supranational and quasi-governmental entities,
commercial paper, certificates of deposit, money market instruments, foreign
currency exchange-related securities and loan participations and assignments.
The Portfolio may invest up to 35% of its total assets in privately issued
mortgage-related securities. All of the securities purchased for the Portfolio
will be investment grade (rated at least Baa by Moody's or BBB by S&P, or, if
unrated, determined by the Adviser to be of comparable quality), except that the
Portfolio may invest up to 20% of its total assets in securities rated below
investment grade, but rated at least B by Moody's or S&P, or determined by the
Adviser to be of comparable quality. In the event that, due to a downgrade of
one or more debt securities, an amount in excess of 20% of the Portfolio's total
assets is held in securities rated below investment grade and comparable unrated
securities, the Adviser will engage in an orderly disposition of such securities
to the extent necessary to reduce the Portfolio's holdings thereof. Securities
rated Baa or lower by Moody's or BBB or lower by S&P have speculative
characteristics and are subject to greater risks. See "Other Investment Policies
and Risk Factors--Debt Securities" below and the Appendix in the SAI for a
description of Moody's and S&P ratings.
The Portfolio may invest up to 20% of its total assets in a combination of
U.S. dollar-denominated debt of any foreign issuer, Yankee bonds, Eurodollar
bonds and debt securities denominated in foreign currencies, except that no more
than 10% of the Portfolio's total assets shall be invested in debt securities
denominated in foreign currencies. The Portfolio may use forward currency
contracts, currency options, currency futures and options thereon to hedge
against unfavorable changes in currency exchange rates and for income and return
enhancement purposes. The Portfolio also may use options, futures contracts,
options on futures contracts, interest rate protection transactions, dollar
rolls and reverse repurchase agreements for hedging and for income and return
enhancement purposes. See "Other Investment Policies and Risk Factors" for
further discussion of hedging and related strategies and other investment
policies of the Portfolio.
PACE MUNICIPAL FIXED INCOME INVESTMENTS
Adviser: Morgan Grenfell Capital
Management, Incorporated
Objective: High current income exempt from federal income tax
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PACE MUNICIPAL FIXED INCOME INVESTMENTS seeks to achieve its investment
objective through investment in general obligation, revenue and private activity
bonds and notes, the interest on which is exempt from federal income tax, with a
dollar-weighted portfolio duration, under normal conditions, of between three
and seven years.
Under normal conditions, the Portfolio invests at least 80% of its total
assets in general obligation, revenue and private activity bonds and notes that
are issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities, or multi-state agencies or authorities, the interest on
which, in the opinion of counsel to the issuer of the instrument, is exempt from
federal income tax ("Municipal Obligations"), including municipal bonds,
industrial development bonds ("IDBs"), municipal lease obligations and
certificates of participation therein, put bonds and private activity bonds
("PABs"). The Portfolio also will not invest more than 25% of its total assets
in Municipal Obligations whose issuers are located in the same state or more
than 25% of its total assets in Municipal Obligations that are secured by
revenues from entities in a particular industry category, except that the
Portfolio may invest up to 50% of its total assets in public housing authorities
and state and local housing finance authorities, including bonds that are
secured or backed by the U.S. Treasury or other U.S. government - guaranteed
securities. To the extent the Portfolio concentrates its investments in single
family and multi-family housing obligations, the Portfolio will be subject to
the peculiar risks associated with investments in such obligations, including
prepayment risks and the risks of default on housing loans, which may be
affected by economic conditions and other factors relating to such obligations.
The Portfolio will include Municipal Obligations of varying maturities with
a dollar-weighted average portfolio duration, under normal conditions, of
between three and seven years. Portfolio composition generally covers a range of
maturities with geographic and issuer diversification. The Portfolio may invest
in PABs collateralized by letters of credit issued by banks having stockholders'
equity in excess of $100 million as of the date of their most recently published
statement of financial condition. The Portfolio may also invest in variable rate
Municipal Obligations, most of which permit the holder thereof to receive the
principal amount on demand upon seven days' notice. The Portfolio limits its
investments to Municipal Obligations that are rated at least A, MIG-2 or Prime 2
by Moody's or A, SP-2 or A-2 by S&P at the time of investment or unrated
securities determined to be of comparable quality by the Adviser, except that up
to 15% of its total assets may be invested in municipal bonds that, at the time
of purchase, are rated Baa by Moody's or BBB by S&P, or if unrated, are
determined by the Adviser to be of comparable quality. Municipal Obligations in
the lowest investment grade category are considered medium grade securities and
have speculative characteristics. See "Other Investment Policies and Risk
Factors--Debt Securities" for a discussion of certain risks associated with
securities rated in the fourth highest rating category.
The Portfolio may invest without limit in PABs. Dividends attributable to
interest income on certain types of PABs issued after August 15, 1986 to finance
non-governmental activities are a tax preference item for purposes of the
federal alternative minimum tax ("AMT"). Although no assurance can be given, the
Adviser will endeavor to manage the Portfolio so that no more than 25% of the
interest income will be a tax preference item. Dividends derived from interest
income on all Municipal Obligations are a component of the "current earnings"
adjustment for corporations for purposes of the AMT. See "Dividends and Taxes."
Under normal circumstances, the Portfolio may invest up to 20% of its total
assets in certain taxable securities to maintain liquidity. In addition, for
temporary defensive purposes during periods when the Adviser determines that
market conditions warrant, the Portfolio may invest without limit in such
taxable securities. See "Other Investment Policies and Risk Factors" for further
discussion of other investment policies of the Portfolio.
PACE GLOBAL FIXED INCOME INVESTMENTS
Adviser: Rogge Global Partners plc
Objective: High total return
PACE GLOBAL FIXED INCOME INVESTMENTS seeks to achieve its investment
objective by investing primarily in high-grade Fixed Income Securities issued by
domestic and foreign governments and supranational entities and
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private issuers located overseas, with a dollar-weighted average duration, under
normal conditions, of between four and eight years. Under normal conditions, at
least 65% of the value of the Portfolio's total assets will be invested in
domestic and foreign bonds issued by governments, companies and supranational
organizations such as the International Bank for Reconstruction and Development
(commonly known as the "World Bank"), Asian Development Bank, European
Investment Bank and European Economic Community. Under normal market conditions,
investments will be made in a minimum of four countries, one of which may be the
United States. For temporary defensive purposes, the Portfolio may invest in
securities of only one country, including the United States. The Portfolio may
invest in non-U.S. dollar denominated securities.
The Portfolio's quality standards limit its investments to those rated
within the three highest grades assigned by Moody's or S&P, or unrated
securities determined by the Adviser to be of comparable quality, except for
bonds issued by companies and governments in emerging markets.
The Portfolio may invest up to 10% of its total assets in bonds issued by
companies and governments in emerging countries that, at the time of purchase,
are rated Baa or Ba by Moody's or BBB or BB by S&P or are unrated but determined
to be of comparable quality by the Adviser. For purposes of this Portfolio,
"emerging countries" are those countries not included in the Morgan Stanley
Capital International World Index ("MSCI Index") of major world economies.
Malaysia will be considered an emerging market country for purposes of this
Portfolio.
Bonds rated below investment grade are deemed by these agencies to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
These securities are commonly referred to as "junk bonds." In the event that,
due to a downgrade of one or more debt securities, an amount in excess of 10% of
the total assets of the Portfolio is held in securities rated below investment
grade and comparable unrated securities, the Adviser will engage in an orderly
disposition of such securities to the extent necessary to reduce the Portfolio's
holdings thereof.
The emerging countries in which the Portfolio may invest tend to be in the
less economically developed regions of the world. General characteristics of
emerging countries also include lower degrees of political stability, a high
demand for capital investment, a high dependence on export markets for their
major industries, a need to develop basic economic infra-structures and rapid
economic growth. The Adviser believes that investments in bonds issued in
emerging countries offer the opportunity for significant long-term investment
returns; however, these investments generally are lower quality than the three
highest rated securities and involve certain risks. See "Other Investment
Policies and Risk Factors--Foreign Securities" and "--Foreign Government
Securities."
The Portfolio may use forward currency contracts, currency options, currency
futures and options thereon to hedge against unfavorable changes in currency
exchange rates and for income and return enhancement purposes. The Portfolio
also may use options, futures contracts, and options on futures contracts for
hedging and for income and return enhancement purposes. For a more detailed
discussion of the risks in investing in foreign securities, see "Investment
Policies and Restrictions--Special Characteristics of Foreign and Emerging
Market Securities" in the SAI. See "Other Investment Policies and Risk Factors"
for further discussion of hedging and related strategies and other investment
policies of the Portfolio.
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS
Adviser: Brinson Partners, Inc.
Objective: Capital appreciation and
dividend income
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS seeks to achieve its investment
objective by investing primarily in equity securities that, in the Adviser's
opinion, are undervalued. The Portfolio may invest in a broad range of equity
securities of U.S. issuers that are traded on major stock exchanges as well as
on the over-the-counter ("OTC") market, including common and preferred stocks,
debt securities convertible into or exchangeable for common stock and
securities, such as warrants or rights, that are convertible into common stock.
Up to 10% of the Portfolio's total assets may include convertible
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debt securities rated Ba by Moody's or BB by S&P or, if unrated, determined to
be of comparable quality by the Adviser. The Portfolio expects its equity
investments to encompass both large and intermediate capitalization companies,
but under normal circumstances at least 65% of the Portfolio's total assets will
be invested in common stock of companies with total market capitalization (i.e.,
market value of common stock outstanding) of $2.5 billion or greater at the time
of purchase. The Portfolio may invest up to 5% of its total assets in foreign
securities, including American Depositary Receipts ("ADRs").
The Adviser's approach to investing for the Portfolio is to invest in the
equity securities of U.S. companies believed to be undervalued based upon
internal research and proprietary valuation systems. Investment decisions are
based on fundamental research, internally developed valuation systems and
seasoned judgment. The Adviser's research focuses on several levels of analysis;
first, on understanding wealth shifts that occur within the equity market, and
second, on individual company research. At the company level, the Adviser
quantifies expectations of a company's ability to generate profit and to grow
business into the future. For each stock under analysis, the Adviser discounts
to the present all of the future cash flows that it believes will accrue to the
Portfolio from the investment to calculate a present or intrinsic value. This
value estimate generated by the Adviser's proprietary valuation model is
compared to observed market price and ranked against other stocks accordingly.
The rankings, in combination with the Adviser's investment judgment, determine
which securities are included in the Portfolio.
The Portfolio also may use options, futures contracts and options on futures
contracts for hedging and for income and return enhancement purposes. See "Other
Investment Policies and Risk Factors" for further discussion of hedging and
related strategies and other investment policies of the Portfolio.
PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS
Adviser: Alliance Capital Management L.P.
Objective: Capital appreciation
PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS seeks to achieve its investment
objective by investing primarily in equity securities of companies that, in the
Adviser's opinion, are characterized by an earnings growth rate that is faster
than that of the average growth rate of the companies included in the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500 Index") and have a total market
capitalization of at least $2.5 billion. Dividend income is an incidental
consideration in the selection of investments. The securities held by the
Portfolio can be expected generally to experience greater volatility than those
of PACE LARGE COMPANY VALUE EQUITY INVESTMENTS. The Portfolio may invest in a
broad range of equity securities of U.S. issuers, including common and preferred
stocks, debt securities convertible into or exchangeable for common stock and
securities, such as warrants or rights, that are convertible into common stock.
Under normal conditions, at least 65% of the Portfolio's total assets will be
invested in common stocks of companies with total market capitalization of $2.5
billion or greater at the time of purchase. The Portfolio may invest up to 5% of
its total assets in foreign securities, including ADRs. See "Other Investment
Policies and Risk Factors" for further discussion of other investment policies
of the Portfolio.
The Adviser follows its "disciplined growth" strategy in managing the
Portfolio. This strategy is based on the Adviser's quantitative scoring system
for stock selection. The Adviser's internal fundamental research team is the
cornerstone of the stock selection process. All portfolio securities are closely
monitored by the Adviser's research analysts, providing necessary independent
investment opinions and financial projections. Each stock in the Adviser's
research universe is ranked based on the analyst's investment opinion and six
measures of fundamental earnings growth and valuation. The Portfolio is normally
concentrated in the top 30% of the research universe as ranked by this stock
selection process. Stocks ranking in the bottom half of this research coverage
generally must be sold. In relying on this process, the Adviser seeks to
identify the best combination of strong relative earnings growth and reasonable
valuation.
Individual holdings and position sizes are determined by the Adviser after
considering
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their respective investment merits and contribution to portfolio risk. Style and
industry risk are controlled relative to the growth benchmark. Stock selection
is the primary determinant of investment performance relative to benchmark.
PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS
Adviser: Brandywine Asset Management, Inc.
Objective: Capital appreciation
PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS seeks to achieve its
investment objective by investing primarily in equity securities with total
market capitalization of less than $2.5 billion that, in the Adviser's opinion,
are undervalued or overlooked in the marketplace at the time of purchase, which
generally have below-market average price/ earnings ("P/E") ratios. The
Portfolio will invest only in companies with common stock traded on the major
stock exchanges as well as on the OTC market. The Portfolio may invest in a
broad range of equity securities of U.S. issuers, including common and preferred
stock, debt securities convertible into or exchangeable for common stock and
securities such as warrants or rights that are convertible into common stock.
Under normal conditions, at least 65% of the Portfolio's total assets will be
invested in common stocks of issuers with total market capitalization of less
than $2.5 billion at the time of purchase. The Portfolio defines a low P/E ratio
as a P/E (based on trailing twelve-month earnings) which places an issuer among
the lowest 25% based on P/E ratios for all exchange-traded and OTC stocks with
positive earnings and a capitalization greater than $10 million. See "Other
Investment Policies and Risk Factors" for further discussion of other investment
policies of the Portfolio.
The Adviser performs a qualitative, fundamental review of candidates to
determine whether they are appropriate candidates for the Portfolio. This review
identifies and avoids stocks undesirable for investment. First, the Adviser
adjusts all reported earnings for extraordinary gains and losses so as to
consider only true, low P/E stocks for entry into the Portfolio. Second, the
Adviser excludes stocks that have pre-announced significant earnings changes
which, when formally reported will raise their P/E ratios. Third, the Adviser
eliminates stocks that have had recent strong price increases, and therefore are
not truly undervalued. Fourth, the fundamental review identifies and removes
those stocks that are suffering a severe or sudden fundamental deterioration.
The Portfolio intends to invest in the common stock only of companies
meeting these criteria. Each stock's weighting in the Portfolio will be
proportional to its capitalization, except that the Portfolio will not purchase
any stock if it would exceed 2% of the Portfolio's assets. The Portfolio may
deviate from strict capitalization weighting in order to invest only in round
lots, for illiquidity considerations, or to block purchases at favorable prices.
PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS
Adviser: Delaware Management Company, Inc.
Objective: Capital appreciation
PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS seeks to achieve its
investment objective by investing primarily in the common stock of "emerging
growth" companies, which are companies characterized by above-average earnings
growth rates and total market capitalization of less than $2.5 billion. Dividend
income is an incidental consideration in the selection of investments. The
securities held by the Portfolio can be expected generally to experience greater
volatility than those of PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS. The
Portfolio may invest in a broad range of equity securities of U.S. issuers,
including common and preferred stock, debt securities convertible into or
exchangeable for common stock and securities, such as warrants or rights, that
are convertible into common stock. Under normal conditions, at least 65% of the
Portfolio's total assets will be invested in common stocks of issuers with total
market capitalization of less than $2.5 billion that exhibit the potential for
high future earnings growth relative to the overall market. The Portfolio may
invest up to 5% of its total assets in foreign securities, including ADRs.
The Adviser uses a bottom-up, fundamental approach, including on-site
company visits, to uncover and analyze companies that exhibit the possibility of
accelerating earnings growth because of management changes, new products,
established products exhibiting unit volume
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growth or structural changes in the economy. The quality of the management team
and the strength of the company's finances and internal controls are also
factors in the investment decision.
The Adviser is exposed to and follows companies constituting a full range of
market sectors; nevertheless, it may focus on a limited number of attractive
industries. The securities of these companies may have limited marketability and
may be subject to more abrupt or erratic market movements than securities of
larger, more established companies or the market averages in general. The
Portfolio also may use options, futures contracts and options on futures
contracts for hedging and for income and return enhancement purposes. See "Other
Investment Policies and Risk Factors" for further discussion of hedging and
related strategies and other investment policies of the Portfolio.
PACE INTERNATIONAL EQUITY INVESTMENTS
Adviser: Martin Currie Inc.
Objective: Capital appreciation
PACE INTERNATIONAL EQUITY INVESTMENTS seeks to achieve its objective by
investing in equity securities of companies domiciled outside the United States.
Under normal market conditions, at least 65% of the Portfolio's total assets
will be invested in common stocks, which may or may not pay dividends, as well
as convertible bonds, convertible preferred stocks, warrants, rights or other
equity securities of companies domiciled in countries outside the United States.
"Domiciled," for these purposes, means companies (1) which are organized under
the laws of a country other than the United States, (2) for which the principal
securities trading market is in such a country, or (3) which derive a
significant proportion (at least 50 percent) of their revenues or profits from
goods produced or sold, investments made, or services performed in the
respective country or which have at least 50 percent of their assets situated in
such a country. The Portfolio also may invest up to 10% of its total assets in
securities of investment companies, such as closed-end investment management
companies which invest in foreign markets.
The Portfolio will normally invest in the securities of issuers from three
or more countries outside the United States and, under normal market
circumstances, the Portfolio's investments involve securities principally traded
in at least ten different countries. Particular consideration will be given to
investments principally traded in Japanese, European, Pacific and Australian
securities markets, and in foreign securities of companies traded on U.S.
securities markets. The Portfolio may also invest up to 10% of its total assets
in emerging markets, including Asia, Latin America and other regions, where
markets may not yet fully reflect the potential of the developing economy. For
purposes of this Portfolio, "emerging markets" are markets in countries not
included in the MSCI World Index of major world economies. For purposes of this
Portfolio, the market in Malaysia will be considered an emerging market.
In allocating the Portfolio's assets among the various securities markets of
the world, the Adviser will consider such factors as the condition and growth
potential of the various economic and securities markets, currency and taxation
considerations and other pertinent financial, social, national and political
factors. Under certain adverse investment conditions, the Portfolio may restrict
the number of securities markets in which its assets will be invested. The
Portfolio will invest only in markets where, in the judgment of the Adviser,
there exists an acceptable framework of market regulation and sufficient
liquidity.
When the Adviser believes that conditions in international securities
markets warrant a defensive investment strategy, the Portfolio temporarily may
invest up to 100% of its assets in domestic debt securities, foreign debt
securities principally traded in the United States, and foreign debt securities
principally traded outside of the United States, obligations issued or
guaranteed by the U.S. or a foreign government or their respective agencies,
authorities or instrumentalities, corporate bonds and sponsored ADRs.
The Portfolio may use forward currency contracts, currency options, currency
futures and options thereon to hedge against unfavorable changes in currency and
for income and return enhancement purposes. The Portfolio also may use options,
futures contracts and options on futures contracts for hedging and income and
return enhancement purposes. See "Other Investment Policies and Risk Factors"
for further discussion of hedging and related strategies and other investment
policies of the Portfolio. For a more detailed discussion of the
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risks in investing in foreign securities, see "Other Investment Policies and
Risk Factors--Foreign Securities," "--Foreign Government Securities" below and
"Investment Policies and Restrictions--Special Characteristics of Foreign and
Emerging Market Securities" in the SAI.
PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS
Adviser: Schroder Capital Management International Inc.
Objective: Capital appreciation
PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS seeks to achieve its
investment objective by investing, under normal conditions, at least 65% of the
Portfolio's total assets in equity securities of issuers domiciled in emerging
market countries. "Domiciled" for these purposes means companies (1) which are
organized under the laws of an emerging market country, (2) for which the
principal securities trading market is in such a country, or (3) which derive a
significant proportion (at least 50 percent) of their revenues or profits from
goods produced or sold, investments made, or services performed in the
respective country or which have at least 50 percent of their assets situated in
such a country. For purposes of this Portfolio, "emerging market" countries are
those countries not included in the MSCI Index of major world economies.
Malaysia will be considered an emerging market country for purposes of this
Portfolio. The Portfolio will normally invest in the securities of issuers from
three or more emerging countries.
The Portfolio may invest in a broad range of equity securities, including
common and preferred stock, debt securities convertible into or exchangeable for
stock and securities such as warrants or rights that are convertible into stock.
The Portfolio also may invest up to 10% of its total assets in securities of
investment companies, such as closed-end investment management companies which
invest in foreign markets. The Portfolio also may invest up to 35% of its total
assets in debt securities. All of the debt securities purchased for the
Portfolio will be limited to those that are rated at least A by Moody's or S&P
(or, if unrated, determined by the Adviser to be of comparable quality), except
that the Portfolio may invest up to 10% of its total assets in securities rated
below A by Moody's or S&P, but rated at least C by S&P, or determined by the
Adviser to be of comparable quality. In the event that, due to a downgrade of
one or more debt securities, an amount in excess of 10% of the Portfolio's total
assets is held in securities rated below A by Moody's or S&P and comparable
unrated securities, the Adviser will engage in an orderly disposition of such
securities to the extent necessary to reduce the Portfolio's holdings thereof.
Securities rated Baa or lower by Moody's or BBB or lower by S&P have speculative
characteristics and are subject to greater risks. See "Other Investment Policies
and Risk Factors--Debt Securities" below and the Appendix in the SAI for a
description of Moody's and S&P ratings.
In recent years, many emerging market countries have begun programs of
economic reform: removing import tariffs, dismantling trade barriers,
deregulating foreign investment, privatizing state owned industries, permitting
the value of their currencies to float against the dollar and other major
currencies, and generally reducing the level of state intervention in industry
and commerce. Important intra-regional economic integration also holds the
promise of greater trade and growth. At the same time, significant progress has
been made in restructuring the heavy external debt burden that certain emerging
market countries accumulated during the 1970s and 1980s. While there is no
assurance that these trends will continue, the Adviser will seek out attractive
investment opportunities in these countries.
The Portfolio will not necessarily seek to diversify investments on a
geographic basis within the emerging market category and, to the extent the
Portfolio concentrates its investments in issuers located in one country or
area, the Portfolio is more susceptible to factors adversely affecting that
country or area.
The Portfolio may use forward currency contracts, currency options, currency
futures and options thereon to hedge against unfavorable changes in currency
exchange rates and for income and return enhancement purposes. The Portfolio may
acquire emerging market securities that are denominated in currencies other than
a currency of an emerging market country. The Portfolio also may use options,
futures contracts and options on futures contracts for hedging and income and
return enhancement purposes. See "Other Investment Policies and Risk Factors"
for further discussion of hedging and related strategies and other investment
policies of the Portfolio. For a more detailed discussion of the
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risks in investing in foreign securities, see "Other Investment Policies and
Risk Factors-- Foreign Securities," "--Foreign Government Securities" below and
"Investment Policies and Restrictions--Special Characteristics of Foreign and
Emerging Market Securities" in the SAI.
OTHER INVESTMENT POLICIES AND
RISK FACTORS
MONEY MARKET INSTRUMENTS
All Portfolios other than PACE MONEY MARKET INVESTMENTS also may invest in
high-grade money market instruments, such as commercial paper of a U.S. or
foreign company or foreign government certificates of deposit, bankers'
acceptances and time deposits of domestic and foreign banks, and obligations
issued or guaranteed by the U.S. government, its agencies and instrumentalities.
These obligations generally will be U.S. dollar-denominated. Commercial paper
will be rated, at the time of purchase, at least Prime-2 by Moody's or A-2 by
S&P or, if not rated, issued by an entity having an outstanding unsecured debt
issue rated at least A or Prime-2 by Moody's or A or A-2 by S&P. See the
Appendix to the SAI for a description of Moody's and S&P's ratings.
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in some or all of the following U.S. government
securities: securities that are backed by the full faith and credit of the U.S.
government, such as U.S. Treasury obligations (bills, notes and bonds),
securities that are supported primarily or solely by the creditworthiness of the
government-related issuer, such as securities issued by the RFC, the Student
Loan Marketing Association, the Federal Home Loan Banks and the TVA, and
securities that are supported primarily or solely by specific pools of assets
and the creditworthiness of a U.S. government-related issuer, such as U.S.
government mortgage-backed securities. For more information concerning the types
of mortgage-backed securities in which certain Portfolios may invest, see "Other
Investment Policies and Risk Factors--Mortgage-Backed Securities." In addition,
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED
INCOME INVESTMENTS, PACE STRATEGIC FIXED INCOME INVESTMENTS and PACE GLOBAL
FIXED INCOME INVESTMENTS may invest in certain zero coupon securities that are
"stripped" U.S. Treasury notes and bonds. See "Other Investment Policies and
Risk Factors and Risk Factors--Zero Coupon Securities."
DEBT SECURITIES
Each Portfolio may invest in corporate and other debt obligations. The yield
of a Fixed Income Security depends on a variety of factors, including general
Fixed Income Security market conditions, the financial condition of the issuer,
the size of the particular offering, the maturity, credit quality and rating of
the issue and expectations regarding changes in tax rates. Generally, the longer
the maturity of a Fixed Income Security, the higher the rate of interest paid
and the greater the volatility. Furthermore, The value of the debt securities
held by a Portfolio will rise when interest rates decline. Conversely, when
interest rates rise, the value of Fixed Income Securities will to decline.
Except where otherwise indicated, each Portfolio will invest in securities
rated A or better by any NRSRO or determined by the Adviser to be of comparable
quality. PACE INTERMEDIATE FIXED INCOME INVESTMENTS, PACE STRATEGIC FIXED INCOME
INVESTMENTS, PACE MUNICIPAL FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED INCOME
INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS may
invest in medium-rated securities (i.e., rated Baa by Moody's or BBB by S&P).
Moody's considers securities rated Baa to have speculative characteristics. PACE
STRATEGIC FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED INCOME INVESTMENTS and
PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS also may invest in
lower-rated securities (i.e., rated lower than Baa by Moody's or lower than BBB
by S&P). However, PACE STRATEGIC FIXED INCOME INVESTMENTS will not purchase a
security rated lower than B by Moody's or S&P, and PACE GLOBAL FIXED INCOME
INVESTMENTS will not purchase a security rated lower than Ba by Moody's or BB by
S&P. Changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity for such securities to make principal and interest
payments than is the case for higher grade debt securities. In addition, PACE
INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS will not purchase a security
rated lower than C by S&P or another rating assigned by Moody's that the
Portfolio's Adviser determines to be of comparable rating to S&P's C rating.
Debt securities rated below investment grade are deemed by these agencies to be
predominantly
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speculative with respect to the issuer's capacity to pay interest and repay
principal, may involve major risk exposure to adverse conditions and, as
previously stated, are commonly referred to as "junk bonds."
Each Portfolio is permitted to purchase debt securities that are not rated
by an NRSRO but that the Portfolio's Adviser determines to be of comparable
quality to that of rated securities in which it may invest. These securities are
included in the computation of any percentage limitations applicable to
comparably rated securities.
Although the relevant Advisers will attempt to minimize the speculative
risks associated with investments in junk bonds through diversification, credit
analysis and attention to current trends in interest rates and other factors, an
investor should carefully review the objectives and policies of PACE STRATEGIC
FIXED INCOME INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS EQUITY
INVESTMENTS and consider its ability to assume the investment risks involved
before making an investment.
Ratings of debt securities represent the rating agencies' opinions regarding
their quality, are not a guarantee of quality and may be reduced after a
Portfolio has acquired the security. The Advisers, and in the case of PACE MONEY
MARKET INVESTMENTS, Mitchell Hutchins, will consider such an event in
determining whether the Portfolio should continue to hold the security but may
not be required to dispose of it. Credit ratings attempt to evaluate the safety
of principal and interest payments and do not evaluate the risks of fluctuations
in market value. Also, rating agencies may fail to make timely changes in credit
ratings in response to subsequent events affecting an issuer, so that an
issuer's current financial condition may be better or worse than the rating
indicates.
Lower rated debt securities generally offer a higher current yield than that
available from higher grade issues, but they involve higher risks, in that they
are especially subject to adverse changes in general economic conditions and in
the industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuation in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress, which could adversely
affect their ability to make payments of principal and interest and increase the
possibility of default. In addition, issuers of these securities may not have
more traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by such
issuers is significantly greater, because such securities frequently are
unsecured and subordinated to the prior payment of senior indebtedness.
The market for lower rated securities has expanded in recent years, and its
growth paralleled a long economic expansion. In the past, the prices of many
lower rated debt securities declined substantially, reflecting an expectation
that many issuers of such securities might experience financial difficulties. As
a result, the yields on lower rated debt securities rose dramatically. The
higher yields did not reflect the value of the income stream that holders of
such securities expected, but rather the risk that holders of such securities
could lose a substantial portion of their value as a result of the issuers'
financial restructuring or default. There can be no assurance that such declines
will not recur. The market for lower rated debt securities generally is thinner
and less active than that for higher quality securities, which may limit a
Portfolio's ability to sell the securities at fair value in response to changes
in the economy or the financial markets. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of lower rated securities, especially in a thinly traded
market.
DURATION
Duration is a measure of the expected life of a fixed income security that
was developed as a more precise alternative to the concept of "term to
maturity." Duration incorporates a bond's yield, coupon interest payments, final
maturity and call features into one measure. Duration is one of the fundamental
tools used by the Adviser in portfolio selection for PACE GOVERNMENT SECURITIES
FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED INCOME INVESTMENTS, PACE
STRATEGIC FIXED INCOME INVESTMENTS, PACE MUNICIPAL FIXED INCOME INVESTMENTS and
PACE GLOBAL FIXED INCOME INVESTMENTS.
Traditionally, a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "volatility" of the security). However, "term to
maturity" measures only the time until a debt
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security provides its final payments, taking no account of the pattern of the
security's payments prior to maturity. Duration is a measure of the expected
life of a Fixed Income Security on a present value basis. Duration takes the
length of the time intervals between the present time and the time that the
interest and principal payments are scheduled or, in the case of a callable
bond, expected to be received, and weights them by the present values of the
cash to be received at each future point in time. For any Fixed Income Security
with interest payments occurring prior to the payment of principal, duration is
always less than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest of a Fixed Income Security, the longer the
duration of the security; conversely, the higher the stated or coupon rate of
interest of a Fixed Income Security, the shorter the duration of the security.
Duration allows an Adviser to make certain predictions regarding how the
value of a portfolio will generally respond to changes in the level of interest
rates. For example, a portfolio consisting entirely of Treasury securities with
a remaining maturity of five years might have a duration of 4.5 years, depending
upon the Treasury securities coupon and the level of market yields. A 1% change
in the level of interest rates generally would cause a change of approximately
4.5% in the net asset value of the portfolio. A portfolio consisting entirely of
Treasury securities with a remaining maturity of ten years might have a duration
of about 7.5 years, depending upon the treasury note's coupon and the level of
market yields, and a 1% change in the level of interest rates would cause a
change of between 7% and 8% in the net asset value of the portfolio. However,
various factors, such as changes in anticipated prepayment rates, qualitative
considerations and market supply and demand, can cause a portfolio containing
particular securities to respond somewhat differently to changes in interest
rates than indicated in the above examples. These examples are intended for
demonstration purposes only and are not intended to approximate how a
Portfolio's investment portfolio will respond to changes in interest rates. A
Portfolio's investment portfolio may include securities with differing
maturities and quality levels, and interest rates on those instruments may not
all change by the same amount at the same time as rates rise or fall generally
in the marketplace. Also, the Treasury securities described in the example
cannot be retired prior to maturity, while some of the securities in the
Portfolios' investment portfolios can. These factors, among others, can cause a
Portfolio's investment portfolio to respond somewhat differently to changes in
interest rates than shown in the example.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a Portfolio's duration by approximately
the same amount that purchasing an equivalent amount of the underlying
securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques (including its proprietary systems, if any) that
incorporate the economic life of a security into the determination of its
interest rate exposure.
MUNICIPAL OBLIGATIONS
Municipal Obligations include, but are not limited to, municipal bonds,
floating rate and variable rate municipal obligations, participation interests
in municipal bonds, tax-exempt commercial paper, tender option bonds and
short-term municipal notes. Municipal bonds include IDBs, municipal lease
obligations and certificates of participation therein, put bonds and PABs.
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PACE MUNICIPAL FIXED INCOME INVESTMENTS may invest in a variety of Municipal
Obligations, as described below:
MUNICIPAL BONDS. Municipal bonds are debt obligations issued to obtain
funds for various public purposes that pay interest that is exempt from federal
income tax in the opinion of issuer's counsel. The two principal classifications
of municipal bonds are "general obligation" and "revenue" bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as from the user of the facility being financed.
The term "municipal bonds" also includes "moral obligation" issues, which are
normally issued by special purpose authorities. In the case of such issues, an
express or implied "moral obligation" of a related governmental unit is pledged
to the payment of the debt service, but is usually subject to annual budget
appropriations. The term "municipal bonds" also includes municipal lease
obligations, such as leases, installment purchase contracts and conditional
sales contracts and certificates of participation therein. Municipal lease
obligations are issued by state and local governments and authorities to
purchase land or various types of equipment or facilities and may be subject to
annual budget appropriations. The Portfolio generally invests in municipal lease
obligations through certificates of participation.
MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION
INTERESTS. A municipal lease is an obligation in the form of a lease or
installment purchase contract that is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance (as well as regular
federal income tax). Municipal leases frequently involve special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses. These
clauses relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
Thus, the Portfolio's investment in municipal leases will be subject to the
special risk that the governmental issuer may not appropriate funds for lease
payments.
In addition, such leases or contracts may be subject to the temporary
abatement of payments in the event the issuer is prevented from maintaining
occupancy of the leased premises or utilizing the leased equipment. Although the
obligations may be secured by the leased equipment or facilities, the
disposition of the property in the event of nonappropriation or foreclosure
might prove difficult, time-consuming and costly, and result in an
unsatisfactory or delayed recoupment of the Portfolio's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase contracts or other instruments. The certificates
are typically issued by a trust or other entity that has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase contracts.
Certain municipal lease obligations and certificates of participation may be
deemed illiquid for purposes of the Portfolio's limitations on investments in
illiquid securities. Other municipal lease obligations and certificates of
participation acquired by the Portfolio may be determined by the Adviser,
pursuant to guidelines adopted by the trustees of the Trust, to be liquid
securities for these purposes. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors, including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These
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factors include the general creditworthiness of the issuer, the importance to
the issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by the Portfolio. The Portfolio may not invest more than 5%
of its net assets in municipal leases.
PACE MUNICIPAL FIXED INCOME INVESTMENTS may purchase participations in
municipal securities held by a commercial bank or other financial institution.
Such participations provide the Portfolio with the right to a PRO RATA undivided
interest in the underlying municipal securities. In addition, such
participations generally provide the Portfolio with the right to demand payment,
on not more than seven days' notice, of all or any part of the Portfolio's
participation interest in the underlying municipal security, plus accrued
interest.
INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS. IDBs and PABs are
issued by or on behalf of public authorities to finance various privately
operated facilities, such as airport or pollution control facilities, and are
considered to be "municipal bonds" if the interest paid thereon is exempt from
federal income tax in the opinion of the bond issuer's counsel. IDBs and PABs
are in most cases revenue bonds and thus are not payable from the unrestricted
revenues of the issuer. The credit quality of IDBs and PABs is usually directly
related to the credit standing of the user of the facilities being financed.
IDBs issued after August 15, 1986 generally are considered PABs. The Portfolio
is authorized to invest more than 25% of its total assets in IDBs and PABs.
