As filed with the Securities and Exchange Commission on November 6, 1998
File No. 811-8790
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5
THE NON-U.S. FIXED INCOME PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
P.O. Box 2508 GT, George Town, Grand Cayman, Cayman Islands, BWI
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (809) 949-6644
Christopher J. Kelly, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to:John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant
to Section 8(b) of the Investment Company Act of 1940, as amended. However,
beneficial interests in the Registrant are not being registered under the
Securities Act of 1933, as amended (the "1933 Act"), because such interests will
be issued solely in private placement transactions that do not involve any
"public offering" within the meaning of Section 4(2) of the 1933 Act.
Investments in the Registrant may only be made by investment companies,
insurance company separate accounts, common or commingled trust funds or similar
organizations or entities that are "accredited investors" within the meaning of
Regulation D under the 1933 Act. This Registration Statement does not constitute
an offer to sell, or the solicitation of an offer to buy, any beneficial
interests in the Registrant.
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PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
The Non-U.S. Fixed Income Portfolio (the "Portfolio") is a no-load
open-end management investment company which was organized as a trust under the
laws of the State of New York on June 16, 1993. Beneficial interests in the
Portfolio are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"). Investments in the
Portfolio may only be made by other investment companies, insurance company
separate accounts, common or commingled trust funds or similar organizations or
entities that are "accredited investors" within the meaning of Regulation D
under the 1933 Act. This Registration Statement does not constitute an offer to
sell, or the solicitation of an offer to buy, any "security" within the meaning
of the 1933 Act.
The Portfolio is advised by J.P. Morgan Investment Management Inc. ("JPMIM"
or the "Advisor").
Investments in the Portfolio are not deposits or obligations of, or
guaranteed or endorsed by, Morgan Guaranty Trust Company of New York ("Morgan"),
an affiliate of the Advisor, or any other bank. Interests in the Portfolio are
not federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other governmental agency. An investment in the Portfolio
is subject to risk, as the net asset value of the Portfolio will fluctuate with
changes in the value of the Portfolio's holdings.
Part B contains more detailed information about the Portfolio,
including information related to (i) the investment policies and restrictions of
the Portfolio, (ii) the Trustees, officers, Advisor and administrators of the
Portfolio, (iii) portfolio transactions, (iv) rights and liabilities of
investors and (v) the audited financial statements of the Portfolio at September
30, 1997.
The investment objective of the Portfolio is described below, together
with the policies employed to attempt to achieve this objective. Additional
information about the investment policies of the Portfolio appears in Part B,
under Item 13. There can be no assurance that the investment objective of the
Portfolio will be achieved.
The Portfolio's investment objective, which is non-fundamental and can
be changed without a vote of interest holders, is to provide a high total
return, consistent with moderate risk of capital, from a portfolio of
international fixed income securities. Total return will consist of income plus
realized and unrealized capital gains and losses. The Portfolio seeks to achieve
its objective by investing in the types of fixed income securities described
below. The expected total return of a portfolio of fixed income securities may
not be as high as that of a portfolio of equity securities.
The Portfolio is designed for investors who seek exposure to the
international bond markets in their investment portfolios.
The Advisor actively manages the Portfolio's allocation across
countries, its duration and the selection of specific securities within
countries. Based on fundamental economic and capital markets research,
quantitative valuation techniques and experienced judgment, the Advisor
allocates the Portfolio's assets primarily among the developed countries of the
world outside the United States. The Advisor adjusts the Portfolio's duration in
light of market conditions and the Advisor's interest rate outlook for the
countries in which it invests. The Advisor selects securities among the broad
sectors of the fixed income market including, but not limited to, debt
obligations of governments and their agencies, supranational organizations,
corporations and banks, taking into consideration such factors as their relative
value, the likelihood of a change in credit rating, and the liquidity of the
issue. Under normal circumstances, the Advisor intends to keep the Portfolio
essentially fully invested with at least 65% of the Portfolio's assets invested
in bonds of foreign issuers. These investments will be made in at least three
foreign countries. For further information on international investments, see
"Additional Investment Information and Risk Factors."
Duration is a measure of the weighted average maturity of the bonds
held in the Portfolio and can be used as a measure of the sensitivity of the
Portfolio's market value to changes in interest rates. Generally, the longer the
duration of the Portfolio, the more sensitive its market value will be to
changes in interest rates. Typically, the Portfolio's duration will range
between one year shorter and one year longer than the duration of the non-U.S.
fixed income universe, as represented by Salomon Brothers Non-U.S. World
Government Bond Index, the Portfolio's benchmark. Currently the benchmark's
duration is approximately 5 years. The maturities of the individual bonds in the
Portfolio may vary widely, however.
The Portfolio may invest in securities denominated in foreign
currencies, the U.S. dollar or multinational currency units such as the ECU. The
Advisor will generally attempt to hedge the Portfolio's foreign currency
exposure into the U.S. dollar. However, the Advisor may from time to time decide
to keep foreign currency positions unhedged or engage in foreign currency
transactions if, based on fundamental research, technical factors, and the
judgment of experienced currency managers, it believes the foreign currency
exposure will benefit the Portfolio. For further information on foreign currency
exchange transactions, see "Additional Investment Information and Risk Factors."
The Advisor intends to manage its portfolio actively in pursuit of its
investment objective. Portfolio transactions are undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates in each country, but the Portfolio may also
engage in short-term trading consistent with its objective. To the extent the
Portfolio engages in short-term trading, it may realize short-term capital gains
or losses and incur increased transaction costs. The portfolio turnover rate for
the Portfolio for the fiscal year ended September 30, 1996 and the fiscal year
ended September 30, 1997 were 330% and 346% respectively.
FIXED INCOME INVESTMENTS. The Portfolio may invest in a broad range of
debt securities of foreign, and to a lesser extent domestic, corporate and
government issuers. The corporate securities in which the Portfolio may invest
include debt securities of various types and maturities, e.g., debentures,
notes, mortgage securities, equipment trust certificates and other
collateralized securities and zero coupon securities. Collateralized securities
are backed by a pool of assets such as loans or receivables which generate cash
flow to cover the payments due on the securities. Collateralized securities are
subject to certain risks, including a decline in the value of the collateral
backing the security, failure of the collateral to generate the anticipated cash
flow or in certain cases more rapid prepayment because of events affecting the
collateral, such as accelerated prepayment of mortgages or other loans backing
these securities or destruction of equipment subject to equipment trust
certificates. In the event of any such prepayment a Fund will be required to
reinvest the proceeds of prepayments at interest rates prevailing at the time of
reinvestment, which may be lower. In addition, the value of zero coupon
securities which do not pay interest is more volatile than that of interest
bearing debt securities with the same maturity.
CORPORATE BONDS. The Portfolio may invest in a broad range of debt
obligations of foreign issuers. These include debt securities of foreign
corporations; debt obligations of foreign banks and bank holding companies; and
debt obligations issued or guaranteed by supranational organizations such as the
World Bank, the European Investment Bank and the Asian Development Bank. To a
limited extent, the Portfolio may also invest in non-U.S. dollar denominated
securities of U.S. issuers.
GOVERNMENT SECURITIES. The Portfolio may invest in debt obligations
issued or guaranteed by a foreign sovereign government or one of its agencies,
authorities, instrumentalities or political subdivisions including a foreign
state, province or municipality.
MONEY MARKET INVESTMENTS. The Portfolio may invest in money market
instruments of foreign or domestic issuers denominated in U.S. dollars and other
currencies. Under normal circumstances the Portfolio will purchase these
securities as a part of its management of the Portfolio's duration, to invest
temporary cash balances or to maintain liquidity to meet redemptions. However,
the Portfolio may also invest in money market instruments as a temporary
defensive measure taken in the Advisor's judgment during, or in anticipation of,
adverse market conditions. For more detailed information about these money
market investments see Item 13 in Part B.
QUALITY INFORMATION. Under normal circumstances at least 65% of the
Portfolio's total assets will consist of securities that at the time of purchase
are rated at least A by Moody's Investors Service, Inc. ("Moody's") or Standard
& Poor's Ratings Group ("Standard & Poor's") or that are unrated and in the
Advisor's opinion are of comparable quality. In the case of the remaining 35% of
the Portfolio's investments, the Portfolio may purchase securities that are
rated Baa or better by Moody's or BBB or better by Standard & Poor's or are
unrated and in the Advisor's opinion are of comparable quality. Securities rated
Baa by Moody's or BBB by Standard & Poor's are considered investment grade, but
have some speculative characteristics. These standards must be satisfied at the
time an investment is made. If the quality of the investment later declines, the
Portfolio may continue to hold the investment. See Appendix A in Part B for more
detailed information on these ratings.
NON-DIVERSIFICATION. The Portfolio is registered as a non-diversified
investment company which means that the Portfolio is not limited by the
Investment Company Act of 1940, as amended (the "1940 Act"), in the proportion
of its assets that may be invested in the obligations of a single issuer. Thus,
the Portfolio may invest a greater proportion of its assets in the securities of
a smaller number of issuers and, as a result, may be subject to greater risk
with respect to its portfolio securities. The Portfolio, however, will comply
with the diversification requirements imposed by the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company. See Item 20 in Part B.
The Portfolio may also purchase obligations on a when-issued or delayed
delivery basis, enter into repurchase and reverse repurchase agreements, lend
its portfolio securities, purchase certain privately placed securities and enter
into forward foreign currency exchange contracts. In addition, the Portfolio may
use options on securities and indexes of securities, futures contracts and
options on futures contracts for hedging and risk management purposes. Forward
foreign currency exchange contracts, options and futures contracts are
derivative instruments. For a discussion of these investments and investment
techniques, see "Additional Investment Information and Risk Factors."
ADDITIONAL INVESTMENT INFORMATION AND RISK FACTORS
CONVERTIBLE SECURITIES. The convertible securities in which the
Portfolio may invest include any debt securities or preferred stock which may be
converted into common stock or which carry the right to purchase common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period and for fixed income securities no interest
accrues to the Portfolio until settlement. At the time of settlement, a
when-issued security may be valued at less than its purchase price. The
Portfolio maintains with the Custodian a separate account with a segregated
portfolio of securities in an amount at least equal to these commitments. When
entering into a when-issued or delayed delivery transaction, the Portfolio will
rely on the other party to consummate the transaction; if the other party fails
to do so, the Portfolio may be disadvantaged. It is the current policy of the
Portfolio not to enter into when-issued commitments exceeding in the aggregate
15% of the market value of the Portfolio's total assets less liabilities other
than the obligations created by these commitments.
REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement
transactions with brokers, dealers or banks that meet the credit guidelines
established by the Trustees. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase it at a mutually agreed
upon date and price, reflecting the interest rate effective for the term of the
agreement. The term of these agreements is usually from overnight to one week. A
repurchase agreement may be viewed as a fully collateralized loan of money by
the Portfolio to the seller. The Portfolio always receives securities as
collateral with a market value at least equal to the purchase price plus accrued
interest and this value is maintained during the term of the agreement. If the
seller defaults and the collateral value declines, the Portfolio might incur a
loss. If bankruptcy proceedings are commenced with respect to the seller, the
Portfolio's realization upon the disposition of collateral may be delayed or
limited. Investments in certain repurchase agreements and certain other
investments which may be considered illiquid are limited. See "Illiquid
Investments; Privately Placed and other Unregistered Securities" below.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment
restrictions, the Portfolio is permitted to lend its securities in an amount up
to 33-1/3% of the value of the Portfolio's net assets. The Portfolio may lend
its securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolio in the normal settlement time, generally three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Portfolio and its investors. The Portfolio may pay reasonable finders' and
custodial fees in connection with a loan. In addition, the Portfolio will
consider all facts and circumstances, including the creditworthiness of the
borrowing financial institution, and the Portfolio will not make any loans in
excess of one year.
Loans of portfolio securities may be considered extensions of credit by
the Portfolio. The risks to the Portfolio with respect to borrowers of its
portfolio securities are similar to the risks to the Portfolio with respect to
the sellers in repurchase agreement transactions. See "Repurchase Agreements"
above. The Portfolio will not lend its securities to any officer, Trustee,
Director, employee or other affiliate of the Portfolio, the Adviser or the
placement agent, unless otherwise permitted by applicable law.
FOREIGN INVESTMENT INFORMATION. The Portfolio invests primarily in
certain foreign securities. Investment in securities of foreign issuers and in
obligations of foreign branches of domestic banks involves somewhat different
investment risks from those affecting securities of U.S. domestic issuers. There
may be limited publicly available information with respect to foreign issuers,
and foreign issuers are not generally subject to uniform accounting, auditing
and financial standards and requirements comparable to those applicable to
domestic companies. Dividends and interest paid by foreign issuers may be
subject to withholding and other foreign taxes which may decrease the net return
on foreign investments as compared to dividends and interest paid to the
Portfolio by domestic companies.
Investors should realize that the value of the Portfolio's investments
in foreign securities may be adversely affected by changes in political or
social conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Portfolio's operations. Furthermore, the economies of individual foreign
nations may differ from the United States economy, whether favorably or
unfavorably, in areas such as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. Any foreign investments made by the Portfolio
must be made in compliance with U.S. and foreign currency restrictions and tax
laws restricting the amounts and types of foreign investments.
In addition, while the volume of transactions effected on foreign bond
markets has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, the Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. issuers. Moreover, the settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. In addition, there is generally
less government supervision and regulation of securities exchanges, brokers and
issuers located in foreign countries than in the United States.
Although the Portfolio invests primarily in securities of established
issuers based in developed foreign counties, it may also invest in securities of
issuers in emerging markets countries. Investments in securities of issuers in
emerging markets countries may involve a high degree of risk and many may be
considered speculative. These investments carry all of the risks of investing in
securities of foreign issuers outlined in this section to a heightened degree.
