As filed with the Securities and Exchange Commission on January 2, 1998
File No. 811-9008
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 8
THE SERIES PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
Post Office Box 2508 GT, George Town, Grand Cayman, Cayman Islands, BWI
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (345) 949-6644
Christopher J. Kelley, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: Steven K. West, 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 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 beneficial
interests in the Registrant.
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PART A (THE DISCIPLINED EQUITY PORTFOLIO)
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 Series Portfolio (the "Portfolio Trust") is an open-end management
investment company which was organized as a trust under the laws of the State of
New York on June 24, 1994. Beneficial interests of the Portfolio Trust are
divided into series, one of which, The Disciplined Equity Portfolio (the
"Portfolio") is described herein. The Portfolio is diversified for purposes of
the Investment Company Act of 1940, as amended (the "1940 Act"). 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 (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 Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
INVESTMENTS IN THE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, MORGAN 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 May 31,
1997.
The investment objective of the Portfolio is described below, together
with the policies it employs in its efforts 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 is to provide high total return
from a broadly diversified portfolio of equity securities. Total return will
consist of realized and unrealized capital gains and losses plus income. The
Portfolio invests primarily in equity securities of large capitalization U.S.
companies.
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The Portfolio is designed for investors who are pursuing a long-term
goal such as retirement; want to add a growth investment to further diversify a
portfolio and want a fund that seeks to consistently outperform the market in
which it invests. The Portfolio is not for investors who want a fund that
pursues market trends or focuses only on particular industries or sectors;
require regular income or stability of principal or are pursuing a short-term
goal or investing emergency reserves.
In managing the Portfolio, the Advisor begins with a three step
process, research, valuation and stock selection. Based on fundamental research,
the Advisor takes an in-depth look at company prospects over a relatively long
period -- often as much as five years -- rather than focusing on near-term
expectations. This approach is designed to provide insight into a company's real
growth potential. The Advisor's in-house research is developed by an extensive
worldwide network of over 120 career analysts. The team of analysts dedicated to
U.S. equities includes more than 20 members, with an average of over ten years
of experience.
The research findings allow the Advisor to rank the companies in each
industry group according to their relative value. The greater a company's
estimated worth compared to the current market price of its stock, the more
undervalued the company. The valuation rankings are produced with the help of a
variety of models that quantify the research team's findings. Industry by
industry, the Portfolio's weightings are similar to those of the S&P 500 Index.
The Portfolio does not look to overweight or underweight industries.
The Portfolio buys and sells stocks according to it's own policies,
using the research and valuation rankings as a basis. In general, the management
team buys stocks that are identified as undervalued and considers selling them
when they appear overvalued. Along with attractive valuation, the Advisor often
considers a number of other criteria including catalysts that could trigger a
rise in a stock's price, high potential reward compared to potential risk and
temporary mispricings caused by market overreactions.
Potential Risks and Rewards
The value of your investment in the Portfolio will fluctuate in
response to movements in the stock market. Portfolio performance will also
depend on the effectiveness of the Advisor's research and the management team's
stock picking decisions.
By owning a large number of stocks within the S&P 500 Index, with an
emphasis on those that appear undervalued or fairly valued, and by tracking the
industry weightings of that Index, the fund seeks returns that modestly but
consistently exceed those of the S&P 500 Index with virtually the same level of
volatility.
The potential risks of the Portfolio are as follows:
With respect to market conditions, the Portfolio's share price and
performance will fluctuate in response to stock market movements.
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With respect to management choices, the Portfolio could underperform
its benchmark due to its asset allocation and securities choices.
With respect to foreign investments, currency exchange rate movements
could reduce gains or create losses. The Portfolio could lose money because of
foreign government actions, political instability, or lack of adequate and
accurate information.
Derivatives such as futures, options, and foreign currency forward
contracts that are used for hedging the Portfolio or specific securities may not
fully offset the underlying positions. Derivatives used for risk management may
not have the intended effects and may result in losses or missed opportunities.
Derivatives that involve leverage could magnify losses.
With respect to illiquid holdings, the Portfolio could have difficulty
valuing these holdings precisely. The Portfolio could be unable to sell these
holdings at the time or price it desired.
With respect to when-issued and delayed delivery securities, when the
Portfolio buys securities before issue or for delayed delivery, it could be
exposed to leverage risk if it does not use segregated accounts.
With respect to short-term trading, increased trading would raise the
Portfolio's brokerage and related costs. Increased short-term capital gains
distributions would raise shareholders' income tax liability.
The potential rewards of the Portfolio are as follows:
With respect to market conditions, stocks have generally outperformed
more stable investments (such as bonds and cash equivalents) over the long term.
With respect to management choices, the Portfolio could outperform its
benchmark due to these same choices.
With respect to foreign investments, favorable exchange rate movements
could generate gains or reduce losses. Foreign investments, which represent a
major portion of the world's securities, offer attractive potential performance
and opportunities for diversification.
With respect to derivatives, hedges that correlate well with underlying
positions can reduce or eliminate losses at low cost. The Portfolio could make
money and protect against losses if management's analysis proves correct.
Derivatives that involve leverage could generate substantial gains at low cost.
With respect to illiquid holdings, these holdings may offer more
attractive yields or potential growth than comparable widely traded securities.
With respect to when-issued and delayed delivery securities, the
Portfolio can take advantage of attractive transaction opportunities.
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With respect to Short-term trading, the Portfolio could realize gains
in a short period of time. The Portfolio could also protect against losses if a
stock is overvalued and its value later falls.
The policies to balance risk and reward are as follows:
With respect to market conditions, under normal circumstances the
portfolio plans to remain fully invested, with at least 65% in stocks; stock
investments may include U.S. and foreign convertible securities, preferred
stocks, trust or partnership interests, warrants, rights, and investment company
securities. The Portfolio seeks to limit risk through diversification. During
severe market downturns, the Portfolio has the option of investing up to 100% of
assets in investment-grade short-term securities.
With respect to management choices, the Advisor focuses its active
management on securities selection, the area where it believes its commitment to
research can most enhance returns.