PARTICIPATION INTERESTS. Participation interests are interests in municipal
bonds, including IDBs and PABs, and floating and variable rate obligations that
are owned by banks. These interests typically carry a demand feature permitting
the holder to tender them back to the bank, which demand feature generally is
backed by an irrevocable letter of credit or guarantee of the bank. The credit
standing of such bank affects the credit quality of the participation interests.
TENDER OPTION BONDS. Tender option bonds are long-term Municipal
Obligations sold by a bank subject to a "tender option" that gives the purchaser
the right to tender them to the bank at par plus accrued interest at designated
times (the tender option). The tender option may be exercisable at intervals
ranging from bi-weekly to semi-annually, and the interest rate on the bonds is
typically reset at the end of the applicable interval in order to cause the
bonds to have a market value that approximates their par value. The tender
option generally would not be exercisable in the event of a default on, or
significant downgrading of, the underlying Municipal Obligations. Therefore, the
Portfolio's ability to exercise the tender option will be affected by the credit
standing of both the bank involved and the issuer of the underlying securities.
PUT BONDS. A put bond is a municipal bond that gives the holder the
unconditional right to sell the bond back to the issuer or a remarketing agent
at a specified price and exercise date, which is typically well in advance of
the bond's maturity date. The obligation to purchase the bond on the exercise
date may be supported by a letter of credit or other credit support arrangement
from a bank, insurance company or other financial institution, the credit
standing of which affects the credit quality of the obligation.
TAX-EXEMPT COMMERCIAL PAPER AND SHORT-TERM MUNICIPAL NOTES. Tax-exempt
commercial paper and short-term municipal notes include tax anticipation notes,
bond anticipation notes, revenue anticipation notes and other forms of
short-term loans. Such notes are issued with a short-term maturity in
anticipation of the receipt of tax funds, the proceeds of bond placements and
other revenues.
YIELDS AND RISK FACTORS. The yield of a municipal security depends on a
variety of factors, including general municipal and fixed income security market
conditions, the financial condition of the issuer, the size of the particular
offering, the maturity, credit quality and rating of the issue and expectations
regarding changes in tax rates. Generally, the longer the maturity of a
municipal security, the higher the rate of interest paid and the greater the
volatility. Further, if general market interest rates are increasing, the prices
of Municipal Obligations ordinarily will decrease and, if rates decrease, the
opposite generally will be true. The Portfolio may invest in Municipal
Obligations with a broad range of maturities, based on the Adviser's judgment of
current and future market conditions as well as other factors, such
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as the Portfolio's liquidity needs. Accordingly, the average dollar-weighted
duration of the Portfolio's portfolio may vary.
Future federal, state and local laws may adversely affect the tax-exempt
status of interest on the Portfolio's portfolio securities or of the
exempt-interest dividends paid by the Portfolio, extend the time for payment of
principal or interest or otherwise constrain enforcement of such obligations.
Opinions relating to the validity of Municipal Obligations and the tax-exempt
status of interest thereon are rendered by the issuer's bond counsel at the time
of issuance; the Adviser will rely on such opinions without independent
investigation. See "Other Investment Policies and Risk Factors--Debt Securities"
for further discussion of ratings.
MORTGAGE-BACKED SECURITIES
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED
INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME INVESTMENTS each may invest
in mortgage-backed securities. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property and include single- and
multi-class pass-through securities and collateralized mortgage obligations.
Multi-class pass-through securities and collateralized mortgage obligations are
collectively referred to herein as CMOs.
The U.S. government securities in which these three Portfolios may invest
include mortgage-backed securities issued or guaranteed as to the payment of
principal and interest (but not as to market value) by GNMA, FNMA or the FHLMC.
Other mortgage-backed securities in which these three Portfolios may invest are
issued by private issuers, generally originators of and investors in mortgage
loans, including savings associations, mortgage bankers, commercial banks,
investment bankers and special purpose entities (collectively, "Private Mortgage
Lenders"). Payments of principal and interest (but not the market value) of such
private mortgage-backed securities may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any government guarantee of the underlying mortgage assets but
with some form of non-government credit enhancement.
GNMA CERTIFICATES. GNMA guarantees certain mortgage pass-through
certificates ("GNMA certificates") that are issued by Private Mortgage Lenders
and that represent ownership interests in individual pools of residential
mortgage loans. These securities are designed to provide monthly payments of
interest and principal to the investor. Timely payment of interest and principal
is backed by the full faith and credit of the U.S. government. Each mortgagor's
monthly payments to his lending institution on his residential mortgage are
"passed through" to certificateholders such as the Portfolios. Mortgage pools
consist of whole mortgage loans or participations in loans. The terms and
characteristics of the mortgage instruments are generally uniform within a pool
but may vary among pools. Lending institutions which originate mortgages for the
pools are subject to certain standards, including credit and other underwriting
criteria for individual mortgages included in the pools.
FNMA CERTIFICATES. FNMA facilitates a national secondary market in
residential mortgage loans insured or guaranteed by U.S. government agencies and
in privately insured or uninsured residential mortgage loans (sometimes referred
to as "conventional mortgage loans" or "conventional loans") through its
mortgage purchase and mortgage-backed securities sales activities. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA certificates"), which
represent PRO RATA shares of all interest and principal payments made and owed
on the underlying pools. FNMA guarantees timely payment of interest and
principal on FNMA certificates. The FNMA guarantee is not backed by the full
faith and credit of the U.S. government.
FHLMC CERTIFICATES. FHLMC also facilitates a national secondary market for
conventional residential and U.S. government-insured mortgage loans through its
mortgage purchase and mortgage-backed securities sales activities. FHLMC issues
two types of mortgage pass-through securities: mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). Each PC
represents a PRO RATA share of all interest and principal payments made and owed
on the underlying pool. FHLMC generally guarantees timely monthly payment of
interest on PCs and the
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ultimate payment of principal, but it also has a PC program under which it
guarantees timely payment of both principal and interest. GMCs also represent a
PRO RATA interest in a pool of mortgages. These instruments, however, pay
interest semi-annually and return principal once a year in guaranteed minimum
payments. The FHLMC guarantee is not backed by the full faith and credit of the
U.S. government.
PRIVATE MORTGAGE-BACKED SECURITIES. Mortgage-backed securities issued by
Private Mortgage Lenders are structured similarly to the CMOs or single-class
mortgage-backed securities issued or guaranteed by GNMA, FNMA and the FHLMC.
Such mortgage-backed securities may be supported by pools of U.S. government- or
agency-insured or guaranteed mortgage loans or by other mortgage-backed
securities issued by a government agency or instrumentality, but they generally
are supported by pools of conventional (i.e., non-government guaranteed or
insured) mortgage loans. Since such mortgage-backed securities normally are not
guaranteed by an entity having the credit standing of GNMA, FNMA and the FHLMC,
they normally are structured with one or more types of credit enhancement. See
"Other Investment Policies and Risk Factors--Mortgage-Backed Securities--Types
of Credit Enhancement." Such credit enhancements do not protect investors from
changes in the market value of CMOs.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS MORTGAGE
PASS-THROUGHS. CMOs are debt obligations that are collateralized by mortgage
loans or mortgage pass-through securities (such collateral collectively being
called "Mortgage Assets"). CMOs may be issued by Private Mortgage Lenders or by
government entities such as FNMA or the FHLMC. Multi-class mortgage pass-through
securities are interests in trusts that are comprised of Mortgage Assets and
that have multiple classes similar to those in CMOs. Unless the context
indicates otherwise, references herein to CMOs include multi-class mortgage
pass-through securities. Payments of principal of, and interest on, the Mortgage
Assets (and in the case of CMOs, any reinvestment income thereon) provide the
funds to pay debt service on the CMOs or to make scheduled distributions on the
multi-class mortgage pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal repayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO (other than any principal
only or "PO" class (defined below)) on a monthly, quarterly or semi annual
basis. The principal and interest on the Mortgage Assets may be allocated among
the several classes of a CMO in many ways. In one structure, payments of
principal, including any principal prepayments, on the Mortgage Assets are
applied to the classes of a CMO in the order of their respective stated
maturities or final distribution dates so that no payment of principal will be
made on any class of the CMO until all other classes have an earlier stated
maturity or final distribution date that have been paid in full. In some CMO
structures, all or a portion of the interest attributable to one or more of the
CMO classes may be added to the principal amounts attributable to such classes,
rather than passed through to certificateholders on a current basis, until other
classes of the CMO are paid in full.
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or final distribution date but may be retired earlier.
ARM AND FLOATING RATE MORTGAGE-BACKED SECURITIES. ARM mortgage-backed
securities are mortgage-backed securities that represent a right to receive
interest payments at a rate that is adjusted to reflect the interest earned on a
pool of mortgage loans bearing variable or adjustable rates of interest (such
mortgage loans are referred to as "ARMs"). Floating rate mortgage-backed
securities are classes of mortgage-backed securities that have been structured
to represent the right to receive interest payments at rates that fluctuate in
accordance with an index but that generally are supported by pools comprised of
fixed-rate mortgage loans. Because the interest rates on ARM floating rate
mortgage-backed securities
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are reset in response to changes in a specified market index, the values of such
securities tend to be less sensitive to interest rate fluctuations than the
values of fixed-rate securities. See "Investment Policies and Restrictions--ARM
and Floating Rate Mortgage-Backed Securities" in the SAI for further information
on these securities.
TYPES OF CREDIT ENHANCEMENT. To lessen the effect of failures by obligors
on Mortgage Assets to make payments, mortgage-backed securities may contain
elements of credit enhancement. Credit enhancement generally falls into two
categories: (1) liquidity protection and (2) protection against losses resulting
after default by an obligor on the underlying assets and collection of all
amounts recoverable directly from the obligor and through liquidation of the
collateral. Liquidity protection refers to the provision of advances, generally
by the entity administering the pool of assets (usually the bank, savings
association or mortgage banker that transferred the underlying loans to the
issuer of the security), to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
after default and liquidation ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. Such protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor, from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Portfolios will not
pay any additional fees for such credit enhancement, although the existence of
credit enhancement may increase the price of a security.
Examples of credit enhancement arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "spread accounts" or "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over-collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets exceed
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information regarding the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.
SPECIALLY STRUCTURED CMOS AND NEW TYPES OF MORTGAGE-BACKED SECURITIES. PACE
GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED INCOME
INVESTMENTS and PACE STRATEGIC FIXED INCOME INVESTMENTS each may invest in
interest only ("IO"), principal only ("PO") and other specially structured CMO
classes. A Portfolio will not invest more than 5% of its net assets in any
combination of IOs, POs and inverse floating rate securities, including those
which are not mortgage- and asset-backed securities. See "Other Investment
Policies and Risk Factors--Risks of Mortgage-and Asset-Backed Securities."
New types of mortgage-backed securities are developed and marketed from time
to time and, consistent with their investment limitations, the Portfolios expect
to invest in those new types of mortgage-backed securities that the respective
Portfolio's Adviser believes may assist the Portfolio in achieving its
investment objective. Similarly, the Portfolios may invest in mortgage-backed
securities issued by new or existing governmental or private issuers other than
those identified above.
ASSET-BACKED SECURITIES
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED
INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME INVESTMENTS may each invest
in asset-backed securities. Asset-backed securities have structural
characteristics similar to mortgage-backed securities. However, the underlying
assets are not first lien mortgage loans or interests therein, but include
assets such as motor vehicle installment loan contracts, home equity loans,
leases of various types of real and personal property and receivables from
revolving credit (credit card) agreements. Such assets are securitized through
the use of trusts or special purpose corporations. Payments or distributions of
principal and interest on asset-backed securities may be guaranteed up to
certain amounts and for a certain time period by a letter of credit or a pool
insurance policy
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issued by a financial institution unaffiliated with the issuer or other credit
enhancements may be present.
RISKS OF MORTGAGE- AND ASSET-BACKED SECURITIES
The yield characteristics of the mortgage-and asset-backed securities in
which PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE INTERMEDIATE
FIXED INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME INVESTMENTS may invest
differ from those of traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently (usually
monthly) and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. Generally,
prepayments on fixed-rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Mortgage- and asset-backed securities may also decrease in value as a result of
increases in interest rates and, because of prepayments, may benefit less than
other bonds from declining interest rates. Reinvestments of prepayments may
occur at lower interest rates than the original investment, thus adversely
affecting a Portfolio's yield. Actual prepayment experience may cause the yield
of a mortgage-backed security to differ from what was assumed when the Portfolio
purchased the security. Prepayments at a slower rate than expected may lengthen
the effective life of a mortgage-backed security. The value of securities with
longer effective lives generally fluctuates more widely in response to changes
in interest rates than the value of securities with shorter effective lives. The
market for privately issued mortgage-and asset-backed securities is smaller and
less liquid than the market for U.S. government mortgage-backed securities.
CMO classes may be specially structured in a manner that provides any of a
wide variety of investment characteristics, such as yield, effective maturity
and interest rate sensitivity. As market conditions change, however, and
particularly during periods of rapid or unanticipated changes in market interest
rates, the attractiveness of the CMO classes and the ability of the structure to
provide the anticipated investment characteristics may be significantly reduced.
These changes can result in volatility in the market value, and in some
instances reduced liquidity, of the CMO class.
The rate of interest payable on CMO classes may be set at levels that are
either above or below market rates at the time of issuance, so that the
securities will be sold at a substantial premium to, or at a discount from, par
value. In the most extreme case, one class will be entitled to receive all or a
portion of the interest but none of the principal from the underlying mortgage
assets (the interest-only or "IO" class) and one class will be entitled to
receive all or a portion of the principal but none of the interest (the
principal-only or "PO" class). IOs and POs may also be created from mortgage-
backed securities that are not CMOs. The yields on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive to the rate of principal payments
(including prepayments) on the underlying mortgage assets. If the mortgage
assets underlying an IO experience greater than anticipated principal
prepayments, an investor may fail to recoup fully its initial investment even if
the security is government issued or guaranteed or is rated AAA or the
equivalent.
Some CMO classes are structured to pay interest at rates that are adjusted
in accordance with a formula, such as a multiple or fraction of the change in a
specified interest rate index, so as to pay at a rate that will be attractive in
certain interest rate environments but not in others. For example, an inverse
floating rate CMO class pays interest at a rate that increases as a specified
interest rate index decreases but decreases as that index increases. For other
CMO classes, the yield may move in the same direction as market interest
rates--i.e., the yield may increase as rates increase and decrease as rates
decrease--but may do so more rapidly or to a greater degree. The market value of
such securities generally is more volatile than that of a fixed rate obligation.
Such interest rate formulas may be combined with other CMO characteristics. For
example, a CMO class may be an "inverse IO," on which the holders are entitled
to receive no payments of principal and are entitled to receive interest at a
rate that will vary inversely with a specified index or a multiple thereof.
While the market values of particular securities in which a Portfolio
invests may be volatile, or may become volatile under certain conditions, its
Adviser will seek to manage the Portfolio so that the volatility of the
Portfolio, taken as a whole, is consistent with the
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Portfolio's investment objective. If the Adviser incorrectly forecasts interest
rate changes or other factors that may affect the volatility of securities held
by the Portfolio, the Portfolio's ability to meet its investment objective may
be reduced.
During 1994, the value and liquidity of many mortgage-backed securities
declined sharply due primarily to increases in interest rates. There can be no
assurance that such declines will not recur. The market value of certain
mortgage-backed securities, including IO and PO classes of mortgage-backed
securities, can be extremely volatile and these securities may become illiquid.
A Portfolio's adviser seeks to manage a Portfolio's investments in
mortgage-backed securities so that the volatility of a Portfolio, taken as a
whole, is consistent with the Portfolio's investment objective. If market
interest rates or other factors that affect the volatility of securities held by
a Portfolio change in ways that a Portfolio's Adviser does not anticipate, the
Portfolio's ability to meet its investment objective may be reduced.
CONVERTIBLE SECURITIES
PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE LARGE COMPANY VALUE EQUITY
INVESTMENTS, PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS, PACE SMALL/MEDIUM
COMPANY VALUE EQUITY INVESTMENTS, PACE SMALL/MEDIUM COMPANY GROWTH EQUITY
INVESTMENTS, PACE INTERNATIONAL EQUITY INVESTMENTS and PACE INTERNATIONAL
EMERGING MARKETS EQUITY INVESTMENTS each may invest in convertible securities. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or dividends paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying stock because they have fixed income characteristics,
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases. While no securities investment is without
some risk, investments in convertible securities generally entail less risk than
the issuer's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security.
LOWER RATED CONVERTIBLE SECURITIES
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS may invest up to 10% of its
total assets in convertible securities that are rated below investment grade but
no lower than Ba by Moody's or BB by S&P, or if not rated by a NRSRO, determined
by its Adviser to be of comparable quality. PACE STRATEGIC FIXED INCOME
INVESTMENTS may invest up to 20% of its total assets in convertible securities
that are rated below investment grade but no lower than B by Moody's or S&P, or
if not rated by a NRSRO, determined by its Adviser to be of comparable quality.
PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS may invest up to 10% of
its total assets in convertible securities that are rated below investment grade
but no lower than C by S&P, or if not rated by a NRSRO, determined by its
Adviser to be of comparable quality. Convertible securities rated below
investment grade are commonly referred to as "junk bonds" and are deemed by the
NRSROs to be predominantly speculative and may involve significant risk exposure
to adverse conditions.
Lower rated convertible securities generally offer a higher current yield
than that available from higher grade issues, but they involve higher risks, in
that they are especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in
the financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress, which
could adversely affect their ability to make payments of principal and interest
(or, in the case of convertible preferred stock, dividends) and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them, and may be unable to repay debt at
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maturity by refinancing. The risk of loss due to default by such issuers is
significantly greater, because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
HEDGING AND RELATED INCOME STRATEGIES
Each Portfolio except PACE MONEY MARKET INVESTMENTS, PACE MUNICIPAL FIXED
INCOME INVESTMENTS, PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS and PACE
SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS may use options (both
exchange-traded and OTC) and futures contracts to attempt to enhance income and
return and may attempt to reduce the overall risk of its investments (hedge) by
using options, options on futures contracts and futures contracts. A Portfolio
may use these instruments to enhance income or return--for example, to change
the Portfolio's exposure from one interest rate to another or from one foreign
currency to another. This can be seen as hedging or speculation depending on the
effect of the instrument, because the Portfolio is using these instruments to
change the underlying characteristics of its portfolio or of particular
positions in the portfolio. These strategies may be used by certain Portfolios
in an attempt to manage their foreign currency exposure, the average duration of
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED
INCOME INVESTMENTS, PACE STRATEGIC FIXED INCOME INVESTMENTS AND PACE GLOBAL
FIXED INCOME INVESTMENTS, and other risks of a Portfolio's investments that can
cause fluctuations in its net asset value. Each Portfolio's ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations. The use of options and futures solely to enhance income may be
considered a form of speculation. Appendix A to this Prospectus describes the
hedging instruments that these Portfolios may use, and the SAI contains further
information on these strategies.
PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED INCOME
INVESTMENTS, PACE INTERNATIONAL EQUITY INVESTMENTS and PACE INTERNATIONAL
EMERGING MARKETS EQUITY INVESTMENTS may each enter into forward currency
contracts, buy or sell foreign currency futures contracts, write (sell) and
purchase call or put options on securities, currencies and securities indices,
buy or sell interest rate futures contracts and (except for PACE STRATEGIC FIXED
INCOME INVESTMENTS and PACE GLOBAL FIXED INCOME INVESTMENTS) stock index futures
contracts and purchase put and call options or write call or put options on such
contracts for hedging and income and return enhancement purposes. Each Portfolio
(except PACE MONEY MARKET INVESTMENTS, PACE MUNICIPAL FIXED INCOME INVESTMENTS,
PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS and PACE SMALL/MEDIUM COMPANY VALUE
EQUITY INVESTMENTS) may enter into options and futures contracts that
approximate (but do not exceed) the full value of the Portfolio. Under normal
circumstances, however, a Portfolio's use of these instruments will place at
risk a much smaller portion of its assets.
PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED INCOME
INVESTMENTS, PACE INTERNATIONAL EQUITY INVESTMENTS and PACE INTERNATIONAL
EMERGING MARKET EQUITY INVESTMENTS may enter into forward currency contracts for
the purchase or sale of a specified currency at a specified future date either
with respect to specific transactions or with respect to portfolio positions.
For example, when the Adviser anticipates making a currency exchange transaction
in connection with the purchase or sale of a security, a Portfolio may enter
into a forward contract in order to set the exchange rate at which the
transaction will be made. A Portfolio also may enter into a forward contract to
sell an amount of a foreign currency approximating the value of some or all of
the Portfolio's securities denominated in such currency. Each Portfolio may use
forward contracts in one currency or a basket of currencies to hedge against
fluctuations in the value of another currency when the Adviser anticipates there
will be a correlation between the two and may use forward currency contracts to
shift a Portfolio's exposure to foreign currency fluctuations from one country
to another. The primary purpose of entering into these contracts is to minimize
the risk to the Portfolios from adverse changes in the relationship between the
U.S. dollar and foreign currencies.
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS and PACE STRATEGIC FIXED
INCOME INVESTMENTS may enter into interest rate protection transactions,
including interest rate swaps and interest rate caps, collars and floors for
hedging and income and return enhancement purposes. For example, a Portfolio may
enter into interest rate protection transactions to preserve a return or spread
on a particular
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investment or portion of its portfolio or to protect against any increase in the
price of securities the Portfolio anticipates purchasing at a later date. A
Portfolio will enter into interest rate protection transactions only with banks
and recognized securities dealers believed by its Adviser to present minimal
credit risks in accordance with guidelines established by the Trust's board of
trustees. A Portfolio may enter into interest rate protection transactions that
approximate (but do not exceed) the full value of the Portfolio.
The Portfolios may not employ any of the strategies described above, and
there can be no assurance that any strategy used will succeed. If its Adviser
incorrectly forecasts interest rates, currency exchange rates, market values or
other economic factors in utilizing a strategy for a Portfolio, the Portfolio
might have been in a better position had it not hedged at all. The use of these
strategies involves certain special risks, including (1) the fact that skills
needed to implement a strategy using hedging instruments are different from
those needed to select the Portfolio's securities, (2) possible imperfect
correlation, or even no correlation, between price movements of hedging
instruments and price movements of the investments being hedged, (3) the fact
that, while hedging strategies can reduce the risk of loss, they can also reduce
the opportunity for gain, or even result in losses, by offsetting favorable
price movements in hedged investments and (4) the possible inability of a
Portfolio to sell a portfolio security at an advantageous time, due to the need
for the Portfolio to maintain "cover" or to segregate securities in connection
with hedging transactions and the possible inability of a Portfolio to close out
or to liquidate its hedged position.
New financial products and risk management techniques continue to be
developed. Each Portfolio may use these instruments and techniques to the extent
consistent with its investment objectives and regulatory and federal tax
considerations.
FOREIGN SECURITIES
PACE MONEY MARKET INVESTMENTS may invest in U.S. dollar-denominated
securities of foreign issuers, including debt securities of foreign corporations
and foreign governments and obligations of foreign banks, domestic branches of
foreign banks, foreign branches of domestic banks and foreign branches of
foreign banks. PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE GLOBAL FIXED INCOME
INVESTMENTS, PACE INTERNATIONAL EQUITY INVESTMENTS and PACE INTERNATIONAL
EMERGING MARKETS EQUITY INVESTMENTS may each invest in foreign debt securities,
including securities of foreign corporations, obligations of foreign branches of
U.S. banks and securities issued by foreign governments. PACE INTERMEDIATE FIXED
INCOME INVESTMENTS may invest up to 10% of its total assets in securities
denominated in foreign currencies of developed countries. PACE LARGE COMPANY
VALUE EQUITY INVESTMENTS, PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS and PACE
SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS each may invest up to 5% of its
total assets in foreign securities, including ADRs. See "Investment Policies and
Restrictions--Special Characteristics of Foreign and Emerging Market Securities"
in the SAI.
Investments in foreign securities involve risks relating to political and
economic developments abroad, as well as those that result from the differences
between the regulations to which U.S. and foreign issuers and markets are
subject. These risks may include expropriation, confiscatory taxation,
limitations on the use or transfer of Portfolio assets and political or social
instability or diplomatic developments. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments positions. Securities of many
foreign issuers may be less liquid and their prices more volatile than those of
securities of comparable U.S. companies. These risks are often heightened for
investments in emerging countries.
In addition, substantial limitations may exist in certain countries with
respect to a Portfolio's ability to repatriate investment income, capital or the
proceeds of sales of securities by foreign investors. The Portfolio could be
adversely affected by delays in, or a refusal to grant, any required government
approval for repatriation of capital, as well as by the application to the
Portfolio of any restrictions on investments.
Certain of the Portfolios' investments have included securities issued by
Malaysian companies. Currency restrictions imposed by the Malaysian government
may delay for up to one year the proceeds of any sale of those securities by the
Portfolio. Portfolio assets
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subject to those restrictions would be unavailable to the Portfolio to meet
redemption requests or for reinvestment in other securities; in addition, it may
be difficult for the Portfolio to determine the fair value of such securities
(or of the Malaysian currency in which they are denominated) for purposes of
computing the Portfolio's net asset value. To the extent that another Portfolio
invests in Malaysian securiites, it would also be subject to these
considerations.
The securities markets of many of the emerging countries in which a
Portfolio may invest are substantially smaller, less developed, less liquid and
more volatile than the securities markets of the United States and other more
developed countries. Disclosure and regulatory standards in many respects are
less stringent than in the U.S. and other major markets. There also may be a
lower level of monitoring and regulation of emerging markets and the activities
of investors in such markets, and enforcement of existing regulations has been
extremely limited.
Many of the foreign securities held by a Portfolio will not be registered
with the SEC, nor will the issuers thereof be subject to SEC reporting
requirements. Accordingly, there may be less publicly available information
concerning foreign issuers of securities held by a Portfolio than is available
concerning U.S. companies. Foreign companies, and in particular, companies in
smaller and emerging countries, are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory requirements
comparable to those applicable to U.S. companies.
Additionally, because foreign securities ordinarily will be denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect a Portfolio's net asset value, the value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income to be distributed to shareholders by a Portfolio. If the value
of a foreign currency rises against the U.S. dollar, the value of Portfolio
assets denominated in such currency will increase; correspondingly, if the value
of a foreign currency declines against the U.S. dollar, the value of Portfolio
assets denominated in such currency will decrease. The exchange rates between
the U.S. dollar and other currencies can be volatile and are determined by
factors such as supply and demand in the currency exchange markets,
international balances of payments, government intervention, speculation and
other economic and political conditions. Any of these factors could affect a
Portfolio.
Several European countries expect to adopt a single currency, the euro,
effective January 1, 1999. Countries participating in the Economic and Monetary
Union expect that their exchange rates will become irrevocably fixed on that
date. The countries expected to participate are Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain. A newly created European Central Bank ("ECB") will attempt to manage
monetary policy for this region. Pre-existing national currencies will continue
to be valid until they are replaced by euro coins and bank notes, which is
expected to occur by sometime in 2002. These changes may significantly impact
European capital markets, and related risks may increase volatility in world
capital markets. This, in turn, may impact a Portfolio's share price.
Risks related to the euro include the following: market uncertainties if its
introduction is delayed; potential increased volatility in exchange rates,
especially between European countries that are participating in the new currency
and those that are not; unanticipated expenses incurred in accommodating the new
currency; investor uncertainty resulting in asset shifts away from the affected
currencies; possible inconsistent treatment of European Currency Units, a
currency basket used as a unit of account for settlement purposes which
preexists the euro's introduction; disputes concerning the enforceability of
contracts; and interest rate and exchange rate volatility as the new ECB and
market participants search for a common understanding of policy targets and
instruments. Additional information is provided in the Statement of Additional
Information.
The costs attributable to foreign investing that a Portfolio must bear
frequently are higher than those attributable to domestic investing. For
example, the cost of maintaining custody of foreign securities exceeds custodian
costs for domestic securities, and transaction and settlement costs of foreign
investing also frequently are higher than those attributable to domestic
investing. Costs associated with the exchange of currencies also make foreign
investing more expensive than domestic investing. A Portfolio's net investment
income
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and/or capital gains from its foreign investment activities may be subject to
non-U.S. withholding taxes that, if not recoverable by a Portfolio, may reduce
the Portfolio's return. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign tax to which a
Portfolio would be subject. Foreign markets have different clearance and
settlement procedures; in certain markets there have been times when settlements
have failed to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Portfolio are uninvested and no return is
earned thereon. The inability of a Portfolio to make intended security purchases
due to settlement problems could cause the Portfolio to miss attractive
investment opportunities. Inability to dispose of a portfolio security due to
settlement problems could result either in losses to a Portfolio due to
subsequent declines in the value of such portfolio security or, if a Portfolio
has entered into a contract to sell the security, could result in possible
liability to the purchaser.
In addition to purchasing securities of foreign issuers in foreign markets,
a Portfolio may invest in ADRs, European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") or other securities convertible into securities of
companies based in foreign countries. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. Generally, ADRs, traded in
registered form, are denominated in U.S. dollars and are designed for use in the
U.S. securities markets. EDRs, in bearer form, are European receipts evidencing
a similar arrangement, may be denominated in other currencies and are designed
for use in European securities markets. GDRs are similar to EDRs and are
designed for use in several international financial markets. For purposes of a
Portfolio's investment policies, ADRs, EDRs and GDRs generally are deemed to
have the same classification as the underlying securities they represent. Thus,
an ADR, EDR or GDR evidencing ownership of common stock will be treated as
common stock.
FOREIGN GOVERNMENT SECURITIES
PACE MONEY MARKET INVESTMENTS, 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 may each invest in foreign government securities. The foreign
government securities in which the Portfolios may invest generally consist of
obligations supported by national, state or provincial governments or similar
political subdivisions. Foreign government securities also include Brady Bonds
and debt obligations of supranational entities, which include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development, international banking institutions and
related government agencies. Examples include the World Bank, the European Coal
and Steel Community, the Asian Development Bank and the Inter-American
Development Bank. See "Investment Policies and Restrictions--Special
Characteristics of Foreign and Emerging Market Securities--Brady Bonds" in the
SAI for further discussion of risks involved when investing in Brady Bonds.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units of an issuer (including supranational issuers). An example of a
multinational currency unit is the European Currency Unit ("ECU"). An ECU
represents specified amounts of the currencies of certain member states of the
European Community. Debt securities of quasi-governmental agencies are issued by
entities owned by either a national, state or equivalent government or are
obligations of a political unit that is not backed by the national government's
full faith and credit and general taxing powers. Foreign government securities
also include mortgage-related securities issued or guaranteed by national, state
or provincial governmental instrumentalities, including quasi-governmental
agencies.
Investments in foreign government debt securities involve special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to pay interest or repay principal when due
in accordance with the terms of such debt, and the Portfolios may have
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limited legal recourse in the event of default. Political conditions, especially
a sovereign entity's willingness to meet the terms of its debt obligations, are
of considerable significance.
REPURCHASE AGREEMENTS
Each Portfolio may use repurchase agreements. Repurchase agreements are
transactions in which a Portfolio purchases securities from an approved bank or
securities dealer or its affiliates and simultaneously commits to resell the
obligations to that counterparty, usually no more than seven days after
purchase. Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible decline in the market value of the
underlying obligations. Repurchase agreements involving obligations other than
U.S. government securities (such as commercial paper and corporate bonds) may be
subject to special risks and may not have the benefit of certain protections in
the event of the counterparty's insolvency. If the seller or guarantor becomes
insolvent, the Portfolio may suffer delays, costs and possible losses. Each
Portfolio intends to enter into repurchase agreements only with counterparties
in transactions believed by Mitchell Hutchins to present minimum credit risks in
accordance with guidelines established by the Trust's board of trustees. Each
Portfolio maintains custody of the underlying obligations prior to their
repurchase, either through its regular custodian or through a special "tri-
party" custodian or sub-custodian that maintains separate accounts for both the
Portfolio and its counterparty. Thus, the obligation of the counterparty to pay
the repurchase price on the date agreed to or upon demand is, in effect, secured
by such obligations.
DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS and PACE STRATEGIC FIXED
INCOME INVESTMENTS may enter into dollar rolls, in which a Portfolio sells
mortgage-backed or other securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date. In the case of dollar rolls involving mortgage-backed
securities, the mortgage-backed securities that are purchased will be of the
same type and will have the same interest rate as those sold, but will be
supported by different pools of mortgages. The Portfolio forgoes principal and
interest paid during the roll period on the securities sold, but the Portfolio
is compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the securities sold. The Portfolio also could be compensated through the
receipt of fee income equivalent to a lower forward price. At the time a
Portfolio enters into a dollar roll, the Trust's custodian will segregate cash
or liquid securities having a value not less than the forward purchase price.
The Portfolios may also enter into reverse repurchase agreements in which
the Portfolio sells securities to a bank or dealer and agrees to repurchase them
at a mutually agreed date and price. The market value of securities sold under
reverse repurchase agreements typically is greater than the proceeds of the
sale, and, accordingly, the market value of the securities sold is likely to be
greater than the value of the securities in which the Portfolio invests those
proceeds. Thus, reverse repurchase agreements involve the risk that the buyer of
the securities sold by the Portfolio might be unable to deliver them when the
Portfolio seeks to repurchase. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Portfolio's obligation to repurchase the securities, and
the Portfolio's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
The dollar rolls and reverse repurchase agreements entered into by the
Portfolios normally will be arbitrage transactions in which a Portfolio will
maintain an offsetting position in securities or repurchase agreements that
mature on or before the settlement date on the related dollar roll or reverse
repurchase agreement. Since the Portfolio will receive interest on the
securities or repurchase agreements in which it invests the transaction
proceeds, such transactions may involve leverage. However, since these
securities or repurchase agreements will mature on or before the settlement date
of the related dollar roll or reverse repurchase agreement, the Advisers believe
that these arbitrage transactions do not present the risks to the Portfolios
that are associated with other types of leverage.
Dollar rolls and reverse repurchase agreements will be considered to be
borrowings
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and, accordingly, will be subject to the respective Portfolios' limitations on
borrowings, which will restrict the aggregate of such transactions (plus any
other borrowings) to 33 1/3% of a Portfolio's total assets. A Portfolio will not
enter into dollar rolls or reverse repurchase agreements other than in arbitrage
transactions as described above, in an aggregate amount in excess of 5% of the
Portfolio's total assets. Neither Portfolio currently intends to enter into
dollar rolls other than in such arbitrage transactions, and neither Portfolio
currently intends to enter into reverse repurchase agreements other than in such
arbitrage transactions or for temporary or emergency purchases. See "Investment
Policies and Restrictions--Reverse Repurchase Agreements" in the SAI.
FLOATING RATE AND VARIABLE RATE OBLIGATIONS
Floating rate and variable rate obligations bear interest at rates that are
not fixed, but that vary with changes in specified market rates or indices.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation or capital depreciation is less than for fixed rate obligations.
Floating rate or variable rate obligations typically permit the holder to demand
payment of principal from the issuer or remarketing agent at par value prior to
maturity and may permit the issuer to prepay principal, plus accrued interest,
at its discretion after a specified notice period. Frequently, floating rate or
variable rate obligations and/or the demand features thereon are secured by
letters of credit or other credit support arrangements provided by banks, the
credit standing of which affects the credit quality of the obligations.
ILLIQUID SECURITIES
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 price at which a Portfolio has valued the securities. Under
current guidelines of the staff of the SEC, IOs and POs are considered illiquid.