These heightened risks include (i) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and economic stability;
(ii) the small current size of the markets for securities of emerging markets
issuers and the currently low or non-existent volume of trading, resulting in
lack of liquidity and in price volatility; (iii) certain national policies which
may restrict the Portfolio's investment opportunities including restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests; and (iv) the absence of developed legal structures governing private
or foreign investment and private property.
Since the Portfolio's investments in foreign securities involve foreign
currencies, the value of its assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. See "Foreign Currency Exchange
Transactions."
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Portfolio buys and
sells securities and receives interest and dividends in currencies other than
the U.S. dollar, the Portfolio may from time to time enter into foreign currency
exchange transactions. The Portfolio either enters into these transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or uses forward contracts to purchase or sell foreign
currencies. The cost of the Portfolio's spot currency exchange transactions is
generally the difference between the bid and offer spot rate of the currency
being purchased or sold.
A forward foreign currency exchange contract is an obligation by the
Portfolio to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are derivative instruments, as their value derives from the exchange rate
between the currencies exchanged under the contract. These contracts are entered
into in the interbank market directly between currency traders (usually large
commercial banks) and their customers. A forward foreign currency exchange
contract generally has no deposit requirement, and is traded at a net price
without commission. The Portfolio will not enter into forward contracts for
speculative purposes. Neither spot transactions nor forward foreign currency
exchange contracts eliminate fluctuations in the prices of the Portfolio's
securities or in foreign exchange rates, or prevent loss if the prices of these
securities should decline.
The Portfolio may enter into foreign currency exchange transactions in
an attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or
anticipated securities transactions. The Portfolio may also enter into forward
contracts to hedge against a change in foreign currency exchange rates that
would cause a decline in the value of existing investments denominated or
principally traded in a foreign currency. To do this, the Portfolio would enter
into a forward contract to sell the foreign currency in which the investment is
denominated or principally traded in exchange for U.S. dollars. The Portfolio
will only enter into forward contracts to sell a foreign currency in exchange
for another foreign currency if the Advisor expects the foreign currency
purchased to appreciate against the U.S. dollar.
Although these transactions are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
limit any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause the Portfolio to assume the
risk of fluctuations in the value of the currency purchased against the hedged
currency and the U.S. dollar. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market conditions in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
SOVEREIGN FIXED INCOME SECURITIES. The Portfolio may invest in fixed
income securities issued or guaranteed by a foreign sovereign government or its
agencies, authorities or political subdivisions. Investment in sovereign fixed
income securities involves special risks not present in corporate fixed income
securities. The issuer of the sovereign debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due, and the Portfolio may have limited recourse in
the event of a default. During periods of economic uncertainty, the market
prices of sovereign debt, and the Portfolio's net asset value, may be more
volatile than prices of U.S. debt obligations. In the past, certain foreign
countries have encountered difficulties in servicing their debt obligations,
withheld payments of principal and interest and declared moratoria on the
payment of principal and interest on their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward international lenders and local political
constraints. Sovereign debtors may also be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities to reduce
principal and interest arrearages on their debt. The failure of a sovereign
debtor to implement economic reforms, achieve specified levels of economic
performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
BRADY BONDS. The Portfolio may invest in Brady bonds, which are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings. Brady bonds have been issued since 1989 and
do not have a long payment history. In light of the history of defaults of
countries issuing Brady bonds on their commercial bank loans, investments in
Brady bonds may be viewed as speculative. Brady bonds may be fully or partially
collateralized or uncollateralized, are issued in various currencies (but
primarily the dollar) and are actively traded in over-the-counter secondary
markets. Incomplete collateralization of interest or principal payment
obligations results in increased credit risk. Dollar-denominated collateralized
Brady bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized by U.S. Treasury zero coupon bonds having the same maturity as
the Brady bonds.
OBLIGATIONS OF SUPRANATIONAL ENTITIES. The Portfolio may invest in
obligations of supranational entities designated or supported by governmental
entities to promote economic reconstruction or development and of international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the "World Bank"), the
European Coal and Steel Community, the Asian Development Bank and the
Inter-American Development Bank. Each supranational entity's lending activities
are limited to a percentage of its total capital (including "callable capital"
contributed by its governmental members at the entity's call), reserves and net
income. There is no assurance that participating governments will be able or
willing to honor their commitments to make capital contributions to a
supranational entity.
INVESTING IN EMERGING MARKETS. The Portfolio may also invest in
countries with emerging economies or securities markets. Political and economic
structures in many of such countries may be undergoing significant evolution and
rapid development, and such countries may lack the social, political and
economic stability characteristic of more developed countries. Certain of such
countries may have in the past failed to recognize private property rights and
have at times nationalized or expropriated the assets of private companies. As a
result, the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the values of the Portfolio's investments in
those countries and the availability to the Portfolio of additional investments
in those countries. The small size and inexperience of the securities markets in
certain of such countries and the limited volume of trading in securities in
those countries may make the Portfolio's investments in such countries illiquid
and more volatile than investments in more developed countries, and the
Portfolio may be required to establish special custodial or other arrangements
before making certain investments in those countries. There may be little
financial or accounting information available with respect to issuers located in
certain of such countries, and it may be difficult as a result to assess the
value or prospects of an investment in such issuers.
Transaction costs in emerging markets may be higher than in the United
States and other developed securities markets. As legal systems in emerging
markets develop, foreign investors may be adversely affected by new or amended
laws and regulations or may not be able to obtain swift and equitable
enforcement of existing law.
RESTRICTIONS ON INVESTMENT AND REPATRIATION. Certain emerging markets
limit, or require governmental approval prior to, investments by foreign
persons. Repatriation of investment income and capital from certain emerging
markets is subject to certain governmental consents. Even where there is no
outright restriction on repatriation of capital, the mechanics of repatriation
may affect the operation of the Portfolio.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of the Portfolio's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Portfolio
may acquire investments that are illiquid or have limited liquidity, such as
private placements or investments that are not registered under the 1933 Act and
cannot be offered for public sale in the United States without first being
registered under the 1933 Act. An illiquid investment is any investment that
cannot be disposed of within seven days in the normal course of business at
approximately the amount at which it is valued by the Portfolio. The price the
Portfolio pays for illiquid securities or receives upon resale may be lower than
the price paid or received for similar securities with a more liquid market.
Accordingly the valuation of these securities will reflect any limitations on
their liquidity.
The Portfolio may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor and approved by the Trustees. The Trustees will
monitor the Advisor's implementation of these guidelines on a periodic basis.
FUTURES AND OPTIONS TRANSACTIONS. The Portfolio is permitted to enter
into the futures and options transactions described below for both hedging and
risk management purposes, although not for speculation. For a more detailed
description of these transactions see "Options and Futures Transactions" in Item
13 in Part B.
The Portfolio may (a) purchase and sell (write) exchange traded and
over-the-counter (OTC) put and call options on fixed income securities or
indexes of fixed income securities, (b) purchase and sell futures contracts on
indexes of fixed income securities, and (c) purchase and sell (write) put and
call options on futures contracts on indexes of fixed income securities. Each of
these instruments is a derivative instrument, as its value derives from the
underlying asset or index.
The Portfolio may use futures contracts and options for hedging and
risk management purposes. The Portfolio may not use futures contracts and
options for speculation.
The Portfolio may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge the Portfolio's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of the Portfolio's overall strategy in a manner deemed
appropriate to the Advisor and consistent with the Portfolio's objective and
policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase the Portfolio's return. While the use of these
instruments by the Portfolio may reduce certain risks associated with owning its
portfolio securities, these techniques themselves entail certain other risks. If
the Advisor applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower the
Portfolio's return. Certain strategies limit the Portfolio's possibilities to
realize gains as well as limiting its exposure to losses. The Portfolio could
also experience losses if the prices of its options and futures positions were
poorly correlated with its other investments, or if it could not close out its
positions because of an illiquid secondary market. In addition, the Portfolio
will incur transaction costs, including trading commissions and option premiums,
in connection with its futures and options transactions and these transactions
could significantly increase the Portfolio's turnover rate.
The Portfolio may purchase and sell put and call options on securities,
indexes of securities and futures contracts, or purchase and sell futures
contracts, only if such options are written by other persons and if (i) the
aggregate premiums paid on all such options which are held at any time do not
exceed 20% of the Portfolio's net assets, and (ii) the aggregate margin deposits
required on all such futures or options thereon held at any time do not exceed
5% of the Portfolio's total assets.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the
Portfolio obtains the right (but not the obligation) to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
Portfolio pays the current market price for the option (known as the option
premium). Options have various types of underlying instruments, including
specific securities, indexes of securities, indexes of securities prices, and
futures contracts. The Portfolio may terminate its position in a put option it
has purchased by allowing it to expire or by exercising the option. The
Portfolio may also close out a put option position by entering into an
offsetting transaction, if a liquid market exists. If the option is allowed to
expire, the Portfolio will lose the entire premium it paid. If the Portfolio
exercises a put option on a security, it will sell the instrument underlying the
option at the strike price. If the Portfolio exercises an option on an index,
settlement is in cash and does not involve the actual sale of securities. An
option may be exercised on any day up to its expiration date.
The buyer of a typical put option can expect to realize a gain if the
price of the underlying instrument falls substantially. However, if the price of
the instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
SELLING (WRITING) PUT AND CALL OPTIONS. When the Portfolio writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Portfolio assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. The Portfolio may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. If the market is not
liquid for a put option the Portfolio has written, however, the Portfolio must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as discussed
below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Portfolio to sell or deliver the
option's underlying instrument in return for the strike price upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
OPTIONS ON INDEXES. The Portfolio may purchase put and call options on
any securities index based on securities in which the Portfolio may invest.
Options on securities indexes are similar to options on securities, except that
the exercise of securities index options is settled by cash payment and does not
involve the actual purchase or sale of securities. In addition, these options
are designed to reflect price fluctuations in a group of securities or segment
of the securities market rather than price fluctuations in a single security.
The Portfolio, in purchasing or selling index options, is subject to the risk
that the value of its portfolio securities may not change as much as an index
because the Portfolio's investments generally will not match the composition of
an index.
For a number of reasons, a liquid market may not exist and thus the
Portfolio may not be able to close out an option position that it has previously
entered into. When the Portfolio purchases an OTC option, it will be relying on
its counterparty to perform its obligations, and the Portfolio may incur
additional losses if the counterparty is unable to perform.
FUTURES CONTRACTS. When the Portfolio purchases a futures contract, it
agrees to purchase a specified quantity of an underlying instrument at a
specified future date or to make a cash payment based on the value of a
securities index. When the Portfolio sells a futures contract, it agrees to sell
a specified quantity of the underlying instrument at a specified future date or
to receive a cash payment based on the value of a securities index. The price at
which the purchase and sale will take place is fixed when the Portfolio enters
into the contract. Futures can be held until their delivery dates or the
position can be (and normally is) closed out before then. There is no assurance,
however, that a liquid market will exist when the Portfolio wishes to close out
a particular position.
When the Portfolio purchases a futures contract, the value of the
futures contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Portfolio's exposure to positive and negative price fluctuations in
the underlying instrument, much as if it had purchased the underlying instrument
directly. When the Portfolio sells a futures contract, by contrast, the value of
its futures position will tend to move in a direction contrary to the value of
the underlying instrument. Selling futures contracts, therefore, will tend to
offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when the Portfolio buys or sells a futures contract
it will be required to deposit "initial margin" with its Custodian in a
segregated account in the name of its futures broker, known as a futures
commission merchant (FCM). Initial margin deposits are typically equal to a
small percentage of the contract's value. If the value of either party's
position declines, that party will be required to make additional "variation
margin" payments equal to the change in value on a daily basis. The party that
has a gain may be entitled to receive all or a portion of this amount. The
Portfolio may be obligated to make payments of variation margin at a time when
it is disadvantageous to do so. Furthermore, it may not always be possible for
the Portfolio to close out its futures positions. Until it closes out a futures
position, the Portfolio will be obligated to continue to pay variation margin.
Initial and variation margin payments do not constitute purchasing on margin for
purposes of the Portfolio's investment restrictions. In the event of the
bankruptcy of an FCM that holds margin on behalf of the Portfolio, the Portfolio
may be entitled to return of margin owed to it only in proportion to the amount
received by the FCM's other customers, potentially resulting in losses to the
Portfolio.
The Portfolio will segregate liquid assets in connection with its use
of options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
INVESTMENT RESTRICTIONS
The investment restrictions of the Portfolio described in Item 13 of
Part B, except as noted, are deemed fundamental policies, i.e., they may be
changed only with the approval of a majority of the outstanding voting
securities of the Portfolio.
The Portfolio may not purchase securities or other obligations of
issuers conducting their principal business activity in the same industry if its
investments in such industry would exceed 25% of the value of the Portfolio's
total assets, except this limitation shall not apply to investments in U.S.
Government securities. (For the purposes of this 25% limitation, the staff of
the Securities and Exchange Commission (the "SEC") considers (i) all
supranational organizations as a group to be a single industry and (ii) each
foreign government and its political subdivisions to be a single industry.) In
addition, the Portfolio may not borrow money except that the Portfolio may (a)
borrow money from banks for temporary or emergency purposes (not for leveraging
purposes) and (b) enter into reverse repurchase agreements for any purpose,
provided that (a) and (b) in total do not exceed 33-1/3% of the Portfolio's
total assets less liabilities (other than borrowings); and the Portfolio may not
issue senior securities except as permitted by the 1940 Act or any rule, order
or interpretation thereunder.
For a more detailed discussion of the above investment restrictions, as
well as a description of certain other investment restrictions, see Item 13 in
Part B.
ITEM 5. MANAGEMENT OF THE PORTFOLIO.
The Board of Trustees provides broad supervision over the affairs of
the Portfolio. The Portfolio has retained the services of JPMIM as investment
advisor and Morgan as administrative services agent. The Portfolio has retained
the services of Funds Distributors, Inc. ("FDI") as co-administrator (the "Co-
Administrator").