The Portfolio anticipates that total foreign investments will not
exceed 5% of assets. The Portfolio actively manages the currency exposure of its
foreign investments relative to its benchmark, and may hedge into the U.S.
dollar from time to time.
The Portfolio uses derivatives for hedging and for risk management
(i.e., to establish or adjust exposure to particular securities, markets or
currencies); risk management may include management of the Portfolio's exposure
relative to its benchmark. The Portfolio only establishes hedges that it expects
will be highly correlated with underlying positions. While the Portfolio may use
derivatives that incidentally involve leverage, it does not use them for the
specific purposes of leveraging the Portfolio.
With respect to illiquid holdings, the Portfolio may not invest more
than 15% of net assets in illiquid holdings. To maintain adequate liquidity, the
Portfolio may hold investment grade short-term securities (including repurchase
agreements) and, for temporary or extraordinary purposes, may borrow from banks
up to 33 1/3% of the value of its total assets.
With respect to when-issued and delayed delivery securities, the
Portfolio uses segregated accounts to cover any leverage risk.
With respect to Short-term trading, the Portfolio anticipates a
portfolio turnover rate of approximately 100%. The Portfolio generally avoids
short-term trading, except to take advantage of attractive or unexpected
opportunities or to meet demands generated by shareholder activity.
For a more detailed discussion of associated risks as well as a
description of certain other investment restrictions, see Item 13 in Part B.
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ITEM 5. MANAGEMENT OF THE PORTFOLIO TRUST
The Board of Trustees provides broad supervision over the affairs of
the Portfolio Trust. The Portfolio Trust has retained the services of Morgan as
investment adviser and administrative services agent. The Portfolio Trust has
retained the services of Funds Distributor, Inc. ("FDI") as co-administrator
(the "Co-Administrator").
The Portfolio Trust 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.
FUND SERVICES AGREEMENT. Pursuant to an Amended and Restated Portfolio
Fund Services Agreement with the Portfolio Trust, Pierpont Group, Inc.
("Pierpont Group"), 461 Fifth Avenue, New York, New York 10017, assists the
Trustees in exercising their overall supervisory responsibilities for the
affairs of the Portfolio Trust. Pierpont Group provides these services for a fee
approximating its reasonable cost for providing these services to the Portfolio
Trust and certain other registered investment companies with similar agreements
with PGI.
See Item 14 in Part B.
INVESTMENT ADVISOR. The Portfolio has retained the services of Morgan
as investment advisor. Morgan, with principal offices at 60 Wall Street, New
York, New York 10260, is a New York trust company that conducts a general
banking and trust business. Morgan is a wholly owned subsidiary of J.P. Morgan &
Co. Incorporated ("J.P. Morgan"), a bank holding company organized under the
laws of Delaware. Through offices in New York City and abroad, J.P. Morgan,
through the Advisor and other subsidiaries, offers a wide range of services to
governmental, institutional, corporate and individual customers and acts as
investment advisor to individual and institutional clients with combined assets
under management of more than $240 billion. Morgan provides investment advice
and portfolio management services to the Portfolio. Subject to the supervision
of the Trustees, Morgan makes the Portfolio's day-to-day investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Portfolio's investments.
The Advisor uses a sophisticated, disciplined, collaborative process
for managing all asset classes. For equity portfolios, this process utilizes
research, valuation and stock selection. Morgan has managed portfolios of equity
securities of U.S. equity securities on behalf of its clients since the 1960s.
The portfolio managers making investments in U.S. equity securities work in
conjunction with Morgan's domestic equity analysts, as well as capital market,
credit and economic research analysts, traders and administrative officers. The
U.S. equity analysts each cover a different industry, monitoring a universe of
600 predominantly large and medium-sized U.S. companies.
James C. Wiess and Timothy J. Devlin, both Vice Presidents, are primarily
responsible for the day-to-day management and implementation of Morgan's
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investment process for the Portfolio since its inception. Mr. Wiess has been
employed by Morgan since 1992 and Mr. Devlin, since July of 1996.
As compensation for the services rendered and related expenses borne by
Morgan under its investment advisory agreement with the Portfolio, the Portfolio
has agreed to pay Morgan 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 Trust, 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 Trust; (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 Trust and certain other investment
companies subject to similar agreements with FDI.
ADMINISTRATIVE SERVICES AGENT. Pursuant to an Administrative Services
Agreement with the Portfolio Trust, 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 and certain other registered investment companies managed by the
Advisor 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 the
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"), 225
Franklin Street, Boston, Massachusetts 02110, serves as the Portfolio's
custodian and fund accounting agent. State Street keeps the books of account for
the Portfolio at a location outside the United States.
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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 commissions.
Morgan has agreed that it will, at least through September 30, 1998,
maintain the Portfolio's total operating expenses at the annual rate of 0.45% of
the Portfolio's average daily net assets. This expense limitation does not cover
extraordinary expenses during the period. There is no assurance that the Advisor
will continue this waiver beyond the specified period.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES
The Portfolio is a series of the Portfolio Trust, which 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 one or more series.
Currently, there are five active subtrusts (series) of the Portfolio Trust.
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.
The Declaration of Trust provides that investors in the Portfolio (other
investment companies, insurance company separate accounts and common and
commingled trust funds) are each 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 December 5, 1997, J.P. Morgan Institutional Disciplined Equity
Fund (a series of the J.P. Morgan Institutional Funds) and J.P. Morgan
Disciplined Equity Fund, Ltd. (a Bahamas international business company) (the
"Funds") owned 89% and 11%, respectively, of the outstanding beneficial
interests in the Portfolio. So long as the Funds control the Portfolio, they may
take actions without the approval of any other holder of beneficial interests in
the Portfolio.
Each investor in the Portfolio is entitled to a vote in proportion to
the amount of its investment in the Portfolio. Investors in the Portfolio will
vote as a separate class, except as to voting of Trustees, as otherwise required
by the 1940 Act, or if determined by the Trustees to be a matter which affects
all series. As to any matter which only affects a specific series, only
investors in that series are entitled to vote. 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
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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. Income includes
dividends and interest, including discount earned (including both original issue
and market discount) on discount paper accrued ratably to the date of maturity
and any net realized and unrealized gains or losses on the assets of the
Portfolio. All 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 May 31.