However, IO and PO classes of fixed-rate mortgage-backed securities issued by
the U.S. government or one of its agencies or instrumentalities will not be
considered illiquid if the Portfolio's Adviser has determined that they are
liquid pursuant to guidelines established by the Trust's board of trustees.
Illiquid securities also are considered to include, among other things, certain
cover for OTC options, repurchase agreements in excess of seven days,
non-marketable interest bearing time deposits with maturities in excess of seven
days and securities whose disposition is restricted under the federal securities
laws (other than "Rule 144A securities" that the Portfolio's Adviser has
determined to be liquid under procedures approved by the Trust's board of
trustees). Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act of 1933, as amended ("1933 Act").
Institutional markets for restricted securities have developed as a result of
Rule 144A, providing both readily ascertainable values for restricted securities
and the ability to liquidate an investment to satisfy share redemption orders.
An insufficient number of qualified institutional buyers interested in
purchasing Rule 144A eligible restricted securities held by a Portfolio,
however, could affect adversely the marketability of such portfolio securities,
and the Portfolio might be unable to dispose of such securities promptly or at
favorable prices. See "Investment Policies and Restrictions--Illiquid
Securities" in the SAI.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Portfolio may purchase debt securities, including mortgage- and
asset-backed securities, on a "when-issued" basis or may purchase or sell
securities on a "delayed delivery" basis, i.e., for issuance or delivery to the
Portfolio later than the normal settlement date for such securities at a stated
price and yield. The Portfolio generally would not pay for such securities or
start earning interest on them until they are received. However, when a
Portfolio undertakes a when-issued or delayed delivery purchase commitment, it
immediately assumes the risks of ownership, including the risk of price
fluctuation. Failure of a counter-
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party to deliver a security purchased by a Portfolio on a when-issued or delayed
delivery basis may result in the Portfolio's incurring a loss or missing an
opportunity to make an alternative investment. Depending on market conditions, a
Portfolio's when-issued and delayed delivery purchase commitments could cause
its net asset value per share to be more volatile, because these securities may
increase the amount by which the Portfolio's total assets, including the value
of when-issued and delayed delivery securities held by the Portfolio, exceeds
its net assets. See "Investment Policies and Restrictions--When-Issued and
Delayed Delivery Securities" in the SAI.
ZERO COUPON SECURITIES
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED
INCOME INVESTMENTS, PACE STRATEGIC FIXED INCOME INVESTMENTS and PACE GLOBAL
FIXED INCOME INVESTMENTS may invest in certain zero coupon securities that are
"stripped" U.S. Treasury notes and bonds. PACE STRATEGIC FIXED INCOME
INVESTMENTS also may invest in zero coupon securities of corporate issuers and
other securities that are issued with original issue discount ("OID") and
payment-in-kind ("PIK") securities. Federal tax law requires that a holder of a
security with OID accrue a portion of the OID as income each year, even though
the holder may receive no interest payment on the security during the year.
Accordingly, although the investing Portfolio will receive no payments on its
zero coupon securities prior to their maturity or disposition, it will have
income attributable to such securities prior to that time. Similarly, while PIK
securities may pay interest in the form of additional securities rather than
cash, that interest must be included in the annual income of PACE STRATEGIC
FIXED INCOME INVESTMENTS.
Companies such as the Portfolios, which seek to qualify for pass-through
federal income tax treatment as regulated investment companies (each, a "RIC"),
must distribute substantially all of their net investment income each year,
including non-cash income. Accordingly, each Portfolio will be required to
include in its dividends an amount equal to the income attributable to its zero
coupon, other OID and PIK securities. Those dividends will be paid from the cash
assets of a Portfolio or by liquidation of portfolio securities, if necessary,
at a time when the Portfolio otherwise might not have done so. Zero coupon and
PIK securities usually trade at a substantial discount from their face or par
value and will be subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities that make
current distributions of interest in cash. See "Taxes" in the SAI.
LENDING OF PORTFOLIO SECURITIES
Each Portfolio may lend its securities to qualified broker-dealers or
institutional investors in an amount up to 33 1/3% of its total assets
(including the loan collateral) taken at market value. Lending securities
enables a Portfolio to earn additional income but could result in a loss or
delay in recovering the Portfolio's securities. The borrower must maintain with
the Portfolio's custodian collateral in the form of cash, liquid securities or
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends, determined on a daily
basis and adjusted accordingly. In determining whether to lend securities to a
particular broker-dealer or institutional investor, the Manager will consider,
and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each Portfolio
will retain authority to terminate any loans at any time. A Portfolio may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. A Portfolio
will receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. A Portfolio will regain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and rights
to dividends, interest or other distributions, when retaining such rights is
considered to be in the Portfolio's interest.
YEAR 2000 RISK
Like other mutual funds and other financial and business organizations
around the
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world, each Portfolio could be adversely affected if the computer systems used
by Mitchell Hutchins, other service providers and entities with computer systems
that are linked to the Portfolio's records do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Issue." Mitchell Hutchins is taking steps that
it believes are reasonably designed to address the Year 2000 Issue with respect
to the computer systems that it uses and to obtain satisfactory assurances that
comparable steps are being taken by each of the Portfolios' other major service
providers. However, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Portfolios.
Similarly, the companies in which the Portfolios invest and trading systems
used by the Portfolios could be adversely affected by the Year 2000 Issue. The
ability of a company or trading system to respond successfully to the Year 2000
Issue requires both technological sophistication and diligence, and there can be
no assurance that any steps taken will be sufficient to avoid an adverse impact.
DERIVATIVES
Certain Portfolios may invest in instruments or securities that commonly are
referred to as "derivatives," because their value depends on (or "derives" from)
the value of an underlying asset, reference rate or index. Derivative
instruments include options, futures contracts, interest rate protection
contracts and similar instruments that may be used by certain Portfolios in
hedging and related income strategies. There is only limited consensus as to
what constitutes a "derivative" security. However, in the Manager's view, the
derivative securities in which one or more of the Portfolios may invest include
listed options and futures on market indices, interest rates and foreign
currencies, "stripped" securities, and specially structured types of mortgage-
and asset-backed securities, such as IOs, POs and inverse floaters, and
dollar-denominated securities whose value is linked to foreign currencies. The
market value of derivative instruments and securities sometimes is more volatile
than that of other investments, and each type of derivative instrument may pose
its own special risks. An Adviser takes these risks into account in its
management of the Portfolio.
PORTFOLIO TURNOVER
The portfolio turnover rates for each Portfolio may vary greatly from year
to year and will not be a limiting factor when an Adviser deems portfolio
changes appropriate. A high portfolio turnover rate (i.e., 100% or more) may
involve correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by each Portfolio. See "Portfolio
Transactions" in the SAI. In addition, high portfolio turnover may result in
increased short-term capital gains, which when distributed to shareholders, are
treated as ordinary income. See "Dividends and Taxes." The portfolio turnover
rate for each of the fixed income Portfolios may be high at times and may vary
from year to year depending on the particular Portfolio's use of certain
instruments involving the simultaneous sale and repurchase of specific
securities and certain hedging strategies.
TEMPORARY DEFENSIVE INVESTMENTS
When an Adviser believes unusual circumstances warrant a defensive posture,
and with the concurrence of the Manager, each Portfolio temporarily may commit
all or any portion of its assets to cash (U.S. dollars or foreign currencies) or
money market instruments of U.S. or foreign issuers, including repurchase
agreements.
PACE MUNICIPAL FIXED INCOME INVESTMENTS may invest temporarily without limit
in certain taxable securities for defensive purposes. PACE GLOBAL FIXED INCOME
INVESTMENTS may invest temporarily in securities of only one country, including
the United States, for such purposes. PACE INTERNATIONAL EQUITY INVESTMENTS also
may invest temporarily up to 100% of its assets in domestic debt, foreign debt
principally traded in the United States and in foreign securities principally
traded outside of the United States, obligations issued or guaranteed by the
U.S. or a foreign government or their respective agencies, authorities or
instrumentalities, corporate bonds and sponsored ADRs for such purposes.
The Portfolios are intended as vehicles for the implementation of long-term
asset allocation strategies rendered through the
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PACE Program that are based on an evaluation of your investment objectives and
risk tolerances. Because these asset allocation strategies are designed to
spread investment risk across the various segments of the securities markets
through investment in a number of Portfolios, each individual Portfolio
generally intends to be fully invested in accordance with its investment
objective and policies during most market conditions. Although the Adviser of a
Portfolio may, upon the concurrence of the Manager, take a temporary defensive
position when the Adviser believes adverse market conditions so warrant, it can
be expected that a defensive posture will be adopted less frequently than would
be the case for other mutual funds. This policy may impede an Adviser's ability
to protect a Portfolio's capital during declines in the particular segment of
the market to which the Portfolio's assets are committed. Consequently, no
single Portfolio should be considered a complete investment program, and an
investment among the Portfolios should be regarded as a long-term investment
that should be held through several market cycles.
OTHER INVESTMENT POLICIES
The Portfolios (except PACE MONEY MARKET INVESTMENTS and PACE MUNICIPAL
FIXED INCOME INVESTMENTS) may engage in short sales of securities "against the
box." Each Portfolio may borrow money for temporary or emergency purchases, but
not in excess of 10% of its total assets; however, no Portfolio will purchase
securities when its borrowings exceed 5% of its total assets.
New types of mortgage- and asset-backed securities, derivative securities,
hedging instruments and risk management techniques are developed and marketed
from time to time. Each Portfolio may invest in these securities and instruments
and use these techniques to the extent consistent with its investment objective
and limitations and with disclosure, regulatory and tax considerations.
NON-DIVERSIFICATION
PACE INTERMEDIATE FIXED INCOME INVESTMENTS and PACE GLOBAL FIXED INCOME
INVESTMENTS are "non-diversified," as that term is defined in the 1940 Act, but
each intends to qualify as a RIC for federal income tax purposes. See "Dividends
and Taxes." This means, in general, that more than 5% of each Portfolio's total
assets may be invested in securities of one issuer (including a foreign
government), but only if, at the close of each quarter of its taxable year, the
aggregate amount of such holdings does not exceed 50% of the value of its total
assets and no more than 25% of the value of its total assets is invested in the
securities of a single issuer. To the extent that either Portfolio at times may
include the securities of a smaller number of issuers than if it were
"diversified" (as defined in the 1940 Act), the Portfolio will be subject to
greater risk with respect to its portfolio securities than if it had invested in
a broader range of securities, because changes in the financial condition or
market assessment of a single issuer may cause greater fluctuation in the
Portfolio's total return and the price of Portfolio shares.
MANAGEMENT
The overall management of the business and affairs of the Trust and the
Portfolios rests with the Trust's board of trustees. The trustees approve all
significant agreements between the Trust and the persons that furnish services
to the Trust and the Portfolios. As the Trust's Manager, Mitchell Hutchins is
responsible for the day-to-day business operations of the Trust.
MANAGER
Mitchell Hutchins, located at 1285 Avenue of the Americas, New York, New
York 10019, is the Manager of the Trust. Mitchell Hutchins is a wholly owned
asset management subsidiary of PaineWebber, which is a wholly owned subsidiary
of Paine Webber Group Inc. ("PW Group"), a publicly held financial services
holding company. Mitchell Hutchins provides investment advisory and portfolio
management services to investment companies, pension funds and other
institutional, corporate and individual clients. See "Management--Advisers--PACE
Money Market Investments."
Pursuant to an Investment Management and Administration Agreement with the
Trust ("Management Agreement"), Mitchell Hutchins manages the investment
operations of the Trust, administers the Trust's affairs, provides investment
advisory services for PACE MONEY MARKET INVESTMENTS and is responsible for the
selection, subject to review and approval of the
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trustees, of Advisers for each of the Portfolios (other than PACE MONEY MARKET
INVESTMENTS) and the review of the Advisers' continued performance. See
"Investment Management, Advisory and Distribution Arrangements--Investment
Management Arrangements" in the SAI.
Pursuant to a separate Sub-Advisory Agreement (the "Advisory Agreement")
between Mitchell Hutchins and each Adviser, the Advisers furnish investment
advisory services in connection with the investment management of the respective
Portfolios other than PACE MONEY MARKET INVESTMENTS. Each Adviser is paid a fee
for its services by the Manager out of the fee it collects from the applicable
Portfolio. No additional fee is paid by the investor.
Subject to the supervision and direction of the trustees, the Manager
provides to the Trust investment management evaluation services principally by
(1) performing initial review of and recommending prospective Advisers for each
Portfolio other than PACE MONEY MARKET INVESTMENTS and (2) monitoring Adviser
performance. In evaluating prospective Advisers, the Manager considers, among
other factors, each Adviser's level of expertise, relative performance,
consistency of performance and investment discipline or philosophy. The Manager
is responsible for communicating performance expectations and evaluations to the
Advisers and for ultimately recommending to the trustees whether Advisers'
contracts should be renewed, modified or terminated. The Manager reports to the
trustees regarding the results of its evaluation and monitoring functions. For
PACE MONEY MARKET INVESTMENTS, the Manager is responsible for furnishing
investment advisory services to the Portfolio, subject to the supervision of the
trustees.
The Manager is also responsible for conducting the general operation of the
Trust, except those functions performed by the Advisers, custodian and transfer
agent. Pursuant to the Management Agreement, each Portfolio pays the Manager a
fee comprised of two components: one, for administrative services provided to
each Portfolio, computed daily and paid monthly at the annual rate of 0.20% of
each Portfolio's average daily net assets; and the other, for investment
management services provided to each Portfolio, computed daily and paid monthly
at the annual rate specified below based on the value of the Portfolio's average
daily net assets. The Manager pays each Adviser, out of the investment
management services fee it receives from the applicable Portfolio, a fee that is
computed daily and paid monthly at the annual rate specified below based on the
value of the Portfolio's average daily net assets:
<TABLE>
<CAPTION>
FEE RATE PAID
BY PORTFOLIO FEE RATE PAID BY
TO THE MANAGER THE MANAGER TO
(AS A % OF THE ADVISER (AS
AVERAGE NET A % OF AVERAGE
PORTFOLIO ASSETS) NET ASSETS)
- -------------------------------------------------- -------------- ----------------
<S> <C> <C>
PACE MONEY MARKET INVESTMENTS..................... 0.15% N/A
PACE GOVERNMENT SECURITIES FIXED INCOME
INVESTMENTS...................................... 0.50% 0.25%
PACE INTERMEDIATE FIXED INCOME INVESTMENTS........ 0.40% 0.20%
PACE STRATEGIC FIXED INCOME INVESTMENTS........... 0.50% 0.25%
PACE MUNICIPAL FIXED INCOME INVESTMENTS........... 0.40% 0.20%
PACE GLOBAL FIXED INCOME INVESTMENTS.............. 0.60% 0.35%
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS....... 0.60% 0.30%
PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS...... 0.60% 0.30%
PACE SMALL/MEDIUM COMPANY VALUE EQUITY
INVESTMENTS...................................... 0.60% 0.30%
PACE SMALL/MEDIUM COMPANY GROWTH EQUITY
INVESTMENTS...................................... 0.60% 0.40%
PACE INTERNATIONAL EQUITY INVESTMENTS............. 0.70% 0.40%
PACE INTERNATIONAL EMERGING MARKETS EQUITY
INVESTMENTS...................................... 0.90% 0.50%
</TABLE>
Investors should be aware that the Manager may be subject to a conflict of
interest when making decisions regarding the retention and compensation of
particular Advisers. However, the Manager's compensation and the Manager's
decisions, including the identity of an Adviser and the specific amount of the
Manager's compensation to be paid to the
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Adviser, are subject to review and approval by the board of trustees and
separately by the trustees who are not affiliated with the Manager, any of the
Advisers or any of their affiliates. In addition, the Manager is subject to
certain standards of fiduciary duty required by law.
ADVISERS
The Advisers have agreed to the foregoing fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment adviser, partially in recognition of the reduced administrative and
other responsibilities they have undertaken with respect to the Portfolios.
Subject to the monitoring of the Manager and, ultimately, the supervision and
control of the trustees, each Adviser's responsibilities are focused on making
investment decisions for the Portfolio and placing orders to purchase and sell
securities on behalf of the Portfolio in accordance with the Portfolio's stated
investment objective and policies. The Advisers are paid their fees for
management of the Portfolios by Mitchell Hutchins, not the Trust.
The Trust has received an exemptive order from the SEC that permits the
Trust's board of trustees, without the approval of shareholders: (a) to employ a
new Adviser pursuant to the terms of a new Advisory Agreement, either as a
replacement for an existing Adviser or as an additional Adviser; (b) to change
the terms of an Advisory Agreement; and (c) to continue the employment of an
existing Adviser on the same advisory contract terms where a contract has been
assigned because of a change in control of the Adviser. Shareholders receive
notice of such action, including the information concerning the Adviser that
normally is provided in the Prospectus.
The following sets forth certain information about each of the Advisers:
PACE MONEY MARKET INVESTMENTS
As of October 31, 1998, Mitchell Hutchins was adviser or subadviser of 32
investment companies with 75 separate portfolios having aggregate assets of
approximately $41.2 billion, of which approximately $31.3 billion consisted of
assets in money market funds. Susan Ryan, a senior vice president of Mitchell
Hutchins, is primarily responsible for the day-to-day management of PACE MONEY
MARKET INVESTMENTS. Since 1987, Ms. Ryan has been a portfolio manager at
Mitchell Hutchins for taxable money market funds. See "Management--Manager."
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS AND PACE STRATEGIC FIXED
INCOME INVESTMENTS
Pacific Investment Management Company ("PIMCO") is located at 840 Newport
Center Drive, Suite 300, Newport Beach, California 92660. PIMCO is a subsidiary
of PIMCO Advisors L.P. ("PIMCO Advisors"). The general partners of PIMCO
Advisors are PIMCO Partners, G.P. and PIMCO Advisors Holdings L.P. ("PAH").
PIMCO Partners, G.P. is a general partnership between PIMCO Holding LLC and
PIMCO Partners LLC. PIMCO Partners, G.P. is the sole general partner of PAH. As
of October 31, 1998, PIMCO had over $150 billion in assets under management.
Since April 1996, Pasi Hamalainen has been primarily responsible for the
day-to-day management of PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS.
Mr. Hamalainen is an executive vice president of PIMCO. Prior to joining PIMCO,
Mr. Hamalainen held a fellowship at The Wharton School and assisted in teaching
in the MBA program at the Aresty Institute of Executive Education. Since July
1997, William C. Powers, a Managing Director of PIMCO, has been primarily
responsible for the day-to-day management of PACE STRATEGIC FIXED INCOME
INVESTMENTS. Mr. Powers has been associated with PIMCO since 1991 as a senior
member of the fixed income portfolio management group. He was previously
associated with Bear Stearns & Co. as Senior Managing Director specializing in
mortgage-backed securities.
PACE INTERMEDIATE FIXED INCOME INVESTMENTS
Pacific Income Advisers, Inc. ("PIA") is located at 1299 Ocean Avenue, Suite
210, Santa Monica, California 90401. Lloyd McAdams and Heather U. Baines, who
serve as Chairman and Chief Investment Officer and President and Chief Executive
Officer, respectively, own PIA's voting securities, which makes each of them
controlling persons of PIA. As of September 30, 1998, PIA had approximately $6
billion in assets under management. Mr. McAdams is primarily responsible for the
day-to-day management of
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PACE INTERMEDIATE FIXED INCOME INVESTMENTS. Since 1986, he has served as
Chairman and Chief Investment Officer of PIA and Chairman and Chief Executive
Officer of Syndicated Capital, Inc.
PACE MUNICIPAL FIXED INCOME INVESTMENTS
Morgan Grenfell, Incorporated ("MG") is located at 150 South Independence
Square West, Philadelphia, Pennsylvania 19106. All of the outstanding voting
stock of MG is owned by Morgan Grenfell Asset Management, Ltd., which is a
wholly owned subsidiary of Morgan Grenfell Group plc. Morgan Grenfell Group plc
is an indirect wholly owned subsidiary of Deutsche Bank AG, an international
commercial and investment banking group. As of October 31, 1998, MG had over $14
billion in assets under management. MG has been active in managing portfolios of
securities since 1989 and the portfolio management team has over 20 years
experience in the management of tax-exempt fixed income investments. David W.
Baldt is primarily responsible for the day-to-day management of PACE Municipal
Fixed Income Investments. Since June 1989, Mr. Baldt has been Executive Vice
President and Chief Investment Officer for fixed income at MG.
PACE GLOBAL FIXED INCOME INVESTMENTS
Rogge Global Partners plc ("Rogge Global") is located at 5-6 St. Andrew's
Hill, London, England EC4V5BY. Rogge Global is a wholly owned subsidiary of UAM.
UAM is listed on the New York Stock Exchange ("NYSE") and is principally engaged
through affiliated firms and abroad in providing institutional investment
management services and acquiring institutional management firms like Rogge
Global. As of October 31, 1998, Rogge Global had over $5.3 billion in assets
under management. It was organized in 1984 and specializes in global fixed
income management. Rogge Global uses a team approach in the management of PACE
GLOBAL
FIXED INCOME INVESTMENTS. The team is led by Olaf Rogge, Chief Investment
Officer of Rogge Global, along with John Graham, Richard Bell, Adrian James and
Malie Okrent. Mr. Rogge, who founded Rogge Global in 1984, has been managing
global investments for more than 25 years. Mr. Graham joined Rogge Global in
February 1994 and is currently a Director, Portfolio Manager and Analyst. Prior
thereto, he served as a Senior Manager of the Multi-Currency Fixed Income
Investment Team at JP Morgan. Mr. Bell joined Rogge Global in June 1990 and
serves as a Director, Portfolio Manager and Analyst. Mr. James joined Rogge
Global in April 1995 and serves as a Director, Portfolio Manager and Analyst.
From October 1987 through April 1995, Mr. James worked for NatWest Capital
Markets, where he was a Director and functioned as the International Bond
Economist. Ms. Okrent joined Rogge Global in 1998 as a Portfolio Manager in
charge of Global Credit. She had previously been a senior portfolio manager at
Rothschild Asset Management managing US, global and short term mandates. Before
joining Rothschild, she had spent the previous seven years at JP Morgan where
she also managed US, global and short term mandates.
PACE LARGE COMPANY VALUE EQUITY INVESTMENTS
Brinson Partners, Inc. ("Brinson Partners") is located at 209 South LaSalle
Street, Chicago, Illinois 60604. Gary P. Brinson is President and Managing
Director of Brinson Partners. Brinson Partners is an indirect subsidiary wholly
owned by UBS AG. UBS AG, with headquarters in Zurich, Switzerland, is an
internationally diversified organization with operations in many aspects of the
financial services industry. As of October 30, 1998, Brinson Partners had
approximately $173 billion in assets under management. It and its predecessor
entities have managed domestic and international investment assets since
December 31, 1981. Mr. Jeffrey J. Diermeier, Managing Director of U.S. Equities,
Mr. Robert C. Moore, Managing Director and Director of Equity Research, Mr. John
C. Leonard, Executive Director and Equity Portfolio Strategy Analyst, and Ms.
Lydia J. Miller, Director and Equity Portfolio Strategy Analyst are the team
responsible for the day-to-day management of PACE LARGE COMPANY VALUE EQUITY
INVESTMENTS. Mr. Diermeier was formerly Managing Director of Asset Allocation.
In addition, Mr. Diermeier and Mr. Moore have been working together for over 20
years and both played a key role in the research, design and implementation of
Brinson Partners' proprietary equity valuation model. Prior to joining Brinson
Partners in 1991, Mr. Leonard worked as a Financial Advisor
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with Sheffield Financial Management for four years. Ms. Miller, who joined
Brinson Partners in 1995, formerly served as Director of Equities and Portfolio
Manager at SBC Portfolio Management International, Inc. for over four years and
as a mutual fund portfolio manager at Value Line Asset Management for over three
years.
PACE LARGE COMPANY GROWTH EQUITY INVESTMENTS
Alliance Capital Management L.P. ("Alliance") is located at 1345 Avenue of
the Americas, New York, New York 10105. Alliance Capital Management Corporation
("ACMC") is the general partner of Alliance and conducts no other active
business. As of September 30, 1998 The Equitable Life Assurance Society of the
United States ("Equitable"), ACMC, Inc. and Equitable Capital Management
Corporation ("ECMC") were the beneficial owners of approximately 56.8% of the
outstanding units of Alliance. ACMC, ECMC and ACMC, Inc. are wholly owned
subsidiaries of Equitable. Equitable, a New York life insurance company, had
total assets as of June 30, 1998 of approximately $87 billion. Equitable is a
wholly owned subsidiary of The Equitable Companies Incorporated ("ECI"), a
Delaware corporation whose shares are publicly traded on the NYSE. As of
September 30, 1998 AXA-UAP, a French insurance holding company, owned
approximately 58.5% of the issued and outstanding shares of the common stock of
ECI. Alliance is a leading international investment manager supervising client
accounts with assets as of September 30, 1998 of $241.9 billion (of which more
than $99.5 billion represented the assets of registered mutual funds). Jane Mack
Gould is primarily responsible for the day-to-day management of PACE LARGE
COMPANY GROWTH EQUITY INVESTMENTS. Ms. Gould is a Senior Vice President and
Portfolio Manager and has been with Alliance since 1971.
PACE SMALL/MEDIUM COMPANY VALUE EQUITY INVESTMENTS
Brandywine Asset Management, Inc. ("Brandywine") is located at Three
Christina Centre, Suite 1200, 201 N. Walnut Street, Wilmington, Delaware 19801.
Brandywine is a wholly owned subsidiary of Legg Mason, Inc. ("Legg Mason"). Legg
Mason, based in Baltimore, Maryland, is a holding company which provides
securities brokerage, investment management and investment banking services
through its wholly owned subsidiaries. As of October 31, 1998, Brandywine had
approximately $7.2 billion in assets under management. It uses a value-oriented
approach when investing in both domestic and international markets. Henry Otto,
a Managing Director of Brandywine, Michael Jamison, a Managing Director of
Brandywine, and Steven Tonkovich, a Managing Director of Brandywine, are
primarily responsible for the day-to-day management of PACE SMALL/MEDIUM COMPANY
VALUE EQUITY INVESTMENTS. Mr. Otto is the primary portfolio manager for
Brandywine's small capitalization portfolios and has assisted in designing
quantitative evaluation tools at Brandywine since 1988. Mr. Jamison is Chief
Investment Officer of Brandywine's individual management program, responsible
for managing both equity and balanced portfolios at Brandywine since 1993. From
1988 to 1993, Mr. Jamison was a managing director of Mitchell Hutchins Asset
Management Inc. Mr. Tonkovich is portfolio manager for Brandywine's low
price/earnings, small capitalization portfolios and is also responsible for the
ongoing development of quantitative tools for value investing since 1989.
PACE SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS
Delaware Management Company, Inc. ("Delaware") is located at One Commerce
Square, Philadelphia, PA 19103. Delaware is a member of Delaware Investments, a
subsidiary of Lincoln National Corporation ("Lincoln National"). Lincoln
National, with headquarters in Fort Wayne, Indiana, is a diversified
organization with operations in many aspects of the financial services industry,
including insurance and investment management. As of October 31, 1998, Delaware
and its affiliates had over $47 billion in assets under management. Delaware and
its predecessors have been managing funds in Delaware Investments since 1938.
Delaware follows a fundamental, bottom-up approach to small company investing.
Gerald S. Frey is primarily responsible for the day-to-day management of PACE
SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS. Mr. Frey is a Vice President of
Delaware. Prior to joining Delaware
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Investments in 1996, Mr. Frey was a Senior Director with Morgan Grenfell Capital
Management in New York. He has 17 years of experience in the money management
business. In making investment decisions for the Portfolio, Mr. Frey regularly
consults with the other members of the team, John A. Heffern, Marshall T.
Bassett, Jeffery Hynoski, Steven Lampe and Lori F. Wachs. Mr. Heffern, Vice
President, joined Delaware in 1997. Previously, he was a Senior Vice President,
Equity Research at NatWest Securities Corporation's Specialty Finance Services
unit. Prior to that, he was a Principal and Senior Regional Bank Analyst at
Alex. Brown & Sons. Mr. Bassett, Vice President, joined Delaware in 1997. In his
most recent position, he served as Vice President in Morgan Stanley Asset
Management's Emerging Growth Group, where he analyzed small growth companies.
Prior to that, he was a trust officer at Sovran Bank and Trust Company. Mr.
Hynoski, Vice President, joined Delaware in 1998. Previously, he held the
position of Vice President, Bessemer Trust since 1993. Prior to that he served
as an analyst for Lord Abbett and Cowen Asset Management. Mr. Lampe, Vice
President, joined Delaware in 1995. Prior to that he held a manager position
with Price Waterhouse servicing the financial services industry. Ms. Wachs is an
Assistant Vice President. She joined the Delaware Group in 1992 from Goldman
Sachs & Company where she was an equity analyst for two years.
PACE INTERNATIONAL EQUITY INVESTMENTS
Martin Currie Inc. ("Martin Currie") is located at Saltire Court, 20 Castle
Terrace, Edinburgh, Scotland EHI 2ES. It is a wholly owned subsidiary of Martin
Currie Limited. As of September 30, 1998, Martin Currie had over $8.8 billion in
assets under management. It is one of Scotland's leading independent investment
management companies, and, since its founding in 1881, has developed an
expertise in equity investments. Martin Currie uses a team approach in the
management of PACE INTERNATIONAL EQUITY INVESTMENTS. The team is led by James
Fairweather, Chief Investment Officer of Martin Currie since 1997. Mr.
Fairweather joined Martin Currie in 1984 and has served in various investment
management capacities since then.
PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS
Schroder Capital Management International Inc. ("SCMI") is located at 1301
Avenue of the Americas, New York, New York 10019. It is a wholly owned U.S.
subsidiary of Schroders Incorporated, the wholly owned U.S. holding company
subsidiary of Schroders plc. Schroders plc, which is listed on the London Stock
Exchange, is the holding parent of a large worldwide group of banks and
financial services companies (referred to as the "Schroder Group"), with
associated companies and branch and representative offices located in eighteen
countries worldwide. The financial services companies of the Schroder Group had
approximately $195 billion in assets under management as of June 30, 1998. As of
September 30, 1998, SCMI, together with its UK affiliate Schroder Capital
Management International Limited, had approximately $23.9 billion in assets
under management. Since its founding in 1980, SCMI has developed an expertise in
emerging markets investments. John A. Troiano, Heather Crighton and Mark
Bridgeman, with the assistance of an emerging markets investment committee, are
primarily responsible for the day-to-day management of PACE INTERNATIONAL
EMERGING MARKETS EQUITY INVESTMENTS. Mr. Troiano has been a Managing Director of
SCMI since October 1995, and has been employed by various Schroder Group
companies in the portfolio management area since 1981. Ms. Crighton is a First
Vice President of SCMI and has been employed by SCMI in the investment research
and portfolio management areas since 1992. Mr. Bridgeman, a Vice President of
SCMI, has been employed by various Schroder Group companies in the investment
research and portfolio management areas since 1990.
FEE WAIVERS AND SUBSIDIES
Mitchell Hutchins has agreed to waive all or a portion of its management fee
and subsidize certain operating expenses of the Portfolios through July 31,
1999. See "Trust Expenses." Fee waivers and/or expense subsidies will increase a
Portfolio's yield or total return. See "Performance Information." Fee waivers
and expense subsidies are not guaranteed to continue in future years.
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DISTRIBUTOR
Mitchell Hutchins is the distributor of each Portfolio's shares. PaineWebber
is the exclusive dealer pursuant to a contract with Mitchell Hutchins.
PORTFOLIO TRANSACTIONS
PaineWebber, and any of the Advisers or an affiliated person thereof (an
"affiliated broker"), each may act as a broker or futures commission merchant
("FCM") for a Portfolio. In order for an affiliated broker to effect any
portfolio transactions for a Portfolio on an exchange or board of trade, the
commissions, fees or other remuneration received by the affiliated broker must
be reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers or FCMs in connection with comparable transactions
involving similar securities being purchased or sold on an exchange or board of
trade during a comparable period of time. This standard would allow an
affiliated broker to receive only that remuneration which would be expected to
be received by an unaffiliated broker or FCM in a similar arm's-length
transaction.
VALUATION OF SHARES
The net asset value of each Portfolio's shares fluctuates and is determined
as of the close of regular trading on The New York Stock Exchange Inc. ("NYSE")
(currently 4:00 p.m., eastern time) each Business Day. If trading on the NYSE is
halted for the day before 4:00 p.m., Eastern time, and trading on the NYSE will
not resume again that day, each Portfolio's net asset value per share will be
calculated at the time trading was halted. Each Portfolio's net asset value per
share is determined by dividing the value of the securities plus any cash or
other assets held by the Portfolio less all liabilities by the total number of
Portfolio shares outstanding.
Each Portfolio values its assets based on their current market value when
market quotations are readily available. If this value cannot be established,
assets are valued at fair value as determined in good faith by or under the
direction of the Trust's board of trustees. The amortized cost method of
valuation is used to value all portfolio securities held by PACE MONEY MARKET
INVESTMENTS and short-term dollar-denominated debt obligations of the other
Portfolios with 60 days or less remaining to maturity, unless the board of
trustees determines that this does not represent fair value. All investments
denominated in foreign currencies are valued daily in U.S. dollars based on the
then-prevailing exchange rate. It should be recognized that judgment plays a
greater role in valuing lower rated debt securities and restricted or illiquid
securities held by any of the Portfolios because there is less reliable,
objective data available.
PURCHASES
GENERAL
Purchases of shares of a Portfolio by a PACE Program participant must be
made through a securities account maintained with PaineWebber. Payment for
Portfolio shares must be made by check made payable to PaineWebber.
THE PACE PROGRAM. Shares of the Portfolios currently are available only to
participants in the PACE Program. The PACE Program and the Trust are designed to
assist investors in devising an asset allocation strategy to meet their
individual needs. PaineWebber will not have any investment discretion over the
investor's PACE Program account; all investment decisions ultimately rest with
the investor.
Under the PACE Program, PaineWebber investment executives provide services
to the investor that include assisting the investor to identify his or her
financial characteristics, including risk tolerances and investment objectives
in the context of the Portfolios, and assisting the investor to complete an
Investor Profile Questionnaire, that can be updated periodically upon the
investor's request. PaineWebber uses an investment profile evaluation and asset
allocation methodology to assist it in translating investor needs, preferences
and attitudes identified from the questionnaire into suggested portfolio
allocations. A PaineWebber investment executive presents the recommended
allocation to the investor initially and may also review later with the investor
monthly account statements and other information such as the performance data
provided on a quarterly basis, monitor identified changes in the investor's
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financial characteristics and assist the investor in preparing a revised
questionnaire or otherwise communicating changes to PaineWebber for
reevaluation. In addition, for any investor who so directs his or her
PaineWebber investment executive, the investor's holdings in the PACE Program
will be automatically rebalanced on a periodic basis to maintain the investor's
designated allocation among the Portfolios. Screening will be performed
quarterly with respect to accounts for which the investor has elected the
rebalancing service, and rebalancing will be performed for each such account
where the deviation from the allocation prescribed by the investor exceeds the
uniform threshold. Also, the PACE Program participant and his or her PaineWebber
investment executive will discuss the participant's investments in the PACE
Program at least annually.