The Portfolio has not retained the services of a principal underwriter
or distributor, since interests in the Portfolio are offered solely in private
placement transactions. FDI, acting as agent for the Portfolio, serves as
exclusive placement agent of interests in the Portfolio. FDI receives no
additional compensation for serving as exclusive placement agent to the
Portfolio.
The Portfolio has entered into an Amended and Restated Portfolio Fund
Services Agreement dated July 11, 1996 with Pierpont Group, Inc. ("Pierpont
Group") to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio. The fees to be paid under the agreement
approximate the reasonable cost of Pierpont Group in providing these services to
the Trust, the Portfolio and certain other registered investment companies
subject to similar agreements with Pierpont Group, Inc. Pierpont Group was
organized in 1989 at the request of the Trustees of the J.P. Morgan Family of
Funds (formerly The Pierpont Family of Funds) for the purpose of providing these
services at cost to those funds. See Item 14 in Part B. The principal offices of
Pierpont Group are located at 461 Fifth Avenue, New York, New York 10017.
INVESTMENT ADVISOR. Subject to the supervision of the Portfolio's
Trustees, the Advisor makes the Portfolio's day-to-day investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Portfolio's investments. Effective October 1, 1998 the portfolio's investment
advisor is JPMIM. Prior to that date, Morgan, a wholly owned subsidiary of J.P.
Morgan & Co. Incorporated ("J.P. Morgan"), was the Portfolio's investment
advisor. JPMIM, also a wholly owned subsidiary of J.P. Morgan, is a registered
investment adviser under the Investment Advisers Act of 1940, as amended. JPMIM
manages employee benefit funds of corporations, labor unions and state and local
governments and the accounts of other institutional investors, including
investment companies. Certain of the assets of employee benefit accounts under
its management are invested in commingled pension trust funds for which Morgan
serves as trustee.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of approximately $275 billion.
The Advisor uses a sophisticated, disciplined, collaborative process
for managing the Portfolio. For fixed income portfolios, this process focuses on
the systematic analysis of real interest rates, sector diversification,
quantitative and credit analysis, and, for foreign fixed income securities,
country selection. Morgan has managed portfolios of international fixed income
securities on behalf of its clients since 1977. The portfolio managers making
investments in international fixed income securities work in conjunction with
fixed income, credit, capital market and economic research analysts, as well as
traders and administrative officers. The following persons are primarily
responsible for the day-to-day management and implementation of Morgan's process
for the Portfolio (the inception date of each person's responsibility for the
Portfolio and his or her business experience for the past five years is
indicated parenthetically): Dominic J. Pegler, Vice President (since April,
1996; employed by Morgan since April 1996, previously an economist at Bank of
England ) and Maria Ryan, Associate (since January, 1997; employed by Morgan
since prior to 1992).
As compensation for the services rendered and related expenses borne by
the Advisor under the Investment Advisory Agreement with the Portfolio, the
Portfolio has agreed to pay the Advisor a fee, which is computed daily and may
be paid monthly, at the annual rate of 0.35% of the Portfolio's average daily
net assets.
Under a separate agreement, Morgan also provides administrative and related
services to the Portfolio. See "Administrative Services Agent" below.
CO-ADMINISTRATOR. Pursuant to a Co-Administration Agreement with the
Portfolio, FDI serves as the Co-Administrator for the Portfolio. FDI (i)
provides office space, equipment and clerical personnel for maintaining the
organization and books and records of the Portfolio; (ii) provides officers for
the Portfolio; (iii) files Portfolio regulatory documents and mails Portfolio
communications to Trustees and investors; and (iv) maintains related books and
records. See "Administrative Services Agent" below.
For its services under the Co-Administration Agreement, the Portfolio
has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to the Portfolio is based on the ratio of its net assets to the
aggregate net assets of the Portfolio and certain other registered investment
companies subject to similar agreements with FDI.
ADMINISTRATIVE SERVICES AGENT. Pursuant to the Administrative Services
Agreement with the Portfolio, Morgan provides certain administrative and related
services to the Portfolio, including services related to tax compliance,
preparation of financial statements, calculation of performance data, oversight
of service providers and certain regulatory and Board of Trustees matters.
Under the Administrative Services Agreement, the Portfolio has agreed
to pay Morgan fees equal to its allocable share of an annual complex-wide
charge. This charge is calculated daily based on the aggregate net assets of the
Portfolio, the other Portfolios in which series of the Trust or the J.P. Morgan
Funds invest and J.P. Morgan Series Trust and in accordance with the following
annual schedule: 0.09% on the first $7 billion of their aggregate average daily
net assets and 0.04% of their aggregate average daily net assets in excess of $7
billion, less the complex-wide fees payable to FDI.
PLACEMENT AGENT. FDI, a registered broker-dealer, also serves as
exclusive placement agent for the Portfolio. FDI is a wholly owned indirect
subsidiary of Boston Institutional Group, Inc. FDI's principal business address
is 60 State Street, Suite 1300, Boston, Massachusetts 02109.
CUSTODIAN. State Street Bank and Trust Company ("State Street"), 40
King Street West, Toronto, Ontario, Canada M5H 3Y8 serves as the Portfolio's
custodian and fund accounting and transfer agent. State Street keeps the books
of account for the Portfolio.
EXPENSES. In addition to the fees payable to the service providers
identified above, the Portfolio is responsible for usual and customary expenses
associated with its operations. Such expenses include organization expenses,
legal fees, accounting and audit expenses, insurance costs, the compensation and
expenses of the Trustees, registration fees under federal and foreign securities
laws, extraordinary expenses and brokerage expenses.
J.P. Morgan has agreed that it will reimburse the Portfolio through at
least January 31, 1999 to the extent necessary to maintain the Portfolio's total
operating expenses at the annual rate of 0.50% of the Portfolio's average daily
net assets. This limit does not cover extraordinary expenses during the period.
There is no assurance that J.P. Morgan will continue this waiver beyond the
specified period. For the fiscal year ended September 30, 1997 the Portfolio's
total expenses were 0.52% of its average net assets.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is organized as a trust under the laws of the State of
New York. Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Each investor is entitled to a vote in
proportion to the amount of its investment in the Portfolio. Investments in the
Portfolio may not be transferred, but an investor may withdraw all or any
portion of its investment at any time at net asset value. Investors in the
Portfolio (e.g., other investment companies, insurance company separate accounts
and common and commingled trust funds) will each be liable for all obligations
of the Portfolio. However, the risk of an investor in the Portfolio incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations.
As of September 30, 1998, J.P. Morgan Institutional International Bond
Fund (the "Fund") owned approximately 99% of the outstanding beneficial
interests in the Portfolio. So long as the Fund controls the Portfolio, the Fund
may take actions without the approval of any other holder of beneficial
interests in the Portfolio.
In January 1998 the Portfolio received a substantial redemption request
in connection with the reorganization of certain non-U.S. Funds managed by
Morgan. This redemption will not reduce the net assets of the Fund, but it will
reduce the size of the Portfolio. After the redemption, the Portfolio's assets
are expected to be approximately $7 million.
Investments in the Portfolio have no preemptive or conversion rights
and are fully paid and nonassessable, except as set forth below. The Portfolio
is not required and has no current intention of holding annual meetings of
investors, but the Portfolio will hold special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote. Changes in fundamental policies will be submitted to investors
for approval. Investors have under certain circumstances (e.g., upon application
and submission of certain specified documents to the Trustees by a specified
percentage of the outstanding interests in the Portfolio) the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees. Investors also have
the right to remove one or more Trustees without a meeting by a declaration in
writing by a specified percentage of the outstanding interests in the Portfolio.
Upon liquidation of the Portfolio, investors would be entitled to share pro rata
in the net assets of the Portfolio available for distribution to investors.
The net asset value of the Portfolio is determined each business day
other than the holidays listed in Part B ("Portfolio Business Day"). This
determination is made once each Portfolio Business Day as of 4:15 p.m.
New York time (the "Valuation Time").
The "net income" of the Portfolio will consist of (i) all income
accrued, less the amortization of any premium, on the assets of the Portfolio,
less (ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles. Interest income
includes discount earned (including both original issue and market discount) on
discount paper accrued ratably to the date of maturity and any net realized
gains or losses on the assets of the Portfolio. All of the net income of the
Portfolio is allocated pro rata among the investors in the Portfolio.
The end of the Portfolio's fiscal year is September 30.
Under the anticipated method of operation of the Portfolio, the
Portfolio will not be subject to any income tax. However, each investor in the
Portfolio will be taxable on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's ordinary income and
capital gain in determining its income tax liability. The determination of such
share will be made in accordance with the Code and regulations promulgated
thereunder.
It is intended that the Portfolio's assets, income and distributions
will be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio.
Investor inquiries may be directed to FDI, in care of State Street
Cayman Trust Company, Ltd., at Elizabethan Square, Shedden Road, George Town,
Grand Cayman, Cayman Islands (809-949-6644).
ITEM 7. PURCHASE OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by investment companies, insurance company separate accounts, common or
commingled trust funds, or similar organizations or entities which are
"accredited investors" as defined in Rule 501 under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
received in "good order" by the Portfolio. The net asset value of the Portfolio
is determined on each Portfolio Business Day.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., monies credited to the account
of the Custodian by a Federal Reserve Bank).
The Portfolio may, at its own option, accept securities in payment for
investments in its beneficial interests. The securities delivered in kind are
valued by the method described in Net Asset Value as of the business day prior
to the day the Portfolio receives the securities. Securities may be accepted in
payment for beneficial interests only if they are, in the judgment of the
Advisor, appropriate investments for the Portfolio. In addition, securities
accepted in payment for beneficial interests must: (i) meet the investment
objective and policies of the Portfolio; (ii) be acquired by the Portfolio for
investment and not for resale; (iii) be liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (iv) if
stock, have a value which is readily ascertainable as evidenced by a listing on
a stock exchange, OTC market or by readily available market quotations from a
dealer in such securities. The Portfolio reserves the right to accept or reject
at its own option any and all securities offered in payment for beneficial
interests.
The Portfolio and FDI reserve the right to cease accepting investments
at any time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each Portfolio Business Day. At the Valuation Time on each such
day, the value of each investor's beneficial interest in the Portfolio will be
determined by multiplying the net asset value of the Portfolio by the
percentage, effective for that day, which represents that investor's share of
the aggregate beneficial interests in the Portfolio. Any additions or
reductions, which are to be effected at the Valuation Time on such day, will
then be effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be recomputed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio at the Valuation Time on such day plus or minus, as
the case may be, the amount of net additions to or reductions in the investor's
investment in the Portfolio effected as of the Valuation Time, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
Valuation Time on such day, plus or minus, as the case may be, the amount of net
additions to or reductions in the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be applied to
determine the value of the investor's interest in the Portfolio as of the
Valuation Time on the following Portfolio Business Day.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may redeem all or any portion of its
investment at the net asset value next determined after a request in "good
order" is furnished by the investor to the Portfolio. The proceeds of a
redemption will be paid by the Portfolio in federal funds normally on the next
Portfolio Business Day after the redemption is effected, but in any event within
seven days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
redemption may be suspended or the payment of the proceeds therefrom postponed
during any period in which the New York Stock Exchange (the "NYSE") is closed
(other than weekends or holidays) or trading on the NYSE is restricted or, to
the extent otherwise permitted by the 1940 Act, if an emergency exists.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio or the investor's
portfolio, as the case may be.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. Page
General Information and History ............ B-1
Investment Objective and Policies........... B-1
Management of the Portfolio................. B-11
Control Persons and Principal Holders
of Securities............................... B-14
Investment Advisory and Other Services...... B-15
Brokerage Allocation and Other Practices.... B-19
Capital Stock and Other Securities.......... B-20
Purchase, Redemption and Pricing of
Securities.................................. B-21
Tax Status.................................. B-22
Underwriters................................ B-24
Calculations of Performance Data............ B-24
Financial Statements........................ B-24
Appendix.................................... Appendix-1
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
The investment objective of The Non-U.S. Fixed Income Portfolio (the
"Portfolio"), which is non-fundamental and can be changed without the approval
of interest holders, is to provide a high total return consistent with moderate
risk of capital, from a portfolio of international fixed income securities. The
Portfolio attempts to achieve its investment objective by investing primarily in
high grade, non-dollar-denominated corporate and government debt obligations of
foreign issuers described in Part A and this Part B.
The Portfolio is advised by J.P. Morgan Investment Management Inc. ("JPMIM"
or the "Advisor").
INVESTMENT PROCESS
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B-32
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Duration management: The duration decision is central to Morgan's
investment process and begins with an analysis of economic conditions and real
yields in the countries that make up the Portfolio's universe. Based on this
analysis, fixed income portfolio managers forecast three potential paths
(optimistic, pessimistic, and most likely) that interest rates in each market
could follow over the next three and twelve months. These forecasts are
converted into return curves that enable Morgan to estimate the risk-return
profile of different portfolio durations. In each market, duration is set at its
"optimal" level--that is, at the level that Morgan believes will generate the
highest excess return per unit of excess risk, as measured against the
benchmark.
Country allocation: Morgan allocates the Portfolio's assets primarily
among the developed countries of the world outside the United States. Country
allocations are determined through an optimization procedure that ranks markets
according to the risks and returns inherent in their "optimal" durations.
Country weightings also reflect liquidity and credit quality considerations. To
help contain risk, Morgan typically limits the country-weighted duration of the
Portfolio to a range between one year shorter and one year longer than that of
the benchmark.