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 Internal Revenue Code of 1986, as
amended (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, B.W.I. (345-949-6644).
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 other 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.
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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 Trust. The net asset value of the
Portfolio is determined at the Valuation Time 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 Morgan,
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.
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ITEM 8. REDEMPTION OR REPURCHASE
An investor in the Portfolio may reduce 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 Trust. The proceeds of a
reduction will be paid by the Portfolio Trust in federal funds normally on the
next Portfolio Business Day after the reduction 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
reduction 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 Trust, on behalf of 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 . . . . . . . . . . . B1-1
Investment Objective and Policies . . . . . . . . . . B1-1
Management of the Portfolio Trust . . . . . . . . . . B1-18
Control Persons and Principal Holder
of Securities . . . . . . . . . . . . . . . . . . . . B1-23
Investment Advisory and Other Services . . . . . . . B1-24
Brokerage Allocation and Other Practices . . . . . . B1-28
Capital Stock and Other Securities . . . . . . . . . B1-30
Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . . . . . . B1-31
Tax Status . . . . . . . . . . . . . . . . . . . . . B1-33
Underwriters . . . . . . . . . . . . . . . . . . . . B1-35
Calculations of Performance Data . . . . . . . . . . B1-35
Financial Statements . . . . . . . . . . . . . . . . B1-35
Description of Security Ratings . . . . . . . . . . . Appendix A
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
The investment objective of The Disciplined Equity Portfolio (the
"Portfolio") is to provide a high total return from a broadly diversified
portfolio of equity securities.
The Portfolio is advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
The following discussion supplements the information regarding the
investment objective of the Portfolio and the policies to be employed to achieve
this objective. Unless the context otherwise requires, terms defined in Part A
have the same meaning in this Part B.
The Portfolio is designed for investors seeking enhanced total return
relative to that of large and medium sized companies, typically represented by
the S&P 500 Index.
The Portfolio invests primarily in equity securities of large
capitalization U.S. companies. Under normal circumstances, the Portfolio expects
to invest at least 65% of its total assets in such securities.
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INVESTMENT PROCESS
Research: Morgan's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, follow
approximately 600 medium and large capitalization U.S. companies. Their research
goal is to forecast intermediate-term earnings and prospective dividend growth
rates for the companies that they cover.
Valuation: The analysts' forecasts are converted into comparable
expected returns using a proprietary dividend discount model, which calculates
the intermediate-term earnings by comparing a company's current stock price with
its forecasted dividends and earnings. Within each sector, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
Stock Selection: A broadly diversified portfolio is constructed using
disciplined buy and sell rules. Purchases are allocated among stocks in the
first three quintiles. A stock that falls into the fourth and fifth quintiles
generally becomes a candidate for sale, either because its price has risen or
its fundamentals have deteriorated. The Portfolio's sector weightings are
matched to those of the S&P 500 Index, the Portfolio's benchmark. Morgan also
controls the Portfolio's exposure to style and theme bets and maintains
near-market security weightings in individual security holdings. This process
results in an investment portfolio containing approximately 300 stocks.
MONEY MARKET INSTRUMENTS
Although the Portfolio intends, under normal circumstances and to the
extent practicable, to be fully invested in equity securities, the Portfolio may
invest in money market instruments to the extent consistent with its investment
objective and policies. The Portfolio may make money market investments pending
other investment or settlement, for liquidity or in adverse market conditions. 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. 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. 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
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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: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
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 the 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 have more than $2 billion in assets and are organized under the laws
of the United States or any state, (ii) foreign branches of these banks or of
foreign banks (Euros) and (iii) U.S. branches of foreign banks (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 the Advisor acting as agent, for no additional
fee, in its capacity as investment advisor to the Portfolio and as fiduciary for
other clients for whom it exercises investment discretion. The monies loaned to
the borrower come from accounts managed by the Advisor or its affiliates,
pursuant to arrangements with such accounts. Interest and principal payments are
credited to such accounts. The Advisor, acting as a fiduciary on behalf of its
clients, 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 the Advisor. Since
master demand obligations typically are not rated by credit rating agencies, the
Portfolio may invest in
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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. It is
possible that the issuer of a master demand obligation could be a client of
Morgan to whom Morgan, in its capacity as a commercial bank, has made a loan.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Portfolio Trust's 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 thirteen months. The
securities which are subject to repurchase agreements, however, may have
maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. The Portfolio always will 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 Portfolio's custodian (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 the collateral by the Portfolio may be delayed or limited.
The Portfolio may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described herein or in Part A.
EQUITY INVESTMENTS
As discussed in Part A, the Portfolio invests primarily in Equity
Securities. The Equity Securities in which the Portfolio invests include those
listed on any domestic or foreign securities exchange or traded in the
over-the-counter (OTC) market as well as certain restricted or unlisted
securities. A discussion of the various types of equity investments which may be
purchased by the Portfolio appears in Part A and below. See "Quality and
Diversification Requirements".
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EQUITY SECURITIES. The Equity Securities in which the Portfolio may invest
may or may not pay dividends and may or may not carry voting rights. Common
stock occupies the most junior position in a company's capital structure.
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.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
COMMON STOCK WARRANTS
The Portfolio may invest in common stock warrants that entitle the
holder to buy common stock from the issuer of the warrant at a specific price
(the strike price) for a specific period of time. The market price of warrants
may be substantially lower than the current market price of the underlying
common stock, yet warrants are subject to similar price fluctuations. As a
result, warrants may be more volatile investments than the underlying common
stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying common stock and do not represent any
rights in the assets of the issuer company. A warrant will expire worthless if
it is not exercised on or prior to the expiration date.
FOREIGN INVESTMENTS
The Portfolio may invest in certain foreign securities and does not
expect to invest more than 5% of its total assets at the time of purchase in
securities of foreign issuers.
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 U.S. 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.
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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.