PACE Program participants will pay PaineWebber a quarterly Program Fee at an
annual rate of up to 1.50% of the value of the shares of the Portfolios held in
the participant's PaineWebber account. The quarterly fee will be charged to the
participant's securities account. Qualified plans may make arrangements to pay
the quarterly fee separately. The Program Fee may be reduced at various levels
of assets and for participation by certain individual retirement accounts
("IRAs"), retirement plans for self-employed individuals and employee benefit
plans subject to the Employee Retirement Income Security Act of 1974
(collectively "Plans"). For certain Plans, PaineWebber may provide different
services than those described above for different fees. Fees may be subject to
negotiation, and fees may differ based upon a number of factors, including, but
not limited to, the type of account, the size of the account, the amount of PACE
Program assets and the number and range of supplemental advisory services to be
provided by PaineWebber investment executives. PaineWebber investment executives
receive a portion of any PACE Program Fee paid in consideration of providing
services to participants in the PACE Program. Investors who are fiduciaries or
otherwise, in the process of making investment decisions with respect to Plans,
should consider, in a prudent manner, the relationship of the fees to be paid by
the Plan along with the level of services provided by PaineWebber. The minimum
initial investment in the Trust for all accounts is $10,000, and any subsequent
investment in the Trust must be at a minimum of $500. The Trust reserves the
right at any time to vary the initial and subsequent investment minimums. See
"Other Services and Information--Individual Retirement Accounts."
Trustees of the Trust, employees of PaineWebber and Mitchell Hutchins and
their subsidiaries, and family members of these persons who maintain an
"employee related" account at PaineWebber and trustees/directors of PaineWebber
mutual funds may participate in the PACE Program at a reduced, or without the
imposition of the, PACE Program Fee.
Payment for shares of the Trust is due at PaineWebber no later than the
first Business Day after the order is placed (the "Settlement Date"). No order
may be placed until the investor has completed a questionnaire, reviewed the
resulting analysis, made the asset allocation decision and executed necessary
PACE Program documentation.
REDEMPTIONS
REDEMPTIONS IN GENERAL
As described below, Portfolio shares may be redeemed at their net asset
value, and redemption proceeds will be paid within the first Business Day of the
receipt of a redemption request. Investors may redeem shares through
PaineWebber.
Investors may submit redemption requests to their PaineWebber investment
executives in person or by telephone, mail or wire. As each Portfolio's agent,
PaineWebber will honor a redemption request by repurchasing Portfolio shares
from a redeeming shareholder at the shares' net asset value next determined
after receipt of the request by PaineWebber's New York City offices. Within the
first Business Day after receipt of the request, repurchase proceeds will be
credited to the investor's brokerage account or paid by check at the election of
the investor. PaineWebber reserves the right not to honor any redemption
request, in which case PaineWebber promptly will forward the request to the
Transfer Agent for redemption as described below. The redeeming shareholders
will be advised by their account executives if PaineWebber chooses not to honor
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a redemption request. PaineWebber investment executives are responsible for
promptly forwarding redemption requests to PaineWebber's New York City offices.
A redemption request will be executed by the Transfer Agent at the net asset
value next computed after it is received in "good order." "Good order" means
that the request must be accompanied by the following: (1) a letter of
instruction or a stock assignment specifying the number of shares or amount of
investment to be redeemed (or that all shares credited to a Portfolio account be
redeemed), signed by all registered owners of the shares in the exact names in
which they are registered; (2) a guarantee of each registered owner's signature;
A signature guarantee may be obtained from a domestic bank or trust company,
broker, dealer, clearing agency or savings association which is a participant in
a medallion program recognized by the Securities Transfer Agents Association.
The three recognized medallion programs are Securities Transfer Agents Medallion
Program (STAMP), Stock Exchanges Medallion Program (SEMP) and the New York Stock
Exchange Medallion Signature Program (MSP). Signature guarantees which are not a
part of these programs will not be accepted; (3) other supporting legal
documents for estates, trusts, guardianships, custodianships, partnerships and
corporations; and (4) duly endorsed share certificates, if any. Investors are
responsible for ensuring that a request for redemption is received in "good
order."
ADDITIONAL INFORMATION ON REDEMPTIONS
An investor in the PACE Program may have redemption proceeds of $1 million
or more wired to the investor's PaineWebber brokerage account or a commercial
bank account designated by the investor. Questions about this option, or
redemption requirements generally, should be referred to the investor's
PaineWebber investment executive. If an investor requests redemption of shares
which were purchased recently, the Trust may delay payment until it is assured
that good payment has been received. In the case of purchases by check, this can
take up to 15 days.
Because the Trust incurs certain fixed costs in maintaining shareholder
accounts, the Trust reserves the right to redeem all Portfolio shares in any
PACE Program account of less than $7,500 net asset value. If the Trust elects to
do so, it will notify the investor and provide the investor the opportunity to
increase the amount invested to the account minimum in effect at the time the
account was originally opened or more within 30 days of the notice. The Trust
will not redeem accounts that fall below $7,500 solely as a result of a
reduction in net asset value per share or redemptions to pay PACE Program fees.
Proceeds of an involuntary redemption will be deposited in the investor's
brokerage account unless the PACE Program is instructed to the contrary.
OTHER SERVICES AND INFORMATION
Investors interested in the services described below should consult their
PaineWebber investment executive.
AUTOMATIC INVESTMENT PLAN. Certain shareholders may purchase shares of a
Portfolio through an automatic investment plan, under which shareholders may
authorize PaineWebber to place a purchase order each month or quarter for
Portfolio shares in an amount not less than $500 per month or quarter. The
purchase price is paid automatically from cash held in the shareholder's
PaineWebber brokerage account through the automatic redemption of the
shareholder's shares of a PaineWebber money market fund or through the
liquidation of other securities held in the investor's PaineWebber brokerage
account. If the PACE Program assets are held in a PaineWebber RMA account, the
shareholder may arrange for preauthorized automatic fund transfer on a regular
basis, from the shareholder's bank account to the shareholder's RMA account.
Shareholders may utilize this service in conjunction with the automatic
investment plan to facilitate regular PACE investments. This automatic fund
transfer service, however, is not available for retirement plan shareholders.
In addition to providing a convenient and disciplined manner of investing,
participation in the automatic investment plan enables the investor to use the
technique of "dollar cost averaging." When under the automatic investment plan a
shareholder invests the same dollar amount each month, the shareholder will
purchase more shares when a Portfolio's net
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asset value per share is low and fewer shares when the net asset value per share
is high. Using this technique, a shareholder's average purchase price per share
over any given period will usually be lower than if the shareholder purchased a
fixed number of shares on a monthly basis during the period. Of course,
investing through the automatic investment plan does not assure a profit or
protect against loss in declining markets. Additionally, since the automatic
investment plan involves continuous investing regardless of price levels, an
investor should consider his or her financial ability to continue purchases
through periods of low price levels.
For further information regarding the automatic investment plan, the RMA
account or the automatic funds transfer service, shareholders should contact
their PaineWebber investment executive.
AUTOMATIC REDEMPTION PLAN. Shareholders may have PaineWebber redeem a
portion of their shares in the PACE Program monthly or quarterly under the
automatic redemption plan. Quarterly redemptions are made in March, June,
September and December. The amount to be redeemed must be at least $500 per
month or quarter. Purchases of additional shares of a Portfolio concurrent with
redemption are ordinarily disadvantageous to shareholders because of tax
liabilities. For retirement plan shareholders, special limitations apply. For
further information regarding the automatic redemption plan, shareholders should
contact their PaineWebber investment executive.
INDIVIDUAL RETIREMENT ACCOUNTS. A Self-Directed IRA is available through
PaineWebber under which investments may be made in the Portfolios as well as in
other investments available through PaineWebber. The minimum initial investment
in an IRA is $10,000. Investors considering establishing an IRA should review
applicable tax laws and should consult their tax advisers.
DIVIDENDS AND TAXES
DIVIDENDS
Net investment income, net realized long-and short-term capital gains, and
net realized gains from foreign currency transactions will be determined
separately for each Portfolio. Dividends from the net investment income of PACE
MONEY MARKET INVESTMENTS are declared daily and paid monthly. Shareholders of
this Portfolio receive dividends from the day following the purchase up to and
including the date of redemption. Dividends from the net investment income of
PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED
INCOME INVESTMENTS, PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE MUNICIPAL
FIXED INCOME INVESTMENTS and PACE GLOBAL FIXED INCOME INVESTMENTS are declared
and paid monthly. Dividends from the net investment income of the six equity
Portfolios are declared and paid annually. Net investment income includes
dividends and accrued interest and discount, less amortization of premium
(except for PACE GLOBAL FIXED INCOME INVESTMENTS) and accrued expenses. Each of
PACE STRATEGIC FIXED INCOME INVESTMENTS, PACE INTERMEDIATE FIXED INCOME
INVESTMENTS, PACE GLOBAL FIXED INCOME INVESTMENTS, PACE INTERNATIONAL EQUITY
INVESTMENTS and PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESTMENTS may, but
is not required to, distribute with any dividend all or a portion of any net
realized gains from foreign currency transactions. Each of PACE STRATEGIC FIXED
INCOME INVESTMENTS, PACE INTERMEDIATE FIXED INCOME INVESTMENTS and PACE GLOBAL
FIXED INCOME INVESTMENTS may accompany dividends with distributions of net
realized short-term capital gains and net realized gains from foreign currency
transactions. It is possible, however, that, due to currency-related losses or
short-term capital losses after such a distribution, all or a portion of its
distributions may be treated as a non-taxable return of capital to shareholders
for tax purposes.
Substantially all of each Portfolio's net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any, together with
any undistributed net realized short-term capital gain and net realized gains
from foreign currency transactions, is distributed annually. A Portfolio may
make additional distributions if necessary to avoid a 4% excise tax on certain
undistributed income and capital gain.
Each Portfolio's dividends and other distributions are paid in additional
Portfolio shares at net asset value unless the shareholder
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has requested cash payments. Shareholders who wish to receive dividends and/or
other distributions in cash, either mailed to the shareholder by check or
credited to the shareholder's PaineWebber account, should contact their
PaineWebber investment executive or complete the appropriate section of the
application form.
TAXES
Each Portfolio intends to continue to qualify for treatment as a RIC under
the Internal Revenue Code so that it will be relieved of federal income tax on
that part of its investment company taxable income (consisting generally of
taxable net investment income, net gains from certain foreign currency
transactions and net short-term capital gain) and net capital gain (the excess
of net long-term capital gain over net short-term capital loss) that is
distributed to its shareholders.
Dividends from a Portfolio's investment company taxable income (whether paid
in cash or in additional Portfolio shares) generally are taxable to its
shareholders as ordinary income. Distributions of a Portfolio's net capital gain
(whether paid in cash or in additional Portfolio shares), when designated as
such, are taxable to its shareholders as long-term capital gain, regardless of
how long they have held their Portfolio shares. Shareholders not subject to tax
on their income will not be required to pay tax on amounts distributed to them.
Distributions by PACE MUNICIPAL FIXED INCOME INVESTMENTS that it designates
as "exempt-interest dividends" generally may be excluded from gross income by a
shareholder. These dividends constitute the portion of the Portfolio's aggregate
dividends (excluding capital gain distributions) equal to the excess of the
excludable interest over certain amounts disallowed as deductions. In order to
pay exempt-interest dividends to its shareholders, that Portfolio must (and
intends to) satisfy the requirement that, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is exempt from federal income tax.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of PACE MUNICIPAL FIXED INCOME INVESTMENTS is not deductible. If
that Portfolio invests in certain PABs, shareholders must include the portion of
their exempt-interest dividends from that Portfolio attributable to those PABs
in calculating their liability for the AMT. Corporate shareholders must include
all of their exempt-interest dividends in calculating their liability for that
tax. If that Portfolio realizes capital gains as a result of market
transactions, any distribution of those gains is taxable to its shareholders.
All or a portion of the exempt-interest dividends paid by that Portfolio also
may be subject to state or local taxes, or both. Moreover, when a shareholder
redeems shares of that Portfolio, the portion of the redemption proceeds
attributable to undistributed excludable interest will lose its character as
such and may be taxable as part of the redemption proceeds (see below).
The Trust notifies its shareholders following the end of each calendar year
of the amounts of dividends and capital gain distributions paid (or deemed paid)
that year by each Portfolio and of any portion of those dividends that qualifies
for the corporate dividends-received deduction or, in the case of PACE MUNICIPAL
FIXED INCOME INVESTMENTS, any portion thereof that is a tax preference item for
purposes of the AMT. Under certain circumstances, the notice also will specify
the shareholder's share of any foreign taxes paid by the Portfolio, in which
event the shareholder would be required to include in his gross income his PRO
RATA share of those taxes but might be entitled to claim a credit or deduction
for those taxes.
The Trust is required to withhold 31% of all taxable dividends, capital gain
distributions and (except in the case of PACE MONEY MARKET INVESTMENTS)
redemption proceeds payable to any individuals and certain other noncorporate
shareholders who do not provide the Trust with a correct taxpayer identification
number. Withholding at that rate is also required from taxable dividends payable
to such shareholders who otherwise are subject to backup withholding.
A redemption of shares of a Portfolio may result in taxable gain or loss to
the redeeming shareholder, depending upon whether the redemption proceeds
payable to the shareholder are more or less than the shareholder's adjusted
basis for the redeemed shares. If shares of a Portfolio are purchased
49
<PAGE>
within 30 days before or after redeeming that Portfolio's shares at a loss
(including receipt of Portfolio shares in payment of a dividend distribution and
acquisition of shares through the automatic investment plan), all or a portion
of that loss will not be deductible and will increase the basis of the newly
purchased shares.
As noted above, shareholders will pay a PACE Program Fee. For individual
shareholders, this fee will be treated as a "miscellaneous itemized deduction"
for federal income tax purposes.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Portfolio and its shareholders; see the
SAI for a further discussion. There may be other federal, state or local tax
considerations applicable to a particular investor. Prospective investors are
urged to consult their tax advisers.
PERFORMANCE INFORMATION
Each Portfolio performs a standardized computation of annualized total
return and may show this return in advertisements or promotional materials.
Standardized return shows the change in value of an investment in a Portfolio as
a steady compound annual rate of return. Actual year-by-year returns fluctuate
and may be higher or lower than standardized return. Total return calculations
assume reinvestment of dividends and other distributions.
Each Portfolio may use other total return presentations in conjunction with
standardized return. These may cover the same or different periods as those used
for standardized return and may include cumulative returns, average annual
rates, actual year-by-year rates or any combination thereof.
PACE MUNICIPAL FIXED INCOME INVESTMENTS, PACE GOVERNMENT SECURITIES FIXED
INCOME INVESTMENTS, PACE INTERMEDIATE FIXED INCOME INVESTMENTS, PACE STRATEGIC
FIXED INCOME INVESTMENTS and PACE GLOBAL FIXED INCOME INVESTMENTS also may
advertise their yield. Yield reflects investment income net of expenses over a
30-day (or one-month) period on a Portfolio share, expressed as an annualized
percentage of the net asset value per share at the end of the period. PACE MONEY
MARKET INVESTMENTS may advertise its yield and effective yield. The yield of
PACE MONEY MARKET INVESTMENTS is the income on an investment in the Portfolio
over a specified seven-day period. This income is then "annualized" (that is,
assumed to be earned each week over a 52-week period) and shown as a percentage
of the investment. The effective yield is calculated similarly but, when
annualized, the income earned is assumed to be reinvested. The effective yield
will be higher than the yield because of the compounding effect of this assumed
reinvestment.
In addition to the Portfolio's yield, PACE MUNICIPAL FIXED INCOME
INVESTMENTS may also show tax-equivalent yield. Tax-equivalent yield shows the
yield that would produce the same income after a stated rate of taxes as the
Portfolio tax-exempt yield (yield excluding taxable income), with adjustments
for the portion, if any, of a Portfolio's yield that is not tax-exempt. Yield
computations differ from other accounting methods and therefore may differ from
dividends actually paid or reported net income.
Total return and yield information reflects past performance and does not
necessarily indicate future results. Investment return and principal values will
fluctuate, and proceeds upon redemption may be more or less than
a shareholder's cost. See "Performance Information" in the SAI.
GENERAL INFORMATION
ORGANIZATION
The Trust, PaineWebber PACE Select Advisors Trust, is registered with the
SEC as an open-end management investment company and was organized as a Delaware
business trust under the laws of the State of Delaware by Certificate of Trust
dated September 9, 1994. The trustees have authority to issue an unlimited
number of shares of beneficial interest of separate series, par value $.001 per
share.
The Trust does not hold annual shareholder meetings. Shareholders of record
holding at least two-thirds of the outstanding shares of the Trust may remove a
trustee by votes cast in person or by proxy at a meeting called for that
purpose. The trustees are
50
<PAGE>
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any trustee when so required in writing by the
shareholders of record holding at least 10% of the Trust's outstanding shares.
Each share of each Portfolio has equal voting rights, except as noted above.
Each share of each Portfolio is entitled to participate equally in dividends and
other distributions and the proceeds of any liquidation. The shares of each
series of the Trust will be voted separately except when an aggregate vote of
all series is required by the 1940 Act.
To avoid additional operating costs and for investor convenience, the
Portfolios will not issue share certificates. Ownership of shares of each
Portfolio is recorded on a stock register by the Transfer Agent and shareholders
have the same rights of ownership with respect to such shares as if certificates
had been issued.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, is custodian of each Portfolio's assets and employs foreign
sub-custodians approved by the Trust's board of trustees in accordance with
applicable requirements under the 1940 Act, to provide custody of the
Portfolio's foreign assets, if any. PFPC Inc. ("PFPC"), a subsidiary of PNC
Bank, N.A., 400 Bellevue Parkway, Wilmington, Delaware 19809, is the Portfolios'
transfer and dividend disbursing agent. PFPC (not the Funds) pays PaineWebber
for certain Transfer agency-related services that PFPC has delegated to
PaineWebber.
CONFIRMATIONS AND STATEMENTS
Shareholders receive confirmations of their purchases and redemptions of
shares of the Portfolios. Participants in the PACE Program will receive a
statement at least monthly that reports all of their Portfolio activity and a
consolidated year-end statement that shows all their Portfolio transactions for
that year. Shareholders also receive audited annual and unaudited semiannual
financial statements of the Portfolios.
51
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for a share of
beneficial interest for the period shown. This information is supplemented by
the financial statements, accompanying notes, and the report of Ernst & Young
LLP, independent auditors, which appear in the Trust's Annual Report to
Shareholders for the fiscal year ended July 31, 1998 and are incorporated by
reference into the Statement of Additional Information. The financial statements
and notes, as well as the financial information in the table below, have been
audited by Ernst & Young LLP. Further information about the Trust's performance
is also included in the Annual Report to Shareholders, which may be obtained
without charge by calling 1-800-647-1568.
<TABLE>
<CAPTION>
PACE PACE
MONEY MARKET GOVERNMENT SECURITIES
INVESTMENTS FIXED INCOME INVESTMENTS
------------------------------------------------ ------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEARS ENDED AUGUST 24, 1995+ FOR THE YEARS ENDED AUGUST 24, 1995+
----------------------------- THROUGH ----------------------------- THROUGH
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996 JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
------------- ------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period.................. $ 1.00 $ 1.00 $ 1.00 $ 12.61 $ 12.07 $ 12.00
------------- ------------- ------- ------------- ------------- -------
Net investment income....... 0.05 0.05 0.05 0.72 0.64 0.49
Net realized and unrealized
gains (losses) from
investments, futures
contracts and foreign
currency................... -- -- -- 0.18 0.58 0.03
------------- ------------- ------- ------------- ------------- -------
Net increase from investment
operations................. 0.05 0.05 0.05 0.90 1.22 0.52
------------- ------------- ------- ------------- ------------- -------
Dividends from net
investment income.......... (0.05) (0.05) (0.05) (0.72) (0.63) (0.44)
Distributions from net
realized gains............. -- -- -- (0.20) (0.05) (0.01)
------------- ------------- ------- ------------- ------------- -------
Total dividends and
distributions.............. (0.05) (0.05) (0.05) (0.92) (0.68) (0.45)
------------- ------------- ------- ------------- ------------- -------
Net asset value, end of
period..................... $ 1.00 $ 1.00 $ 1.00 $ 12.59 $ 12.61 $ 12.07
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Total investment return
(1)........................ 5.32% 5.13% 4.75% 7.39% 10.42% 4.35%
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Ratios/Supplemental Data:
Net assets, end of period
(000's).................... $25,493 $16,070 $10,221 $162,119 $101,606 $58,752
Ratio of:
Expenses to average net
assets, net of fee waivers
and expense
reimbursements............. 0.50% 0.50% 0.50%* 0.85% 1.57%** 0.85%*
Expenses to average net
assets, before fee waivers
and expense
reimbursements............. 1.20% 1.89% 2.40%* 0.95% 1.70%** 1.15%*
Net investment income to
average net assets, net of
fee waivers and expense
reimbursements............. 5.20% 5.04% 4.93%* 5.90% 5.44%** 5.09%*
Net investment income to
average net assets, before
fee waivers and expense
reimbursements............. 4.50% 3.65% 3.03%* 5.80% 5.31%** 4.79%*
Portfolio turnover.......... -- -- -- 353% 712% 978%
</TABLE>
- ------------
+ Commencement of operations
* Annualized
** Includes 0.72% of interest expense related to the reverse repurchase
agreement transactions entered into during the fiscal year.
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of each period reported, reinvestment of all dividends at net
asset value on the payable dates, and a sale at net asset value on the last
day of each period reported. The figures do not include the PACE Program
Fee; results would be lower if this fee was included. Total investment
return for period of less than one year has not been annualized.
52
<PAGE>
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACE PACE
INTERMEDIATE FIXED INCOME STRATEGIC FIXED INCOME
INVESTMENTS INVESTMENTS
------------------------------------------------ ------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEARS ENDED AUGUST 24, 1995+ FOR THE YEARS ENDED AUGUST 24, 1995+
----------------------------- THROUGH ----------------------------- THROUGH
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996 JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
------------- ------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................... $ 12.23 $ 11.95 $ 12.00 $ 13.04 $ 12.44 $ 12.00
------------- ------------- ------- ------------- ------------- -------
Net investment income....... 0.67 0.66 0.53 0.69 0.67 0.59
Net realized and unrealized
gains (losses) from
investments, futures
contracts and foreign
currency transactions....... 0.09 0.28 (0.09) 0.40 0.70 0.38
------------- ------------- ------- ------------- ------------- -------
Net increase (decrease) from
investment operations....... 0.76 0.94 0.44 1.09 1.37 0.97
------------- ------------- ------- ------------- ------------- -------
Dividends from net
investment income........... (0.64) (0.66) (0.48) (0.69) (0.67) (0.52)
Distributions from net
realized gains.............. -- -- (0.01) (0.12) (0.10) (0.01)
------------- ------------- ------- ------------- ------------- -------
Total dividends and
distributions............... (0.64) (0.66) (0.49) (0.81) (0.77) (0.53)
------------- ------------- ------- ------------- ------------- -------
Net asset value, end of
period...................... $ 12.35 $ 12.23 $ 11.95 $ 13.32 $ 13.04 $ 12.44
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Total investment return
(1)......................... 6.41% 8.14% 3.59% 8.66% 11.35% 8.15%
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Ratios/ Supplemental Data:
Net assets, end of period
(000's) $99,690 $66,751 $41,273 $126,880 $75,174 $42,550
Ratio of:
Expenses to average net
assets, net of fee waivers
and expense reimbursements.. 0.84% 0.85% 0.85%* 0.85% 0.85% 0.85%*
Expenses to average net
assets, before fee waivers
and expense reimbursements.. 0.84% 0.99% 1.23%* 0.94% 1.10% 1.40%*
Net investment income to
average net assets, net of
fee waivers and expense
reimbursements.............. 5.60% 5.70% 5.56%* 5.49% 5.69% 5.85%*
Net investment income to
average net assets, before
fee waivers and expense
reimbursements.............. 5.60% 5.56% 5.18%* 5.40% 5.44% 5.30%*
Portfolio turnover.......... 111% 67% 36% 234% 357% 166%
<CAPTION>
PACE PACE
MUNICIPAL FIXED INCOME GLOBAL FIXED INCOME
INVESTMENTS INVESTMENTS
------------------------------------------------- ------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEARS ENDED AUGUST 24, 1995+ FOR THE YEARS ENDED AUGUST 24, 1995+
------------------------------ THROUGH ----------------------------- THROUGH
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996 JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
-------------- ------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................... $ 12.67 $ 12.32 $ 12.00 $ 12.17 $ 12.33 $ 12.00
------- ------------- ------- ------------- ------------- -------
Net investment income....... 0.58 0.61 0.49 0.62 0.64 0.53
Net realized and unrealized
gains (losses) from
investments, futures
contracts and foreign
currency transactions....... 0.02 0.38 0.27 (0.03) (0.21) 0.27
------- ------------- ------- ------------- ------------- -------
Net increase (decrease) from
investment operations....... 0.60 0.99 0.76 0.59 0.43 0.80
------- ------------- ------- ------------- ------------- -------
Dividends from net
investment income........... (0.57) (0.61) (0.43) (0.40) (0.51) (0.46)
Distributions from net
realized gains.............. -- (0.03) (0.01) (0.11) (0.08) (0.01)
------- ------------- ------- ------------- ------------- -------
Total dividends and
distributions............... (0.57) (0.64) (0.44) (0.51) (0.59) (0.47)
------- ------------- ------- ------------- ------------- -------
Net asset value, end of
period...................... $ 12.70 $ 12.67 $ 12.32 $ 12.25 $ 12.17 $ 12.33
------- ------------- ------- ------------- ------------- -------
------- ------------- ------- ------------- ------------- -------
Total investment return
(1)......................... 4.87% 8.30% 6.38% 4.88% 3.54% 6.68%
------- ------------- ------- ------------- ------------- -------
------- ------------- ------- ------------- ------------- -------
Ratios/ Supplemental Data:
Net assets, end of period
(000's) $51,638 $34,292 $17,765 $88,838 $60,279 $38,296
Ratio of:
Expenses to average net
assets, net of fee waivers
and expense reimbursements.. 0.85% 0.85% 0.85%* 0.95% 0.95% 0.95%*
Expenses to average net
assets, before fee waivers
and expense reimbursements.. 0.93% 1.40% 1.74%* 1.23% 1.29% 1.61%*
Net investment income to
average net assets, net of
fee waivers and expense
reimbursements.............. 4.67% 5.08% 4.95%* 5.10% 5.36% 5.24%*
Net investment income to
average net assets, before
fee waivers and expense
reimbursements.............. 4.59% 4.53% 4.07%* 4.82% 5.02% 4.58%*
Portfolio turnover.......... 34% 15% 78% 125% 270% 197%
</TABLE>
53
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
PACE
PACE LARGE COMPANY GROWTH
LARGE COMPANY VALUE EQUITY INVESTMENTS
EQUITY INVESTMENTS ------------------------------------------------
------------------------------------------------
FOR THE PERIOD FOR THE YEARS ENDED FOR THE PERIOD
FOR THE YEARS ENDED AUGUST 24, 1995+ ----------------------------- AUGUST 24, 1995+
----------------------------- THROUGH JULY 31, THROUGH
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996 1998# JULY 31, 1997 JULY 31, 1996
------------- ------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $ 20.03 $ 14.07 $ 12.00 $ 19.28 $ 13.27 $ 12.00
------------- ------------- ------- ------------- ------------- -------
Net investment income
(Loss).................... 0.14 0.11 0.12 (0.03) 0.03 0.03
Net realized and unrealized
gains (losses) from
investments, futures
contracts and foreign
currency.................. 1.63 6.61 2.02 4.79 6.01 1.26
------------- ------------- ------- ------------- ------------- -------
Net increase (decrease) from
investment operations..... 1.77 6.72 2.14 4.76 6.04 1.29
------------- ------------- ------- ------------- ------------- -------
Dividends from net
investment income......... (0.14) (0.11) (0.05) (0.01) (0.03) (0.02)
Distributions from net
realized gains............ (1.39) (0.65) (0.02) (1.04) -- --
------------- ------------- ------- ------------- ------------- -------
Total dividends and
distributions............. (1.53) (0.76) (0.07) (1.05) (0.03) (0.02)
------------- ------------- ------- ------------- ------------- -------
Net asset value, end of
period.................... $ 20.27 $ 20.03 $ 14.07 $ 22.99 $ 19.28 $ 13.27
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Total investment return
(1)....................... 9.89% 49.13% 17.90% 26.40% 45.61% 10.76%
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Ratios/Supplemental Data:
Net assets, end of period
(000's)................... $266,354 $180,807 $80,897 $275,461 $160,334 $69,248
Ratio of:
Expenses to average net
assets, net of fee waivers
and expense
reimbursements............ 0.98% 1.00% 1.00%* 1.00% 1.00% 1.00%*
Expenses to average net
assets, before fee waivers
and expense
reimbursements............ 0.98% 1.06% 1.40%* 1.02% 1.05% 1.33%*
Net investment income (loss)
to average net assets, net
of fee waivers and expense
reimbursements............ 0.82% 0.81% 1.22%* (0.14)% 0.22% 0.33%*
Net investment income (loss)
to average net assets,
before fee waivers and
expense reimbursements.... 0.82% 0.75% 0.82%* (0.16)% 0.17% (0.01)%*
Portfolio turnover.......... 34% 46% 38% 102% 73% 65%
</TABLE>
- ------------------------
+ Commencement of operations
* Annualized
# Sub-advisory functions for this Portfolio were transferred from
Chancellor LGT Asset Management, Inc. to Alliance Capital Management
L.P. on November 10, 1997.
## Sub-advisory functions for this Portfolio were transferred from
Westfield Capital Management Company, Inc. to Delaware Management
Company, Inc. on December 17, 1996.
(1) Total investment return is calculated assuming a $1,000 investment on
the first day of each period reported, reinvestment of all dividends and
distributions, if any, at net asset value on the payable dates, and a
sale at net asset value on the last day of each period reported. The
figures do not include the PACE Program Fee; results for each Portfolio
would be lower if this fee was included. Total investment returns for
periods of less than one year have not been annualized.
54
<PAGE>
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PACE
PACE SMALL/MEDIUM COMPANY
SMALL/MEDIUM COMPANY VALUE GROWTH EQUITY INVESTMENTS
EQUITY INVESTMENTS ------------------------------------------------
------------------------------------------------
FOR THE PERIOD FOR THE YEAR ENDED FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 24, 1995+ ----------------------------- AUGUST 24, 1995+
----------------------------- THROUGH JULY 31, THROUGH
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996 JULY 31, 1998 1997## JULY 31, 1996
------------- ------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................... $ 17.52 $ 12.29 $ 12.00 $ 14.44 $ 11.20 $ 12.00
------------- ------------- ------- ------------- ------------- -------
Net investment income....... 0.10 0.12 0.10 (0.03) (0.02) 0.00
Net realized and unrealized
gains (losses) from
investments, futures
contracts and foreign
currency transactions....... 1.14 5.55 0.23 2.03 3.26 (0.78)
------------- ------------- ------- ------------- ------------- -------
Net increase (decrease) from
investment operations....... 1.24 5.67 0.33 2.00 3.24 (0.78)
------------- ------------- ------- ------------- ------------- -------
Dividends from net
investment income........... (0.13) (0.10) (0.04) -- -- (0.02)
Distributions from net
realized gains.............. (1.24) (0.34) -- (0.64) -- --
------------- ------------- ------- ------------- ------------- -------
Total dividends and
distributions............... (1.37) (0.44) (0.04) (0.64) -- (0.02)
------------- ------------- ------- ------------- ------------- -------
Net asset value, end of
period...................... $ 17.39 $ 17.52 $ 12.29 $ 15.80 $ 14.44 $ 11.20
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Total investment return
(1)......................... 6.97% 46.99% 2.76% 14.44% 28.93% (6.55)%
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Ratios/ Supplemental Data:
Net assets, end of period
(000's) $183,558 $135,047 $63,894 $198,855 $125,609 $63,364
Ratio of:
Expenses to average net
assets, net of fee waivers
and expense reimbursements.. 0.99% 1.00% 1.00%* 1.00% 1.00% 1.00%*
Expenses to average net
assets, before fee waivers
and expense reimbursements.. 1.00% 1.12% 1.51%* 1.03% 1.08% 1.27%*
Net investment income (loss)
to average net assets, net
of fee waivers and expense
reimbursements.............. 0.61% 1.00% 1.07%* (0.20)% (0.21)% (0.14)%*
Net investment income (loss)
to average net assets,
before fee waivers and
expense reimbursements...... 0.60% 0.88% 0.56%* (0.23)% (0.29)% (0.41)%*
Portfolio turnover.......... 42% 39% 30% 131% 247% 115%
<CAPTION>
PACE PACE
INTERNATIONAL EQUITY INTERNATIONAL EMERGING
INVESTMENTS MARKETS EQUITY INVESTMENTS
------------------------------------------------ ------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 24, 1995+ FOR THE YEAR ENDED AUGUST 24, 1995+
----------------------------- THROUGH ----------------------------- THROUGH
JULY 31, 1998 JULY 31, 1997 JULY 31, 1996 JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
------------- ------------- ---------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................... $ 15.66 $ 12.79 $ 12.00 $ 15.60 $ 12.49 $ 12.00
------------- ------------- ------- ------------- ------------- -------
Net investment income....... 0.16 0.10 0.12 0.09 0.06 0.07
Net realized and unrealized
gains (losses) from
investments, futures
contracts and foreign
currency transactions....... 1.20 2.97 0.73 (5.23) 3.09 0.44
------------- ------------- ------- ------------- ------------- -------
Net increase (decrease) from
investment operations....... 1.36 3.07 0.85 (5.14) 3.15 0.51
------------- ------------- ------- ------------- ------------- -------
Dividends from net
investment income........... (0.16) (0.13) (0.06) (0.05) (0.04) (0.02)
Distributions from net
realized gains.............. (0.32) (0.07) -- -- -- --
------------- ------------- ------- ------------- ------------- -------
Total dividends and
distributions............... (0.48) (0.20) (0.06) (0.05) (0.04) (0.02)
------------- ------------- ------- ------------- ------------- -------
Net asset value, end of
period...................... $ 16.54 $ 15.66 $ 12.79 $ 10.41 $ 15.60 $ 12.49
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Total investment return
(1)......................... 9.27% 24.30% 7.08% (32.99)% 25.31% 4.23%
------------- ------------- ------- ------------- ------------- -------
------------- ------------- ------- ------------- ------------- -------
Ratios/ Supplemental Data:
Net assets, end of period
(000's) $164,477 $102,979 $45,331 $ 63,237 $54,759 $25,481
Ratio of:
Expenses to average net
assets, net of fee waivers
and expense reimbursements.. 1.21% 1.35% 1.50%* 1.50% 1.50% 1.50%*
Expenses to average net
assets, before fee waivers
and expense reimbursements.. 1.21% 1.35% 1.81%* 1.79% 2.09% 2.35%*
Net investment income (loss)
to average net assets, net
of fee waivers and expense
reimbursements.............. 1.14% 0.95% 1.35%* 0.98% 0.63% 0.94%*
Net investment income (loss)
to average net assets,
before fee waivers and
expense reimbursements...... 1.14% 0.95% 1.04%* 0.69% 0.04% 0.08%*
Portfolio turnover.......... 56% 55% 25% 51% 39% 22%
</TABLE>
55
<PAGE>
APPENDIX A
The Portfolios may use some or all of the following instruments:
OPTIONS ON EQUITY AND DEBT SECURITIES AND FOREIGN CURRENCIES--A call option
is a short-term contract pursuant to which the purchaser of the option, in
return for a premium, has the right to buy the security or currency underlying
the option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to deliver the underlying
security or currency against payment of the exercise price. A put option is a
similar contract that gives its purchaser, in return for a premium, the right to
sell the underlying security or currency at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
OPTIONS ON SECURITIES INDICES--A securities index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of those securities. An index option operates in the same way as a more
traditional securities option, except that exercise of an index option is
effected with cash payment and does not involve delivery of securities. Thus,
upon exercise of an index option, the purchaser will realize, and the writer
will pay, an amount based on the difference between the exercise price and the
closing price of the index.