Sector/security selection: Holdings primarily consist of government and
government-guaranteed bonds, but also include publicly and privately traded
corporate debt obligations, debt obligations of banks and bank holding companies
and of supranational organizations, and convertible securities. Sectors are
over- or under-weighted when Morgan perceives significant valuation distortions
in their yield spreads. Securities are selected by the portfolio manager, with
substantial input from fixed income analysts and traders as well as from
Morgan's extended network of equity analysts. Credit analysts monitor the
quality of current and prospective holdings and, in conjunction with the credit
committee, recommend purchases and sales.
The following discussion supplements the information regarding the
investment objective of the Portfolio and the policies to be employed to achieve
this objective as set forth above and in Part A.
MONEY MARKET INSTRUMENTS
As discussed in Part A, the Portfolio may invest in money market
instruments to the extent consistent with its investment objective and policies.
A description of the various types of money market instruments that may be
purchased by the Portfolio appears below. Also see "Quality and Diversification
Requirements".
U.S. TREASURY SECURITIES. The Portfolio may invest in direct obligations of
the U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, the Portfolio must look principally
to the federal agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its commitments.
Securities in which the Portfolio may invest that are not backed by the full
faith and credit of the United States include, but are not limited to,
obligations of the Tennessee Valley Authority, the Federal Home Loan Mortgage
Corporation, and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations. Securities in which the
Portfolio may invest that are not backed by the full faith and credit of the
United States, include, but are not limited to, obligations of the Federal Farm
Credit System and the Federal Home Loan Banks, both of whose obligations may be
satisfied only by the individual credits of each issuing agency. Securities
which are backed by the full faith and credit of the United States include
obligations of the Government National Mortgage Association, the Farmers Home
Administration, and the Export-Import Bank.
FOREIGN GOVERNMENT OBLIGATIONS. The Portfolio, subject to its applicable
investment policies, may also invest in short-term obligations of foreign
sovereign governments or of their agencies, instrumentalities, authorities or
political subdivisions. These securities may be denominated in the U.S. dollar
or in another currency. See "Foreign Investments".
BANK OBLIGATIONS. The Portfolio, unless otherwise noted in Part A or
below, may invest in negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which are organized under the laws of the United States or any state, (ii)
foreign branches of these banks or of foreign banks of equivalent size (Euros)
and (iii) U.S. branches of foreign banks of equivalent size (Yankees). The
Portfolio will not invest in obligations for which the Advisor, or any of its
affiliated persons, is the ultimate obligor or accepting bank. The Portfolio may
also invest in obligations of international banking institutions designated or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the European Investment Bank, the
Inter-American Development Bank, or the World Bank).
COMMERCIAL PAPER. The Portfolio may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee.
The monies loaned to the borrower come from accounts managed by Morgan or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. Morgan has the right to increase or
decrease the amount provided to the borrower under an obligation. The borrower
has the right to pay without penalty all or any part of the principal amount
then outstanding on an obligation together with interest to the date of payment.
Since these obligations typically provide that the interest rate is tied to the
Federal Reserve commercial paper composite rate, the rate on master demand
obligations is subject to change. Repayment of a master demand obligation to
participating accounts depends on the ability of the borrower to pay the accrued
interest and principal of the obligation on demand which is continuously
monitored by Morgan. Since master demand obligations typically are not rated by
credit rating agencies, the Portfolio may invest in such unrated obligations
only if at the time of an investment the obligation is determined by the Advisor
to have a credit quality which satisfies the Portfolio's quality restrictions.
See "Quality and Diversification Requirements." Although there is no secondary
market for master demand obligations, such obligations are considered by the
Portfolio to be liquid because they are payable upon demand. The Portfolio does
not have any specific percentage limitation on investments in master demand
obligations.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trustees. In a repurchase agreement, the Portfolio buys a
security from a seller that has agreed to repurchase the same security at a
mutually agreed upon date and price. The resale price normally is in excess of
the purchase price, reflecting an agreed upon interest rate. This interest rate
is effective for the period of time the Portfolio is invested in the agreement
and is not related to the coupon rate on the underlying security. A repurchase
agreement may also be viewed as a fully collateralized loan of money by the
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolio invest
in repurchase agreements for more than 13 months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
13 months from the effective date of the repurchase agreement. The Portfolio
will always receive securities as collateral whose market value is, and during
the entire term of the agreement remains, at least equal to 100% of the dollar
amount invested by the Portfolio in each agreement plus accrued interest, and
the Portfolio will make payment for such securities only upon physical delivery
or upon evidence of book entry transfer to the account of the Custodian. If the
seller defaults, the Portfolio might incur a loss if the value of the collateral
securing the repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Portfolio may be delayed or
limited.
The Portfolio may make investments in other debt securities, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in Part A or this Part B.
CORPORATE BONDS AND OTHER DEBT SECURITIES
As discussed in Part A, the Portfolio may invest in bonds and other
debt securities of domestic and foreign issuers to the extent consistent with
its investment objectives and policies. A description of these investments
appears in Part A and below. See "Quality and Diversification Requirements". For
information on short-term investments in these securities, see "Money Market
Instruments".
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables. Payments of principal and interest may be guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the entities issuing the securities.
The asset-backed securities in which the Portfolio may invest are subject to the
Portfolio's overall credit requirements. However, asset-backed securities, in
general, are subject to certain risks. Most of these risks are related to
limited interests in applicable collateral. For example, credit card debt
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
FOREIGN INVESTMENTS
The Portfolio makes substantial investments in foreign countries.
Foreign investments may be made directly in securities of foreign issuers or in
the form of American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"). Generally, ADRs and EDRs are receipts issued by a bank or
trust company that evidence ownership of underlying securities issued by a
foreign corporation and that are designed for use in the domestic, in the case
of ADRs, or European, in the case of EDRs, securities markets.
Since investments in foreign securities may involve foreign currencies,
the value of the Portfolio's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Portfolio may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
the settlement of foreign securities transactions or to manage the Portfolio's
currency exposure related to foreign investments. The Portfolio will not enter
into such commitments for speculative purposes. See "Additional Investment
Information and Risk Factors" in Part A.
ADDITIONAL INVESTMENTS.
CONVERTIBLE SECURITIES. The Portfolio may invest in convertible
securities of domestic and, subject to the Portfolio's investment restrictions,
foreign issuers. The convertible securities in which the Portfolio may invest
include any debt securities or preferred stock which may be converted into
common stock or which carry the right to purchase common stock. Convertible
securities entitle the holder to exchange the securities for a specified number
of shares of common stock, usually of the same company, at specified prices
within a certain period of time.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for fixed income securities no interest accrues to the Portfolio
until settlement takes place. At the time the Portfolio makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it will record
the transaction, reflect the value each day of such securities in determining
its net asset value and, if applicable, calculate the maturity for the purposes
of average maturity from that date. At the time of settlement a when-issued
security may be valued at less than the purchase price. To facilitate such
acquisitions, the Portfolio will maintain with the custodian a segregated
account with liquid assets, consisting of cash, U.S. Government securities or
other appropriate securities, in an amount at least equal to such commitments.
On delivery dates for such transactions, the Portfolio will meet its obligations
from maturities or sales of the securities held in the segregated account and/or
from cash flow. If the Portfolio chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with the disposition
of any other portfolio obligation, incur a gain or loss due to market
fluctuation. It is the current policy of the Portfolio not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets, less liabilities other than the obligations
created by when-issued commitments.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Portfolio to the extent permitted under the Investment
Company Act of 1940, as amended (the "1940 Act") or any order pursuant thereto.
These limits currently require that, as determined immediately after a purchase
is made, (i) not more than 5% of the value of the Portfolio's total assets will
be invested in the securities of any one investment company, (ii) not more than
10% of the value of its total assets will be invested in the aggregate in
securities of investment companies as a group, and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Portfolio. As a shareholder of another investment company, the Portfolio would
bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Portfolio bears directly
in connection with its own operations.
REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Portfolio sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price. For purposes of the 1940 Act, a reverse repurchase agreement is
also considered as the borrowing of money by the Portfolio and, therefore, a
form of leverage. The Portfolio will invest the proceeds of borrowings under
reverse repurchase agreements. In addition, the Portfolio will enter into a
reverse repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Portfolio will establish and maintain with the custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to its purchase obligations under its reverse repurchase agreements. See
"Investment Restrictions" for the Portfolio's limitation on reverse repurchase
agreements and on bank borrowings.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its securities if
such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Portfolio at least equal at all times to 100%
of the market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Portfolio any income accruing
thereon. Loans will be subject to termination by the Portfolio in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Portfolio and its
investors. The Portfolio may pay reasonable finders' and custodial fees in
connection with a loan. In addition, the Portfolio will consider all facts and
circumstances including the creditworthiness of the borrowing financial
institution, and the Portfolio will not make any loans in excess of one year.
The Portfolio will not lend its securities to any officer, Trustee, Director,
employee or other affiliate of the Portfolio, the Advisor or the placement
agent, unless otherwise permitted by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolio may
invest in privately placed, restricted, Rule 144A or other unregistered
securities as described in Part A.
As to illiquid investments, the Portfolio is subject to a risk that
should the Portfolio decide to sell them when a ready buyer is not available at
a price the Portfolio deems representative of their value, the value of the
Portfolio's net assets could be adversely affected. Where an illiquid security
must be registered under the Securities Act of 1933, as amended (the "1933
Act"), before it may be sold, the 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.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Although the Portfolio is not limited by the diversification
requirements of the 1940 Act, it will comply with the diversification
requirements imposed by the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company. Current 1940 Act
diversification requirements require that the Portfolio must diversify its
holdings so that, with respect to 50% of the Portfolio's assets, no more than 5%
of its assets are invested in the securities of any one issuer other than the
U.S. Government at the close of each quarter of the Portfolio's taxable year.
The Portfolio may with respect to the remaining 50% of its assets, invest up to
25% of its assets in the securities of any one issuer (except this limitation
does not apply to U.S. Government Securities).
The Portfolio invests principally in a diversified portfolio of "high
grade" and "investment grade" securities. Investment grade debt is rated, on the
date of investment, within the four highest ratings of Moody's, currently Aaa,
Aa, A and Baa, or of Standard & Poor's, currently AAA, AA, A and BBB, while high
grade debt is rated, on the date of the investment, within the two highest of
such ratings. Such securities must be rated, on the date of investment, Ba by
Moody's or BB by Standard & Poor's. The Portfolio may invest in debt securities
which are not rated or other debt securities to which these ratings are not
applicable, if in the opinion of the Advisor, such securities are of comparable
quality to the rated securities discussed above. In determining suitability of
investment in a particular unrated security, the Advisor takes into
consideration asset and debt service coverage, the purpose of the financing,
history of the issuer, existence of other rated securities of the issuer, and
other relevant conditions, such as comparability to other issuers. In addition,
at the time the Portfolio invests in any commercial paper, bank obligation or
repurchase agreement, the issuer must have outstanding debt rated A or higher by
Moody's or Standard & Poor's, the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's, or if no such ratings are available, the investment must be of
comparable quality in the Advisor's opinion.
OPTIONS AND FUTURES TRANSACTIONS
EXCHANGE TRADED AND OVER-THE-COUNTER OPTIONS. All options purchased or
sold by the Portfolio will be traded on a securities exchange or will be
purchased or sold by securities dealers (OTC options) that meet creditworthiness
standards approved by the Board of Trustees. While exchange-traded options are
obligations of the Options Clearing Corporation, in the case of OTC options, the
Portfolio relies on the dealer from which it purchased the option to perform if
the option is exercised. Thus, when the Portfolio purchases an OTC option, it
relies on the dealer from which it purchased the option to make or take delivery
of the underlying securities. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction.
Provided that the Portfolio has arrangements with certain qualified
dealers who agree that the Portfolio may repurchase any option it writes for a
maximum price to be calculated by a predetermined formula, the Portfolio may
treat the underlying securities used to cover written OTC options as liquid. In
these cases, the OTC option itself would only be considered illiquid to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In entering into
futures and options transactions the Portfolio may purchase or sell (write)
futures contracts and purchase or sell put and call options, including put and
call options on futures contracts. In addition, the Portfolio may sell (write)
put and call options, including options on futures. Futures contracts obligate
the buyer to take and the seller to make delivery at a future date of a
specified quantity of a financial instrument or an amount of cash based on the
value of a securities index. Currently, futures contracts are available on
various types of fixed income securities, including but not limited to U.S.
Treasury bonds, notes and bills, Eurodollar certificates of deposit and on
indexes of fixed income securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Portfolio are paid by the Portfolio into a segregated
account, in the name of the Futures Commission Merchant, as required by the 1940
Act and the SEC's interpretations thereunder.
COMBINED POSITIONS. The Portfolio may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Portfolio may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the
Portfolio's current or anticipated investments exactly. The Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Portfolio's options
or futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require the Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired. (See "Exchange Traded and Over-the-Counter
Options" above for a discussion of the liquidity of options not traded on an
exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Portfolio or the Advisor may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. The
Portfolio intends to comply with Section 4.5 of the regulations under the
Commodity Exchange Act, which limits the extent to which the Portfolio can
commit assets to initial margin deposits and option premiums. In addition, the
Portfolio will comply with guidelines established by the SEC with respect to
coverage of options and futures contracts by mutual funds, and if the guidelines
so require, will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account cannot
be sold while the futures contract or option is outstanding, unless they are
replaced with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of the Portfolio's assets could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
SWAPS AND RELATED SWAP PRODUCTS. The Portfolio may engage in swap
transactions, including, but not limited to, interest rate, currency, securities
index, basket, specific security and commodity swaps, interest rate caps, floors
and collars and options on interest rate swaps (collectively defined as "swap
transactions").