Foreign investments may be made directly in securities of foreign
issuers or in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other
similar securities of foreign issuers. ADRs are securities, typically issued by
a U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited
with the depositary. ADRs include American Depositary Shares and New York
Shares. EDRs are receipts issued by a European financial institution. GDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all costs
of the unsponsored facility. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through to the
holders of the receipts voting rights with respect to the deposited securities.
In addition, while the volume of transactions effected on foreign stock
exchanges 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. companies. Moreover, the settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. In buying and selling
securities on foreign exchanges, purchasers normally pay fixed commissions that
are generally higher than the negotiated commissions charged in the United
States. 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.
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.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Portfolio may buy and sell securities and receive interest and
dividends in currencies other than the U.S. dollar, the Portfolio may enter from
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time to time 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 foreign currency forward 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. Foreign currency forward
exchange contracts establish an exchange rate at a future date. These contracts
are derivative instruments, as their value derives from the spot exchange rates
of the currencies underlying the contract. These contracts are entered into in
the interbank market directly between currency traders (usually large commercial
banks) and their customers. A foreign currency forward exchange contract
generally has no deposit requirement and is traded at a net price without
commission. Neither spot transactions nor foreign currency forward 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 or in exchange
for another foreign currency. 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 vis a vis 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 movements 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.
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ADDITIONAL INVESTMENTS
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 money market instruments and other 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.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Portfolio to the extent permitted under the 1940 Act.
These limits 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. The Portfolio has applied for exemptive
relief from the SEC to permit the Portfolio to invest in affiliated investment
companies. If the requested relief is granted, the Portfolio would then be
permitted to invest in affiliated funds, subject to certain conditions specified
in the applicable order.
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
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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 may not enter into reverse repurchase agreements
exceeding in the aggregate one-third of the market value of its total assets,
less liabilities other than the obligations created by reverse repurchase
agreements. 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 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
respective 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 before entering into such an agreement, 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 exclusive placement agent unless otherwise
permitted by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolio may
not acquire any illiquid holdings 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 Securities Act of 1933, as amended
(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 holdings or receives upon resale may be
lower than the price paid or received for similar holdings with a more liquid
market. Accordingly the valuation of these holdings 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.
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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 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
The Portfolio intends to meet the diversification requirements of the
1940 Act. To meet these requirements, 75% of the assets of the Portfolio are
subject to the following fundamental limitations: (1) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
and (2) the Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio's assets not
subject to the limitation described above, there is no limitation on investment
of these assets under the 1940 Act, so that all of such assets may be invested
in securities of any one issuer, subject to the limitation of any applicable
state securities laws. Investments not subject to the limitations described
above could involve an increased risk to the Portfolio should an issuer, or a
state or its related entities, be unable to make interest or principal payments
or should the market value of such securities decline.
The Portfolio will also 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 "Tax Status."
The Portfolio may invest in convertible debt securities for which there
are no specific quality requirements. 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. At the time the Portfolio invests in any other short-term
debt securities, they must be rated A or higher by Moody's or Standard & Poor's,
or if unrated, the investment must be of comparable quality in the Advisor's
opinion.
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.
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OPTIONS AND FUTURES TRANSACTIONS
The Portfolio may (a) purchase and sell exchange traded and
over-the-counter (OTC) put and call options on equity securities or indexes of
equity securities, (b) purchase and sell futures contracts on indexes of equity
securities and (c) purchase and sell put and call options on futures contracts
on indexes of equity 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. 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 a 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 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 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.
OPTIONS
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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. If an
option is American style, it may be exercised on any day up to its expiration
date. A European style option may be exercised only on 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.
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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. 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.
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 Portfolio's 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 Trust 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.
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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)
uncovered put and call 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.
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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 "Options and Futures
Transactions--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
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percentage of the Portfolio's assets could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current obligations.
RISK MANAGEMENT. The Portfolio may employ non-hedging risk management
techniques. Risk management strategies are used to keep the Portfolio fully
invested and to reduce the transaction costs associated with cash flows into and
out of the Portfolio. The objective where equity futures are used to "equitize"
cash is to match the notional value of all futures contracts to the Portfolio's
cash balance. The notional value of futures and of the cash is monitored daily.
As the cash is invested in securities and/or paid out to participants in
redemptions, the Advisor simultaneously adjusts the futures positions. Through
such procedures, the Portfolio not only gains equity exposure from the use of
futures, but also benefits from increased flexibility in responding to client
cash flow needs. Additionally, because it can be less expensive to trade a list
of securities as a package or program trade rather than as a group of individual
orders, futures provide a means through which transaction costs can be reduced.
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 rate for the period December 30, 1996
(commencement of operations) through May 31, 1997 was 20%. 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 distributions resulting from such gains are considered
ordinary income for federal income tax purposes. See Item 20 below. The
estimated annual portfolio turnover rate for the Portfolio generally should not
exceed 100%.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Portfolio
Trust with respect to 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 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 may not:
1. Purchase any security if, as a result, more than 25% its total assets
would be invested in securities of issuers in any single industry. This
limitation
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shall not apply to securities issued or guaranteed as to principal or interest
by the U.S. Government, its agencies or instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing money in
accordance with paragraph 3 below, making loans in accordance with paragraph 7
below, the issuance of beneficial interests in multiple classes or series, the
purchase or sale of options, futures contracts, forward commitments, swaps and
transactions in repurchase agreements are not deemed to be senior securities.
3. Borrow money, except in amounts not to exceed one third of the Portfolio's
total assets (including the amount borrowed) (i) from banks for temporary or
short-term purposes or for the clearance of transactions, (ii) in connection
with redemptions or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets, (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) pursuant to
reverse repurchase agreements entered into by the Portfolio.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio may be
deemed to be an underwriter under the 1933 Act.
5. Purchase or sell real estate except that the Portfolio may (i) acquire or
lease office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities that are
secured by real estate or interests therein, (iv) purchase and sell
mortgage-related securities and (v) hold and sell real estate acquired by the
Portfolio as a result of the ownership of securities.
6. Purchase or sell commodities or commodity contracts, except the Portfolio may
purchase and sell financial futures contracts, options on financial futures
contracts and warrants and may enter into swap and forward commitment
transactions.