INDEX FUTURES CONTRACTS--An index futures contract is a bilateral agreement
pursuant to which one party agrees to accept, and the other party agrees to
make, delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of trading of the contract and
the price at which the futures contract is originally agreed upon. No physical
delivery of the securities comprising the index is made. Generally, contracts
are closed out prior to the expiration date of the contract.
INTEREST RATE AND FOREIGN CURRENCY FUTURES CONTRACTS--Interest rate and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities or currency, except that an option on a futures contract
gives the purchaser the right, in return for the premium, to assume a position
in a futures contract (a long position if the option is a call and a short
position if the option is a put), rather than to purchase or sell a security or
currency, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance that represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call and a long position in the case of a put.
FORWARD CURRENCY CONTRACTS--A forward currency contract involves an
obligation to purchase or sell a specified currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
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APPENDIX B
THIS DOCUMENT HAS BEEN PREPARED BY PAINEWEBBER INCORPORATED
AS A COPY OF THE NOTICE THAT APPEARED IN THE FEDERAL REGISTER ON
FRIDAY, MARCH 22, 1996 (VOL. 61, N0. 57 AT 11882).
PAINEWEBBER INCORPORATED (PAINEWEBBER) LOCATED IN NEW YORK, NY [Application No.
D-09818]
PROPOSED EXEMPTION
Based on the facts and representations set forth in the application, the
Department is considering granting an exemption under the authority of section
408(a) of the Act and section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, August 10,
1990).(1)
Section I. Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of the Act
and the sanctions resulting from the application of section 4975 of the Code, by
reason of section 4975(c)(1) (A) through (D) of the Code, shall not apply,
effective August 18, 1995, to the purchase or redemption of shares by an
employee benefit plan, an individual retirement account (the IRA) or a
retirement plan for a self-employed individual (the Keogh Plan) (collectively
referred to herein as the Plans) in the PaineWebber Managed Accounts Services
Portfolio Trust (the Trust) established in connection with such Plans'
participation in the PaineWebber PACE Program (the PACE Program).
In addition, the restrictions of section 406(b) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason of section
4975(c)(1) (E) and (F) of the Code, shall not apply, effective August 18, 1995,
to (a) the provision, by PaineWebber Managed Accounts Services (PMAS), a
division of PaineWebber, of asset allocation and related services to an
independent fiduciary of a Plan (the Independent Fiduciary) or to a directing
participant (the Directing Participant) in a Plan that is covered under the
provisions of section 404(c) of the Act (the Section 404(c) Plan), which may
result in the selection by the Independent Fiduciary or the Directing
Participant of portfolios of the Trust (the Portfolios) in the PACE Program for
the investment of Plan assets; and (b) the provision of investment management
services by Mitchell Hutchins Asset Management, Inc. (Mitchell Hutchins) to the
PACE Money Market Investments Portfolio of the Trust.
This proposed exemption is subject to the conditions set forth below in
Section II.
Section II. General Conditions
(a) The participation of each Plan in the PACE Program is approved by an
Independent Fiduciary or, if applicable, Directing Participant.
(b) As to each Plan, the total fees paid to PMAS and its affiliates constitute
no more than reasonable compensation and do not include the receipt of fees
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the '40 Act)
by PMAS and its affiliates in connection with the transactions.
(c) No Plan pays a fee or commission by reason of the acquisition or redemption
of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares remain at least as
favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(e) PMAS provides written documentation to an Independent Fiduciary or a
Directing Participant of its recommendations or evaluations based upon
objective criteria.
(f) Any recommendation or evaluation made by PMAS to an Independent Fiduciary or
Directing Participant is implemented only at the express direction of such
fiduciary or participant.
(g) PMAS provides investment advice in writing to an Independent Fiduciary or
Directing Participant with respect to all available Portfolios.
(h) With the exception of the PACE Money Market Investments Portfolio, any
sub-adviser (the Sub-Adviser) appointed by Mitchell Hutchins to exercise
investment discretion with respect to a Portfolio is independent of
PaineWebber and its affiliates.
(i) The quarterly fee that is paid by a Plan to PMAS for asset allocation and
related services rendered to such Plan under the PACE Program (i.e., the
outside fee) is offset by such amount as is necessary to assure that
Mitchell Hutchins retains 20 basis points as a management fee from any
Portfolio (with the exception of the PACE Money Market Investments Portfolio
from which Mitchell Hutchins retains an investment management fee of 15
basis points) containing investments attributable to the Plan investor.
However, the quarterly fee of 20 basis points that is paid to Mitchell
Hutchins for administrative services is retained by Mitchell Hutchins and is
not offset against the outside fee.
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(1) For purposes of this proposed exemption, reference to provisions of Title
I of the Act, unless otherwise specified, refer also to the corresponding
provisions of the Code.
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(j) With respect to its participation in the PACE Program prior to purchasing
Trust shares,
(1) Each Independent Fiduciary receives the following written or oral
disclosures from PaineWebber:
(A) A copy of the prospectus (the Prospectus) for the Trust discussing
the investment objectives of the Portfolios comprising the Trust; the
policies employed to achieve these objectives; the corporate
affiliation existing between PaineWebber, PMAS, Mitchell Hutchins and
their affiliates; the compensation paid to such entities; any
additional information explaining the risks of investing in the
Trust; and sufficient and understandable disclosures relating to
rebalancing of investor accounts.
(B) Upon written or oral request to PaineWebber, a Statement of
Additional Information supplementing the Prospectus, which describes
the types of securities and other instruments in which the Portfolios
may invest, the investment policies and strategies that the
Portfolios may utilize and certain risks attendant to those
investments, policies and strategies.
(C) An investor questionnaire.
(D) A written analysis of PMAS's asset allocation decision and
recommendation of specific Portfolios.
(E) A copy of the agreement between PMAS and such Plan relating to
participation in the PACE Program.
(F) Upon written request to Mitchell Hutchins, a copy of the respective
investment advisory agreement between Mitchell Hutchins and the
Sub-Advisers.
(G) Copies of the proposed exemption and grant notice describing the
exemptive relief provided herein.
(2) In the case of a Section 404(c) Plan, the Independent Fiduciary will--
(A) Make copies of the foregoing documents available to Directing
Participants.
(B) Allow Directing Participants to interact with PaineWebber Investment
Executives and receive information relative to the services offered
under the PACE Program, including the rebalancing feature, and the
operation and objectives of the Portfolios.
(3) If accepted as an investor in the PACE Program, an Independent Fiduciary
of an IRA or Keogh Plan, is required to acknowledge, in writing to PMAS,
prior to purchasing Trust shares that such fiduciary has received copies
of the documents described in paragraph (j)(l) of this Section II.
(4) With respect to a Section 404(c) Plan, written acknowledgement of the
receipt of such documents is provided by the Independent Fiduciary (i.e.,
the Plan administrator, trustee, investment manager or named fiduciary,
as the recordholder of Trust shares). Such Independent Fiduciary will be
required to represent in writing to PMAS that such fiduciary is--
(A) Independent of PaineWebber and its affiliates;
(B) Knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and;
(C) Able to make an informed decision concerning participation in the
PACE Program.
(5) With respect to a Plan that is covered under Title I of the Act, where
investment decisions are made by a trustee, investment manager or a named
fiduciary, such Independent Fiduciary is required to acknowledge, in
writing, receipt of such documents and represent to PMAS that such
fiduciary is--
(A) Independent of PMAS and its affiliates;
(B) Capable of making an independent decision regarding the investment
of Plan assets;
(C) Knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto; and
(D) Able to make an informed decision concerning participation in the
PACE Program.
(k) As applicable, subsequent to its participation in the PACE Program, each
Independent Fiduciary receives the following written or oral disclosures with
respect to its ongoing participation in the PACE Program:
(1) Written confirmations of each purchase or redemption transaction by the
Plan with respect to a Portfolio.
(2) Telephone quotations from PaineWebber of such Plan's account balance.
(3) A monthly statement of account from PaineWebber specifying the net asset
value of the Plan's investment in such account.
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Such statement is also anticipated to include cash flow and transaction
activity during the month, unrealized gains or losses on Portfolio shares
held; and a summary of total earnings and capital returns on the Plan's
PACE Portfolio for the month and year-to-date.
(4) The Trust's semi-annual and annual report which will include financial
statements for the Trust and investment management fees paid by each
Portfolio.
(5) A written quarterly monitoring report that includes a record of the
Plan's PACE Program portfolio for the quarter and since inception,
showing the rates of return relative to comparative market indices
(illustrated in a manner that reflects the effect of any fees for
participation in the PACE Program actually incurred during the period);
an investment outlook summary containing market commentary; and the
Plan's actual PACE Program portfolio with a breakdown, in both dollars
and percentages, of the holdings in each portfolio. The quarterly
monitoring report will also contain an analysis and an evaluation of a
Plan investor's account to ascertain whether the Plan's investment
objectives have been met and recommending, if required, changes in
Portfolio allocations.
(6) A statement, furnished at least quarterly or annually, specifying--
(A) The total, expressed in dollars, of each Portfolio's brokerage
commissions that are paid to PaineWebber and its affiliates;
(B) The total, expressed in dollars, of each Portfolio's brokerage
commissions that are paid to unrelated brokerage firms;
(C) The average brokerage commissions per share by the Trust to brokers
affiliated with PaineWebber, expressed as cents per share; and
(D) The average brokerage commissions per share by the Trust to brokers
unrelated to PaineWebber and its affiliates, expressed as cents per
share for any year in which brokerage commissions are paid to
PaineWebber by the Trust Portfolios in which a Plan's assets are
invested.
(7) Periodic meetings with a PaineWebber Investment Executive by Independent
Fiduciaries to discuss the quarterly monitoring report or any other
questions that may arise.
(l) In the case of a Section 404(c) Plan where the Independent Fiduciary has
established an omnibus account in the name of the Plan (the Undisclosed
Account) with PaineWebber, the information noted above in subparagraphs
(k)(1) through (k)(7) of this Section II may be provided directly by
PaineWebber to the Directing Participants or to the Independent Fiduciary for
dissemination to the Directing Participants, depending upon the arrangement
negotiated by the Independent Fiduciary with PMAS.
(m) If previously authorized in writing by the Independent Fiduciary, the Plan
investor's account is automatically rebalanced on a periodic basis to the
asset allocation previously prescribed by the Plan or participant, as
applicable, if the quarterly screening reveals that one or more Portfolio
allocations deviates from the allocation prescribed by the investor by the
agreed-upon formula threshold.
(n) The books and records of the Trust are audited annually by independent,
certified public accountants and all investors receive copies of an audited
financial report no later than 60 days after the close of each Trust fiscal
year.
(o) PaineWebber maintains, for a period of six years, the records necessary to
enable the persons described in paragraph (p) of this Section II to determine
whether the conditions of this exemption have been met, except that--
(1) A prohibited transaction will not be considered to have occurred if, due
to circumstances beyond the control of PaineWebber and/or its affiliates,
the records are lost or destroyed prior to the end of the six year
period; and
(2) No party in interest other than PaineWebber shall be subject to the
civil penalty that may be assessed under section 502(i) of the Act, or to
the taxes imposed by section 4975(a) and (b) of the Code, if the records
are not maintained, or are not available for examination as required by
paragraph (p)(1) of this Section II below.
(p) (1) Except as provided in subparagraph (p)(2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (o) of this
Section II are unconditionally available at their customary location
during normal business hours by:
(A) Any duly authorized employee or representative of the Department,
the Internal Revenue Service (the Service) or the Securities and
Exchange Commission (the SEC);
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
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(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or any
duly authorized representative of such participant or beneficiary.
(p) (2) None of the persons described above in paragraphs (p)(l)(B)-(p)(l)(D)
of this paragraph (P) are authorized to examine the trade secrets of
PaineWebber or Mitchell Hutchins or commercial or financial information
which is privileged or confidential.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term "PaineWebber" means PaineWebber Incorporated and any affiliate of
PaineWebber, as defined in paragraph (b) of this Section III.
(b) An "affiliate" of PaineWebber includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with PaineWebber.
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(c) The term "control" means the power to exercise a controlling influence over
the management or policies of a person other than an individual.
(d) The term "Independent Fiduciary" means a Plan fiduciary which is independent
of PaineWebber and its affiliates and is either
(1) A Plan administrator, trustee, investment manager or named fiduciary, as
the recordholder of Trust shares of a Section 404(c) Plan;
(2) A participant in a Keogh Plan;
(3) An individual covered under a self-directed IRA which invests in Trust
shares;
(4) An employee, officer or director of PaineWebber and/or its affiliates
covered by an IRA not subject to Title I of the Act;
(5) A trustee, Plan administrator, investment manager or named fiduciary
responsible for investment decisions in the case of a Title I Plan that
does not permit individual direction as contemplated by Section 404(c) of
the Act; or
(e) The term "Directing Participant" means a participant in a Plan covered under
the provisions of section 404(c) of the Act, who is permitted under the terms
of the Plan to direct, and who elects to so direct, the investment of the
assets of his or her account in such Plan.
(f) The term "Plan" means a pension plan described in 29 CFR 2510.3-2, a welfare
benefit plan described in 29 CFR 2510.3-1, a plan described in section
4975(e)(1) of the Code, and in the case of a Section 404(c) Plan, the
individual account of a Directing Participant.
Effective Date: If granted, this proposed exemption will be effective as of
August 18, 1995.
SUMMARY OF FACTS AND REPRESENTATIONS
1. The parties to the transactions are as follows:
(a) PAINEWEBBER GROUP (PAINE WEBBER GROUP), located in New York, New York,
is the parent of PaineWebber. Paine Webber Group is one of the leading
full-line securities firms servicing institutions, governments and
individual investors in the United States and throughout the world. Paine
Webber Group conducts its businesses in part through PMAS, a division of
PaineWebber and Mitchell Hutchins, a wholly owned subsidiary of
PaineWebber. Paine Webber Group is a member of all principal securities
and commodities exchanges in the United States and the National
Association of Securities Dealers, Inc. In addition, it holds memberships
or associate memberships on several principal foreign securities and
commodities exchanges. Although Paine Webber Group is not an operating
company and, as such, maintains no assets under management, as of
September 30, 1994, Paine Webber Group and its subsidiaries rendered
investment advisory services with respect to $36.1 billion in assets.
(b) PAINEWEBBER, whose principal executive offices are located in New York,
New York, provides investment advisory services to individuals, banks,
thrift institutions, investment companies, pension and profit sharing
plans, trusts, estates, charitable organizations, corporations and other
business and government entities. PaineWebber is also responsible for
securities underwriting, investment and merchant banking services and
securities and commodities trading as principal and agent. PaineWebber
serves as the dealer of Trust shares described herein.
(c) PMAS, located in Weehawken, New Jersey is responsible for individual
investor account management and investor consulting services. PMAS
provides such services to the investors involved in various PaineWebber
investment programs by providing asset allocation recommendations and
related services with
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respect to their investments. PMAS provides investment consulting and
advisory services to more than 40,000 accounts, with account sizes
ranging from institutional accounts in excess of $650 million in assets
to individual accounts with $100,000 minimum investments. PMAS provides
investors in the Trust with asset allocation recommendations and related
services with respect to investments in the Trust Portfolios.
(d) MITCHELL HUTCHINS, which is located in New York, New York, is a
registered investment adviser under the Investment Adviser's Act of 1940
(the Advisers Act) and a wholly owned subsidiary of PaineWebber. Mitchell
Hutchins provides investment advisory and asset management services to
investors and develops and distributes investment products, including
mutual funds and limited partnerships. Mitchell Hutchins also provides
financial services to over $24.8 billion in client assets representing
twenty-eight investment companies with fifty-five separate portfolios.
Mitchell Hutchins is providing investment management and administrative
services with respect to the Trust and investment advisory services with
respect to one of the Trust's Portfolios.
(e) STATE STREET BANK AND TRUST COMPANY (STATE STREET), located in North
Quincy, Massachusetts, serves as the custodian of assets for the Trust.
State Street is not affiliated with PaineWebber and its affiliates. It
provides a full array of integrated banking products, focusing on
servicing financial assets (i.e., asset custody, cash management,
securities lending, multi-currency accounting and foreign exchange),
managing assets and commercial lending. As of September 30, 1994, State
Street rendered custodian services with respect to approximately $1.6
trillion in assets and provided investment management services to
approximately $155 billion in assets.
(f) PFPC, INC. (PFPC), a subsidiary of PNC Bank, National Association, and
whose principal address is in Wilmington, Delaware, serves as the Trust's
transfer and dividend disbursing agent. PFPC is not affiliated with
PaineWebber and its affiliates. PFPC provides a complete range of mutual
fund administration and accounting services to a diverse product base of
domestic and international investment portfolios. PFPC is also one of the
nation's leading providers of transfer and shareholder servicing services
to mutual funds and asset management accounts. As of September 30, 1994,
PFPC rendered accounting and administration services to over 400 mutual
funds and provided transfer agency, dividend disbursing and/or
shareholder servicing services with respect to more than 3.1 million
shareholder accounts.
2. The Trust is a no load, open-end, diversified management investment company
registered under the '40 Act. The Trust was organized as a Delaware business
trust on September 9, 1994 and it has an indefinite duration. As of November
6, 1995, the Trust had $184 million in net assets. The Trust presently
consists of twelve different portfolios which will pay dividends to investors.
The composition of the Portfolios will cover a spectrum of investments ranging
from foreign and U.S. Government-related securities to equity and debt
securities issued by foreign and domestic corporations. Although a Portfolio
of the Trust is permitted to invest its assets in securities issued by
PaineWebber and/or its affiliates, the percentage of that Portfolio's net
assets invested in such securities will never exceed one percent. With the
exception of the PACE Money Market Investments Portfolio, shares in each of
the Portfolios are being initially offered to the public at a net asset value
of $10 per share. Shares in the PACE Money Market Investments Portfolio are
being initially offered to the public at a net asset value of $1.00 per share.
3. Mitchell Hutchins serves as the distributor of Trust shares and PaineWebber
serves as the dealer with respect to shares of the Portfolios.(2) Such shares
are being offered by PaineWebber at no load, to participants in the PACE
Program. The PACE Program is an investment service pursuant to which PMAS
provides participants in the PACE Program with asset allocation
recommendations and related services with respect to the Portfolios based on
an evaluation of an investor's investment objectives and risk tolerances. As
stated above, State Street will serve as the custodian of each Portfolio's
assets and PFPC serves as the Portfolio's transfer and dividend disbursing
agent.
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(2) As distributor or principal underwriter for the Trust, Mitchell Hutchins
will use its best efforts, consistent with its other businesses, to sell shares
of the Portfolios. Pursuant to a separate dealer agreement with Mitchell
Hutchins, PaineWebber will sell Trust shares to investors. However, neither
Mitchell Hutchins nor PaineWebber will receive any compensation for their
services as distributor or dealer of Trust shares. According to the applicants,
Mitchell Hutchins and PaineWebber may be regarded as having an indirect economic
incentive by virtue of the fact that Mitchell Hutchins and PaineWebber will be
paid for the services they provide to the Trust in their respective capacities
as investment manager and administrator of the Trust (Mitchell Hutchins) and as
the provider of asset allocation and related services (PaineWebber, through
PMAS).
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To participate in the PACE Program, each investor must open a brokerage
account with PaineWebber.(3) The minimum initial investment in the PACE
Program is $10,000.
Although PaineWebber anticipates that investors in the Trust will initially
consist of institutions and individuals, it is proposed that prospective
investors will include Plans for which PaineWebber may or may not currently
maintain investment accounts. A majority of these Plans may be IRAs or Keogh
Plans. In addition, it is proposed that Plans for which PaineWebber or an
affiliate serves as a prototype sponsor and/or a nondiscretionary trustee or
custodian be permitted to invest in the Trust.(4)
The applicants represent that the initial purchase of shares in the Trust by
a Plan participating in the PACE Program may give rise to a prohibited
transaction where PaineWebber, or an affiliate thereof, is a party in
interest with respect to the Plan. PaineWebber also acknowledges that a
prohibited transaction could arise upon a subsequent purchase or redemption
of shares in the Trust by a participating Plan inasmuch as the party in
interest relationship between PaineWebber and the Plan may have been
established at that point.
Accordingly, the applicants have requested retroactive exemptive relief from
the Department with respect to the purchase and redemption of shares in the
Trust by a Plan participating in the PACE Program where PaineWebber does not
(a) sponsor the Plan (other than as prototype sponsor) or (b) have
discretionary authority over such Plan's assets.(5) No commissions or fees
will be paid by a Plan with respect to the sale and redemption transactions
or a Plan's exchange of shares in a Portfolio for shares of another
Portfolio. If granted, the proposed exemption will be effective as of August
18, 1995.
4. Overall responsibility for the management and supervision of the Trust and
the Portfolios rests with the Trust's Board of Trustees (the Trustees). The
Trustees will approve all significant agreements involving the Trust and the
persons and companies that provide services to the Trust and the Portfolios.
5. Mitchell Hutchins also serves as the investment manager to each Portfolio.
Under its investment management and administration agreement with the Trust,
Mitchell Hutchins will provide certain investment management and
administrative services to the Trust and the Portfolios that, in part, involve
calculating each Portfolio's net asset value(6) and, with the exception of the
PACE Money Market Investments Portfolio (for which Mitchell Hutchins will
exercise investment discretion), making recommendations to the Board of
Trustees of the Trust regarding (a) the investment policies of each Portfolio
and (b) the selection and retention of the Sub-Advisers who will exercise
investment discretion with respect to the assets of each Portfolio.(7)
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(3) According to the Statement of Additional Information that accompanies the
Prospectus for the PACE Program, shares in the Trust are not certificated for
reasons of economy and convenience. However, PFPC maintains a record of each
investor's ownership of shares. Although Trust shares are transferable and
accord voting rights to their owners, they do not confer pre-emptive rights
(i.e., the privilege of a shareholder to maintain a proportionate share of
ownership of a company by purchasing a proportionate share of any new stock
issues). PaineWebber represents that in the context of an open-end investment
company that continuously issues and redeems shares, a pre-emptive right would
make the normal operations of the Trust impossible.
As for voting rights, PaineWebber states that they are accorded to
recordholders of Trust shares. PaineWebber notes that a recordholder of Trust
shares may determine to seek the submission of proxies by Plan participants and
vote Trust shares accordingly. In the case of individual account plans such as
Section 404(c) Plans, PaineWebber believes that most Plans will pass the vote
through to Directing Participants on a pro-rata basis.
(4) The Department notes that the general standards of fiduciary conduct
promulgated under the Act would apply to the participation in the PACE Program
by an Independent Fiduciary. Section 404 of the Act requires that a fiduciary
discharge his duties respecting a plan solely in the interest of the plan's
participants and beneficiaries and in a prudent fashion. Accordingly, an
Independent Fiduciary must act prudently with respect to the decision to enter
into the PACE Program with PMAS as well as with respect to the negotiation of
services that will be performed thereunder and the compensation that will be
paid to PaineWebber and its affiliates. The Department expects an Independent
Fiduciary, prior to entering into the PACE Program, to understand fully all
aspects of such arrangement following disclosure by PMAS of all relevant
information.
(5) PaineWebber represents that to the extent employee benefit plans that are
maintained by PaineWebber purchase or redeem shares in the Trust, such
transactions will meet the provisions of Prohibited Transaction Exemption (PTE)
77-3 (42 FR 18734, April 8, 1977). PaineWebber further represents that, although
the exemptive relief proposed above would not permit PaineWebber or an affiliate
(while serving as a Plan fiduciary with discretionary authority over the
management of a Plan's assets) to invest those assets over which it exercises
discretionary authority in Trust shares, a purchase or redemption of Trust
shares under such circumstances would be permissible if made in compliance with
the terms and conditions of PTE 77-4 (42 FR 18732, April 8, 1977). The
Department expresses no opinion herein as to whether such transactions will
comply with the terms and conditions of PTEs 77-3 and 77-4.
(6) The net asset value of each Portfolio's shares, except for the PACE Money
Market Investments Portfolio, fluctuates and is determined as of the close of
regular trading on the New York Stock Exchange (the NYSE) (currently, 4:00 p.m.
Eastern Time) each business day. The net asset value of shares in the PACE Money
Market Investments Portfolio is determined as of 12:00 p.m. each business day.
Each Portfolio's net asset value per share is determined by dividing the value
of the securities held by the Portfolio plus any cash or other assets minus all
liabilities by the total number of Portfolio shares outstanding.
(7) Subject to the supervision and direction of the Trustees, Mitchell
Hutchins will provide to the Trust investment management evaluation services
principally by performing initial review on prospective Sub-Advisers for each
Portfolio and thereafter monitoring each Sub-Adviser's performance. In
evaluating prospective Sub-Advisers, Mitchell Hutchins will consider, among
other factors, each Sub-Adviser's level of expertise, consistency of performance
and investment discipline or philosophy. Mitchell Hutchins will have the
responsibility for communicating performance expectations and evaluations to the
Sub-Advisers and ultimately recommending to the Trustees whether a Sub-Adviser's
contract should be continued.
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The Sub-Advisers will provide discretionary advisory services with respect
to the investment of the assets of the respective Portfolios (other than the
PACE Money Market Investments Portfolio) on the basis of their performance
in their respective areas of expertise in asset management. With the
exception of the PACE Money Market Investments Portfolio which will be
advised by Mitchell Hutchins, PaineWebber represents that all of the
Sub-Advisers, will be independent of, and will remain independent of
PaineWebber and/or its affiliates. The Sub-Advisers will be registered
investment advisers under the Advisers Act and maintain their principal
executive offices in various regions of the United States.
The administrative services for which Mitchell Hutchins will be responsible
include the following: (a) supervising all aspects of the operations of the
Trust and each Portfolio (e.g., oversight of transfer agency, custodial,
legal and accounting services; (b) providing the Trust and each Portfolio
with corporate, administrative and clerical personnel as well as maintaining
books and records for the Trust and each Portfolio; (c) arranging for the
periodic preparation, updating, filing and dissemination of the Trust's
Registration Statement, proxy materials, tax returns and required reports to
each Portfolio's shareholders and the SEC, as well as other federal or state
regulatory authorities; (d) providing the Trust and each Portfolio with, and
obtaining for it, office space, equipment and services; (e) providing the
Trustees with economic and investment analyses and reports, and making
available to the Trustees, upon request, any economic, statistical and
investment services. These administrative services do not include any
management services that might be performed by Mitchell Hutchins. As noted
in Representations 17 and 18, Mitchell Hutchins is separately compensated
for management services rendered to the Trust.
6. Through the PACE Program, PMAS is providing a Plan investor with non-binding,
asset allocation recommendations with respect to such investor's investments
in the Portfolios. In order to make these evaluations, PMAS will furnish
copies of an investor questionnaire, designed to elicit information about the
specific investment needs, objectives and expectations of the investor, to an
Independent Fiduciary of a Title I Plan that does not permit
individually-directed investments, to an Independent Fiduciary of an IRA or a
Keogh Plan, or to a Directing Participant of a Section 404(c) Plan. Although
the contents of the questionnaire may vary somewhat depending upon the type of
Plan investing in the PACE Program, for a particular Plan, the same
questionnaire will be given to each participant.
In the case of a Section 404(c) Plan where an Independent Fiduciary has
established an Undisclosed Account with PaineWebber in the name of the Plan,
PMAS will provide investor questionnaires to each Directing Participant
through PaineWebber Investment Executives (who are registered
representatives of PaineWebber), via the Plan's benefits personnel or
independent recordkeeper (the Recordkeeper), or by other means requested by
the Independent Fiduciary. The applicants recognize that Section 404(c)
Plans typically employ a Recordkeeper to assist the Independent Fiduciary
with maintaining Plan-related data which is used to generate benefit status
reports, regulatory compliance reports and participant- and Plan-level
investment performance reports. Therefore, the Undisclosed Account
arrangement is intended to coordinate with the functions traditionally
provided to Section 404(c) Plans by their Recordkeepers.(8)
7. Based upon data obtained from the investor questionnaire, PMAS will evaluate
the investor's risk tolerances and investment objectives. PMAS will then
recommend, in writing, an appropriate allocation of assets among suitable
Portfolios that conforms to these tolerances and objectives.
PaineWebber represents that PMAS will not have any discretionary authority
or control with respect to the allocation of an investor's assets among the
Portfolios. In the case of an IRA or Keogh Plan, PaineWebber represents that
all of PMAS's recommendations and evaluations will be presented to the
Independent Fiduciary and will be implemented only if accepted and acted
upon by such fiduciary.
In the case of a Section 404(c) Plan, PaineWebber represents that Directing
Participants in such Plan will be presented with recommendations and
evaluations that are
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(8) The applicants wish to emphasize that the PACE Program can currently be
provided to participants in Section 404(c) Plans on either an Undisclosed
Account or a disclosed account (the Disclosed Account) basis (i.e., where the
Independent Fiduciary opens a separate PACE Program account with PaineWebber for
each Directing Participant). In this regard, the applicants note that
PaineWebber presently offers the PACE Program on a Disclosed Account arrangement
to IRAs and Keogh Plans. However, for other Section 404(c) Plans such as those
that are covered under the provisions of section 401(k) of the Code, PaineWebber
prefers not to establish Disclosed Accounts for individual participants because
of servicing and other administrative matters typically undertaken by such
Plan's Recordkeepers. The applicants note that from the participant's
perspective, there is no difference in the nature of the services provided under
the PACE Program regardless of whether the participant's investment is held
through a "Disclosed" or "Undisclosed" Account arrangement. The applicants state
that these designations are primarily internal distinctions relating to whether
the participant's name appears in the account set-up and reflects differences in
the applicable sub-accounting functions.
Notwithstanding the above, the Department wishes to point out that,
regardless of the arrangement negotiated with PaineWebber, an Independent
Fiduciary of a Section 404(c) Plan has the responsibility to disseminate all
information it receives to each Directing Participant investing in the PACE
Program.
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tailored to the responses provided by that Directing Participant in his or
her questionnaire. PMAS's recommendations will be disseminated to Directing
Participants in accordance with procedures established for the Plan.
After receipt of PMAS's initial recommendations, which may or may not be
adopted, the Independent Fiduciary or Directing Participant, as applicable,
will select the specific Portfolios. PMAS will continue to recommend to
Independent Fiduciaries or Directing Participants asset allocations among
the selected Portfolios.
8. Aside from the investor questionnaire, in order for a Plan to participate in
the PACE Program, PaineWebber or PMAS will provide an Independent Fiduciary
with a copy of the Trust Prospectus discussing (a) the investment objectives
of the Portfolios comprising the Trust, (b) the policies employed to achieve
these objectives, (c) the corporate affiliation existing between PaineWebber,
PMAS, Mitchell Hutchins and their subsidiaries, and (d) the compensation paid
to such entities by the Trust and information explaining the risks attendant
to investing in the Trust. In addition, upon written or oral request to
PaineWebber, the Independent Fiduciary will be given a Statement of Additional
Information supplementing the Prospectus which describes, in further detail,
the types of securities and other instruments in which the Portfolios may
invest, the investment policies and strategies that the Portfolios may utilize
and certain risks attendant to those investments, policies and strategies.
Further, each Independent Fiduciary will be given a copy of the investment
advisory agreement between PMAS and such Plan relating to participation in the
PACE Program, including copies of the notice of proposed exemption and grant
notice for the exemptive relief provided herein. Upon oral or written request
to the Trust, PaineWebber will also provide an Independent Fiduciary with a
copy of the respective investment advisory agreements between Mitchell
Hutchins and the Sub-Advisers.
In the case of a Section 404(c) Plan, depending on the arrangement
negotiated with the Independent Fiduciary, PaineWebber represents that the
Independent Fiduciary will make available copies of the foregoing documents
to Directing Participants.
In addition, Independent Fiduciaries and, if applicable, Directing
Participants, will receive introductory documentation regarding the PACE
Program in marketing materials and in other communications. Further,
depending upon the arrangement negotiated between PMAS and the Independent
Fiduciary, a PaineWebber Investment Executive will meet with a Directing
Participant, upon oral or written request, to discuss the services offered
under the PACE Program, including the rebalancing feature described in
Representation 12, as well as the operation and objectives of the
Portfolios.(9)
9. If accepted as an investor in the PACE Program, an Independent Fiduciary will
be required by PMAS to acknowledge, in writing, prior to purchasing Trust
shares, that such fiduciary has received copies of the documents referred to
in Representation 8. With respect to a Plan that is covered by Title I of the
Act (e.g., a defined contribution plan), where investment decisions will be
made by a trustee, investment manager or a named fiduciary, PMAS will require
that such Independent Fiduciary acknowledge in writing receipt of such
documents and represent to PaineWebber that such fiduciary is (a) independent
of PaineWebber and its affiliates, (b) capable of making an independent
decision regarding the investment of Plan assets, (c) knowledgeable with
respect to the Plan in administrative matters and funding matters related
thereto, and (d) able to make an informed decision concerning participation in
the PACE Program.
With respect to a Section 404(c) Plan, written acknowledgement of the
receipt of such documents will be provided by the Independent Fiduciary
(i.e., the Plan administrator, trustee, investment manager or named
fiduciary, as the recordholder of Trust shares). Such Independent Fiduciary
will be required to represent, in writing, to PMAS that such fiduciary is
(a) independent of PaineWebber and its affiliates, (b) knowledgeable with
respect to the Plan in administrative matters and funding matters related
thereto, and (c) able to make an informed decision concerning participation
in the PACE Program.
10. After the selection of specific Portfolios by an Independent Fiduciary or a
Directing Participant,(10) PMAS will continue to provide recommendations to
such persons relating to asset allocations among the selected Portfolios.
However, with respect to a Section 404(c) Plan in which at least three
Portfolios may be selected by the Independent Fiduciary, PMAS's initial asset
allocation recommendation to Directing Participants will be limited to fthe
suggested Portfolios offered under the Plan. PMAS anticipates that it may
also work with the Independent Fiduciary of a Section 404(c) Plan to assist
the fiduciary in (a) identifying and
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(9) The Department is expressing no opinion as to whether the information
provided under the PACE Program is sufficient to enable a Directing Participant
to exercise independent control over assets in his or her account as
contemplated by Section 404(c) of the Act.
(10) In the case of a Section 404(c) Plan, PMAS will receive electronically
from the Recordkeeper each participant's investment selections.
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<PAGE>
drafting investment objectives, (b) selecting suitable investment categories
or actual Portfolios to be offered to Directing Participants or (c)
recommending appropriate long-term investment allocations to a Directing
Participant, if this individual receives such advice.
An Independent Fiduciary or a Directing Participant will be permitted to
change his or her investment allocation by specifying the new allocation in
writing or by other means authorized by the Plan (e.g., by use of a kiosk).
Although PaineWebber currently imposes no limitation on the frequency with
which an Independent Fiduciary or a Directing Participant may change his or
her prescribed asset allocation, PaineWebber reserves the right to impose
reasonable limitations.
11. Depending on the arrangement negotiated with PMAS, PaineWebber will provide
each Independent Fiduciary with the following information: (a) Written
confirmations of each purchase and redemption of shares of a Portfolio; (b)
daily telephone quotations of such Plan's account balance; (c) a monthly
statement of account specifying the net asset value of a Plan's assets that
are invested in such account; and (d) a quarterly, written investment
performance monitoring report.