The Portfolio may enter into swap transactions for any legal purpose
consistent with its investment objective and policies, such as for the purpose
of attempting to obtain or preserve a particular return or spread at a lower
cost than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities the Portfolio anticipates purchasing at a later date, or to gain
exposure to certain markets in the most economical way possible. The Portfolio
will not sell interest rate caps, floors or collars if it does not own
securities with coupons which provide the interest that the Portfolio may be
required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional counterparties for periods ranging from a few weeks to several
years. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of return) that would be earned or realized on
specified notional investments or instruments. The gross returns to be exchanged
or "swapped" between the parties are calculated by reference to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency or
commodity, or in a "basket" of securities representing a particular index. The
purchaser of an interest rate cap or floor, upon payment of a fee, has the right
to receive payments (and the seller of the cap is obligated to make payments) to
the extent a specified interest rate exceeds (in the case of a cap) or is less
than (in the case of a floor) a specified level over a specified period of time
or at specified dates. The purchaser of an interest rate collar, upon payment of
a fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a pre-specified notional
amount with pre-specified terms with the seller of the option as the
counterparty.
The "notional amount" of a swap transaction is the agreed upon basis
for calculating the payments that the parties have agreed to exchange. For
example, one swap counterparty may agree to pay a floating rate of interest
(e.g., 3 month LIBOR) calculated based on a $10 million notional amount on a
quarterly basis in exchange for receipt of payments calculated based on the same
notional amount and a fixed rate of interest on a semi-annual basis. In the
event the Portfolio is obligated to make payments more frequently than it
receives payments from the other party, it will incur incremental credit
exposure to that swap counterparty. This risk may be mitigated somewhat by the
use of swap agreements which call for a net payment to be made by the party with
the larger payment obligation when the obligations of the parties fall due on
the same date. Under most swap agreements entered into by the Portfolio,
payments by the parties will be exchanged on a "net basis", and the Portfolio
will receive or pay, as the case may be, only the net amount of the two
payments.
The amount of the Portfolio's potential gain or loss on any swap
transaction is not subject to any fixed limit. Nor is there any fixed limit on
the Portfolio's potential loss if it sells a cap or collar. If the Portfolio
buys a cap, floor or collar, however, the Portfolio's potential loss is limited
to the amount of the fee that it has paid. When measured against the initial
amount of cash required to initiate the transaction, which is typically zero in
the case of most conventional swap transactions, swaps, caps, floors and collars
tend to be more volatile than many other types of instruments.
The use of swap transactions, caps, floors and collars involves
investment techniques and risks which are different from those associated with
portfolio security transactions. If the Advisor is incorrect in its forecasts of
market values, interest rates, and other applicable factors, the investment
performance of the Portfolio will be less favorable than if these techniques had
not been used. These instruments are typically not traded on exchanges.
Accordingly, there is a risk that the other party to certain of these
instruments will not perform its obligations to the Portfolio or that the
Portfolio may be unable to enter into offsetting positions to terminate its
exposure or liquidate its position under certain of these instruments when it
wishes to do so.
Such occurrences could result in losses to the Portfolio.
The Advisor will, however, consider such risks and will enter into
swap and other derivatives transactions only when it believes that the risks are
not unreasonable.
The Portfolio will maintain cash or liquid assets in a segregated
account with its custodian in an amount sufficient at all times to cover its
current obligations under its swap transactions, caps, floors and collars. If
the Portfolio enters into a swap agreement on a net basis, it will segregate
assets with a daily value at least equal to the excess, if any, of the
Portfolio's accrued obligations under the swap agreement over the accrued amount
the Portfolio is entitled to receive under the agreement. If the Portfolio
enters into a swap agreement on other than a net basis, or sells a cap, floor or
collar, it will segregate assets with a daily value at least equal to the full
amount of the Portfolio 's accrued obligations under the agreement.
The Portfolio will not enter into any swap transaction, cap, floor, or
collar, unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in which
many types of swap transactions are traded have grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the markets for certain types of swaps (e.g., interest rate swaps) have become
relatively liquid. The markets for some types of caps, floors and collars are
less liquid.
The liquidity of swap transactions, caps, floors and collars will be as
set forth in guidelines established by the Advisor and approved by the Trustees
which are based on various factors, including (1) the availability of dealer
quotations and the estimated transaction volume for the instrument, (2) the
number of dealers and end users for the instrument in the marketplace, (3) the
level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and
(5) the nature of the marketplace for trades (including the ability to assign or
offset the Portfolio's rights and obligations relating to the instrument). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.
During the term of a swap, cap, floor or collar, changes in the value
of the instrument are recognized as unrealized gains or losses by marking to
market to reflect the market value of the instrument. When the instrument is
terminated, the Portfolio will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and the Portfolio's basis in the contract.
The federal income tax treatment with respect to swap transactions,
caps, floors, and collars may impose limitations on the extent to which the
Portfolio may engage in such transactions.
RISK MANAGEMENT
The Portfolio may employ non-hedging risk management techniques.
Examples of such strategies include synthetically altering the duration of a
portfolio or the mix of securities in a portfolio. For example, if the Advisor
wishes to extend maturities in a fixed income portfolio in order to take
advantage of an anticipated decline in interest rates, but does not wish to
purchase the underlying long-term securities, it might cause the Portfolio to
purchase futures contracts on long-term debt securities. Similarly, if the
Advisor wishes to decrease fixed income securities or purchase equities, it
could cause the Portfolio to sell futures contracts on debt securities and
purchase futures contracts on a stock index. Such non-hedging risk management
techniques are not speculative, but because they involve leverage include, as do
all leveraged transactions, the possibility of losses as well as gains that are
greater than if these techniques involved the purchase and sale of the
securities themselves rather than their synthetic derivatives.
PORTFOLIO TURNOVER
The portfolio turnover rates for the Portfolio for the period from
October 11, 1994 (commencement of operations) through September 30, 1995; the
fiscal year ended September 30, 1996 and 1997 were 288%, 330%, and 346%
respectively. A rate of 100% indicates that the equivalent of all of the
Portfolio's assets have been sold and reinvested in a year. High portfolio
turnover may result in the realization of substantial net capital gains or
losses. To the extent net short term capital gains are realized, any
distribution resulting from such gains are considered ordinary income for
federal income tax purposes. See Item 20 below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Portfolio.
Except where otherwise noted, these investment restrictions are "fundamental"
policies which, under the 1940 Act, may not be changed without the vote of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Portfolio. A "majority of the outstanding voting securities" is defined in
the 1940 Act as the lesser of (a) 67% or more of the voting securities present
at a meeting if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy, or (b) more than 50% of the
outstanding voting securities. The percentage limitations contained in the
restrictions below apply at the time of the purchase of securities.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof are amended or modified, the Portfolio:
1. May not make any investments inconsistent with its classification as a
diversified investment company under the Investment Company Act of 1940;
2. May not purchase any security which would cause the Portfolio to concentrate
its investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;
3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. May not underwrite securities of other issuers, except to the extent that the
Portfolio, in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Portfolio may (a) invest in securities or other instruments
directly or indirectly secured by real estate, and (b) invest in securities or
other instruments issued by issuers that invest in real estate and (c) make
direct investments in mortgages.
7. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodities contracts; but this shall not
prevent the Portfolio from purchasing, selling and entering into financial
futures contracts (including futures contracts on indices of securities,
interest rates and currencies), options on financial futures contracts
(including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and
forward contracts or other derivative instruments that are not related to
physical commodities; and
8. May make loans to other persons, in accordance with its investment objective
and policies and to the extent permitted by applicable law.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restrictions
described below are not fundamental policies of the Portfolio and may be changed
by the Trustees. These non-fundamental investment policies require that the
Portfolio:
(i) May not acquire any illiquid securities, such as repurchase
agreements with more than seven days to maturity or fixed time deposits with a
duration of over seven calendar days, if as a result thereof, more than 15% of
the market value of the Portfolio's total assets would be in investments which
are illiquid;
(ii) May not purchase securities on margin, make short sales of
securities, or maintain a short position, provided that this restriction shall
not be deemed to be applicable to the purchase or sale of when-issued or delayed
delivery securities.
(iii) May not acquire securities of other investment companies, except
as permitted by the 1940 Act or any order pursuant thereto.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
ITEM 14. MANAGEMENT OF THE PORTFOLIO.
The Trustees and officers of the Portfolio, their business addresses,
principal occupations during the past five years and dates of birth are set
forth below. Their titles may have varied during that period. An asterisk
indicates that a Trustee is an "interested person" (as defined in the 1940 Act)
of the Portfolio.
TRUSTEES AND OFFICERS
Frederick S. Addy - Trustee; Retired; Executive Vice President and
Chief Financial Officer from January 1990 to April 1994, Amoco Corporation. His
address is 5300 Arbutus Cove, Austin, Texas 78746, and his date of birth is
January 1, 1932.
William G. Burns - Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, Florida
32779, and his date of birth is November 2, 1932.
Arthur C. Eschenlauer - Trustee; Retired; Senior Vice President, Morgan
Guaranty Trust Company of New York until 1987. His address is 14 Alta Vista
Drive, RD #2, Princeton, New Jersey 08540, and his date of birth is May 23,
1934.
Matthew Healy (*) - Trustee; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc. ("Pierpont Group") since 1989. His address is
Pine Tree Club Estates, 10286 Saint Andrews Road, Boynton Beach, Florida 33436,
and his date of birth is August 23, 1937.
Michael P. Mallardi - Trustee; Retired; Senior Vice President, Capital
Cities/ABC, Inc. and President, Broadcast Group prior to April 1996. His address
is 10 Charnwood Drive, Suffern, New York 10910, and his date of birth is March
17, 1934.
------------ *Mr. Healy is an "interested person" (as defined in the 1940
Act) of the Portfolio. Mr. Healy is also an "interested person" (as defined in
the 1940 Act) of the Advisor due to his son's affiliation with JPMIM.
Each Trustee is currently paid an annual fee of $75,000 for serving as
Trustee of the Master Portfolios (as defined below), the J.P. Morgan Funds, the
J.P. Morgan Institutional Funds and J.P. Morgan Series Trust and is reimbursed
for expenses incurred in connection with service as a Trustee. The Trustees may
hold various other directorships unrelated to the Portfolio.
Trustee compensation expenses paid by the Portfolio for the calendar year
ended December 31, 1997 is set forth below.
<TABLE>
<C> <S> <S>
- ---------------------------------------- --------------------------------- -----------------------------------------
TOTAL TRUSTEE COMPENSATION ACCRUED BY
THE MASTER PORTFOLIOS(*), J.P. MORGAN
AGGREGATE TRUSTEE COMPENSATION INSTITUTIONAL FUNDS, J.P. MORGAN FUNDS
PAID BY THE PORTFOLIO DURING AND J.P. MORGAN SERIES TRUST DURING
NAME OF TRUSTEE 1997 1997(**)
- ---------------------------------------- --------------------------------- -----------------------------------------
- ---------------------------------------- --------------------------------- -----------------------------------------
Frederick S. Addy, $445.19 $72,500
Trustee
- ---------------------------------------- --------------------------------- -----------------------------------------
- ---------------------------------------- --------------------------------- -----------------------------------------
William G. Burns, $445.19 $72,500
Trustee
- ---------------------------------------- --------------------------------- -----------------------------------------
- ---------------------------------------- --------------------------------- -----------------------------------------
Arthur C. Eschenlauer, $445.19 $72,500
Trustee
- ---------------------------------------- --------------------------------- -----------------------------------------
- ---------------------------------------- --------------------------------- -----------------------------------------
Matthew Healey, $87.20 $72,500
Trustee(***), Chairman
and Chief Executive
Officer
- ---------------------------------------- --------------------------------- -----------------------------------------
- ---------------------------------------- --------------------------------- -----------------------------------------
Michael P. Mallardi, $87.20 $72,500
Trustee
- ---------------------------------------- --------------------------------- -----------------------------------------
</TABLE>
(*) Includes the Portfolio and 19 other portfolios (collectively, the
"Master Portfolios") for which JPMIM acts as investment advisor.
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 18 investment companies (15 investment
companies comprising the J.P. Morgan Funds, the J.P. Morgan Funds, the J.P.
Morgan Institutional Funds and J.P. Morgan Series Trust) in the fund complex.
(***) During 1997, Pierpont Group paid Mr. Healey, in his role as Chairman
of Pierpont Group, compensation in the amount of $147,500, contributed $22,100
to a defined contribution plan on his behalf and paid $20,500 in insurance
premiums for his benefit.
The Trustees of the Portfolio are the same as the Trustees of each of
the other Master Portfolios, J.P. Morgan Funds, J.P. Morgan Institutional Funds
and J.P. Morgan Series Trust. In accordance with applicable state requirements,
a majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Master Portfolios, J.P.
Morgan Funds and J.P. Morgan Institutional Funds, up to and including creating a
separate board of trustees.
The Trustees of the Portfolio, in addition to reviewing actions of the
Portfolio's various service providers, decide upon matters of general policy. On
January 15, 1994 the Portfolio entered into a Portfolio Fund Services Agreement
with Pierpont Group to assist the Trustees in exercising their overall
supervisory responsibilities for the Portfolio's affairs. Pierpont Group was
organized in July 1989 to provide services for the J.P. Morgan Funds, and the
Trustees are the equal and sole shareholders of Pierpont Group. The Portfolio
has agreed to pay Pierpont Group a fee in an amount representing its reasonable
costs in performing these services. These costs are periodically reviewed by the
Trustees. The aggregate fees paid to Pierpont Group by the Portfolio for the
period from October 11, 1994 (commencement of operations) through September 30,
1995, the fiscal year ended September 30, 1996 and the fiscal year ended
September 30, 1997 were $20,446 and $11,488, and $6,597, respectively. The
Portfolio has no employees; its executive officers (listed below), other than
the Chief Executive Officer and the officers who are employees of Morgan, are
provided and compensated by Funds Distributor, Inc. ("FDI"), a wholly owned
indirect subsidiary of Boston Institutional Group, Inc. The Portfolio's officers
conduct and supervise the business operations of the Portfolio.