7. Make loans, except that the Portfolio (1) may lend portfolio securities with
a value not exceeding one-third of the Portfolio's net assets, (2) enter into
repurchase agreements, and (3) purchase all or a portion of an issue of debt
securities (including privately issued debt securities), bank loan participation
interests, bank certificates of deposit, bankers' acceptances, debentures or
other securities, whether or not the purchase is made upon the original issuance
of the securities.
8. With respect to 75% of its total assets, purchase securities of an
issuer (other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities), if:
a. such purchase would cause more than 5% of the Portfolio's total assets
to be invested in the securities of such issuer; or
b. such purchase would cause the Portfolio to hold more than 10% of the
outstanding voting securities of such issuer.
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(Although permitted to do so by Restriction No. 3 above, the Portfolio has
no current intention to engage in borrowing for financial leverage.)
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The investment restrictions
described below are not fundamental policies of the Portfolio and may be changed
by its Trustees. These non-fundamental investment policies require that the
Portfolio may not:
(i) Acquire securities of other investment companies, except as
permitted by the 1940 Act or any rule, order or interpretation thereunder, or in
connection with a merger, consolidation, reorganization, acquisition of assets
or an offer of exchange;
(ii) 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 net assets would be in investments that are illiquid;
(iii) Sell any security short, except to the extent permitted by the 1940
Act. Transactions in futures contracts and options shall not constitute selling
securities short; or
(iv) Purchase securities on margin, but the Portfolio may obtain such
short term credits as may be necessary for the clearance of transactions.
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.
For purposes of fundamental investment restrictions regarding industry
concentration, Morgan may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if Morgan determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, Morgan
may classify an issuer accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.
ITEM 14. MANAGEMENT OF THE PORTFOLIO TRUST.
The Trustees and officers of the Portfolio Trust, their business
addresses and principal occupations during the past five years and dates of
birth are set forth below. Their titles may have varied during that period. A
footnote indicates that a Trustee is an "interested person" (as defined in the
1940 Act) of the Portfolio.
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TRUSTEES AND OFFICERS
FREDERICK S. ADDY--Trustee; Retired; Prior to April 1994, Executive Vice
President and Chief Financial Officer, Amoco Corporation. His address is 5300
Arbutus Cove, Austin, TX 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, FL 32779,
and his date of birth is November 2, 1932.
ARTHUR C. ESCHENLAUER--Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His address is 14 Alta Vista Drive,
RD #2, Princeton, NJ 08540, and his date of birth is May 23, 1934.
MATTHEW HEALEY1 --Trustee; Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc. ("Pierpont Group") since prior to 1992. His address is Pine
Tree Country Club Estates, 10286 St. Andrews Road, Boynton Beach, FL 33436, and
his date of birth is August 23, 1937.
MICHAEL P. MALLARDI--Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, NY 10901, and his date of birth is March 17,
1934.
Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) 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 Trust.
The Trustees of the Portfolio Trust are the same as the Trustees of
each of the other Master Portfolios, the J.P. Morgan Funds, the 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, the J.P. Morgan Funds and the J.P. Morgan Institutional
Funds, up to and including creating a separate board of trustees.
- --------
1Mr. Healey is an "interested person" of the Portfolio Trust and the
Advisor as that term is defined in the 1940 Act.
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Trustee compensation expenses accrued by the Portfolio Trust for the
calendar year ended December 31, 1996 is set forth below.
<TABLE>
<CAPTION>
TOTAL TRUSTEE
COMPENSATION ACCRUED
AGGREGATE BY THE MASTER
TRUSTEE PORTFOLIOS(*), J.P.
COMPENSATION MORGAN INSTITUTIONAL
ACCRUED BY THE FUNDS,J.P. MORGAN
PORTFOLIO TRUST FUNDS AND J.P. MORGAN
NAME OF TRUSTEE DURING 1996 SERIES TRUST DURING
1996(***)
<S> <C> <C>
Frederick S. Addy, Trustee $14,977 $65,000
William G. Burns, Trustee $14,977 $65,000
Arthur C. Eschenlauer, Trustee $14,977 $65,000
Matthew Healey, Trustee(**) $14,977 $65,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $14,977 $65,000
</TABLE>
- ----------------------
(*) Includes 8 Portfolios in the Portfolio Trust and 14 other portfolios
(collectively the "Master Portfolios") for which Morgan acts as
investment advisor.
(**) During 1996, Pierpont Group paid Mr. Healey, in his role as Chairman of
Pierpont Group, compensation in the amount of $140,000, contributed
$21,000 to a defined contribution plan on his behalf, and paid $21,500
in insurance premiums for his benefit.
(***) No investment company within the fund complex has a pension or
retirement plan. Currently there are 18 investment companies (15
investment companies comprising the Master Portfolios, the J.P. Morgan
Funds, the J.P. Morgan Institutional Funds and J.P. Morgan Series
Trust) in the fund complex.
The Trustees of the Portfolio Trust, in addition to reviewing actions
of the Portfolio Trust's service providers, decide upon matters of general
policy. On January 15, 1994, the Portfolio Trust entered into a Portfolio Fund
Services Agreement with Pierpont Group to assist the Trustees in exercising
their overall supervisory responsibilities for the Portfolio Trust's affairs.
Pierpont Group was organized in July 1989 to provide services for The Pierpont
Family of Funds, and the Trustees are the equal and sole shareholders of
Pierpont Group. The Portfolio Trust has agreed to pay Pierpont Group a fee in an
amount representing its reasonable costs in performing these services to the
Portfolio Trust and certain other registered investment companies subject to
similar agreements with Pierpont Group. These costs are periodically reviewed by
the Trustees. The
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aggregate fees paid to Pierpont Group by the Portfolio for the period December
30, 1996 (commencement of operations) through May 31, 1997 was $607.
The Portfolio Trust has no employees; its executive officers (listed
below), other than the Chief Executive Officer, are provided and compensated by
Funds Distributor, Inc. ("FDI"), a wholly owned indirect subsidiary of Boston
Institutional Group, Inc. The Portfolio Trust's officers conduct and supervise
the business operations of the Portfolio Trust.