The monthly account statement will include, among other information: (a)
cash flow and transaction activity during the month, including purchase,
sale and exchange activity and dividends paid or reinvested; (b) unrealized
gains or losses on Portfolio shares held; and (c) a summary of total
earnings and capital returns on the Plan's PACE Program Portfolio for the
month and year-to-date. The quarterly investment performance report will
include, among other information, the following: (a) a record of the
performance of the Plan's PACE Program portfolio for the quarter and since
inception showing rates of return relative to comparative market indices
(illustrated in a manner that reflects the effect of any fees for
participation in the PACE Program actually incurred during the period)(11);
(b) an investment outlook summary containing market commentary; and (c) the
Plan's actual PACE Program portfolio with a breakdown, in both dollars and
percentages, of the holdings in each Portfolio. In addition, to the extent
required by the arrangement negotiated with the Independent Fiduciary, the
quarterly performance monitoring report will (a) contain an analysis and an
evaluation of a Plan investor's account to assist the investor to ascertain
whether the investment objectives are being met, and (b) recommend, from
time to time, changes in Portfolio allocations. The quarterly performance
monitoring report is described in the summary of the PACE Program contained
in the Trust Prospectus.
With respect to a Section 404(c) Plan, the quarterly investment performance
report transmitted to the Independent Fiduciary will include the following
aggregate information relative to the Undisclosed Account as well as market
commentary: (a) a record of the performance of the Plan's assets and rates
of return as compared to several appropriate market indices (illustrated in
a manner that reflects the effect of any fees for participation in the PACE
Program actually incurred during the period); and (b) the Plan's actual
investment portfolio with a breakdown of investments made in each Portfolio.
As to each Directing Participant, PMAS will provide information to be
contained in the quarterly performance monitoring report to such
participants.
In addition, on both a quarterly and annual basis, commencing with the first
quarterly report due after this notice of proposed exemption is issued,
PaineWebber will provide, as applicable, an Independent Fiduciary or a
Directing Participant with written disclosures of (a) the total, expressed
in dollars, of each Portfolio's brokerage commissions that are paid to
PaineWebber and its affiliates; (b) the total, expressed in dollars, of each
Portfolio's brokerage commissions that are paid to unrelated brokerage
firms; (c) the average brokerage commissions per share by the Trust to
brokers affiliated with the PaineWebber, expressed as cents per share; and
(d) the average brokerage commissions per share by the Trust to brokers
unrelated to the PaineWebber and its affiliates, expressed as cents per
share for any year in which brokerage commissions are paid to PaineWebber by
the Trust Portfolios in which a Plan's assets are invested.
Further, the Independent Fiduciary or Directing Participant, as applicable,
will have access to a PaineWebber Investment Executive for the discussion of
the quarterly performance monitoring reports, the rebalancing feature
described below in Representation 12 or any questions that may arise.
12. Depending on the arrangement negotiated with PMAS, for any investor who so
directs PMAS, the investor's Trust holdings will be automatically rebalanced
on a periodic basis to maintain the investor's designated allocation among
the Portfolios. PMAS will receive no additional compensation to provide this
service. At both the Independent Fiduciary and Directing Participant levels,
the rebalancing election will be made in writing or in any manner permitted
by the Plan (e.g., in the case of a Section 404(c) Plan, electronic
transmission
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(11) The comparative index is a blended index of the individual Portfolio
indices that are weighted by the allocation percentages corresponding to those
holdings that make up the investor's total investment in the PACE Program.
65
<PAGE>
by the Recordkeeper to PMAS of the Directing Participant's election). The
election will be accompanied by a disclosure that is designed to provide the
Independent Fiduciary and the Directing Participant, as applicable, with an
understanding of the rebalancing feature. Disclosure of the rebalancing
feature is included in the Prospectus for the PACE Program which will be
provided to each Independent Fiduciary and Directing Participant.
It is currently anticipated that screening will be performed quarterly with
respect to the PACE Program accounts for which the investor has elected the
rebalancing service and that rebalancing will be performed for each such
account where any Portfolio allocation deviates from the allocation
prescribed by the investor by the agreed-upon uniform threshold.(12) The
threshold for triggering rebalancing is a percentage (presently, 2 1/2
percent) that has been established by PaineWebber and is applied uniformly
to all accounts subject to rebalancing. If PaineWebber were, in the future,
to determine that this uniform threshold should be changed, PMAS would
notify all investors (including Independent Fiduciaries and Directing
Participants) who had elected the rebalancing feature. Then, in order to
continue to provide this service, PMAS would need to obtain the consent of
each such investor.
The applicants note that rebalancing is a feature that an investor chooses
to apply indefinitely until the investor notifies PaineWebber that it wishes
to have this service discontinued. After rebalancing has been discontinued,
an investor may reactivate the rebalancing service by notifying PaineWebber
in writing.
13. PaineWebber notes that not all of the services described above will be
provided to every Plan. The services that will be provided will depend on
what is decided upon by the Independent Fiduciary. Assuming the Independent
Fiduciary requests a reduction in the level of services, there will be no
corresponding reduction in the fee that the fiduciary pays PMAS. This is due
to the bundled nature of the services provided in the PACE Program. For
example, if the Independent Fiduciary were to limit the number of Portfolios
available as investment options for its Plan participants, this might be
deemed a reduction in the services available under the PACE Program that
would not result in any reduction in the applicable Program fee. Similarly,
under the PACE Program, an Independent Fiduciary of a Section 404(c) Plan may
decide for its own reasons not to make the automatic rebalancing service
available to Directing Participants. Under such circumstances, PMAS will not
reduce its fees to reflect the absence of the provision of rebalancing
services to the Plan. Further, under the particular arrangement which it has
negotiated with PMAS, the Independent Fiduciary may or may not request
PaineWebber Investment Executives to make presentations or be available to
meet with Directing Participants.
Thus, an Independent Fiduciary may choose all, some or none of the PACE
Program's optional services. If an Independent Fiduciary selects all of
these services, the Plan will incur no greater an annual fee than had that
Independent Fiduciary selected some or none of these services. The absence
of a reduction in fees in the event not all services are requested is an
issue that should be considered by the Independent Fiduciary.(13)
Nonetheless, the Applicants represent that the reduction in the types of
services provided will not cause the fees paid to PaineWebber by a Plan
under the PACE Program to violate section 408(b)(2) of the Act.
14. Plans wishing to redeem their Trust shares may communicate their requests in
writing or by telephone to PMAS. Redemption requests received in proper form
prior to the close of trading on the NYSE will be effected at the net asset
value per share determined on that day. Redemption requests received after
the close of regular trading on the NYSE will be effected at the net asset
value at the close of business of the next day, except on weekends or
holidays when the NYSE is closed. A Portfolio will be required to transmit
redemption proceeds for credit to an investor's account with PaineWebber
within 5 business days after receipt of the redemption
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(12) Currently, with regard to investors who have elected the rebalancing
feature, rebalancing is effected by an automated, mechanical system that, as to
each account: (a) Calculates the current allocation for each Portfolio based on
the quarter-end net asset value; (b) compares the current allocation for each
Portfolio with the allocation prescribed by the investor; (c) identifies for
rebalancing all accounts with one or more Portfolios whose current allocation
deviates by the agreed-upon threshold from the allocation prescribed by the
investor; and (d) for each account which has been identified for rebalancing
pursuant to (a)-(c), (1) calculates the dollar difference between the current
allocation and the allocation prescribed by the investor, (2) reduces each
Portfolio whose current allocation exceeds the allocation prescribed by the
investor by an amount equal to the dollar difference between the two
allocations, and (3) increases each Portfolio whose current allocation is less
than the allocation prescribed by the investor by an amount equal to the dollar
difference between the two allocations. This rebalancing is accomplished by
automatically exchanging, in the order of the Portfolio's respective CUSIP
numbers, a dollar-equivalent number of shares of each Portfolio to be reduced
for the corresponding number of shares of a Portfolio to be increased until the
current allocation is equal to the allocation prescribed by the investor.
Valuation of the Portfolios is done as of the close of regular trading on the
NYSE each business day.
(13) In this regard, the Department emphasizes that it expects the Independent
Fiduciary to consider prudently the relationship of the fees to be paid by the
Plan to the level of services to be provided by PaineWebber. In response to the
Department's concern over this matter, PaineWebber represents that it will amend
the Trust Prospectus to include the following statement: "Investors who are
fiduciaries or otherwise, in the process of making investment decisions with
respect to Plans, should consider, in a prudent manner, the relationship of the
fees to be paid by the Plan along with the level of services provided by
PaineWebber."
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request.(14) In the case of an IRA or Keogh Plan investor, PaineWebber will
not hold redemption proceeds as free credit balances and will, in the absence
of receiving investment instructions, place all such assets in a money market
fund (other than the PACE Money Market Investments Portfolio) that may be
affiliated with PaineWebber.(15) In the case of Plans that are covered by
Title I of the Act, the redemption proceeds will be invested by PaineWebber
in accordance with the investment directions of the Independent Fiduciary
responsible for the management of the Plan's assets. With respect to a
Section 404(c) Plan, the treatment of such investment will depend upon the
arrangement for participant investment instructions selected by the Plan
sponsor. In the event that the Independent Fiduciary does not give other
investment directions, such assets will be swept into a no-load money market
fund that may be affiliated with PaineWebber. No brokerage charge or
commission is charged to the participant for this service.
Due to the high costs of maintaining small PACE Program (Plan) accounts, the
Trusts may redeem all Trust shares held in a PACE Program account in which
the Trust shares have a current value of $7,500 or less after the investor
has been given at least thirty days in which to purchase additional Trust
shares to increase the value of the account to more than the $7,500 amount.
Proceeds of an involuntary redemption will be deposited in the investor's
brokerage account unless PaineWebber is otherwise instructed.(16)
15. Through the PACE Program, shares of a Portfolio may be exchanged by an
investor for shares of another Portfolio at their respective net asset values
and without the payment of an exchange fee. However, Portfolio shares are not
exchangeable with shares of other PaineWebber group of funds or portfolio
families.
With respect to brokerage transactions that are entered into under the PACE
Program for a Portfolio, such transactions may be executed through
PaineWebber and other affiliated broker-dealers, if in the judgment of
Mitchell Hutchins or the Sub-Adviser, as applicable, the use of such
broker-dealer is likely to result in price and execution at least as
favorable, and at a commission charge comparable to those of other qualified
broker-dealers.
16. Each Portfolio will bear its own expenses, which generally include all costs
that are not specifically borne by PaineWebber, Mitchell Hutchins or the
Sub-Advisers. Included among a Portfolio's expenses will be costs incurred in
connection with the Portfolio's organization, investment management and
administration fees, fees for necessary professional and brokerage services,
fees for any pricing service, the costs of regulatory compliance and costs
associated with maintaining the Trust's legal existence and shareholder
relations. No Portfolio, however, will impose sales charges on purchases,
reinvested dividends, deferred sales charges, redemption fees; nor will any
Portfolio incur distribution expenses. Investment management fees payable to
Mitchell Hutchins and the Sub-Advisers will be disclosed in the Trust
Prospectus.
17. As to each Plan, the total fees that are paid to PMAS and its affiliates
will constitute no more than reasonable compensation.(17) In this regard, for
its services under the PACE Program, PMAS charges an investor a quarterly fee
for asset allocation and related services. This "outside fee", will not be
more than 1.50 percent on an annual basis of the maximum annual value of the
assets in the investor's PACE Program account. Such fee may be paid either
from the assets in the account or by separate check. A smaller outside fee
may be charged depending on such factors as the size of the PACE Program
account (e.g., PACE Program accounts in excess of $100,000), the number of
Plan participants or the number of PACE Program accounts. The outside fee is
charged directly to an investor and is neither affected by the allocation of
assets among the Portfolios nor by whether an investor follows or ignores
PMAS's advice.(18) In the case of Plans, the outside fee may be paid by the
Plan or the Plan sponsor or, in the case of IRAs only, the fee may be paid by
the IRA owner directly.
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(14) PaineWebber will provide clearance (on a fully disclosed basis),
settlement and other back office services to other broker- dealers.
(15) The applicants are not requesting, nor is the Department proposing,
exemptive relief with respect to the investment, by PaineWebber, of redemption
proceeds in an affiliated money market fund and where the Plan investor has not
given investment instructions. The applicants represent that to the extent
PaineWebber is considered a fiduciary, such investments will comply with the
terms and conditions of PTE 77-4. However, the Department expresses no opinion
herein on whether such transactions are covered by this class exemption.
(16) The thirty day limit does not restrict a Plan's ability to redeem its
interest in the Trust. The thirty day notice period is provided to give a Plan
an opportunity to increase the value of the assets in its Plan account with
PaineWebber to an amount in excess of $7,500. If desired, the Plan may still
follow the redemption guidelines described above.
(17) The applicants represent that PMAS and its affiliates will not receive
12b-1 Fees in connection with the transactions.
(18) PaineWebber represents that the outside fee will not be imposed on the
accounts of the PaineWebber Group and its subsidiaries, including PaineWebber,
PMAS, Mitchell Hutchins or their subsidiaries, accounts of their immediate
families and IRAs and certain employee pension benefit plans for these persons.
The applicants state that this fee will be waived to encourage employees to
invest in PaineWebber, although PaineWebber reserves the right to impose such
fees. However, with respect to IRAs or Plans maintained by PaineWebber or its
affiliates for their employees, the applicants assert that such waiver would be
required by PTE 77-3.
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For Plan investors, the outside fee will be payable in full within five
business days (or such other period as may be required under applicable law
or regulation) after the trade date for the initial investment in the
Portfolios and will be based on the value of assets in the PACE Program on
the trade date of the initial investment. The initial fee payment will cover
the period from the initial investment trade date through the last calendar
day of the subsequent calendar quarter, and the fee will be pro-rated
accordingly. Thereafter, the quarterly fee will cover the period from the
first calendar day through the last calendar day of the current calendar
quarter. The quarterly fee will be based on the value of assets in the PACE
Program measured as of the last calendar day of the previous quarter, and
will be payable on the fifth business day of the current quarter.
If additional funds are invested in the Portfolios during any quarter, the
applicable fee, pro-rated for the number of calendar days then remaining in
the quarter and covering the amount of such additional funds, shall be
charged and be payable five business days later. In the case of redemptions
during a quarter, the fee shall be reduced accordingly, pro-rated for the
number of calendar days then remaining in the quarter. If the net fee
increase or decrease to an investor for additional purchases and/or
redemptions during any one quarter is less than $20, the fee increase or
decrease will be waived.
In addition, for investment management and administrative services provided
to the Trust, Mitchell Hutchins will be paid, from each Portfolio, a fee
which is computed daily and paid monthly at an annual rate ranging from .35
percent to 1.10 percent, of which the management fee component ranges from
.15 percent to .90 percent on an annual basis, of each Portfolio's average
daily net assets depending upon the Portfolio's objective.(19) From these
management fees, Mitchell Hutchins will compensate the applicable Sub-
Adviser. This "inside fee," which is the difference between the individual
Portfolio's total management fee and the fee paid by Mitchell Hutchins to
the Sub-Adviser, will vary from the annual rate of .15 percent to .40
percent depending on the Portfolio. With the exception of the PACE Money
Market Investments Portfolio from which Mitchell Hutchins is paid a
management fee of 15 basis points, Mitchell Hutchins is retaining 20 basis
points as a management fee from each remaining single Portfolio on
investment assets attributable to the Plans. Pursuant to Transfer Agency and
Service Agreements with the Trust, PFPC and State Street will be paid annual
fees of $350,000 and $650,000, respectively, for transfer agent and
custodial services.
18. The management fees that are paid at the Portfolio level to Mitchell
Hutchins and the Sub-Advisers are set forth in the following table. For
purposes of the table, Mitchell Hutchins and a Sub-Adviser are referred to as
"MH" and "SA," respectively. As noted in the table, the sum of the management
fees retained by Mitchell Hutchins and the Sub-Adviser with respect to a
Portfolio will equal the total management fee paid by that Portfolio.
<TABLE>
<CAPTION>
MH MANAGEMENT SA RETAINED FEE MH RETAINED FEE
PORTFOLIO FEE (PERCENT) (PERCENT) (PERCENT)
- ------------------------------------------------------------ --------------- --------------- ---------------
<S> <C> <C> <C>
PACE Money Market Investments............................. .15 .00 .15
PACE Government Securities Fixed Income Investments....... .50 .25 .25
PACE Intermediate Fixed Income Investments................ .40 .20 .20
PACE Strategic Fixed Income Investments................... .50 .25 .25
PACE Municipal Fixed Income Investments................... .40 .20 .20
PACE Global Fixed Income Investments...................... .60 .35 .25
PACE Large Company Value Equity Investments............... .60 .30 .30
PACE Large Company Growth Equity Investments.............. .60 .30 .30
PACE Small/Medium Company Value Equity Investments........ .60 .30 .30
PACE Small/Medium Company Growth Equity Investments....... .60 .30 .30
PACE International Equity Investments..................... .70 .40 .30
PACE International Emerging Markets Investments........... .90 .50 .40
</TABLE>
PMAS is offsetting, quarterly, against the outside fee such amounts as is
necessary to ensure that Mitchell Hutchins retains no more than 20 basis
points as a management fee from any Portfolio on investment assets
attributable to any Plan.(20)
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(19) The fees payable to Mitchell Hutchins under its investment management and
administration agreement with the Trust are comprised of two components. One
component is for administrative services provided to each Portfolio at the
annual rate of .20 percent of each Portfolio's net assets. The second component
is for investment management and related services provided to each Portfolio.
The annualized fee range here is from .15 percent to .90 percent of the
Portfolio's average daily net assets.
(20) PaineWebber asserts that it chose 20 basis points as the maximum net fee
retained for management services rendered to the Portfolios because this amount
represents the lowest percentage management fee charged by PaineWebber among the
Portfolios (excluding the PACE Money Market Investments Portfolio for which a
fee of 15 basis points will be charged).
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The administrative services fee payable to Mitchell Hutchins is not being
offset against the outside fee. Instead, that fee is being retained by
Mitchell Hutchins.
19. The following example demonstrates the operation of the fee offset
mechanism, the calculation of the net inside fee, and the calculation of the
total of a Plan investor's net outside fee and share of the investment
management fees paid by the Portfolios in a given calendar quarter or year:
Assume that as of September 30, 1995, the net asset value of Trust Portfolio
shares held by a Plan investor was $1,000. Investment assets attributable to
the Plan were distributed among five Trust Portfolios: (1) PACE Money Market
Investments in which the Plan made a $50 investment and from which Mitchell
Hutchins would retain an inside fee of .15 percent; (2) PACE Intermediate
Fixed Income Investments in which the Plan made a $200 investment and from
which Mitchell Hutchins would retain an inside fee of .20 percent; (3) PACE
Large Company Value Equity Investments in which the Plan made a $250
investment and Mitchell Hutchins would retain an inside fee of .30 percent;
(4) PACE Small/ Medium Company Growth Equity Investments in which the Plan
made a $250 investment and Mitchell Hutchins would be entitled to receive an
inside fee of .30 percent; and (5) PACE International Equity Investments in
which the Plan made a $250 investment and Mitchell Hutchins would be
entitled to receive an inside fee of .30 percent.
Assume that the Plan investor pays an outside fee of 1.50 percent so that
the total outside fee for the calendar quarter October 1 through December
31, prior to the fee offset, would be as follows:
<TABLE>
<CAPTION>
MAXIMUM OUTSIDE OUTSIDE
PORTFOLIO AMOUNT INVESTED QUARTERLY FEE QUARTERLY FEE
- ------------------------------------------------------------ --------------- ---------------- ---------------
<S> <C> <C> <C>
PACE Money Market Investments........................... $ 50 1.50% (.25) $ 0.1875
PACE Intermediate Fixed Income Investments.............. 200 1.50% (.25) .7500
PACE Large Company Value Equity Investments............. 250 1.50% (.25) .9375
PACE Small/Medium Company Growth Equity Investments..... 250 1.50% (.25) .9375
PACE International Equity Investments................... 250 1.50% (.25) .9375
----- ---------------- -------
Total Outside Fee Per Quarter........................... 1,000 -- 3.7500
</TABLE>
Under the proposed fee offset, the outside fee charged to the Plan must be
reduced by a Reduction Factor to ensure that Mitchell Hutchins retains an
inside fee of no more than 20 basis points from each of the Portfolios on
investment assets attributable to the Plan. The following table shows the
Reduction Factor as applied to each of the Portfolios comprising the Trust:
<TABLE>
<CAPTION>
REDUCTION
MH RETAINED FEE MAXIMUM MH FEE FACTOR
PORTFOLIO (PERCENT) (PERCENT) (PERCENT)
- ------------------------------------------------------------ --------------- --------------- ---------------
<S> <C> <C> <C>
PACE Money Market Investments........................... .15 .15 .00
PACE Government Securities Fixed Income Investments..... .25 .20 .05
PACE Intermediate Fixed Income Investments.............. .20 .20 .00
PACE Strategic Fixed Income Investments................. .25 .20 .05
PACE Municipal Fixed Income Investments................. .20 .20 .00
PACE Global Fixed Income Investments.................... .25 .20 .05
PACE Large Company Value Equity Investments............. .30 .20 .10
PACE Large Company Growth Equity Investments............ .30 .20 .10
PACE Small/Medium Company Value Equity Investments...... .30 .20 .10
PACE Small/Medium Company Growth Equity Investments..... .30 .20 .10
PACE International Equity Investments................... .30 .20 .10
PACE International Emerging Markets Investments......... .40 .20 .20
</TABLE>
Under the proposed fee offset, a Reduction Factor of .10 percent is applied
against the quarterly outside fee with respect to the value of Plan assets
that have been invested in PACE Large Company Value Equity Investments, PACE
Small/Medium Company Growth Equity Investments and PACE International Equity
Investments. As noted above, the PACE Money Market Investments Portfolio and
the PACE Intermediate Fixed Income Investments Portfolio do not require the
application of a Reduction Factor because the management fee retained by
Mitchell Hutchins for managing these Portfolios does not exceed 20 basis
points. Therefore, the quarterly offset for the plan investor is computed as
follows:
(.25)[($250).10% + ($250).10% + ($250).10%] = $0.1875 or $.19.
In the foregoing example, if the Plan investor elects to receive an invoice
directly, the Plan investor would be mailed a statement for its PACE Program
account on or about October 15, 1995. This statement would show the outside
fee to be charged for the calendar quarter October 1 through December 31, as
adjusted by subtracting the quarterly offset from the quarterly outside fee
as determined above. The net quarterly outside fee that would be paid to
PMAS would be determined as follows:
$3.75 - $.19 = $3.56.
The Plan investor that elects to receive an invoice directly would be asked
to pay the outside fee for that quarter within 30 days of the date on which
the statement was mailed (e.g.,
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<PAGE>
November 15, 1995). If the outside fee were not paid by that date, PMAS
would debit the account of the Plan investor (as with other investors) for
the amount of the outside fee (pursuant to the authorization contained in
the PACE Program Investment Advisory Agreement, and as described in the PACE
Program Description appended to the Prospectus).(21) A Plan investor that
elects to have the outside fee debited from its account would receive, in
November, a statement as of October 31 reflecting the outside fee and the
quarterly offset therefrom.
Assuming the Plan investor's investment in and allocation among the
Portfolios remains constant throughout the quarter, (a) the Plan investor's
fees for the quarter for asset allocation and related services provided by
PMAS (net outside fee) and (b) the fees paid by the Portfolios for
investment management services provided by Mitchell Hutchins (inside fee)
would be as follows:
$3.56 (net outside fee)+(.25) [($50+$200+$250+$250+$250).20%]
(administrative services fee)+(.25)
[($50).15% + ($200).20% + ($250 + $250 + $250).30%] (inside fee) =
$4.74.
Assuming the Plan investor's investment in and allocation among the
Portfolios remains constant throughout the year, the total net outside fee
and inside fee borne by the Plan investor for the year would be as follows:
4 (($4.74) = $18.96 or 1.89% per $1,000 invested.
20. PaineWebber notes that a potential conflict may exist by reason of the
variance in retained inside fees between the different Portfolios. For
example, Mitchell Hutchins will retain a lower inside fee with respect to
assets invested in the PACE Money Market Investments Portfolio than all other
Portfolios. PaineWebber recognizes that this factor could result in the
recommendation of a higher fee-generating Portfolio to an investing Plan.
Nonetheless, PMAS will be subject to and intends to comply fully with the
standards of fiduciary duty that require that it act solely in the best
interest of the Plan when making investment recommendations.
21. The books of the Trust will be audited annually by independent, certified
public accountants selected by the Trustees and approved by the investors.
All investors will receive copies of an audited financial report no later
than sixty days after the close of each Trust fiscal year. All Trust
financial statements will be prepared in accordance with generally accepted
accounting principles and relevant provisions of the federal securities laws.
The books and financial records of the Trust will be open for inspection by
any investor, including the Department, the Service and SEC, at all times
during regular business hours.
22. In summary, it is represented that the transactions will satisfy the
statutory criteria for an exemption under section 408(a) of the Act because:
(a) The investment of a Plan's assets in the PACE Program will be made and
approved by a Plan fiduciary or participant that is independent of
PaineWebber and its affiliates such that the Independent Fiduciary or
Directing Participant will maintain complete discretion with respect to
participating in the PACE Program.
(b) An Independent Fiduciary or Directing Participant will have full
discretion to redeem his or her shares in the Trust.
(c) No Plan will pay a fee or commission by reason of the acquisition or
redemption of shares in the Trust and PMAS nor will its affiliates
receive 12b-1 Fees in connection with the transactions.
(d) Prior to making an investment in the PACE Program, each Independent
Fiduciary or Directing Participant will receive offering materials and
disclosures from PMAS which disclose all material facts concerning the
purpose, fees, structure, operation, risks and participation in the PACE
Program.
(e) PMAS will provide written documentation to an Independent Fiduciary or
Directing Participant of its recommendations or evaluations based upon
objective criteria.
(f) With the exception of Mitchell Hutchins which will manage the PACE Money
Market Investments Portfolio, any Sub-Adviser appointed to exercise
investment discretion over a Portfolio will always be independent of
PaineWebber and its affiliates.
(g) The quarterly investment advisory fee that is paid by a Plan to PMAS for
investment advisory services rendered to such Plan will be offset by such
amount as is necessary to assure that Mitchell Hutchins retains 20 basis
points from any Portfolio (with the exception of the PACE Money Market
Investments Portfolio) on investment assets attributable to the Plan
investor. However, the quarterly fee paid to Mitchell Hutchins
- --------------------------
(21) PaineWebber explains that the foregoing example illustrates the fact that
Plan investors will get the benefit of the fee offset contemporaneously upon the
payment of the outside fee. Because the inside fee is paid monthly and the fee
offset is computed quarterly, the applicants also explain that PMAS does not
receive the benefit of a "float" as a result of such calculations because the
fee offset will always be realized no later than the time that the outside fee
is paid. Since the inside fee is paid at the end of each calendar month, the
applicants further explain that Plan investors will realize the full benefit of
the offset before the time that the inside fee is paid for the second and third
months of the calendar quarter.
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<PAGE>
for administrative services will be retained by Mitchell Hutchins and
will not be offset against the outside fee.
(h) Each participating Plan will receive copies of the Trust's semi-annual
and annual report which will include financial statements for the Trust
that have been prepared by independent, certified public accountants and
investment management fees paid by each Portfolio.
(i) On a quarterly and annual basis, PaineWebber will provide written
disclosures to an Independent Fiduciary or, if applicable, Directing
Participant, with respect to (1) the total, expressed in dollars, of each
Portfolio's brokerage commissions that are paid to PaineWebber and its
affiliates; (2) the total, expressed in dollars, of each Portfolio's
brokerage commissions that are paid to unrelated brokerage firms; (3) the
average brokerage commissions per share by the Trust to brokers
affiliated with the PaineWebber, expressed as cents per share; and (4)
the average brokerage commissions per share by the Trust to brokers
unrelated to the PaineWebber and its affiliates, expressed as cents per
share for any year in which brokerage commissions are paid to PaineWebber
by the Trust Portfolios in which a Plan's assets are invested.
For Further Information Contact: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
40000-40004 FEDERAL REGISTER VOL. 61, NO. 148 WEDNESDAY, JULY 31, 1996
[PROHIBITED TRANSACTION EXEMPTION 96-59; EXEMPTION
APPLICATION NO. D-09818, ET AL.] NOTICES
GRANT OF INDIVIDUAL EXEMPTIONS; PAINEWEBBER INCORPORATED
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: GRANT OF INDIVIDUAL EXEMPTIONS.
- --------------------------------------------------------------------------------
SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) from certain of the prohibited transaction restrictions
of the Employee Retirement Income Security Act of 1974 (the Act) and/or the
Internal Revenue Code of 1986 (the Code).
Notices were published in the FEDERAL REGISTER of the pendency before the
Department of proposals to grant such exemptions. The notices set forth a
summary of facts and representations contained in each application for exemption
and referred interested persons to the respective applications for a complete
statement of the facts and representations. The applications have been available
for public inspection at the Department in Washington, D.C. The notices also
invited interested persons to submit comments on the requested exemptions to the
Department. In addition the notices stated that any interested person might
submit a written request that a public hearing be held (where appropriate). The
applicants have represented that they have complied with the requirements of the
notification to interested persons. No public comments and no requests for a
hearing, unless otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions are being
granted solely by the Department because, effective December 31, 1978, section
102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978)
transferred the authority of the Secretary of the Treasury to issue exemptions
of the type proposed to the Secretary of Labor.
STATUTORY FINDINGS
In accordance with section 408(a) of the Act and/or section 4975(c)(2) of
the Code and the procedures set forth in 29 CFR Part 2570, Subpart B (55 FR
32836, 32847, August 10, 1990) and based upon the entire record, the Department
makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants and
beneficiaries; and
(c) They are protective of the rights of the participants and beneficiaries of
the plans.
PAINEWEBBER INCORPORATED (PAINEWEBBER), LOCATED IN NEW YORK, NY [Prohibited
Transaction Exemption 96-59; Exemption Application No. D-09818]
EXEMPTION
Section I. Covered Transactions
The restrictions of section 406(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply, effective August 18,
1995, to the purchase or redemption of shares by an employee benefit plan, a
plan described in section 403(b) of the Code (the Section 403(b) Plan), an
individual retirement account (the IRA) or a retirement plan for a self-employed
individual (the Keogh Plan) (collectively referred to herein as the Plans) in
the PaineWebber Managed Accounts Services Portfolio Trust (the Trust)
established in connection with such Plans' participation in the PaineWebber PACE
Program (the PACE Program).
In addition, the restrictions of section 406(b) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason of section
4975(c)(1)(E) and (F) of the Code, shall not apply, effective August 18, 1995,
to (a) the provision, by PaineWebber Managed Accounts Services (PMAS), a
division of PaineWebber, of asset
71
<PAGE>
allocation and related services to an independent fiduciary of a Plan (the
Independent Fiduciary) or to a directing participant (the Directing Participant)
in a Plan that is covered under and permits participant selection as
contemplated by the provisions of section 404(c) of the Act (the Section 404(c)
Plan), which may result in the selection by the Independent Fiduciary or the
Directing Participant of portfolios of the Trust (the Portfolios) in the PACE
Program for the investment of Plan assets; and (b) the provision of investment
management services by Mitchell Hutchins Asset Management, Inc. (Mitchell
Hutchins) to the PACE Money Market Investments Portfolio of the Trust.
This exemption is subject to the conditions set forth below in Section II.
Section II. General Conditions
(a) The participation of each Plan in the PACE Program is approved by an
Independent Fiduciary or, if applicable, Directing Participant.
(b) As to each Plan, the total fees paid to PMAS and its affiliates constitute
no more than reasonable compensation and do not include the receipt of fees
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the '40 Act)
by PMAS and its affiliates in connection with the transactions.
(c) No Plan pays a fee or commission by reason of the acquisition or redemption
of shares in the Trust.
(d) The terms of each purchase or redemption of Trust shares remain at least as
favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(e) PMAS provides written documentation to an Independent Fiduciary or a
Directing Participant of its recommendations or evaluations based upon
objective criteria.
(f) Any recommendation or evaluation made by PMAS to an Independent Fiduciary or
Directing Participant is implemented only at the express direction of such
fiduciary or participant.
(g) PMAS provides investment advice in writing to an Independent Fiduciary or
Directing Participant with respect to all Portfolios made available under the
Plan.
(h) With the exception of the PACE Money Market Investments Portfolio, any
sub-adviser (the Sub-Adviser) appointed by Mitchell Hutchins to exercise
investment discretion with respect to a Portfolio is independent of
PaineWebber and its affiliates.
(i) The quarterly fee that is paid by a Plan to PMAS for asset allocation and
related services rendered to such Plan under the PACE Program (i.e., the
outside fee) is offset by such amount as is necessary to assure that
Mitchell Hutchins retains 20 basis points as a management fee from any
Portfolio (with the exception of the PACE Money Market Investments Portfolio
from which Mitchell Hutchins retains an investment management fee of 15
basis points) containing investments attributable to the Plan investor.
However, the quarterly fee of 20 basis points that is paid to Mitchell
Hutchins for administrative services is retained by Mitchell Hutchins and is
not offset against the outside fee.
(j) With respect to its participation in the PACE Program prior to purchasing
Trust shares,
(1) Each Independent Fiduciary receives the following written or oral
disclosures from PaineWebber:
(A) A copy of the prospectus (the Prospectus) for the Trust discussing
the investment objectives of the Portfolios comprising the Trust; the
policies employed to achieve these objectives; the corporate
affiliation existing between PaineWebber, PMAS, Mitchell Hutchins and
their affiliates; the compensation paid to such entities; any
additional information explaining the risks of investing in the
Trust; and sufficient and understandable disclosures relating to
rebalancing of investor accounts.
(B) Upon written or oral request to PaineWebber, a Statement of
Additional Information supplementing the Prospectus, which describes
the types of securities and other instruments in which the Portfolios
may invest, the investment policies and strategies that the
Portfolios may utilize and certain risks attendant to those
investments, policies and strategies.
(C) An investor questionnaire.
(D) A written analysis of PMAS's asset allocation recommendation of
specific Portfolios.
(E) A copy of the agreement between PMAS and such Plan relating to
participation in the PACE Program.
(F) Upon written request to Mitchell Hutchins, a copy of the respective
investment advisory agreements between Mitchell Hutchins and the Sub-
Advisers.
(G) Copies of the proposed exemption and grant notice describing the
exemptive relief provided herein.
(2) In the case of a Section 404(c) Plan, the Independent Fiduciary will--
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<PAGE>
(A) Make copies of the foregoing documents available to Directing
Participants.
(B) Allow Directing Participants to interact with PaineWebber Investment
Executives and receive information relative to the services offered
under the PACE Program, including the rebalancing feature, and the
operation and objectives of the Portfolios.
(3) If accepted as an investor in the PACE Program, an Independent Fiduciary
of a Section 403(b) Plan, an IRA or a Keogh Plan, is required to
acknowledge, in writing to PMAS, prior to purchasing Trust shares that
such fiduciary has received copies of the documents described in
paragraph (j)(1) of this Section II.
(4) With respect to a Section 404(c) Plan, written acknowledgment of the
receipt of such documents is provided by the Independent Fiduciary (i.e.,
the Plan administrator, trustee, investment manager or named fiduciary).
Such Independent Fiduciary will be required to represent in writing to
PMAS that such fiduciary is--
(A) Independent of PaineWebber and its affiliates;
(B) Knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and;
(C) Able to make an informed decision concerning participation in the
PACE Program.