The officers of the Portfolio, their principal occupations during the
past five years and their dates of birth are set forth below. The business
address of each of the officers unless otherwise noted is 60 State Street, Suite
1300, Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, Florida 33436. His date of birth is August 23, 1937.
MARGARET W. CHAMBERS; Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI.
Prior to July 1994, she was President and Chief Compliance Officer of FDI. Her
date of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. From April 1993 to January 1995,
Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust Company. His
date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Portfolios only. Managing Director, State Street Cayman Trust Company, Ltd.
since October 1994. Prior to October 1994, Mrs. Henning was head of mutual funds
at Morgan Grenfell in Cayman and was Managing Director of Bank of Nova Scotia
Trust Company (Cayman) Limited prior to September 1993. Address: P.O. Box 2508
GT, Elizabethan Square, 2nd Floor, Shedden Road, George Town, Grand Cayman,
Cayman Islands, BWI. Her date of birth is March 24, 1942.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Prior to May 1994, Ms. Jacoppo-Wood was a senior paralegal at The Boston Company
Advisors, Inc. ("TBCA"). Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. Prior to April 1994, Mr. Kelley was employed by Putnam Investments in
legal and compliance capacities. His date of birth is December 24, 1964.
KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
Prior to July 1994 she was a finance student at Stonehill College. Her date of
birth is July 5, 1972.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to August 1994, Ms. Nelson was an Assistant Vice President and Client
Manager for The Boston Company, Inc. Her date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Manager for the Budgeting and Expense Processing Group. Prior to September 1995,
Ms. Pace served as a Fund Administrator for Morgan Guaranty Trust Company of New
York. Her address is 60 Wall Street, New York, New York 10260. Her date of birth
is March 13, 1966.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.
STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice President
and Client Development Manager for FDI since April 1998. From April 1997 to
March 1998, Ms. Pierce was employed by Citibank, NA as an officer of Citibank
and Relationship Manager on the Business and Professional Banking team handling
over 22,000 clients. Address: 200 Park Avenue, New York, New York 10166. Her
date of birth is August 18, 1968.
GEORGE A. RIO; President and Treasurer. Executive Vice President and Client
Service Director of FDI since April 1998. From June 1995 to March 1998, Mr. Rio
was Senior Vice President and Senior Key Account Manager for Putnam Mutual
Funds. From May 1994 to June 1995, Mr. Rio was Director of Business Development
for First Data Corporation. From September 1983 to May 1994, Mr. Rio was Senior
Vice President & Manager of Client Services and Director of Internal Audit at
The Boston Company. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
as a Manager of the Tax Group and is responsible for U.S. mutual fund tax
matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax Manager in
the Investment Company Services Group of Deloitte & Touche LLP. Her address is
60 Wall Street, New York, New York 10260. Her date of birth is September 26,
1965.
The Portfolio's Declaration of Trust provides that it will indemnify
its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Portfolio, unless, as to liability to the Portfolio or its
investors, it is finally adjudicated that they engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
their offices, or unless with respect to any other matter it is finally
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interests of the Portfolio. In the case of
settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of December 19, 1997 J.P. Morgan International Bond Fund, Ltd., a
Bahamas International Business Company, and J.P. Morgan Institutional
International Bond Fund (collectively the "Funds") owned 97% and 3%,
respectively, of the outstanding beneficial interests in the Portfolio. So long
as the Funds control the Portfolio, the Funds may take actions without the
approval of any other holder of beneficial interests in the Portfolio. In
January 1998 the Portfolio expects to receive a substantial redemption request
in connection with the reorganization of certain non-U.S. Funds managed by
Morgan. This redemption will not reduce the net assets of the Fund, but it will
reduce the size of the Portfolio. After the redemption, the Portfolio's assets
are expected to be approximately $7 million.
Each of the Funds has informed the Portfolio that whenever it is
requested to vote on matters pertaining to the Portfolio (other than a vote by a
Fund to continue the operation of the Portfolio upon the withdrawal of another
investor in the Portfolio), it will hold a meeting of its shareholders and will
cast its vote as instructed by those shareholders.
The officers and Trustees of the Portfolio as a group own less than 1%
of the outstanding beneficial interests in the Portfolio.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. The investment advisor to the Portfolio is JPMIM, a
wholly-owned subsidiary of J.P. Morgan. Subject to the supervision of the
Portfolio's Trustees, the Advisor makes the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Portfolio's investments. Prior to October 1, 1998, Morgan was the
investment advisor. JPMIM, a wholly owned subsidiary of J.P. Morgan, is a
registered investment adviser under the Investment Advisers Act of 1940, as
amended, manages employee benefit funds of corporations, labor unions and state
and local governments and the accounts of other institutional investors,
including investment companies. Certain of the assets of employee benefit
accounts under its management are invested in commingled pension trust funds for
which Morgan serves as trustee.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of over $275 billion.
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt, Melbourne and Singapore to cover companies, industries and
countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The Advisor's fixed income investment process is based on analysis of real
rates, sector diversification and quantitative and credit analysis.
The investment advisory services the Advisor provides to the Portfolio
are not exclusive under the terms of the Advisory Agreement. The Advisor is free
to and does render similar investment advisory services to others. The Advisor
serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolio. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolio. See Item
17 below.
Sector weightings are generally similar to a benchmark with emphasis on
security selection as the method to achieve investment performance superior to
the benchmark. The benchmark for the Portfolio is the Salomon Brothers Non-U.S.
Government Bond Index (currency hedged).
Morgan, also a wholly owned subsidiary of J.P. Morgan, is a bank
holding company organized under the laws of the State of Delaware. Morgan, whose
principal offices are at 60 Wall Street, New York, New York 10260, is a New York
trust company which conducts a general banking and trust business. Morgan is
subject to regulation by the New York State Banking Department and is a member
bank of the Federal Reserve System. Through offices in New York City and abroad,
Morgan offers a wide range of services, primarily to governmental,
institutional, corporate and high net worth individual customers in the United
States and throughout the world.
The Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of
certain other investment management affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as salaries
of advisory personnel borne by the Advisor under the Investment Advisory
Agreement, the Portfolio has agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to the annual rate of 0.35% of the
Portfolio's average daily net assets. For the period from October 11, 1994
(commencement of operations) through September 30, 1995, the fiscal year ended
September 30, 1996, and the fiscal year ended September 30, 1997 the Portfolio
paid $782,748, $737,543, and $650,645 respectively, and the six months ended
March 31, 1998, $253,881 (unaudited), in advisory fees to the Advisor.
The Investment Advisory Agreement provides that it will continue in
effect for a period of two years after execution only if specifically approved
annually thereafter (i) by a vote of the holders of a majority of the
Portfolio's outstanding securities or by its Trustees and (ii) by a vote of a
majority of the Trustees who are not parties to the Investment Advisory
Agreement or "interested persons" as defined by the 1940 Act cast in person at a
meeting called for the purpose of voting on such approval. The Investment
Advisory Agreement will terminate automatically if assigned and is terminable at
any time without penalty by a vote of a majority of the Trustees, or by a vote
of the holders of a majority of the Portfolio's outstanding voting securities,
on 60 days' written notice to the Advisor and by the Advisor on 90 days' written
notice to the Portfolio.
The Glass-Steagall Act and other applicable laws generally prohibit
banks and their subsidiaries, such as Morgan from engaging in the business of
underwriting or distributing securities, and the Board of Governors of the
Federal Reserve System has issued an interpretation to the effect that under
these laws a bank holding company registered under the federal Bank Holding
Company Act or certain subsidiaries thereof may not sponsor, organize, or
control a registered open-end investment company continuously engaged in the
issuance of its shares, such as the Portfolio. The interpretation does not
prohibit a holding company or a subsidiary thereof from acting as investment
advisor and custodian to such an investment company. Morgan believes that it may
perform the services for the Portfolio contemplated by the Advisory Agreement
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. State laws on this issue may differ from the interpretation of
relevant federal law, and banks and financial institutions may be required to
register as dealers pursuant to state securities laws. However, it is possible
that future changes in either federal or state statutes and regulations
concerning the permissible activities of banks or trust companies, as well as
further judicial or administrative decisions and interpretations of present and
future statutes and regulations, might prevent Morgan from continuing to perform
such services for the Portfolio.
If Morgan were prohibited from acting as investment advisor to the
Portfolio, it is expected that the Trustees of the Portfolio would recommend to
investors that they approve the Portfolio's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Under a separate agreement, Morgan also provides administrative and
related services to the Portfolio. See "Administrative Services Agent" in Part A
above.
CO-ADMINISTRATOR. Under the Portfolio's Co-Administration Agreement
dated August 1, 1996, FDI serves as the Portfolio's Co-Administrator. The
Co-Administration Agreement may be renewed or amended by the Trustees without an
investor vote. The Co-Administration Agreement is terminable at any time without
penalty by a vote of a majority of the Trustees or the Portfolio on not more
than 60 days' written notice nor less than 30 days' written notice to the other
party. The Co-Administrator may subject to the consent of the Trustees of the
Portfolio, subcontract for the performance of its obligations, provided,
however, that unless the Portfolio expressly agrees in writing, the
Co-Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions. See "Administrative
Services Agent" below.
For its services under the Co-Administration Agreement, the Portfolio has
agreed to pay FDI fees equal to its allocable share of an annual complex-wide
charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable to
the Portfolio is based on the ratio of its net assets to the aggregate net
assets of the J.P. Morgan Funds, the J.P. Morgan Institutional Funds, the Master
Portfolios and J.P. Morgan Series Trust. For the period August 1, 1996 through
September 30, 1996: $738. For the fiscal year ended September 30, 1997: $4,505.
For the six months ended March 31, 1998: $1,576, (unaudited).
The following administrative fees were paid by the Portfolio to
Signature Broker-Dealer Services, Inc. ("SBDS") (which provided placement agent
and administrative services to the Portfolio prior to August 1, 1996): For the
period from October 11, 1994 (commencement of operations) through September 30,
1995: $13,862. For the period October 1, 1995 through July 31, 1996: $18,964.
ADMINISTRATIVE SERVICES AGENT. The Portfolio has entered into a
Restated Administrative Services Agreement (the "Services Agreement") with
Morgan, pursuant to which Morgan is responsible for certain administrative and
related services provided to the Portfolio.
Under the Services Agreement, effective August 1, 1996, the Portfolio
has agreed to pay Morgan fees equal to its allocable share of an annual
complex-wide charge. This charge is calculated daily based on the aggregate net
assets of the Master Portfolios and J.P. Morgan Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their aggregate
average daily net assets and 0.04% of their average daily net assets in excess
of $7 billion, less the complex-wide fees payable to FDI. The portion of this
charge payable by the Portfolio is determined by the proportionate share that
its net assets bear to the total net assets of the J.P. Morgan Funds, the J.P.
Morgan Institutional Funds, the Master Portfolios, the other investors in the
Master Portfolios for which Morgan provides similar services and J.P. Morgan
Series Trust.
Under administrative services agreements in effect with Morgan from
December 29, 1995 through July 31, 1996, the Portfolio paid Morgan a fee equal
to its proportionate share of an annual complex-wide charge. This charge was
calculated daily based on the aggregate net assets of the Master Portfolios in
accordance with the following schedule: 0.06% of the first $7 billion of the
Master Portfolios' aggregate average daily net assets and 0.03% of the Master
Portfolios' aggregate average daily net assets in excess of $7 billion. Prior to
December 29, 1995, the Portfolio had entered into a financial and fund
accounting services agreement with Morgan, the provisions of which included
certain of the activities described above and, prior to September 1, 1995, also
included reimbursement of usual and customary expenses.
For the period from October 11, 1994 (commencement of operations)
through September 30, 1995, the fiscal year ended September 30, 1996, and the
fiscal year ended September 30, 1997: the Portfolio paid Morgan $156,367,
$37,344, and $57,815, respectively, and for the six months ended March 31, 1998,
$21,879 (unaudited), in administrative services fees.
CUSTODIAN. State Street Bank and Trust Company ("State Street"), 40
King Street West, Toronto, Ontario, Canada M5H 348, serves as the Portfolio's
Custodian and Transfer Agent. Pursuant to the Custodian Contract, State Street
is responsible for maintaining the books of account and records of portfolio
transactions and holding portfolio securities and cash. In the case of foreign
assets held outside the United States, the Custodian employs various
sub-custodians, who were approved by the Trustees of the Portfolio in accordance
with the regulations of the SEC. The Custodian maintains portfolio transaction
records, calculates book and tax allocations for the Portfolio, and computes the
value of the interest of each investor.
INDEPENDENT ACCOUNTANTS. The independent accountants of the Portfolio
are PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036. PricewaterhouseCoopers LLP conducts an annual audit of the financial
statements of the Portfolio, assists in the preparation and/or review of each of
the Portfolio's federal and state income tax returns and consults with the
Portfolio as to matters of accounting and federal and state income taxation.
EXPENSES. In addition to the fees payable to the service providers
identified above, the Portfolio is responsible for certain usual and customary
expenses associated with its operations. Such expenses include organization
expenses, legal fees, accounting and audit expenses, insurance costs, the
compensation and expenses of the Trustees, registration fees under federal
securities laws, and extraordinary expenses applicable to the Portfolio. Such
expenses also include brokerage expenses. Under fee arrangements prior to
September 1, 1995 that included higher fees for financial and fund accounting
services, Morgan as services agent was responsible for reimbursements to the
Portfolio for SBDS's fees as administrator and the usual and customary expenses
described above (excluding organization and extraordinary expenses, custodian
fees and brokerage expenses).
THE EURO. Effective January 1, 1999 the euro, a single multinational
currency, will replace the national currencies of certain countries in the
Economic Monetary Union (EMU). Conversion rates among EMU countries will be
fixed on December 31, 1998, however, existing currencies will still be used
through July 1, 2002. During this transition period, transactions may be settled
in either euro or existing currencies, but financial markets and payment systems
are expected to use the euro exclusively. Beginning January 1, 1999, J.P. Morgan
intends to conduct and settle all Portfolio transactions, where appropriate, in
the euro.