The officers of the Portfolio Trust, their principal occupations during
the past five years and 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 1992. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, FL 33436. His date of birth is August 23, 1937.
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 advised or administered by the Dreyfus
Corporation ("Dreyfus") or its affiliates. From December 1991 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 Manager of Treasury Services and Administration of FDI and an
officer of certain investment companies advised or administered by Dreyfus or
its affiliates. 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. Prior to March
1993, Mr. Conroy was employed as a fund accountant at The Boston Company, Inc.
His date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer. 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 for five years was Managing Director of Bank of Nova Scotia Trust Company
(Cayman) Limited from September 1988 to September 1993. Address: P.O. Box 2508
GT, Elizabethan Square, 2nd Floor, Shedden Road, George Town, Grand Cayman,
Cayman Islands. Her date of birth is March 24, 1942.
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RICHARD W. INGRAM; President and Treasurer. Executive Vice President
and Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director - Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant Vice
President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity Funds,
Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 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.
ELIZABETH A. KEELEY; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and Premier Mutual and an officer of RCM Capital
Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash Management Fund,
Inc. and certain investment companies advised or administered by Dreyfus or
Harris or their respective affiliates. Prior to August 1996, Ms. Keeley was
Assistant Vice President and Counsel of FDI and Premier Mutual. Prior to
September 1995, Ms. Keeley was enrolled at Fordham University School of Law and
received her JD in May 1995. Address: 200 Park Avenue, New York, New York 10166.
Her date of birth is September 14, 1969.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse Investors Cash Management Fund, Inc. and certain investment
companies advised or administered by Harris or its affiliates. From April 1994
to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From
1992 to 1994, Mr. Kelley was employed by Putnam Investments in legal and
compliance capacities. His date of birth is December 24, 1964.
LENORE J. MCCABE; Assistant Secretary and Assistant Treasurer. Assistant
Vice President, State Street Bank and Trust Company since November 1994.
Assigned as Operations Manager, State Street Cayman Trust Company, Ltd. since
February 1995. Prior to November, 1994, employed by Boston Financial Data
Services, Inc. as Control Group Manager. Address: P.O. Box 2508 GT, Elizabethan
Square, 2nd Floor, Shedden Road, George Town, Grand Cayman, Cayman Islands. Her
date of birth is May 31, 1961.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors
Cash Management Fund, Inc. and certain investment companies advised or
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administered by Dreyfus or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.
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.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Executive Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director Of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
The Portfolio Trust'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 wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of December 5, 1997, J.P. Morgan Institutional Disciplined Equity
Fund (a series of the J.P. Morgan Institutional Funds) and J.P. Morgan
Disciplined Equity Fund, Ltd. (a Bahamas international business company) (the
"Funds") owned 89% and 11%, respectively, of the outstanding beneficial
interests in the Portfolio. So long as the Funds control the Portfolio, they may
take actions without the approval of any other holder of beneficial interests in
the Portfolio.
Each of the Funds has informed the Portfolio Trust that whenever it is
requested to vote on matters pertaining to its corresponding Portfolio (other
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than a vote by the Portfolio 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 Trust own none of the outstanding
beneficial interests in any Portfolio.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. The investment advisor to the Portfolio is Morgan
Guaranty Trust Company of New York, a wholly owned subsidiary of J.P. Morgan, a
bank holding company organized under the laws of the State of Delaware. The
Advisor, 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. The Advisor 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, the Advisor 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.
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 more than $240 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 conclusions of the equity analysts' fundamental research is quantified into
a set of projected returns through the use of a dividend discount model. These
returns are projected for 2 to 5 years to enable analysts to take a longer term
view. These returns, or normalized earnings, are used to establish relative
values among stocks in each industrial sector. These values may not be the same
as the markets' current valuations of these companies. This provides the basis
for ranking the attractiveness of the companies in an industry according to five
distinct quintiles or rankings. This ranking is one of the factors considered in
determining the stocks purchased and sold in each sector.
The investment advisory services the Advisor provides to the Portfolio
are not exclusive under the terms of the Investment 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.
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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 the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Portfolio is currently the S&P
500 Index.
J.P. Morgan Investment Management Inc., also a wholly-owned subsidiary of
J.P. Morgan & Co. Incorporated, is a registered investment adviser under the
Investment Advisers Act of 1940, as amended, which 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 the Advisor serves as
trustee. J.P. Morgan Investment Management Inc. advises the Advisor on
investment of the commingled pension trust funds.
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 & Co. Incorporated or any personnel
of other divisions of the Advisor or with any of its affiliated persons, with
the exception of J.P. Morgan Investment Management Inc. and 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 Trust on behalf of 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 December 30, 1996 (commencement of operations) through May 31, 1997, the
Portfolio paid $73,985 in advisory fees.
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 the Portfolio Trust's Trustees and (ii)
by a vote of a majority of the Trustees who are not parties to the 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 of the
Portfolio Trust or by a vote of the holders of a majority of the Portfolio's
outstanding securities on 60 days' written notice to the Advisor and by the
Advisor on 90 days' written notice to the Portfolio.
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The Glass-Steagall Act and other applicable laws generally prohibit
banks 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 Trust. 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 Investment 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 the Advisor were prohibited from acting as investment advisor to the
Portfolio, it is expected that the Trustees of the Portfolio Trust would
recommend to investors that they approve the Portfolio Trust's entering into a
new investment advisory agreement with another qualified investment advisor
selected by the Trustees.
Under a separate agreement, Morgan also provides certain financial, fund
accounting and administrative services to the Portfolio Trust. See
"Administrative Services Agent" below.
CO-ADMINISTRATOR. Under the Portfolio Trust's Co-Administration
Agreement dated August 1, 1996, FDI serves as the Portfolio Trust'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
of the Portfolio Trust 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 Trust, subcontract for the
performance of its obligations, provided, however, that unless the Portfolio
Trust 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
Trust 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 Trust is based on the ratio of its net assets to the
aggregate net assets of the Master Portfolios and certain other investment
companies subject to similar agreements with FDI.
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The following administrative fees were paid by the Portfolio to FDI for
the period December 30, 1996 (commencement of operations) through May 31, 1997:
$520.