(5) With respect to a Plan that is covered under Title I of the Act, where
investment decisions are made by a trustee, investment manager or a named
fiduciary, such Independent Fiduciary is required to acknowledge, in
writing, receipt of such documents and represent to PMAS that such
fiduciary is
(A) Independent of PMAS and its affiliates;
(B) Capable of making an independent decision regarding the investment
of Plan assets;
(C) Knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto; and
(D) Able to make an informed decision concerning participation in the
PACE Program.
(k) As applicable, subsequent to its participation in the PACE Program, each
Independent Fiduciary receives the following written or oral disclosures with
respect to its ongoing participation in the PACE Program:
(1) Written confirmations of each purchase or redemption transaction by the
Plan with respect to a Portfolio.
(2) Telephone access to quotations from PaineWebber of such Plan's account
balance.
(3) A monthly statement of account from PaineWebber specifying the net asset
value of the Plan's investment in such account. Such statement is also
anticipated to include cash flow and transaction activity during the
month, unrealized gains or losses on Portfolio shares held; and a summary
of total earnings and capital returns on the Plan's PACE Portfolio for
the month and year-to-date.
(4) The Trust's semi-annual and annual report which will include financial
statements for the Trust and investment management fees paid by each
Portfolio.
(5) A written quarterly monitoring report that includes (a) a record of the
Plan's PACE Program portfolio for the quarter and since inception,
showing the rates of return relative to comparative market indices
(illustrated in a manner that reflects the effect of any fees for
participation in the PACE Program actually incurred during the period);
(b) an investment outlook summary containing market commentary; and (c)
the Plan's actual PACE Program portfolio with a breakdown, in both
dollars and percentages, of the holdings in each portfolio. The quarterly
monitoring report will also contain an analysis and an evaluation of a
Plan investor's account to assist the investor to ascertain whether the
Plan's investment objectives have been met and recommending, if required,
changes in Portfolio allocations.
(6) A statement, furnished at least quarterly or annually, specifying--
(A) The total, expressed in dollars, of each Portfolio's brokerage
commissions that are paid to PaineWebber and its affiliates;
(B) The total, expressed in dollars, of each Portfolio's brokerage
commissions that are paid to unrelated brokerage firms;
(C) The average brokerage commissions per share that are paid by the
Trust to brokers affiliated with PaineWebber, expressed as cents per
share; and
(D) The average brokerage commissions per share that are paid by the
Trust to
73
<PAGE>
brokers unrelated to PaineWebber and its affiliates, expressed as
cents per share for any year in which brokerage commissions are paid
to PaineWebber by the Trust Portfolios in which a Plan's assets are
invested.
(7) Periodic meetings with a PaineWebber Investment Executive (or the
appropriate PaineWebber representative) by Independent Fiduciaries to
discuss the quarterly monitoring report or any other questions that may
arise.
(1) In the case of a Section 404(c) Plan where the Independent Fiduciary has
established an omnibus account in the name of the Plan (the Undisclosed
Account) with PaineWebber, depending upon the arrangement negotiated by the
Independent Fiduciary with PMAS, certain of the information noted above in
subparagraphs (k)(1) through (k)(7) of this Section II may be provided by
PaineWebber to the Directing Participants or to the Independent Fiduciary for
dissemination to the Directing Participants.
(m) If previously authorized in writing by the Independent Fiduciary, the Plan
investor's account is automatically rebalanced on a periodic basis to the
asset allocation previously prescribed by the Plan or participant, as
applicable, if the quarterly screening reveals that one or more Portfolio
allocations deviates from the allocation prescribed by the investor by the
agreed-upon formula threshold.
(n) The books and records of the Trust are audited annually by independent,
certified public accountants and all investors are sent copies of an audited
financial report no later than 60 days after the close of each Trust fiscal
year.
(o) PaineWebber maintains, for a period of six years, the records necessary to
enable the persons described in paragraph (p) of this Section II to determine
whether the conditions of this exemption have been met, except that--
(1) A prohibited transaction will not be considered to have occurred if, due
to circumstances beyond the control of PaineWebber and/or its affiliates,
the records are lost or destroyed prior to the end of the six year
period; and
(2) No party in interest other than PaineWebber shall be subject to the
civil penalty that may be assessed under section 502(i) of the Act, or to
the taxes imposed by section 4975 (a) and (b) of the Code, if the records
are not maintained, or are not available for examination as required by
paragraph (p)(l) of this Section II below.
(p) (1) Except as provided in subparagraph (p)(2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section 504
of the Act, the records referred to in paragraph (o) of this Section II are
unconditionally available at their customary location during normal business
hours by:
(A) Any duly authorized employee or representative of the Department, the
Internal Revenue Service (the Service) or the Securities and Exchange
Commission (the SEC);
(B) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or any duly
authorized representative of such participant or beneficiary.
(p) (2) None of the persons described above in paragraphs (p)(1)(B)-(p)(1)(D) of
this paragraph (p) are authorized to examine the trade secrets of PaineWebber
or Mitchell Hutchins or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this exemption:
(a) The term "PaineWebber" means PaineWebber Incorporated and any affiliate of
PaineWebber, as defined in paragraph (b) of this Section III.
(b) An "affiliate" of PaineWebber includes--
(1) Any person directly or indirectly through one or more intermediaries,
controlling, controlled by, or under common control with PaineWebber.
(2) Any officer, director or partner in such person, and
(3) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(c) The term "control" means the power to exercise a controlling influence over
the management or policies of a person other than an individual.
(d) The term "Independent Fiduciary" means a Plan fiduciary which is independent
of PaineWebber and its affiliates and is either
(1) A Plan administrator, trustee, investment manager or named fiduciary of
a Section 404(c) Plan or a Section 403(b) Plan;
(2) A participant in a Keogh Plan;
(3) An individual covered under a self-directed IRA which invests in Trust
shares;
74
<PAGE>
(4) An employee, officer or director of PaineWebber and/or its affiliates
covered by an IRA not subject to Title I of the Act;
(5) A trustee, Plan administrator, investment manager or named fiduciary
responsible for investment decisions in the case of a Title I Plan that
does not permit individual direction as contemplated by Section 404(c) of
the Act; or
(e) The term "Directing Participant" means a participant in a Plan covered under
the provisions of section 404(c) of the Act, who is permitted under the terms
of the Plan to direct, and who elects to so direct, the investment of the
assets of his or her account in such Plan.
(f) The term "Plan" means a pension plan described in 29 CFR 2510.3-2, a welfare
benefit plan described in 29 CFR 2510.3-1, a plan described in section
4975(e)(1) of the Code, and in the case of a Section 404(c) Plan, the
individual account of a Directing Participant.
EFFECTIVE DATE: This exemption will be effective as of August 18, 1995.
For a more complete statement of the facts and representations supporting
the Department's decision to grant this exemption, refer to the notice of
proposed exemption (the Notice) published on March 22, 1996 at 61 FR 11882.
WRITTEN COMMENTS
The Department received one written comment with respect to the Notice and
no requests for a public hearing. The comment was submitted by PaineWebber, PMAS
and Mitchell Hutchins (collectively, the Applicants). Their comment is broken
down into the areas discussed below.
(1) SECTION 403(b) PLAN PARTICIPATION. In addition to IRAs, Keogh Plans, Section
404(c) Plans and other types of employee benefit plans that will participate
in the PACE Program, the Applicants represent that they wish to offer shares
in the Trust to Plans that are described in section 403(b) of the Code.
Therefore, the Applicants have requested that the Department include
references to Section 403(b) Plans in the exemptive language set forth in
Section I, in the conditional language set forth in Sections II(j)(3) and
III(d)(1) and in Representation 6 of the Summary of Facts and Representations
(the Summary). The Department has revised the Notice accordingly.
(2) AVAILABLE PORTFOLIOS. Section II(g) of the Notice states that PMAS will
provide investment advice in writing to an Independent Fiduciary or a
Directing Participant with respect to all available Portfolios offered by the
Trust. The Applicants note, however, that, in the case of a Section 404(c)
Plan, an Independent Fiduciary will determine the initial array of Portfolios
among which the Directing Participants may allocate Plan assets, and that
such fiduciary may decide to include less than all of the Portfolios in that
array. Therefore, the Applicants have requested that the Department revise
Section II(g) of the Notice as follows to make it clear that "available"
Portfolios are those that will be selected by the Independent Fiduciary under
such circumstances:
(g) PMAS provides investment advice in writing to an Independent Fiduciary or
Directing Participant with respect to all Portfolios made available under the
Plan.
The Department has made the change requested by the Applicants.
(3) INDEPENDENT FIDUCIARY ROLE. With respect to a Section 404(c) Plan,
Section II(j)(4) of the Notice states that written acknowledgement of the
receipt of initial disclosures from PaineWebber will be provided by the
Independent Fiduciary who may be the Plan administrator, trustee,
investment manager or the named fiduciary, as the record holder of Trust
shares. The Applicants wish to clarify that because the trustee of a
trust is generally the legal owner of trust assets, the Plan trustee
rather than the Independent Fiduciary is the actual recordholder of Trust
shares. Therefore, the Applicants request that the Department revise
Section II(j)(4) of the Notice to read as follows:
(4) With respect to a Section 404(c) Plan, written acknowledgement of the
receipt of such documents is provided by the Independent Fiduciary (i.e.,
the Plan administrator, trustee, investment manager or named fiduciary).
The Department has amended the Notice in this regard.
(4) DIRECTING PARTICIPANT DISCLOSURE. Section II(1) of the Notice states, in
relevant part, that if an Independent Fiduciary of a Section 404(c) Plan
has established an Undisclosed Account with PaineWebber, certain
disclosures will be provided by PaineWebber to the Directing Participants
or to the Independent Fiduciary for dissemination to the Directing
Participants, depending upon the arrangement negotiated with PMAS. In an
effort to reflect the manner in which that information will be
distributed or made available to Directing Participants and/or to the
Independent Fiduciaries of Section 404(c) Plans, the Applicants request
that the Department modify Section II(l) of the Notice.
The Department has amended Section II(1) of the Notice to read as follows:
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(1) In the case of a Section 404(c) Plan where the Independent Fiduciary has
established an omnibus account in the name of the Plan (the Undisclosed
Account) with PaineWebber, depending upon the arrangement negotiated by the
Independent Fiduciary with PMAS, certain of the information noted above in
subparagraphs (k)(1) through (k)(7) of this Section II may be provided by
PaineWebber to the Directing Participants or to the Independent Fiduciary for
dissemination to the Directing Participants.
(5) DESCRIPTION OF PAINEWEBBER GROUP AND PAINEWEBBER. Representation 1(a) of
the Summary, states, in part, that the PaineWebber Group is a member of
all principal securities and commodities exchanges in the United States
and the National Association of Securities Dealers, Inc. It is also
represented that PaineWebber Group holds memberships or associate
memberships on several principal foreign securities and commodities
exchanges. Although the Applicants furnished this information to the
Department, they wish to clarify that these representations pertain to
PaineWebber rather than to the Paine Webber Group. Therefore, they
request that the Department make appropriate changes to the Summary.
The Department has revised the language in Representation 1(b) of the
Summary as follows:
PaineWebber is a member of all principal securities and commodities
exchanges in the United States and the National Association of Securities
Dealers, Inc. It also holds memberships or associate memberships on several
principal foreign securities and commodities exchanges.
(6) NET ASSET VALUE PER SHARE. In pertinent part, Representation 2 of the
Summary states that with the exception of the PACE Money Market
Investments Portfolio, shares in the Trust were initially offered to the
public by PaineWebber at a net asset value of $10 per share and that
shares in the PACE Money Market Investments Portfolio are being offered
to the public at a net asset value of $1.00 per share. The Applicants
wish to clarify that with the exception of the PACE Money Market
Investments Portfolio in which shares are offered to the public at a net
asset value of $1.00 per share, shares in the other Portfolios were
initially offered to the public at a net asset value of $12 per share.
Accordingly, the Department has revised the sixth and seventh sentences of
Representation 2 to read as follows:
With the exception of the PACE Money Market Investments Portfolio, shares in
each of the Portfolios were initially offered to the public at a net asset value
of $12 per share. Shares in the PACE Money Market Investments Portfolio are
offered to the public at a net asset value of $1.00 per share.
(7) MINIMUM INVESTMENTS. The second paragraph of Representation 3 of the Summary
states, in part, that the minimum initial investment for a prospective
investor in the PACE Program is $10,000. The Applicants note, however, that
the minimum initial investment threshold for an investor is currently $25,000
and not $10,000. For Plan investors and Uniform Gift or Transfer to Minors
Accounts, the Applicants wish to clarify that the minimum initial investment
is presently $10,000.
The Department has revised part of Representation 3 to read as follows:
*** The minimum initial investment in the PACE Program currently is $25,000
(except for Plans and Uniform Gift or Transfer to Minors Accounts, for
which the minimum initial investment is currently $10,000).
(8) VALUATION OF PORTFOLIO SHARES. Footnote 10 of the Summary states, in part,
that the net asset value of shares in the PACE Money Market Investments
Portfolio is determined as of 12 p.m. each business day. To indicate that the
net asset value of all Portfolio shares, including shares of the PACE Money
Market Investments Portfolio, is being determined as of the close of regular
trading on the New York Stock Exchange (currently 4 p.m., Eastern Time) each
business day, the Applicants request that the Department modify Footnote 10
of the Summary.
The Department has modified Footnote 10 to read as follows:
The net asset value of each Portfolio's shares is determined as of the close
of regular trading on the New York Stock Exchange (the NYSE) (currently, 4 p.m.,
Eastern Time) each business day. Each Portfolio's net asset value per share is
determined by dividing the value of the securities held by the Portfolio plus
any cash or other assets minus all liabilities by the total number of Portfolio
shares outstanding.
In addition, the Applicants have requested that Footnote 16 of the Summary
be revised to incorporate the following language:
*** The net asset value of each Portfolio's shares is determined as of the
close of regular trading on the NYSE (currently, 4 p.m. Eastern Time)
each business day. PaineWebber may, in the future, impose a minimum
dollar threshold on rebalancing transactions in order to avoid DE
MINIMUS transactions.
(9) PAYMENT OF REDEMPTION PROCEEDS. Representation 14 of the Summary states, in
part, that a Portfolio will be required to transmit redemption proceeds for
credit to an investor's
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<PAGE>
account within 5 business days after receipt. Similarly, Representation 17 of
the Summary sets forth the same time frame for the payment of the outside fee
as well as the applicable fee if additional funds are invested during a
calendar quarter. Because Federal Securities laws currently require
PaineWebber to settle its obligations within three business days, the
Applicants have requested that the Department revise the Summary to reflect
the current timing of such payments.
The Department does not object to these necessary revisions and has deleted
references to the five business day requirement and inserted the phrase "three
business days" in the fourth sentence of paragraph one of Representation 14, in
the first sentence of paragraph two of Representation 17 and in the first
sentence of paragraph three of Representation 17.
(10) BROKERAGE COMMISSION INFORMATION. Representation 22(i) of the Summary
states, in part, that on a quarterly and annual basis, PaineWebber will
provide written disclosures to an Independent Fiduciary or, if applicable, a
Directing Participant regarding brokerage commissions that are paid to
PaineWebber and/ or its affiliates or to unrelated parties. The Applicants
have requested that the Department revise this representation to reflect
that brokerage commission information will be provided to the Independent
Fiduciary and, depending on the arrangement negotiated between the
Independent Fiduciary of a Section 404(c) Plan and PMAS, to a Directing
Participant. The Applicants state that the language set forth in the Summary
appears to indicate that PaineWebber will provide such information under all
circumstances to Independent Fiduciaries and where applicable, to Directing
Participants only.
The Department has revised paragraph (i) of Representation 22 to read, in
part, as follows:
(i) On a quarterly and annual basis, PaineWebber will provide written
disclosures to an Independent Fiduciary and, depending on the arrangement
negotiated with PMAS, a Directing Participant, with respect to (1) the total,
expressed in dollars, of each Portfolio's brokerage commissions that are paid
to PaineWebber and its affiliates;***
After giving full consideration to the entire record, the Department has
decided to grant the exemption subject to the modifications or clarifications
described above. The Applicants' comment letter has been included as part of the
public record of the exemption application. The complete application file,
including all supplemental submissions received by the Department, is made
available for public inspection in the Public Documents Room of the Pension and
Welfare Benefits Administration, Room N-5638, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
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PAINEWEBBER PACE SELECT ADVISORS TRUST
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
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PROSPECTUS DATED DECEMBER 1, 1998
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- -C- 1998 PaineWebber Incorporated PAINEWEBBER -RECYCLE SYMBOL- RECYCLED PAPER
------------------------------------------------------------
<PAGE>
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PaineWebber PACE Select Advisors Trust
1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10019
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber PACE Select Advisors Trust ("Trust" and formerly known as
"Managed Accounts Services Portfolio 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
asset management 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") recommended, 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 December 1, 1998. 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 December 1, 1998.
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, PACE LARGE COMPANY VALUE EQUITY
INVESTMENTS AND PACE INTERNATIONAL EMERGING MARKETS EQUITY INVESMENTS, 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
<PAGE>
associated with such securities. Neither of such ratings represents an
assessment of the likelihood that principal prepayments will be made by
mortgagors or the degree to which such prepayments may differ from those
originally anticipated, nor do such ratings address the possibility that
investors may suffer a lower than anticipated yield or that investors in such
securities may fail to recoup fully their initial investment due to prepayments.
The yields on the money market instruments in which PACE MONEY MARKET
INVESTMENTS invests (such as U.S. government securities, 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. As noted in the
Prospectus, PACE MONEY MARKET INVESTMENTS may only purchase securities that are
"First Tier Securities" (as defined under Rule 2a-7 of the Investment Company
Act of 1940, as amended (the "1940 Act"). To qualify as a First Tier Security a
security must either be (1) rated in the highest short-term rating category by
at least two NRSROs, (2) rated in the highest short-term rating category by a
single NRSRO if only that NRSRO has assigned the obligation a short-term rating,
(3) issued by an issuer that has received such a short-term rating with respect
to a security that is comparable in terms of priority and security or (4)
unrated, but determined by Mitchell Hutchins to be of comparable quality.
Subsequent to its purchase by a Portfolio, an issue may cease to be rated or its
rating may be reduced. If a security in PACE MONEY MARKET INVESTMENTS' portfolio
ceases to be a First Tier Security 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,
2
<PAGE>
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 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.
3
<PAGE>
Floating rate mortgage-backed securities are classes of mortgage-backed
securities that have been structured to represent the right to receive interest
payments at rates that fluctuate in accordance with an index but that generally
are supported by pools comprised of fixed-rate mortgage loans. As with ARM
mortgage-backed securities, interest rate adjustments on floating rate
mortgage-backed securities may be based on indices that lag behind market
interest rates. Interest rates on floating rate mortgage-backed securities
generally are adjusted monthly. Floating rate mortgage-backed securities are
subject to lifetime interest rate caps, but they generally are not subject to
limitations on monthly or other periodic changes in interest rates or monthly
payments.
SPECIAL CHARACTERISTICS OF MORTGAGE- AND ASSET-BACKED SECURITIES. As set
forth in the Prospectus, PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS,
PACE INTERMEDIATE FIXED INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME
INVESTMENTS each are authorized to invest in mortgage-and asset-backed
securities. The yield characteristics of mortgage- and asset-backed securities
differ from those of traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other obligations generally may be prepaid at any time.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on
fixed-rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Similar factors
apply to prepayments on asset-backed securities, but the receivables underlying
asset-backed securities generally are of a shorter maturity and thus are less
likely to experience substantial prepayments. Such securities, however, often
provide that for a specified time period the issuers will replace receivables in
the pool that are repaid with comparable obligations. If the issuer is unable to
do so, repayment of principal on the asset-backed securities may commence at an
earlier date. Mortgage- and asset-backed securities may decrease in value as a
result of increases in interest rates and may benefit less than other fixed
income securities from declining interest rates because of the risk of
prepayment.
ARMs also may be subject to a greater rate of prepayments in a declining
interest rate environment. For example, during a period of declining interest
rates, prepayments on ARMs could increase because the availability of fixed
mortgage loans at competitive interest rates may encourage mortgagors to
"lock-in" at a lower interest rate. Conversely, during a period of rising
interest rates, prepayments on ARMs might decrease. The rate of prepayments with
respect to ARMs has fluctuated in recent years.
The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, and due to any
yield retained by the issuer. Actual yield to the holder may vary from the
coupon rate, even if adjustable, if the mortgage-backed securities are purchased
or traded in the secondary market at a premium or discount. In addition, there
is normally some delay between the time the 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
4
<PAGE>
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. In the past, a common industry practice has
been to assume that prepayments on pools of fixed rate 30-year mortgages would
result in a 12-year average life for the pool. At present, mortgage pools,
particularly those with loans with other maturities or different
characteristics, are priced on an assumption of average life determined for each
pool. In periods of declining interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of a pool of
mortgage-related securities. Conversely, in periods of rising rates the rate of
prepayment tends to decrease thereby lengthening the actual average life of the
pool. However, these effects may not be present, or may differ in degree, if the
mortgage loans in the pools have adjustable interest rates or other special
payment terms, such as a prepayment charge. Actual prepayment experience may
cause the yield of mortgage-backed securities to differ from the assumed average
life yield. Reinvestment of prepayments may occur at lower interest rates than
the original investment, thus adversely affecting the yield of the Portfolios.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which a
Portfolio purchases securities or other obligations and simultaneously commits
to resell them to the counterparty at an agreed-upon date and at a 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
obligations prior to their repurchase, either through its regular custodian or
through a special "tri-party" custodian or sub-custodian that maintains separate
accounts for both the Portfolio and its counterparty. Thus, the obligation of
the counterparty to pay the repurchase price on the date agreed to or upon
demand is, in effect, secured by such obligations. If the value becomes less
than the repurchase price, plus any agreed-upon additional amount, the
counterparty 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 obligations and the price that was paid by a Portfolio upon
their acquisition is accrued as interest and included in its 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 Mitchell Hutchins to present minimal
credit risks in accordance with guidelines established by the Trust's board of
trustees. Mitchell Hutchins will review and monitor the creditworthiness of
those institutions under the board's general supervision.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Each of PACE GOVERNMENT
SECURITIES FIXED INCOME INVESTMENTS and PACE STRATEGIC FIXED INCOME INVESTMENTS
may enter into reverse repurchase agreements and dollar rolls with banks and
securities dealers 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 or upon demand and at a 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.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
qualified broker-dealers or institutional investors in an amount up to 33 1/3%
of its total assets (including the loan collateral) taken at market value.
Lending securities enables a Portfolio to earn additional income but could
result in a loss or delay
5
<PAGE>
in recovering the Portfolio's securities. The borrower must maintain with the
Portfolio's custodian collateral in the form of cash, liquid securities or
irrevocable letters of credit that meet certain guidelines established by
Mitchell Hutchins in an amount at least equal to the market value of the
securities loaned, plus accrued interest and dividends, determined on a daily
basis and adjusted accordingly. In determining whether to lend securities to a
particular broker-dealer or institutional investor, Mitchell Hutchins will
consider, and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. Each Portfolio
will retain authority to terminate any loans at any time. A Portfolio may pay
reasonable fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash or money market instruments held as collateral
to the borrower or placing broker. A Portfolio will receive reasonable interest
on the loan or a flat fee from the borrower and amounts equivalent to any
dividends, interest or other distributions on the securities loaned. A Portfolio
will regain record ownership of loaned securities to exercise beneficial rights,
such as voting and subscription rights and rights to dividends, interest or
other distributions, when retaining such rights is considered to be in the
Portfolio's interest.
Pursuant to procedures adopted by the Trust's board of trustees governing
each Portfolio's securities lending program, the board has approved retention of
PaineWebber to serve as lending agent for the Portfolios. The board also has
authorized each Portfolio to pay fees (including fees calculated as a percentage
of invested cash collateral) to PaineWebber for these services. The board
periodically reviews all portfolio securities loan transactions for which
PaineWebber acted as lending agent. PaineWebber also has been approved as a
borrower under the Trust's securities lending program. For the fiscal year ended
July 31, 1998, PaineWebber, acting as the Portfolios' lending agent, received
compensation from the Portfolios as follows:
<TABLE>
<CAPTION>
PORTFOLIO COMPENSATION
- ------------------------------------------------------------ -----------
<S> <C>
PACE Intermediate Fixed Income Investments.................. $31,626
PACE Global Fixed Income Investments........................ $10,430
PACE Large Company Value Equity Investments................. $13,396
PACE Large Company Growth Equity Investments................ $ 9,553
PACE Small/Medium Company Value Equity Investments.......... $15,681
PACE Small/Medium Company Growth Equity Investments......... $25,124
PACE International Equity Investments....................... $ 8,267
PACE International Emerging Markets Equity Investments...... $21,460
</TABLE>
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 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
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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, as
amended ("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 in order 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
certain restricted securities held by a Portfolio, however, could affect
adversely the marketability of such securities, and a Portfolio might be unable
to dispose of such securities promptly or at favorable prices.
The board of trustees has delegated the function of making day-to-day
determinations of liquidity to the appropriate Adviser or Mitchell Hutchins,
pursuant to guidelines approved by the board. The Adviser or Mitchell Hutchins,
as applicable, takes into account a number of factors in reaching liquidity
decisions, including (1) the frequency of trades for the security, (2) the
number of dealers that make quotes for the security, (3) the number of dealers
that have undertaken to make a market in the security, (4) the number of other
potential purchasers and (5) the nature of the security and how trading is
effected (e.g., the time
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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 MONEY MARKET INVESTMENTS, 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 nine 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.
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
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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 MONEY MARKET INVESTMENTS, 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.
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.
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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 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.
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
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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 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, of 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.
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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, 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.
EUROPEAN CURRENCY UNIFICATION. Several European countries expect to adopt a
single currency, the euro, effective January 1, 1999. Countries participating in
the Economic and Monetary Union expect that their exchange rates will become
irrevocably fixed on that date. A newly created European Central Bank ("ECB")
will attempt to manage monetary policy for this region. Pre-existing national
currencies will continue to be valid until they are replaced by euro coins and
bank notes, which is expected to occur by sometime in 2002.
These changes may significantly impact European capital markets, and related
risks may increase volatility in world capital markets. This, in turn, may
impact a Portfolio's share price. Risks include:
-Currency unification could be delayed. This could cause uncertainty in
world markets and create unanticipated expenses as a result of having to
undo changes made in anticipation of the euro's advent;
-Exchange rates between the U.S. dollar and European currencies may become
more volatile and unstable;
-European entities may face substantial conversion costs which may not be
accurately anticipated and could impact issuer profitability and
creditworthiness;
-Institutional investors may shift assets away from certain European
currencies because of the uncertainty, making markets less liquid;
-European Currency Units ("ECUs"), currency baskets used as a unit of
account by the European Community, have been treated by capital markets
like a currency for settlement purposes. When euros are introduced, the
value of ECUs will become fixed; however, their value may be altered
because the treatment of ECUs in some financial contracts is not uniform;
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-Some major European countries, including the United Kingdom, Sweden and
Denmark, will not be participating in the introduction of the euro. This
could lead to greater volatility in exchange rates between the currencies
of countries participating in the euro and those that are not;
-There is a risk that some contracts (E.G., bank loan agreements,
derivatives contracts, and foreign exchange contracts) may become
unenforceable when the currencies are unified. Certain political units,
including The European Council and the State of New York, have enacted laws
or regulations designed to ensure that financial contracts will continue to
be enforceable after the euro's introduction; however, it is possible that
these laws will not be completely effective in preventing disputes.
Disputes and litigation could negatively impact a Portfolio's portfolio
holdings and may create uncertainties in the valuation of financial
contracts a Portfolio could hold;
-Suitable clearing, settlement and operational systems may not be ready for
the euro conversion; and
-European interest rates and exchange rates could become more volatile as
the European Central Bank and market participants search for a common
understanding of policy targets and instruments.
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
include zero coupon securities which pay no interest until maturity.
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.
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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 are interpositioned between the Portfolio and the borrower meets
the Portfolio's credit standards.
When the Portfolio purchases Assignments from Lenders, it acquires direct
rights against the borrower on the Loan. Under an Assignment, a Portfolio
generally will be able to collect payments and enforce remedies directly from or
against the borrower. Conversely, however, a Portfolio may not have the benefit
of the services of a lead or agent bank to administer the Loan on the
Portfolio's behalf.
Assignments and Participations are generally not registered under the 1933
Act and thus are usually subject to the Portfolios' limitations on investments
in illiquid securities. Because there is no liquid market for such securities,
the Portfolios anticipate that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market will
have an adverse impact on the value of such securities and on the Portfolio's
ability to dispose of particular Assignments or Participations when necessary to
meet the Portfolio's liquidity needs or in response to a specific economic
event, such as a deterioration in the creditworthiness of the borrower. Under
normal circumstances, the bank issuing the Participation will be considered the
issuer for purposes of concentration and diversification.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. A security purchased on a
when-issued or delayed delivery basis is recorded as an asset on the commitment
date and is subject to changes in market value, generally based upon changes in
the level of interest rates. Thus, fluctuation in the value of the security from
the time of the commitment date will affect the Portfolio's net asset value.
When the Portfolio commits to purchase securities on a when-issued or delayed
delivery basis, its custodian will set aside in a segregated account cash 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
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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. A Portfolio will only use leverage when its
Adviser believes that such leverage will benefit the Portfolio after taking
leverage risks into consideration.
The net asset value of a Portfolio and its yield may be more volatile due to
the Portfolio's use of leverage. Leverage also creates interest expenses for a
Portfolio, which will reduce its net income. To the extent the income derived
from securities purchased with funds obtained through leverage exceeds the
interest and other expenses that a Portfolio will have to pay in connection with
such leverage, the Portfolio's net income will be greater than if leverage were
not used. Conversely, if the income from the assets obtained through leverage is
not sufficient to cover the cost of leverage, the net income of a Portfolio will
be less than if leverage were not used, and therefore the amount available for
distribution to stockholders will be reduced.
TYPES OF MUNICIPAL SECURITIES
The types of municipal securities identified in the Prospectus as eligible for
purchase by PACE MUNICIPAL FIXED INCOME INVESTMENTS may include obligations of
issuers whose revenues are primarily derived from mortgage loans on housing
projects for moderate to low income families. The Portfolio also may purchase
mortgage subsidy bonds that are normally issued by special purpose public
authorities. In some cases the repayment of such bonds depends upon annual
legislative appropriations; in other cases repayment is a legal obligation of
the issuer and, if the issuer is unable to meet its obligations, repayment
becomes a moral commitment of a related government unit (subject, however, to
such appropriations).
STAND-BY COMMITMENTS. The Portfolio may acquire stand-by commitments
pursuant to which a bank or other municipal bond dealer agrees to purchase
securities that are held in the Portfolio's portfolio or that are being
purchased by the Portfolio, at a price equal to (1) the acquisition cost
(excluding any accrued interest paid on acquisition), less any amortized market
premium or plus any accrued market or original issue discount, plus (2) all
interest accrued on the securities since the last interest payment date or the
date the securities were purchased by the Portfolio, whichever is later.
Although the Portfolio does not currently intend to acquire stand-by commitments
with respect to municipal securities held in their portfolios, the Portfolio may
acquire such commitments under unusual market conditions to facilitate portfolio
liquidity.
The Portfolio will enter into stand-by commitments only with those banks or
other dealers that, in the opinion of the Portfolio's Adviser, present minimal
credit risk. The Portfolio's right to exercise stand-by commitments would be
unconditional and unqualified. A stand-by commitment would not be transferable
by the Portfolio, although it could sell the underlying securities to a third
party at any time. The Portfolio may pay for stand-by commitments either
separately in cash or by paying a higher price for the securities that are
acquired subject to such a commitment (thus reducing the yield to maturity
otherwise available for the same securities). The acquisition of a stand-by
commitment would not ordinarily affect the valuation or maturity of the
underlying municipal securities. Stand-by commitments acquired by the Portfolio
would be valued at zero
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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.
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.
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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 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
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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 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
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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 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.
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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.
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 that 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.
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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 obligations of the United States or obligations that are
fully guaranteed as to principal and interest by the United States, 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
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.
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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.
(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 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
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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.
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.
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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.
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, floors and collars. 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, floors
and collars 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
24
<PAGE>
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 (except PACE MONEY MARKET
INVESTMENTS AND PACE MUNICIPAL FIXED INCOME INVESTMENTS) 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 make delivery to the purchaser in a short sale, the executing broker
borrows the securities being sold short on behalf of the Portfolio, and the
Portfolio is obligated to replace the securities borrowed at a date in the
future. When a Portfolio sells short, it will establish a margin account with
the broker effecting the short sale, and will deposit collateral with the
broker. In addition, the Portfolio will maintain with its custodian, in a
segregated account, the securities that could be used to cover the short sale. A
Portfolio will incur transaction costs, including interest expense, in
connection with opening, maintaining and closing short sales "against the box."
None of the Portfolios currently intend to have obligations under short-sales
that at any time during the coming year exceed 5% of the Portfolio's net assets.
A Portfolio might make a short sale "against the box" in order to hedge
against market risks when the Portfolio's 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. In such case, any loss in the Portfolio's long position
after the short sale should be reduced by a corresponding gain in the short
position. Conversely, any gain in the long position after the short sale should
be reduced by a corresponding 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 securities a Portfolio owns,
either directly or indirectly, and in the case where the Portfolio owns
convertible securities 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 restriction 12 may be changed by a vote of a majority of the board of
trustees at any time.
25
<PAGE>
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.
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).
26
<PAGE>
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 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.
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.
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF SECURITIES
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**; 51 Trustee and Mrs. Alexander is president, chief executive of-
President ficer and a director of Mitchell Hutchins, (since
January 1995) and an executive vice president and
director of PaineWebber. Mrs. Alexander is
president and a director or trustee of 32
investment companies for which Mitchell Hutchins,
PaineWebber or one their affiliates serves as
investment adviser.
David J. Beaubien; 64 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 Onix
Systems Inc., a manufacturer of process
instrumentation. From 1985 to January 1995, Mr.
Beaubien served as a director or trustee on the
boards of the Kidder, Peabody & Co. Incorporated
mutual funds.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- -------------------------------- --------------------- --------------------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 72 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 a director of Interstate Bakeries
Corporation and a director or trustee of 34
investment companies for which Mitchell Hutchins,
PaineWebber or one their affiliates serves as
investment adviser.
Bruce A. Bursey**; 49 Trustee Mr. Bursey is a senior vice president of
PaineWebber and a director of Managed Accounts
Services. He is also a director of PaineWebber
Trust.
William W. Hewitt, Jr.; 70 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. From
1976-1986, he was president of Merrill Lynch
Funds Distributor, Inc.
Morton L. Janklow; 68 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 a director of Revlon, Inc.
J. Richard Sipes**; 52 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 PaineWebber Trust,
07087 PaineWebber Futures Management Corp., PaineWebber
Properties Inc., and a family of Investment
Companies organized in Puerto Rico.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- -------------------------------- --------------------- --------------------------------------------------
<S> <C> <C>
William D. White; 64 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 served on the Board
of Directors of Centel from 1989 to 1993.
Presently, Mr. White is on the board of directors
of Jefferson Banks Incorporated, Philadelphia,
PA.
M. Cabell Woodward, Jr.; 69 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
Black & Decker Corporation.