J.P. Morgan has identified the following potential risks to the
Portfolio, after the conversion: The risk that valuation of assets are not
properly redenominated; currency risk resulting from increased volatility in
exchange rates between EMU countries and non-participating countries; the
inability any of the Portfolio, its service providers and the issuers of the
Portfolio's portfolio securities to make information technology updates timely;
and the potential unenforceability of contracts. There have been recent laws and
regulations designed to ensure the continuity of contracts, however there is a
risk that the valuation of contracts will be negatively impacted after the
conversion. J.P. Morgan is working to avoid these problems and to obtain
assurances from other service providers that they are taking similar steps.
However, it is not certain that these actions will be sufficient to prevent
problems associated with the conversion from adversely impacting Portfolio
operations and interest holders.
The I.R.S has concluded that euro conversion will not cause a U.S.
taxpayer to realize gain or loss to the extent taxpayer's rights and obligations
are altered solely by reason of the conversion.
THE YEAR 2000 INITIATIVE. With the new millennium rapidly approaching,
organizations are examining their computer systems to ensure they are year 2000
compliant. The issue, in simple terms, is that many existing computer systems
use only two numbers to identify a year in the date field with the assumption
that the first two digits are always 19. As the century is implied in the date,
on January 1, 2000, computers that are not year 2000 compliant will assume the
year is 1900. Systems that calculate, compare, or sort using the incorrect date
will cause erroneous results, ranging from system malfunctions to incorrect or
incomplete transaction processing. If not remedied, potential risks include
business interruption or shutdown, financial loss, reputation loss, and/or legal
liability.
J.P. Morgan has undertaken a firmwide initiative to address the year
2000 issue and has developed a comprehensive plan to prepare, as appropriate,
its computer systems. Each business line has taken responsibility for
identifying and fixing the problem within its own area of operation and for
addressing all interdependencies. A multidisciplinary team of internal and
external experts supports the business teams by providing direction and firmwide
coordination. Working together, the business and multidisciplinary teams have
completed a thorough education and awareness initiative and a global inventory
and assessment of J.P. Morgan's technology and application portfolio to
understand the scope of the year 2000 impact at J.P. Morgan. J.P. Morgan
presently is renovating and testing these technologies and applications in
partnership with external consulting and software development organizations, as
well as with year 2000 tool providers. J.P. Morgan is on target with its plan to
substantially complete renovation, testing, and validation of its key systems by
year-end 1998 and to participate in industry-wide testing (or streetwide
testing) in 1999. J.P. Morgan is also working with key external parties,
including clients, counterparties, vendors, exchanges, depositories, utilities,
suppliers, agents and regulatory agencies, to stem the potential risks the year
2000 problem poses to J.P. Morgan and to the global financial community.
Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $95 million in 1997. In 1998, J.P. Morgan will continue
its efforts to prepare its systems for the year 2000. The total cost to become
year-2000 compliant is estimated at $250 million, for internal systems
renovation and testing, testing equipment, and both internal and external
resources working on the project. Remaining costs will be incurred primarily in
1998. The costs associated with J.P. Morgan becoming year-2000 compliant will be
borne by J.P. Morgan and not the Portfolio.
Morgan has agreed that if in any fiscal year the sum of any Portfolio's
expenses exceeds the limits set by applicable regulations of state securities
commissions, the fees payable by the Portfolio to Morgan for that year shall be
reduced as specified by agreement with the Trust on behalf of the Portfolio.
Currently, Morgan believes that the most restrictive expense limitation of state
securities commissions limits expenses to 2.5% of the first $30 million of
average net assets, 2% of the next $70 million of such net assets and 1.5% of
such net assets in excess of $100 million for any fiscal year. For additional
information regarding waivers or expense subsidies, see "Management of the
Portfolio" in Part A.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Advisor places orders for the Portfolio for all purchases and sales
of portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See Item 13 above.
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolio will be undertaken principally
to accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short term trading
consistent with its objective.
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek best price and execution on a competitive basis for both
purchases and sales of securities. For the period October 11, 1994 (commencement
of operations) through September 30, 1995, the fiscal year ended September 30,
1996 and 1997 the portfolio turnover was 288%, 330%, 346% respectively. The
annual portfolio turnover rate for Portfolio is generally not expected to exceed
300%.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition. The Trustees of the Portfolio review regularly the
reasonableness of commissions and other transaction costs incurred by the
Portfolio in light of facts and circumstances deemed relevant from time to time,
and, in that connection, will receive reports from the Advisor and published
data concerning transaction costs incurred by institutional investors generally.
Research services provided by brokers to which the Advisor has allocated
brokerage business in the past include economic statistics and forecasting
services, industry and company analyses, portfolio strategy services,
quantitative data, and consulting services from economists and political
analysts. Research services furnished by brokers are used for the benefit of all
the Advisor's clients and not solely or necessarily for the benefit of the
Portfolio. The Advisor believes that the value of research services received is
not determinable and does not significantly reduce its expenses. The Portfolio
does not reduce its fee to the Advisor by any amount that might be attributable
to the value of such services.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
portfolio brokerage transactions to affiliates of the Advisor. In order for
affiliates of the Advisor to effect any portfolio transactions for the
Portfolio, the commissions, fees or other remuneration received by such
affiliates must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the
Trustees of the Portfolio, including a majority of the Trustees who are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
The Portfolio's portfolio securities will not be purchased from or
through or sold to or through the Exclusive Placement Agent or Advisor or any
other "affiliated person" (as defined in the 1940 Act) of the Exclusive
Placement Agent or Advisor when such entities are acting as principals, except
to the extent permitted by law. In addition, the Portfolio will not purchase
securities during the existence of any underwriting group relating thereto of
which the Advisor or an affiliate of the Advisor is a member, except to the
extent permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Portfolio as well as other
customers, including other Master Portfolios, the Advisor, to the extent
permitted by applicable laws and regulations, may, but is not obligated to,
aggregate the securities to be sold or purchased for the Portfolio with those to
be sold or purchased for other customers in order to obtain best execution,
including lower brokerage commissions if appropriate. In such event, allocation
of the securities so purchased or sold as well as any expenses incurred in the
transaction will be made by the Advisor in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Portfolio. In
some instances, this procedure might adversely affect the Portfolio.
If the Portfolio effects a closing purchase transaction with respect to
an option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Portfolio will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Portfolio may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees if they choose to do so
and in such event the other investors in the Portfolio would not be able to
elect any Trustee. The Portfolio is not required and has no current intention to
hold annual meetings of investors but the Portfolio will hold special meetings
of investors when in the judgment of the Portfolio's Trustees it is necessary or
desirable to submit matters for an investor vote. No material amendment may be
made to the Portfolio's Declaration of Trust without the affirmative majority
vote of investors (with the vote of each being in proportion to the amount of
its investment).
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two thirds of its
investors (with the vote of each being in proportion to its percentage of the
beneficial interests in the Portfolio), except that if the Trustees recommend
such sale of assets, the approval by vote of a majority of its investors (with
the vote of each being in proportion to its percentage of the beneficial
interests of the Portfolio) will be sufficient. The Portfolio may also be
terminated (i) upon liquidation and distribution of its assets if approved by
the vote of two thirds of its investors (with the vote of each being in
proportion to the amount of its investment) or (ii) by the Trustees by written
notice to its investors.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Portfolio's Declaration of Trust further provides that obligations
of the Portfolio are not binding upon the Trustees individually but only upon
the property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
Portfolio securities with a maturity of 60 days or more, including
securities that are listed on an exchange or traded over the counter, are valued
using prices supplied daily by an independent pricing service or services that
(i) are based on the last sale price on a national securities exchange or, in
the absence of recorded sales, at the readily available closing bid price on
such exchange or at the quoted bid price in the over-the-counter market, if such
exchange or market constitutes the broadest and most representative market for
the security and (ii) in other cases, take into account various factors
affecting market value, including yields and prices of comparable securities,
indication as to value from dealers and general market conditions. If such
prices are not supplied by the Portfolio's independent pricing service, such
securities are priced in accordance with procedures adopted by the Trustees. All
portfolio securities with a remaining maturity of less than 60 days are valued
by the amortized cost method. Because of the large number of municipal bond
issues outstanding and the varying maturity dates, coupons and risk factors
applicable to each issuer's books, no readily available market quotations exist
for most municipal securities.
Trading in securities in most foreign markets is normally completed
before the close of trading on U.S. markets and may also take place on days on
which the U.S. markets are closed. If events materially affecting the value of
securities occur between the time when the market in which they are traded
closes and the time when the Portfolio's net asset value is calculated, such
securities will be valued at fair value in accordance with procedures
established by and under the general supervision of the Trustees.
If the Portfolio determines that it would be detrimental to the best
interest of the remaining investors in the Portfolio to make payment wholly or
partly in cash, payment of the redemption price may be made in whole or in part
by a distribution in kind of securities from the Portfolio, in lieu of cash, in
conformity with the applicable rule of the SEC. If interests are redeemed in
kind, the redeeming investor might incur transaction costs in converting the
assets into cash. The method of valuing portfolio securities is described above
and such valuation will be made as of the same time the redemption price is
determined. The Portfolio will not redeem in kind except in circumstances in
which an investor is permitted to redeem in kind.
The net asset value of the Portfolio will not be computed on a day in
which no order to purchase or withdraw beneficial interests in the Portfolio has
been received or on the days the following legal holidays are observed: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. On days
when U.S. trading markets close early in observance of these holidays, the
Portfolio would expect to close for purchases and withdrawals at the same time.
The days on which net asset value is determined are the Portfolio's business
days.
ITEM 20. TAX STATUS.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York. However, each
investor in the Portfolio will be subject to U.S. Federal income tax in the
manner described below on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's ordinary income and
capital gain in determining its income tax liability. The determination of such
share will be made in accordance with the Code and regulations promulgated
thereunder.
Although, as described above, the Portfolio will not be subject to
federal income tax, it will file appropriate income tax returns.
It is intended that the Portfolio's assets will be managed in such a
way that an investor in the Portfolio will be able to satisfy the requirements
of Subchapter M of the Code. For the Portfolio to qualify as a regulated
investment company under Subchapter M of the Code, the Portfolio limits its
investments so that at the close of each quarter of its taxable year (a) no more
than 25% of its total assets are invested in the securities of any one issuer,
except government securities, and (b) with regard to 50% of its total assets, no
more than 5% of its total assets are invested in the securities of a single
issuer, except U.S. Government securities. In addition, the Portfolio must
satisfy certain other requirements including a requirement that the Portfolio
derive less than 30% of its gross income from the sale of stock, securities,
options, futures, or forward contracts held less then three months. Effective as
of an investor's first taxable year beginning after August 5, 1997, the 30% of
gross income test will no longer apply to investors in the Fund wishing to
satisfy the requirements of subchapter M of the Code.
Gains or losses on sales of securities by the Portfolio will be treated
as long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where, if applicable, the Portfolio
acquires a put or writes a call thereon. Long-term capital gain of individual
investors will be subject to a reduced rate of tax if the portfolio securities
have been held by the Portfolio for more than one year at the time of sale and
will be subject to a further reduced rate of tax if the portfolio securities
have been held by the Portfolio for more than eighteen months at the time of
sale. Other gains or losses on the sale of securities will be short-term capital
gains or losses. Gains and losses on the sale, lapse or other termination of
options on securities will be treated as gains and losses from the sale of
securities. If an option written by the Portfolio lapses or is terminated
through a closing transaction, such as a repurchase by the Portfolio of the
option from its holder, the Portfolio will realize a short-term capital gain or
loss, depending on whether the premium income is greater or less than the amount
paid by the Portfolio in the closing transaction. If securities are purchased by
the Portfolio pursuant to the exercise of a put option written by it, the
Portfolio will subtract the premium received from its cost basis in the
securities purchased.
Under the Code, gains or losses attributable to disposition of foreign
currency or to foreign currency contracts, or to fluctuations in exchange rates
between the time the Portfolio accrues income or receivables or expenses or
other liabilities denominated in a foreign currency and the time the Portfolio
actually collects such income or pays such liabilities, are treated as ordinary
income or ordinary loss. Similarly, gains or losses on the disposition of debt
securities held by the Portfolio, if any, denominated in foreign currency, to
the extent attributable to fluctuations in exchange rates between the
acquisition and disposition dates are also treated as ordinary income or loss.
Forward currency contracts, options and futures contracts entered into
by the Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities. Straddles may also result in the loss of the holding
period of underlying securities for purposes of the 30% of gross income test
described above, and therefore, the Portfolio's ability to enter into forward
currency contracts, options and futures contracts may be limited.
Certain options, futures and foreign currency contracts held by the
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes--i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss regardless of how long the Portfolio has held such options
or futures. Any gain or loss recognized on foreign currency contracts will be
treated as ordinary income.
FOREIGN INVESTORS. It is intended that the Portfolio will conduct its
affairs such that its income and gains will not be effectively connected with
the conduct of a U.S. trade or business. Provided the Portfolio conducts its
affairs in such a manner, allocations of U.S. source dividend income to an
investor who, as to the United States, is a foreign trust, foreign corporation
or other foreign investor will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate), and allocations of portfolio interest (as defined in
the Code) or short term or net long term capital gains to such investors
generally will not be subject to U.S.
tax.
STATE AND LOCAL TAXES. The Portfolio may be subject to state or local
taxes in jurisdictions in which the Portfolio is deemed to be doing business. In
addition, the treatment of the Portfolio and its investors in those states which
have income tax laws might differ from treatment under the federal income tax
laws. Investors should consult their own tax advisors with respect to any state
or local taxes.
FOREIGN TAXES. The Portfolio may be subject to foreign withholding taxes
with respect to income received from sources within foreign countries.