See "Expenses" below for applicable expense limitations.
ADMINISTRATIVE SERVICES AGENT. The Portfolio Trust 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. The Services Agreement may be
terminated at any time, without penalty, by the Portfolio Trust's Trustees or
the Advisor, in each case on not more than 60 days' nor less than 30 days'
written notice to the other party.
Under the Services Agreement, effective August 1, 1996, the Portfolio
Trust 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 aggregate 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 Master Portfolios, the
other investors in the Master Portfolios for which Morgan provides similar
services and J.P. Morgan Series Trust. For the period December 30, 1996
(commencement of operations) through May 31, 1997, the Portfolio paid $6,614 to
Morgan, net of fee waivers and reimbursements, as Services Agent.
CUSTODIAN. State Street Bank and Trust Company ("State Street"), 40
King Street West, Toronto, Ontario, Canada M5H 3Y8, serves as the Portfolio
Trust's custodian and fund accounting 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 Trust in
accordance with the regulations of the SEC. The Custodian maintains portfolio
transaction records, calculates book and tax allocations for the Portfolio Trust
and computes the value of the interest of each investor. State Street is
responsible for maintaining account records detailing the ownership of interests
in the Portfolio.
INDEPENDENT ACCOUNTANTS. The independent accountants of the Portfolio
Trust are Price Waterhouse, LLP, 1177 Avenue of the Americas, New York, New York
10036. Price Waterhouse LLP conducts an annual audit of the financial statements
of the Portfolio, assists in the preparation and/or review of the Portfolio's
federal and state income tax returns and consults with the Portfolio Trust 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 Trust is responsible for usual and customary
expenses associated with its operations. Such expenses include organization
expenses, legal fees, insurance costs, the compensation and expenses of the
Trustees, registration fees under federal and foreign securities laws, and
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extraordinary expenses applicable to the Portfolio Trust. Such expenses also
include registration fees under foreign securities laws and brokerage expenses.
Morgan has agreed to reimburse the Portfolio through September 30,
1998, to the extent necessary to maintain the daily total operating expenses of
the Portfolio at no more than the annualized rate of 0.45% of the daily net
assets of the Portfolio. For the period December 30, 1996 (commencement of
operations) through May 31, 1997, Morgan reimbursed the Portfolio $68,970.
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, 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.
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek best execution on a competitive basis for both purchases
and sales of Securities.
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; as well as the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
the Advisor decides that the broker chosen will provide the best execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of the Portfolio Trust 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.
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The Portfolio paid the following approximate brokerage commissions for
the period December 30, 1996 (commencement of operations) through May 31, 1997:
$25,351.
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of the Portfolio's 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 Trust, 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 Trust'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 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.
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ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a subtrust (or series) of the Portfolio Trust, which
is organized as a trust under the laws of the State of New York. Under the
Portfolio Trust's Declaration of Trust, the Trustees are authorized to issue
beneficial interests in one or more series (each a "Series"), including the
Portfolio. Investors in a Series will be held personally liable for the
obligations and liabilities of that Series (and of no other Series), subject,
however, to indemnification by the Portfolio Trust in the event that there is
imposed upon an investor a greater portion of the liabilities and obligations of
the Series than its proportionate beneficial interest in the Series. The
Declaration of Trust also provides that the Portfolio Trust shall maintain
appropriate insurance (for example, a fidelity bond and errors and omissions
insurance) for the protection of the Portfolio Trust, its investors, Trustees,
officers, employees and agents, and 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 Trust itself was unable to meet its
obligations.
Investors in a Series are entitled to participate pro rata in
distributions of taxable income, loss, gain and credit of their respective
Series only. Upon liquidation or dissolution of a Series, investors are entitled
to share pro rata in that Series' (and no other Series) net assets available for
distribution to its investors. The Portfolio Trust reserves the right to create
and issue additional Series of beneficial interests, in which case the
beneficial interests in each new Series would participate equally in the
earnings, dividends and assets of that particular Series only (and no other
Series). Any property of the Portfolio Trust is allocated and belongs to a
specific Series to the exclusion of all other Series. All consideration received
by the Portfolio Trust for the issuance and sale of beneficial interests in a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings and proceeds thereof, and any funds
or payments derived from any reinvestment of such proceeds, is held by the
Trustees in a separate subtrust (a Series) for the benefit of investors in that
Series and irrevocably belongs to that Series for all purposes. Neither a Series
nor investors in that Series possess any right to or interest in the assets
belonging to any other Series.
Investments in a Series have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Series may not be transferred. Certificates representing an
investor's beneficial interest in a Series 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 each Series. Investors in a Series do not have cumulative voting
rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Series may elect all of the Trustees if they choose
to do so and in such event other investors would not be able to elect any
Trustees. Investors in each Series will vote as a separate class except as to
voting of Trustees, as otherwise required by the 1940 Act, or if determined by
the Trustees to be a matter which affects all Series. As to any matter which
does not affect the interest of a particular Series, only investors in the one
or more affected
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Series are entitled to vote. The Portfolio Trust is not required and has no
current intention of holding annual meetings of investors, but the Portfolio
Trust will hold special meetings of investors when in the judgment of the
Portfolio Trust's Trustees it is necessary or desirable to submit matters for an
investor vote. The Portfolio Trust's Declaration of Trust may be amended without
the vote of investors, except that investors have the right to approve by
affirmative majority vote any amendment which would affect their voting rights,
alter the procedures to amend the Declaration of Trust of the Portfolio Trust,
or as required by law or by the Portfolio Trust's registration statement, or as
submitted to them by the Trustees. Any amendment submitted to investors which
the Trustees determine would affect the investors of any Series shall be
authorized by vote of the investors of such Series and no vote will be required
of investors in a Series not affected.
The Portfolio Trust or any Series (including 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
Series), except that if the Trustees recommend such sale of assets, the approval
by vote of a majority of the investors (with the vote of each being in
proportion to its percentage of the beneficial interests in the Series) will be
sufficient. The Portfolio Trust or any Series (including 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 Trust's Declaration of Trust provides that obligations of
the Portfolio Trust are not binding upon the Trustees individually but only upon
the property of the Portfolio Trust 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 wilful 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 BEING OFFERED.