Lawrence Chinsky; 29 Vice President and Mr. Chinsky is an assistant vice president and
Assistant Treasurer investment monitoring officer of the mutual fund
finance department of Mitchell Hutchins. Prior to
August 1997, he was a securities compliance
examiner with the Office of Compliance,
Inspections and Examinations in the New York
Regional Office of the United States Securities
and Exchange Commission. Mr. Chinsky is vice
president and assistant treasurer of 32
investment companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
John J. Lee, 30 Vice President and Mr. Lee is a vice president and a manager of the
Assistant Treasurer mutual fund finance department of Mitchell
Hutchins. Prior to September 1997, he was an
audit manager in the financial services practice
of Ernst & Young LLP. Mr. Lee is a vice presi-
dent and assistant treasurer of 32 investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
Ann E. Moran; 41 Vice President and Ms. Moran is a vice president and a manager of the
Assistant Treasurer mutual fund financial department of Mitchell
Hutchins. Ms. Moran is a vice president and
assistant treasurer of 32 other investment
companies for which Mitchell Hutchins,
PaineWebber or one of their affiliates serves as
investment adviser.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- -------------------------------- --------------------- --------------------------------------------------
<S> <C> <C>
Andrew S. Novak; 30 Vice President and Mr. Novak is a vice president and assistant gen-
Assistant Secretary eral counsel of Mitchell Hutchins. Prior to Sep-
tember 1997, he was an attorney in private
practice. Mr. Novak is a vice president and
assistant secretary of one investment company for
which Mitchell Hutchins, PaineWebber or one their
affiliates serves as investment adviser.
Dianne E. O'Donnell; 46 Vice President and Ms. O'Donnell is a senior vice president and
Assistant Secretary deputy general counsel of Mitchell Hutchins. Ms.
O'Donnell is a vice president and secretary of 31
investment companies and vice president and
assistant secretary of one investment company for
which Mitchell Hutchins, PaineWebber or one their
affiliates serves as investment adviser.
Emil Polito; 38 Vice President Mr. Polito is a senior vice president and director
of operations and control for Mitchell Hutchins.
Mr. Polito is senior vice president of 32
investment companies, for which Mitchell
Hutchins, PaineWebber or one their affiliates
serves as investment adviser.
Victoria E. Schonfeld; 47 Vice President and Ms. Schonfeld is a managing director and general
Secretary counsel of Mitchell Hutchins. Prior to May 1994,
she was a partner in the law firm of Arnold &
Porter. Ms. Schonfeld is a vice president of 31
investment companies and a vice president and
secretary of one investment company for which
Mitchell Hutchins, PaineWebber or one their
affiliates serves as investment adviser.
Paul H. Schubert; 35 Vice President and Mr. Schubert is a senior vice president and the
Treasurer director of the mutual fund finance department of
Mitchell Hutchins. From August 1992 to August
1994, he was a vice president at BlackRock
Financial Management, L.P. Mr. Schubert is a vice
president and treasurer of 32 other investment
companies for which Mitchell Hutchins,
PaineWebber or one their affiliates serves as in-
vestment adviser.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE;
NAME/AGE AND ADDRESS* POSITION WITH TRUST OTHER DIRECTORSHIPS
- -------------------------------- --------------------- --------------------------------------------------
<S> <C> <C>
Barney A. Taglialatela; 37 Vice President and Mr. Taglialatela is a vice president and a manag-
Assistant Treasurer er of the mutual fund finance division of
Mitchell Hutchins. Prior to February 1995, he was
a manager of the mutual fund finance division of
Kidder Peabody Asset Management, Inc. Mr.
Taglialatela is a vice president and assistant
treasurer of 32 investment companies for which
Mitchell Hutchins, PaineWebber or one their
affiliates serves as investment adviser.
</TABLE>
- ------------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Messrs. Bewkes, 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.
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...................................................... $60,000 $65,000
William W. Hewitt, Trustee...................................................... $80,000 $80,326
Morton L. Janklow, Trustee...................................................... $65,000 $60,000
William D. White, Trustee....................................................... $65,000 $60,000
M. Cabell Woodward, Jr., Trustee................................................ $65,000 $60,000
</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,
1998.
** During the fiscal year ended July 31, 1998, 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.
31
<PAGE>
+ Represents total compensation paid to each trustee during the calendar year
ended December 31, 1997; no fund within the complex has a bonus, pension,
profit sharing or retirement plan.
As of October 31, 1998, the Portfolios had no shareholders who owned of
record 5% or more of a Portfolio's shares, and the Trust is not aware of any
shareholder who is the beneficial owner of 5% or more of its shares.
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.
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
32
<PAGE>
(as defined in the 1940 Act) of the Trust, Mitchell Hutchins or the Adviser, (6)
all expenses incurred in connection with trustees' services, including travel
expenses, (7) taxes (including any income or franchise taxes) and governmental
fees, (8) costs of any liability, uncollectible items of deposit and other
insurance or fidelity bonds, (9) any costs, expenses or losses arising out of a
liability of or claim for damages or other relief asserted against the Trust or
a Portfolio for violation of any law, (10) legal, accounting and auditing
expenses, including legal fees of special counsel for the independent trustees,
(11) charges of custodians, transfer agents and other agents, (12) costs of
preparing share certificates, (13) expenses of setting in type and printing
prospectuses and supplements thereto, statements of additional information and
supplements thereto, reports and proxy materials for existing shareholders, and
costs of mailing such materials to existing shareholders, (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Trust or
a Portfolio, (15) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations, (16) costs of
mailing and tabulating proxies and costs of meetings of shareholders, the board
and any committees thereof, (17) the cost of investment company literature and
other publications provided to trustees and officers and (18) costs of mailing,
stationery and communications equipment.
Under the Management Agreement, Mitchell Hutchins will not be liable for any
error or judgment or mistake of law or for any loss suffered by a Portfolio in
connection with the performance of the contract, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of Mitchell
Hutchins in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. The Management Agreement terminates
automatically upon its assignment and is terminable at any time without penalty
by the Trust's board of trustees or by vote of the holders of a majority of a
Portfolio's outstanding voting securities, on 60 days' written notice to
Mitchell Hutchins or by Mitchell Hutchins on 60 days' written notice to the
Portfolio.
The following table shows the approximate net assets as of October 31, 1998,
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.
INVESTMENT CATEGORY
- ------------------------------------------------------------
NET ASSETS
----------
($MIL)
Domestic (excluding Money Market)........................... $ 7,761.7
Global...................................................... 3,627.2
Equity/Balanced............................................. 6,301.2
Fixed Income (excluding Money Market)....................... 5,087.7
Taxable Fixed Income...................................... 3,496.1
Tax-Free Fixed Income..................................... 1,591.6
Money Market Funds.......................................... 31,335.1
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.
Except as described below, 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,
33
<PAGE>
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. Mitchell Hutchins and
Delaware Management Company, Inc. entered into an Advisory Agreement on December
16, 1996, which was approved by the Trust's board of trustees at a meeting held
on December 10, 1996, including a majority of the Trustees who are not parties
to such contract or interested persons of any such parties. Pursuant to such
agreement, Delaware Management Company, Inc. became the Adviser for PACE
SMALL/MEDIUM COMPANY GROWTH EQUITY INVESTMENTS, replacing the Portfolio's
previous Adviser, Westfield Capital Management Company, Inc. Mitchell Hutchins
and Alliance Capital Management L.P. entered into an Advisory Agreement on
November 10, 1997, which was approved by the Trust's board of trustees at a
meeting held on November 4, 1997, including a majority of the Trustees who are
not parties to such contract or interested persons of any such parties. Pursuant
to such agreement, Alliance Capital Management L.P. became the Adviser for PACE
LARGE COMPANY GROWTH EQUITY INVESTMENTS, replacing the Portfolio's previous
Adviser, Chancellor LGT Asset Management, Inc. Mitchell Hutchins and Brandywine
Asset Management, Inc. ("Brandywine") entered into a new Advisory Agreement on
January 16, 1998, which was approved by the Trust's board of trustees at a
meeting held on January 13, 1998, 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
Brandywine by Legg Mason, Inc.; 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 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.
34
<PAGE>
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 periods indicated.
<TABLE>
<CAPTION>
ADVISORY ADVISORY
AND ADMINISTRATION FEES EARNED AND ADMINISTRATION FEES WAIVED BY
(OR ACCRUED) BY MITCHELL HUTCHINS MITCHELL HUTCHINS
------------------------------------------- -----------------------------------------
FISCAL YEAR FISCAL YEAR FISCAL PERIOD FISCAL YEAR FISCAL YEAR FISCAL PERIOD
ENDED ENDED AUGUST 24, ENDED ENDED AUGUST 24,
JULY 31, JULY 31, 1995* THROUGH JULY 31, JULY 31, 1995* THROUGH
PORTFOLIO 1998 1997 JULY 31, 1996 1998 1997 JULY 31, 1996
- ------------------------------ ------------ ------------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
PACE Money
Market Investments........... $ 76,176 $ 46,463 $ 19,992 $153,019 $ 46,463 $ 19,992
PACE Government Securities
Fixed Income Investments..... 916,670 555,050 218,140 135,366 107,156 92,619
PACE Intermediate
Fixed Income Investments..... 504,134 318,727 138,291 5,372 76,200 82,160
PACE Strategic
Fixed Income Investments..... 697,639 409,105 154,381 91,847 143,533 106,919
PACE Municipal Fixed
Income Investments........... 259,431 143,239 57,596 35,977 131,476 57,596
PACE Global Fixed
Income Investments........... 599,606 389,067 177,669 209,982 167,565 138,050
PACE Large Company
Value Equity Investments..... 1,786,641 1,004,307 350,054 -- 82,199 170,745
PACE Large Company
Growth Equity Investments.... 1,672,807 875,877 285,409 45,136 50,644 115,140
PACE Small/Medium
Company Value Equity
Investments.................. 1,384,807 765,902 302,383 11,273 126,324 179,172
PACE Small/Medium
Company Growth Equity
Investments.................. 1,328,874 719,564 325,385 43,813 71,349 109,433
PACE International
Equity Investments........... 1,163,135 632,415 190,817 -- 1,629 54,634
PACE International
Emerging Markets Equity
Investments.................. 623,343 417,803 151,151 161,872 225,031 109,656
<CAPTION>
SUB-ADVISORY FEES PAID BY
MITCHELL HUTCHINS
(NOT THE PORTFOLIO) TO ADVISER
-----------------------------------------
FISCAL YEAR FISCAL YEAR FISCAL PERIOD
ENDED ENDED AUGUST 24,
JULY 31, JULY 31, 1995* THROUGH
PORTFOLIO 1998 1997 JULY 31, 1996
- ------------------------------ ----------- ----------- -------------
<S> <C> <C> <C>
PACE Money
Market Investments........... $ N/A $ N/A $ N/A
PACE Government Securities
Fixed Income Investments..... 327,708 198,232 77,907
PACE Intermediate
Fixed Income Investments..... 168,045 106,137 46,071
PACE Strategic
Fixed Income Investments..... 249,156 146,108 55,109
PACE Municipal Fixed
Income Investments........... 86,574 47,400 19,188
PACE Global Fixed
Income Investments........... 262,596 170,772 75,569
PACE Large Company
Value Equity Investments..... 670,717 377,030 131,205
PACE Large Company
Growth Equity Investments.... 628,243 328,454 107,028
PACE Small/Medium
Company Value Equity
Investments.................. 519,732 287,096 113,332
PACE Small/Medium
Company Growth Equity
Investments.................. 664,437 279,883 122,019
PACE International
Equity Investments........... 517,629 281,074 84,808
PACE International
Emerging Markets Equity
Investments.................. 283,338 189,911 68,672
</TABLE>
- ------------------------
* Commencement of operations.
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
35
<PAGE>
the type that the Portfolio may make also may be made by those other accounts.
When a Portfolio and one or more other accounts managed by the Adviser or
Mitchell Hutchins, as applicable, are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser or Mitchell Hutchins, as
applicable, to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by a Portfolio or the size of the position
obtained or disposed of by a Portfolio.
Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. No stated
commission is generally applicable to securities traded in U.S. OTC markets, but
the prices of those securities include undisclosed commissions or mark-ups. The
cost of securities purchased from underwriters include an underwriting
commission or concession and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down. U.S. government
securities generally are purchased from underwriters or dealers, although
certain newly-issued U.S. government securities may be purchased directly from
the U.S. Treasury or from the issuing agency or instrumentality.
For the periods indicated, the Portfolios paid the brokerage commissions set
forth below:
<TABLE>
<CAPTION>
TOTAL BROKERAGE COMMISSIONS
-------------------------------------------------
FISCAL YEAR ENDED JULY 31, PERIOD AUGUST 24,
----------------------------- 1995* THROUGH
PORTFOLIO 1998 1997 JULY 31, 1996
- --------------------------------------------- ------------- ------------- -----------------
<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...... 17,292 169 0
PACE Municipal Fixed Income Investments...... 0 0 0
PACE Global Fixed Income Investments......... 0 0 0
PACE Large Company Value Equity
Investments................................. 191,304 164,051 96,437
PACE Large Company Growth Equity
Investments................................. 422,526** 153,087 53,077
PACE Small/Medium Company Value Equity
Investments................................. 491,524 302,226 307,395
PACE Small/Medium Company Growth Equity
Investments................................. 303,695 414,380 100,645
PACE International Equity Investments........ 441,600 288,930 192,164
PACE International Emerging Markets Equity
Investments................................. 286,220 201,775 136,615
</TABLE>
- ------------------------
* Commencement of operations.
** Sub-advisory functions for this portfolio were transferred from Chancellor
LGT Asset Management, Inc. to Alliance Capital Management L.P. on November
10, 1997.
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
36
<PAGE>
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.
For the periods indicated, the Portfolios directed portfolio transactions to
brokers chosen because they provide research and analysis, for which the
Portfolios paid the following in brokerage commissions:
<TABLE>
<CAPTION>
AMOUNT OF BROKERAGE
PORTFOLIO TRANSACTIONS COMMISSIONS PAID
------------------------------------------------- -------------------------------------------------
FISCAL YEAR FISCAL YEAR PERIOD AUGUST 24, FISCAL YEAR FISCAL YEAR PERIOD AUGUST 24,
ENDED ENDED 1995* THROUGH ENDED ENDED 1995* THROUGH
PORTFOLIO JULY 31, 1998 JULY 31, 1997 JULY 31, 1996 JULY 31, 1998 JULY 31, 1997 JULY 31, 1996
- --------------------------- ------------- ------------- ----------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
PACE Money Market
Investments............... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
PACE Government Securities
Fixed Income
Investments............... 1,000,000 0 0 210 0 0
PACE Intermediate Fixed
Income Investments........ 0 0 0 0 0 0
PACE Strategic Fixed Income
Investments............... 0 0 0 0 0 0
PACE Municipal Fixed Income
Investments............... 0 0 0 0 0 0
PACE Global Fixed Income
Investments............... 0 0 0 0 0 0
PACE Large Company Value
Equity Investments........ 180,811,909 134,184,369 93,279,524 166,931 146,622 90,203
PACE Large Company Growth
Equity Investments........ 428,000** 21,091,153 3,967,720 22,005** 25,827 5,904
PACE Small/Medium Company
Value Equity
Investments............... 18,276,509 11,759,079 4,695,962 56,675 45,141 21,746
PACE Small/Medium Company
Growth Equity
Investments............... 18,986,552 75,104,685 0 41,484 136,584 0
PACE International Equity
Investments............... 0 0 0 0 0 0
PACE International Emerging
Markets Equity
Investments............... 278,082 155,236 0 8,138 1,006 0
</TABLE>
- ------------------------------
* Commencement of operations.
** Sub-advisory functions for this portfolio were transferred from Chancellor
LGT Asset Management, Inc. to Alliance Capital Management L.P. on November
10, 1997. Represents portfolio transactions and brokerage commissions for
November 10, 1997 through July 31, 1998.
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.
37
<PAGE>
For the periods indicated, the Portfolios paid to PaineWebber the following
in brokerage commissions:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
BROKERAGE COMMISSIONS COMMISSIONS PAID
TO PAINEWEBBER BY PORTFOLIO
----------------------------------------- -----------------------------------------
FISCAL YEAR FISCAL YEAR PERIOD AUGUST FISCAL YEAR FISCAL YEAR PERIOD AUGUST
ENDED ENDED 24, ENDED ENDED 24,
JULY 31, JULY 31, 1995* THROUGH JULY 31, JULY 31, 1995* THROUGH
PORTFOLIO 1998 1997 JULY 31, 1996 1998 1997 JULY 31, 1996
- ---------------------------------------- ----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
PACE Money Market Investments........... $0 $0 $0 0% 0% 0%
PACE Government Securities Fixed Income
Investments............................ 0 0 0 0 0 0
PACE Intermediate Fixed Income
Investments............................ 0 0 0 0 0 0
PACE Strategic Fixed Income
Investments............................ 0 0 0 0 0 0
PACE Municipal Fixed Income
Investments............................ 0 0 0 0 0 0
PACE Global Fixed Income Investments.... 0 0 0 0 0 0
PACE Large Company Value Equity
Investments............................ 0 0 0 0 0 0
PACE Large Company Growth Equity
Investments............................ 0 0 1,026 0 0 1.90
PACE Small/Medium Company Value Equity
Investments............................ 0 0 0 0 0 0
PACE Small/Medium Company Growth Equity
Investments............................ 0 0 660 0 0 0.65
PACE International Equity Investments... 0 0 0 0 0 0
PACE International Emerging Markets
Equity Investments..................... 0 0 0 0 0 0
<CAPTION>
PERCENTAGE OF
AGGREGATE DOLLAR
AMOUNT OF TRANSACTIONS
INCLUDING THE PAYMENT
OF COMMISSIONS
-----------------------------------------
FISCAL YEAR FISCAL YEAR PERIOD AUGUST
ENDED ENDED 24,
JULY 31, JULY 31, 1995* THROUGH
PORTFOLIO 1998 1997 JULY 31, 1996
- ---------------------------------------- ----------- ----------- -------------
<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............................ 0 0 0.45
PACE Small/Medium Company Value Equity
Investments............................ 0 0 0
PACE Small/Medium Company Growth Equity
Investments............................ 0 0 1.41
PACE International Equity Investments... 0 0 0
PACE International Emerging Markets
Equity Investments..................... 0 0 0
</TABLE>
- ------------------------------
* Commencement of operations.
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 fiscal year ended July
31, 1997, and for the period August 24, 1995 (commencement of operations)
through July 31, 1996, PACE GOVERNMENT SECURITIES FIXED INCOME INVESTMENTS paid
$0 and $644, respectively, in commissions to FCMs. For the fiscal years ended
July 31, 1998 and July 31, 1997, and for the period August 24, 1995
(commencement of operations) through July 31, 1996, PACE STRATEGIC FIXED INCOME
INVESTMENTS paid $5,242, $0 and $914, respectively, in commissions to FCMs. For
the fiscal years ended July 31, 1998 and July 31, 1997, and for the period
August 24, 1995 (commencement of operations) through July 31, 1996, PACE LARGE
COMPANY VALUE EQUITY INVESTMENTS paid $3,838, $2,180 and $0, respectively, in
commissions to FCMs. During those same periods, with respect to the other
Portfolios, no commissions were paid to FCMs.
38
<PAGE>
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 as a limiting factor in making investment
decisions.
A Portfolio's turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year by the monthly
average value of the portfolio securities. Securities or options with remaining
maturities of one year or less on the date of acquisition are excluded from the
calculation. Under certain market conditions, a Portfolio authorized to engage
in transactions in options may experience increased portfolio turnover as a
result of its investment strategies. For instance, the exercise of a substantial
number of options written by a Portfolio (due to appreciation of the underlying
security in the case of call options or depreciation of the underlying security
in the case of put options) could result in a turnover rate in excess of 100%. A
portfolio turnover rate of 100% would occur if all of a Portfolio's securities
that are included in the computation of turnover were replaced once during a
period of one year.
Certain other practices that may be employed by a Portfolio also could
result in high portfolio turnover. For example, portfolio securities may be sold
in anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another comparable quality purchased at
approximately the same time to take advantage of what an Adviser believes to be
a temporary disparity in the normal yield relationship between the two
securities. These yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or supply of, various
types of securities.
Portfolio turnover rates may vary greatly from year to year as well as
within a particular year and may be affected by cash requirements for
redemptions of a Portfolio's shares as well as by requirements that enable the
Portfolio to receive favorable tax treatment.
The following table sets forth the portfolio turnover rates for each
Portfolio for the periods indicated:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES
-----------------------------
FISCAL YEAR FISCAL YEAR
ENDED ENDED
PORTFOLIO JULY 31, 1998 JULY 31, 1997
- ------------------------------------------------------------ ------------- -------------
<S> <C> <C>
PACE Money Market Investments............................... N/A N/A
PACE Government Securities Fixed Income Investments......... 353% 712%
PACE Intermediate Fixed Income Investments.................. 111% 67%
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATES
-----------------------------
FISCAL YEAR FISCAL YEAR
ENDED ENDED
PORTFOLIO JULY 31, 1998 JULY 31, 1997
- ------------------------------------------------------------ ------------- -------------
<S> <C> <C>
PACE Strategic Fixed Income Investments..................... 234% 357%
PACE Municipal Fixed Income Investments..................... 34% 15%
PACE Global Fixed Income Investments........................ 125% 270%
PACE Large Company Value Equity Investments................. 34% 46%
PACE Large Company Growth Equity Investments................ 102% 73%
PACE Small/Medium Company Value Equity Investments.......... 42% 39%
PACE Small/Medium Company Growth Equity Investments......... 131% 247%
PACE International Equity Investments....................... 56% 55%
PACE International Emerging Markets Equity Investments...... 51% 39%
</TABLE>
ADDITIONAL REDEMPTION INFORMATION
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 New York Stock
Exchange ("NYSE") on each Monday through Friday when the NYSE is open. If
trading on the NYSE is halted for the day before 4:00 p.m., Eastern time, and
trading on the NYSE will not resume again that day, each portfolio's net asset
value per share will be calculated at the time trading was halted. Currently,
the NYSE is closed on the observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day and on the
preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively.
Securities that are listed on U.S. and foreign stock exchanges are valued at
the last sale price on the day the securities are 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 or the applicable Adviser 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 trade price on
Nasdaq at 4:00 p.m., eastern time; other OTC securities are valued at the last
bid price available prior
40
<PAGE>
to valuation (other than short-term investments that mature in 60 days or less
which are valued as described further below). 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. In valuing lower rated corporate debt securities 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.
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 the 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 and this
Statement of Additional Information. 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. If 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. If that deviation exceeds 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 except as
otherwise indicated herein will not purchase any instrument with a remaining
maturity greater than 13 months, will limit portfolio investments, including
repurchase agreements, to those U.S. dollar-denominated instruments that are of
high quality under the Rule and that the Mitchell Hutchins determines (pursuant
to delegated authority from the board of
41
<PAGE>
trustees) 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. If amortized cost ceases to represent fair
value, the board will take appropriate action.
In determining the approximate market value of portfolio investments, each
Portfolio may employ outside organizations, which may use a matrix or formula
method that takes into consideration market indices, matrices, yield curves and
other specific adjustments. This may result in the securities being valued at a
price different from the price that would have been determined had the matrix or
formula method not been used. All cash, receivables and current payables are
carried at their face value. Other assets, if any, are valued at fair value as
determined in good faith by or under the direction of the board of trustees.
PERFORMANCE INFORMATION
Each Portfolio's performance data quoted in advertising and other
promotional materials ("Performance Advertisements") represent past performance
and are not intended to indicate future performance. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in a Portfolio's Performance Advertisements are
calculated according to the following formula:
<TABLE>
<S> <C> <C>
P(1 + T)to the power of n = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of a Portfolio
T = average annual total return of shares of that Portfolio
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning
of that period.
</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
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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)to the power of 6 - 1]
-----
cd
<TABLE>
<S> <C> <C> <C>
where: a = interest and other income earned during the period attributable to a
Portfolio
b = expenses accrued for the Period attributable to a Portfolio (net of
reimbursements)
c = the average daily number of shares of a Portfolio outstanding during the
period that were entitled to receive dividends
d = the net asset value per share on the last day of the Period
</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 the Period by (1)
computing the obligation's yield to maturity, based on the market value of the
obligation (including actual accrued interest) on the last business day of the
Period or, if the obligation was purchased during the Period, the purchase price
plus accrued interest and (2) dividing the yield to maturity by 360, and
multiplying the resulting quotient by the market value of the obligation
(including actual accrued interest) to determine the interest income on the
obligation for each day of the period that the obligation is in the portfolio.
Once interest earned is calculated in this fashion for each debt obligation held
by the Portfolio, interest earned during the Period is then determined by
totalling the interest earned on all debt obligations. For purposes of these
calculations, the maturity of an obligation with one or more call provisions is
assumed to be the next date on which the obligation reasonably can be expected
to be called or, if none, the maturity date.
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
E = tax-exempt yield of the Portfolio
p = stated income tax rate
t = taxable yield of the Portfolio
The tax-equivalent yield of PACE MUNICIPAL FIXED INCOME INVESTMENTS assumes
a 39.6% effective federal tax rate.
PACE MONEY MARKET INVESTMENTS computes its yield and effective yield
quotations using standardized methods required by the SEC. The Portfolio from
time to time advertises (1) its current yield based on a recently ended
seven-day period, computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period,
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subtracting a hypothetical charge reflecting deductions from that shareholder
account, dividing the difference by the value of the account at the beginning of
the base period to obtain the base period return, and then multiplying the base
period return by (365/7), with the resulting yield figure carried to at least
the nearest hundredth of one percent, and (2) its effective yield based on the
same seven-day period by compounding the base period return by adding 1, raising
the sum to a power equal to (365/7), and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)to the power of 365/7] - 1
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of each Portfolio fluctuates, it cannot be
compared with yields on savings accounts or other investment alternatives that
provide an agreed to or guaranteed fixed yield for a stated period of time.
However, yield information may be useful to an investor considering temporary
investments in money market instruments. In comparing the yield of one money
market fund to another, consideration should be given to each Portfolio's
investment policies, including the types of investments made, the average
maturity of the portfolio securities and whether there are any special account
charges that may reduce the yield.
OTHER INFORMATION. In Performance Advertisements, each Portfolio may
compare its Standardized Return and/or their Non-Standardized Return with data
published by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA"), Wiesenberger Investment Companies 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.
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<PAGE>
TAXES
ALL PORTFOLIOS. Each Portfolio is treated as a separate corporation for
federal income tax purposes. In order to qualify for treatment as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
(the "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 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) 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 (3) at the close of each quarter of the
Portfolio's taxable year, not more than 25% of the value of its total assets may
be invested in securities (other than U.S. government securities or the
securities of other RICs) of any one issuer.
Dividends and other distributions declared by a Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in any of those months will be deemed to have been paid by the Portfolio and
received by the shareholders on December 31 of that year if the distributions
are paid by the Portfolio during the following January. Accordingly, those
distributions will be taxed to shareholders for the year in which that December
31 falls.
A portion of the dividends from a Portfolio's investment company taxable
income (whether paid in cash or in additional Portfolio shares) may be eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the aggregate dividends received by a Portfolio from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
If shares of a Portfolio are sold at a loss after being held for six months
or less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the price back as a
taxable distribution.
Dividends and interest received by certain Portfolios may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on their securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and many foreign countries do not impose taxes on
capital gains in respect of investments by foreign investors. If more than 50%
of the value of a Portfolio's total assets at the close of its taxable year
consists of securities of foreign corporations, the Portfolio will be eligible
to, and may, file an election with the Internal Revenue Service that will enable
its shareholders, in effect, to receive the benefit of the foreign tax credit
with respect to any foreign and U.S. possessions income taxes paid by it.
Pursuant to the election, the Portfolio would treat those taxes as dividends
paid to its shareholders and each shareholder would be
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<PAGE>
required to (1) include in gross income, and treat as paid by the shareholder,
the shareholder's proportionate share of those taxes, (2) treat the
shareholder's share of those taxes and of any dividend paid by the Portfolio
that represents income from foreign or U.S. possessions sources as the
shareholder's own income from those sources, and (3) either deduct the taxes
deemed paid by the shareholder in computing the shareholder's taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against the shareholder's federal income tax. Each Portfolio will report
to its shareholders shortly after each taxable year their respective shares of
the Portfolio's income from sources within, and taxes paid to, foreign countries
and U.S. possessions if it makes this election.
Each Portfolio will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
The use of hedging and option income strategies, such as writing (selling)
and purchasing options and futures and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of the gains and losses a Portfolio realizes in
connection therewith. Income from the disposition of foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in 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.
A Portfolio's short sales against the box, if any, and transactions in
foreign currencies, forward contracts, options and futures contracts (including
options and futures contracts on foreign currencies) will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by the Portfolio (i.e., may affect whether gains or
losses are ordinary or capital), accelerate recognition of income to the
Portfolio and defer Portfolio losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also (a) will require the Portfolio to mark-to-market certain types of the
positions in its portfolio (i.e., treat them as if they were closed out) and (b)
may cause the Portfolio to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes. Each Portfolio
will monitor its transactions, will make the appropriate tax elections and will
make the appropriate entries in its books and records when it engages in a short
sale against the box or acquires any foreign currency, forward contract, option,
futures contract or hedged investment in order to mitigate the effect of these
rules and prevent disqualification of the Portfolio as a regulated investment
company.
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
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<PAGE>
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.
PACE INTERNATIONAL EQUITY INVESTMENTS AND PACE INTERNATIONAL EMERGING
MARKETS EQUITY INVESTMENTS. Each of these Portfolios may invest in the stock of
"passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, a Portfolio will be subject to federal income tax on a portion of
any "excess distribution" received on the stock of a PFIC or of any gain on
disposition of such stock (collectively "PFIC income"), plus interest thereon,
even if the Portfolio distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Portfolio's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders. If a Portfolio
invests in a PFIC and elects to treat the PFIC as a "qualified electing fund"
("QEF") then in lieu of the foregoing tax and interest obligation, the Portfolio
will be required to include in income each year its pro rata share of the QEF's
annual ordinary earnings and net capital gain, even if they are not distributed
by the QEF to the Portfolio; those amounts likely would have to be distributed
by the Portfolio to satisfy the Distribution Requirement and avoid imposition of
the Excise Tax. In most instances it will be very difficult, if not impossible,
to make this election because of certain requirements thereof.
Pursuant to proposed regulations and 1997 tax legislation, 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
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<PAGE>
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 PaineWebber PACE Select Advisors Trust. The Trust
is organized as a Delaware business trust. Although Delaware law statutorily
limits the potential liabilities of a Delaware business trust's shareholders to
the same extent as it limits the potential liabilities of shareholders of a
Delaware corporation, shareholders of a Portfolio could, under certain conflicts
of laws jurisprudence in various states, be held personally liable for the
obligations of the Trust or a Portfolio. However, the Trust's Trust Instrument
disclaims shareholder liability for acts or obligations of the Trust or its
Portfolios and requires that notice of such disclaimer be given in each written
obligation made or issued by the trustees or by any officers or officer by or on
behalf of the Trust, the Portfolios, the trustees or any of them in connection
with the Trust. The Trust Instrument provides for indemnification from a
Portfolio's property for all losses and expenses of any Portfolio shareholder
held personally liable for the obligations of a Portfolio. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which a Portfolio itself would be unable to meet its
obligations, a possibility which Mitchell Hutchins believes is remote and not
material. Upon payment of any liability incurred by a shareholder solely by
reason of being or having been a shareholder of a Portfolio, the shareholder
paying such liability will be entitled to reimbursement from the general assets
of the Portfolio. The trustees intend to conduct the operations of the
Portfolios in such a way as to avoid, as far as possible, ultimate liability of
the shareholders for liabilities of the Portfolios.
In the event any of the initial shares of a Portfolio are redeemed during
the five-year amortization period, the redemption proceeds will be reduced by a
PRO RATA portion of any unamortized deferred organizational expenses in the same
proportion as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of redemption.
COUNSEL. The law firm of Willkie Farr & Gallagher, 787 Seventh Avenue, 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 fiscal year ended July 31,
1998 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 CORPORATE BOND 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 a
"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 larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be 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 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.
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.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and 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 generic
rating classification from Aa through Caa in its corporate bond rating system.
The modifier 1 indicates that the company ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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DESCRIPTION OF S&P CORPORATE DEBT RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitments on the obligation is
extremely strong. AA. An obligation rated AA differs from the highest rated
issues only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong. A. An obligation rated A is
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the obligation is still
strong.
BBB. An obligation rated BBB exhibits adequate protection parameters:
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC, C, D. Obligations rated BB, B, CCC, CC and C are regarded
as having significant speculative characteristics; BB indicates the least degree
of speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions. BB. An obligation
rated BB is less vulnerable to nonpayment that other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation; B. An obligation
rated B is more vulnerable to nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial commitment on the
obligations. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation; CCC. An obligation rated CCC is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation; CC. An obligation rated CC is currently highly vulnerable to
nonpayment; C. The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on the
obligation are being continued; D. An obligation rated D is in payment default.
The D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
CI. The rating CI is reserved for income bonds on which no interest is
being paid.
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
rating categories.
r. This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
NR. "NR" indicates that no public rating has been requested, that there is
insufficient information on wich to base a rating, or that S&P does not rate a
particular type of obligation as matter of policy.
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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 protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make payments for a preferred stock in this category than
for issues in the "A" category; BB,, B, CCC. Preferred stocks rated "BB", "B"
and "CCC" are regarded, on balance, as predominantly speculative with respect to
the issuer's capacity to pay preferred stock obligations. "BB" indicates the
lowest degree of speculation and "CCC" the highest degree of speculation. While
such issues will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
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DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
PRIME-1. Issuers assigned this highest rating have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by the following charateristics: leading market positions in
well established industries; high rates of return on funds employed,
conservative capitalization structures 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 markers and assured sources of alternates liquidity.
PRIME-2. Issuers assigned this rating have a strong ability for repayment
of senior short-term debt 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.
PRIME-3. Issuers assigned this rating have an acceptable capacity for
repayment of senior short-term obligations. The effect of industry
characteristics and marker composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME. Issuers assigned this rating do not fall within any of the Prime
rating categories.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
A-1. A short-term obligation rated A-1 is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong. A-2. A short-term
obligation rated A-2 is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory. A-3. A short-term obligation
rated A-3 exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation. B.
A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation. C. A short-term obligation rated C is currently
vulnerable to nonpayment and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial commitment on the
obligation. D. A short-term obligation rated D is in payment default. The D
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
DESCRIPTION OF MOODY'S FOUR HIGHEST MUNICIPAL BOND RATINGS
AAA. Bonds rated Aaa are judged to be of the best quality and 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
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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 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 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 rated A posess 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 sometime in the future.
Baa. Bonds 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. An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA. Obligations rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A. An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
DESCRIPTION OF MOODY'S HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER
SHORT-TERM LOANS
Moody's ratings for state and municipal short-term obligations 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 by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection 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. Strong capacity to pay principal and interest. An issue determined
to possess very strong characteristics are given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
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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>
<CAPTION>
PAGE
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<S> <C>
INVESTMENT POLICIES AND RESTRICTIONS.............. 1
HEDGING AND RELATED STRATEGIES.................... 17
TRUSTEES AND OFFICERS; PRINCIPAL HOLDERS OF
SECURITIES....................................... 27
INVESTMENT MANAGEMENT, ADVISORY AND DISTRIBUTION
ARRANGEMENTS..................................... 32
PORTFOLIO TRANSACTIONS............................ 35
ADDITIONAL REDEMPTION INFORMATION................. 40
VALUATION OF SHARES............................... 40
PERFORMANCE INFORMATION........................... 42
TAXES............................................. 45
OTHER INFORMATION................................. 48
FINANCIAL STATEMENTS.............................. 48
APPENDIX.......................................... 49
</TABLE>
- -RECYCLE SYMBOL- Recycled Paper
- -C- 1998 PaineWebber Incorporated
PaineWebber PACE Select
Advisors Trust
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 1, 1998
PAINEWEBBER
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