OTHER TAXATION. The investment by an investor in the Portfolio does not
cause the investor to be liable for any income or franchise tax in the State of
New York. Investors are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Portfolio.
ITEM 21. UNDERWRITERS.
The exclusive placement agent for the Portfolio is FDI, which receives
no additional compensation for serving in this capacity. Investment companies,
insurance company separate accounts, common and commingled trust funds and
similar organizations and entities may continuously invest in the Portfolio.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The Portfolio's September 30, 1997 annual report filed with the SEC
pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder is
incorporated herein by reference (Accession Numbers 0001016969-97-000090 filed
December 10, 1997).
<PAGE>
APPENDIX A
Description of Security Ratings
Standard & Poor's
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard
& Poor's to a debt obligation. Capacity to pay interest and
repay principal is extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues
only in a small degree.
A - Debt rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debts in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
debts in this category than for debts in higher rated
categories.
BB - Debt rated BB is regarded as having less near-term
vulnerability to default than other speculative issues.
However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and
principal payments.
Commercial Paper, including Tax Exempt
A - Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are further refined with the designations 1, 2, and 3
to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding
timely payment is very strong.
Short-Term Tax-Exempt Notes
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest
rating assigned by Standard & Poor's and has a very strong or
strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are
given a "plus" (+) designation.
<PAGE>
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfac-
tory capacity to pay principal and interest.
Moody's
Corporate and Municipal Bonds
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long term risks appear
somewhat 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.
Commercial Paper, including Tax Exempt
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- 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 markets and assured
sources of alternate liquidity.
Short-Term Tax Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Not applicable.
FINANCIAL STATEMENTS INCLUDED IN PART B:
The audited financial statements included in Item 23 are as follows:
Schedule of Investments at September 30, 1997 Statement of Assets and
Liabilities at September 30, 1997 Statement of Operations for the
fiscal year ended September 30, 1997
Statement of Changes in Net Assets for the fiscal year ended September
30, 1997 and 1996 Supplementary Data Notes to Financial Statements at
September 30, 1997
(b) EXHIBITS
1 Declaration of Trust, as amended, of the Registrant.2
2 Restated By-Laws of the Registrant.2
5 Investment Advisory Agreement between the Registrant and J.P. Morgan
Investment Management Inc. ("JPMIM").3
8 Custodian Contract between the Registrant and State Street Bank and Trust
Company ("State Street").2
9(a) Co-Administration Agreement between the Registrant and Funds
Distributor, Inc. dated August 1, 1996 ("Co-Administration Agreement").1
9(a)(1) Amended Exhibit I to Co-Administration Agreement.2
9(b) Transfer Agency and Service Agreement between the Registrant and State
Street.2
9(c) Restated Administrative Services Agreement between the Registrant and
Morgan dated August 1, 1996 ("Administrative Services Agreement").1
9(c)(1) Amended Exhibit I to Administrative Services Agreement.2
9(d) Amended and Restated Portfolio Fund Services Agreement between the
Registrant and Pierpont Group, Inc. dated July 11, 1996.1
27 Financial Data Schedule.3
<PAGE>
1Incorporated herein by reference from Amendment No. 2 to Registrant's
Registration Statement on Form N-1A as filed with the Securities and Exchange
Commission on October 9, 1996 (Accession Number 0000912057-96-022357).
2 Incorporated herein by reference from Amendment No. 3 to Registrant's
Registration Statement on Form N-1A as filed with the Securities and Exchange
Commission on December 24, 1996 (Accession Number 0001016964-96-000049).
3Filed herewith.
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
(1) (2)
Title of Class Number of Record Holders
Beneficial Interests 2 (as of October 31, 1998)
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit to its Registration Statement on Form N-1A.
The Trustees and officers of the Registrant and the personnel of the
Registrant's co-administrator are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940, as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
JPMIM is a Delaware corporation which is a wholly-owned subsidiary of J.P.
Morgan & Co. Incorporated.
JPMIM is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, and is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated. JPMIM manages employee benefit funds of corporations, labor unions
and state and local governments and the accounts of other institutional
investors, including investment companies.
To the knowledge of the Registrant, none of the directors or executive officers
of JPMIM is or has been during the past two fiscal years engaged in any other
business, profession, vocation or employment of a substantial nature, except
that certain officers and directors of JPMIM also hold various positions with,
and engage in business for, J.P. Morgan & Co. Incorporated, which owns all of
the outstanding stock of JPMIM.
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
J.P. Morgan Investment Management Inc. and Morgan Trust Guaranty Company of
New York, 522 Fifth Avenue, New York, New York 10036 and/or 60 Wall Street, New
York, New York 10260-0060 (records relating to their functions as investment
adviser and administrative services agent).
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02109 or 40 King Street West, Toronto, Ontario, Canada M5H 3y8
(records relating to its functions as custodian and transfer agent).
Funds Distributor, Inc., in care of State Street Cayman Trust Company,
Ltd., a Elizabethan Square Shedden Road, GeorgeTown, Grand Cayman, Cayman
Islands (records relating to its functions as Co-administrator and exclusive
placement agent).
Pierpont Group, Inc., 461 Fifth Avenue, New York, New York 10017
(records relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
Item 31. MANAGEMENT SERVICES.
Not applicable.
Item 32. UNDERTAKINGS.
Not applicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Amendment to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereto
duly authorized, in George Town, Grand Cayman, Cayman Islands, BWI on the 6th
day of November, 1998.
THE NON-U.S. FIXED INCOME PORTFOLIO
By: /s/ Jacqueline Henning
---------------------------
Jacqueline Henning
Assistant Secretary and
Assistant Treasurer
INDEX TO EXHIBITS
EXHIBIT NO: DESCRIPTION OF EXHIBITS
EX-5 Investment Advisory Agreement between the Registrant and J.P.
Morgan Investment Management Inc.
EX-27 Financial Data Schedule
THE NON-U.S. FIXED INCOME PORTFOLIO
INVESTMENT ADVISORY AGREEMENT
Agreement, made this 28th day of October, 1998, between The Non-U.S. Fixed
Income Portfolio, a trust organized under the law of the State of New York (the
"Portfolio") and J.P. Morgan Investment Management, Inc., a Delaware corporation
(the "Advisor"),
WHEREAS, the Portfolio is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Portfolio desires to retain the Advisor to render
investment advisory services to the Portfolio, and the Advisor is willing to
render such services;
NOW, THEREFORE, this Agreement
W I T N E S S E T H:
that in consideration of the premises and mutual promises hereinafter set forth,
the parties hereto agree as follows:
1. The Portfolio hereby appoints the Advisor to act as investment
adviser to the Portfolio for the period and on the terms set forth in this
Agreement. The Advisor accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. Subject to the general supervision of the Trustees of the Portfolio,
the Advisor shall manage the investment operations of the Portfolio and the
composition of the Portfolio's holdings of securities and investments, including
cash, the purchase, retention and disposition thereof and agreements relating
thereto, in accordance with the Portfolio's investment objectives and policies
as stated in the Registration Statement (as defined in paragraph 3(d) of this
Agreement) and subject to the following understandings:
(a) the Advisor shall furnish a continuous investment program for the
Portfolio and determine from time to time what investments or securities will be
purchased, retained, sold or lent by the Portfolio, and what portion of the
assets will be invested or held uninvested as cash;
(b) the Advisor shall use the same skill and care in the management of
the Portfolio's investments as it uses in the administration of other accounts
for which it has investment responsibility as agent;
(c) the Advisor, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Declaration of Trust, By-Laws
and Registration Statement of the Portfolio and with the instructions and
directions of the Trustees of the Portfolio and will conform to and comply with
the requirements of the 1940 Act and all other applicable federal and state laws
and regulations;
(d) the Advisor shall determine the securities to be purchased, sold or
lent by the Portfolio and as agent for the Portfolio will effect portfolio
transactions pursuant to its determinations either directly with the issuer or
with any broker and/or dealer in such securities; in placing orders with brokers
and/or dealers the Advisor intends to seek best price and execution for
purchases and sales; the Advisor shall also determine whether or not the
Portfolio shall enter into repurchase or reverse repurchase agreements;
On occasions when the Advisor deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as other customers of the
Advisor, the Advisor may, to the extent permitted by applicable laws and
regulations, but shall not be obligated to, aggregate the securities to be so
sold or purchased in order to obtain best execution, including lower brokerage
commissions, if applicable. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the Advisor in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Portfolio;
(e) the Advisor shall maintain books and records with respect to the
Portfolio's securities transactions and shall render to the Portfolio's Trustees
such periodic and special reports as the Trustees may reasonably request; and
(f) the investment management services of the Advisor to the Portfolio
under this Agreement are not to be deemed exclusive, and the Advisor shall be
free to render similar services to others.
3. The Portfolio has delivered copies of each of the following
documents to the Advisor and will promptly notify and deliver to it all future
amendments and supplements, if any:
(a) Declaration of Trust of the Portfolio (such Declaration of Trust,
as presently in effect and as amended from time to time, is herein called the
"Declaration of Trust");
(b) By-Laws of the Portfolio (such By-Laws, as presently in effect and
as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Trustees of the Portfolio authorizing
the appointment of the Advisor and approving the form of this Agreement;
(d) The Portfolio's Notification of Registration on Form N-8A and
Registration Statement on Form N-1A (No. 811-8790) each under the 1940 Act (the
"Registration Statement") as filed with the Securities and Exchange Commission
(the "Commission") on September 28, 1994, and all amendments thereto.
4. The Advisor shall keep the Portfolio's books and records required to
be maintained by it pursuant to paragraph 2(e). The Advisor agrees that all
records which it maintains for the Portfolio are the property of the Portfolio
and it will promptly surrender any of such records to the Portfolio upon the
Portfolio's request. The Advisor further agrees to preserve for the periods
prescribed by Rule 31a-2 of the Commission under the 1940 Act any such records
as are required to be maintained by the Advisor with respect to the Portfolio by
Rule 31a-1 of the Commission under the 1940 Act.
5. During the term of this Agreement the Advisor will pay all expenses
incurred by it in connection with its activities under this Agreement, other
than the cost of securities and investments purchased for the Portfolio
(including taxes and brokerage commissions, if any).
6. For the services provided and the expenses borne pursuant to this
Agreement, the Portfolio will pay to the Advisor as full compensation therefor a
fee at an annual rate equal to .35% of the Portfolio's average daily net assets.
This fee will be computed daily and payable as agreed by the Portfolio and the
Advisor, but no more frequently than monthly.
7. The Advisor shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Portfolio in connection with the matters
to which this Agreement relates, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the 1940 Act) or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement.
8. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Portfolio at any
time, without the payment of any penalty, by vote of a majority of all the
Trustees of the Portfolio or by vote of a majority of the outstanding voting
securities of the Portfolio on 60 days' written notice to the Advisor, or by the
Advisor at any time, without the payment of any penalty, on 90 days' written
notice to the Portfolio. This Agreement will automatically and immediately
terminate in the event of its assignment (as defined in the 1940 Act).
9. The Advisor shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly provided herein or
authorized by the Trustees of the Portfolio from time to time, have no authority
to act for or represent the Portfolio in any way or otherwise be deemed an agent
of the Portfolio.
10. This Agreement may be amended by mutual consent, but the consent of
the Portfolio must be approved (a) by vote of a majority of those Trustees of
the Portfolio who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
amendment, and (b) by vote of a majority of the outstanding voting securities of
the Portfolio.
11. Notices of any kind to be given to the Advisor by the Portfolio
shall be in writing and shall be duly given if mailed or delivered to the
Advisor at 522 Fifth Avenue, New York, New York 10036, Attention: Funds
Management, or at such other address or to such other individual as shall be
specified by the Advisor to the Portfolio. Notices of any kind to be given to
the Portfolio by the Advisor shall be in writing and shall be duly given if
mailed or delivered to the Portfolio c/o State Street Cayman Trust Company at
Elizabethan Square, Shedden Road, George Town, Grand Cayman, Cayman Islands,
BWI, Attention: Treasurer, or at such other address or to such other individual
as shall be specified by the Portfolio to the Advisor.
12. The Trustees have authorized the execution of this Agreement in
their capacity as Trustees and not individually and the Advisor agrees that
neither the shareholders nor the Trustees nor any officer, employee,
representative or agent of the Portfolio shall be personally liable upon, or
shall resort be had to their private property for the satisfaction of,
obligations given, executed or delivered on behalf of or by the Portfolio, that
the shareholders, trustees, officers, employees, representatives and agents of
the Portfolio shall not be personally liable hereunder, and that it shall look
solely to the property of the Portfolio for the satisfaction of any claim
hereunder.
13. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original.
14. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the 28th day of October,
1998.
THE NON-U.S. FIXED INCOME PORTFOLIO
By: /S/ Jacqueline Henning
Jacqueline Henning
Assistant Secretary
and Assistant Treasurer
J.P. MORGAN INVESTMENT MANAGEMENT, INC.
By: /s/ Diane J. Minardi
Diane J. Minardi
Vice President
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial data extracted from the annual report
dated 9/30/97 for the Non-US Fixed Income Portfolio and is qualified in its
entirety by reference to such annual report.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 214558
<INVESTMENTS-AT-VALUE> 217477
<RECEIVABLES> 24562
<ASSETS-OTHER> 3031
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 245070
<PAYABLE-FOR-SECURITIES> 6508
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4215
<TOTAL-LIABILITIES> 10723
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 234347
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9754
<OTHER-INCOME> 0
<EXPENSES-NET> 972
<NET-INVESTMENT-INCOME> 8782
<REALIZED-GAINS-CURRENT> 16465
<APPREC-INCREASE-CURRENT> (3986)
<NET-CHANGE-FROM-OPS> 21261
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 88444
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 651
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 972
<AVERAGE-NET-ASSETS> 185966
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> .52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>