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.
The value of investments listed on a domestic securities exchange,
other than options on stock indexes, is generally based on the last sale prices
on the New York Stock Exchange at 4:00 P.M. or, in the absence of recorded
sales, at the average of readily available closing bid and asked prices on such
exchange. Securities listed on a foreign exchange are valued at the last quoted
sale price available before the time when net assets are valued. Unlisted
securities are valued at the average of the quoted bid and asked prices in the
over-the-counter market. The value of each security for which readily available
market quotations exist is based on a decision as to the broadest and most
representative market for such security. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be
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converted into U.S. dollars at the prevailing market rates available at the time
of valuation.
Options on stock indexes traded on national securities exchanges are
valued at the close of options trading on such exchanges which is currently 4:10
P.M., New York time. Stock index futures and related options, which are traded
on commodities exchanges, are valued at their last sales price as of the close
of such commodities exchanges which is currently 4:15 P.M., New York time.
Securities or other assets for which market quotations are not readily available
are valued at fair value in accordance with procedures established by and under
the general supervision and responsibility of the Trustees. Such procedures
include the use of independent pricing services which use prices based upon
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Short-term
investments which mature in 60 days or less are valued at amortized cost if
their original maturity was 60 days or less, or by amortizing their value on the
61st day prior to maturity, if their original maturity when acquired by the
Portfolio was more than 60 days, unless this is determined not to represent fair
value by the Trustees.
Trading in securities on most foreign exchanges and OTC markets is
normally completed before the close of trading on the New York Stock Exchange
and may also take place on days on which the New York Stock Exchange is closed.
If events materially affecting the value of securities occur between the time
when the exchange on 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 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 Portfolio may also close for
purchases and withdrawals at such other times as may be determined by the
Trustees to the extent permitted by applicable law. The days on which net asset
value is determined are the Portfolio's business days.
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ITEM 20. TAX STATUS.
The Portfolio Trust is organized as a New York trust. The Portfolio
Trust should not be subject to any income or franchise tax in the State of New
York. The Portfolio should be taxed as a partnership for Federal income tax
purposes and should not be subject to Federal income tax. Each investor in the
Portfolio will be required to include in its own tax return its share (as
determined in accordance with the governing instruments of the Portfolio) of the
Portfolio's ordinary income, capital gains and losses, deductions and other
items of income 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. To ensure that investors will be able to satisfy
the requirements of subchapter M, the Portfolio must satisfy certain gross
income and diversification requirements, including, among other things, 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 than
three months. Effective as of June 1, 1998, the 30% of gross income test will no
longer apply to the Portfolio.
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 a put or call option is written
thereon or the straddle rules described below are otherwise applicable. 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 the repurchase of the option 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 generally 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.
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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. Certain straddles treated as short sales for tax purposes
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. Effective as of June 1, 1998, the 30% of gross
income test will no longer apply to the Portfolio.
Certain options, futures and foreign currency contracts held by the
Portfolio at the end of each taxable 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. However, gain or loss recognized on foreign currency contracts will
be treated as ordinary income or loss.
The Portfolio Trust may invest in equity securities of foreign issuers.
If the Portfolio Trust purchases shares in certain foreign investment funds
(referred to as passive foreign investment companies ("PFICs") under the Code),
investors who are U.S. persons generally would be subject to special rules on
any "excess distribution" from such foreign investment fund, including any gain
from the disposition of such shares. Under these special rules, (i) the gain or
excess distribution would be allocated ratably over the investor's holding
period for such shares, (ii) the amount allocated to the taxable year in which
the gain or excess distribution was realized would be taxable as ordinary
income, (iii) the amount allocated to each prior year, with certain exceptions,
would be subject to tax at the highest tax rate in effect for that year and (iv)
the interest charge generally applicable to underpayments of tax would be
imposed in respect of the tax attributable to each such year. Alternatively, an
investor may, if certain conditions are met, include in its income each year a
pro rata portion of the foreign investment fund's income, whether or not
distributed to the Portfolio Trust.
For taxable years of the Portfolio Trust beginning after 1997, the
Portfolio Trust will be permitted to "mark to market" any marketable stock held
by the Portfolio Trust in a PFIC. If the Portfolio Trust made such an election,
the investor in the Portfolio Trust would include in income each year an amount
equal to its share of the excess, if any, of the fair market value of the PFIC
stock as of the close of the taxable year over the adjusted basis of such stock.
The investor would be allowed a deduction for its share of the excess, if any,
of the adjusted basis of the PFIC stock over its fair market value as of the
close of the taxable year, but only to the extent of any net mark-to-market
gains with respect to the stock included by the investor for prior taxable
years.
FOREIGN INVESTORS. It is intended that the Portfolio Trust 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 Trust conducts
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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.
Investors are advised to consult their own tax advisers with respect to the
reporting of such foreign taxes on the investors' income tax returns.
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 arising solely from such investment. 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 placement agent for the Portfolio Trust 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
Trust.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The Portfolio's May 31, 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 Number: 0000912057-97-025987 filed August 4,
1997).
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APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA has 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 has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only
in a small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt 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.
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SP-2 - The short-term tax-exempt note rating of SP-2 has a
satisfactory 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.
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- 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.
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PART A (THE U.S. SMALL COMPANY OPPORTUNITIES PORTFOLIO (formerly THE SMALL
COMPANY GROWTH PORTFOLIO)
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 Series Portfolio (the "Portfolio Trust") is an open-end management
investment company which was organized as a trust under the laws of the State of
New York on June 24, 1994. Beneficial interests of the Portfolio Trust are
divided into series, one of which, The U.S. Small Company Opportunities
Portfolio (formerly The Small Company Growth Portfolio) (the "Portfolio") is
described herein. The Portfolio is diversified for purposes of the Investment
Company Act of 1940, as amended (the "1940 Act"). 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 (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 Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
INVESTMENTS IN THE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, MORGAN 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, and (iv) rights and liabilities of
investors.
The investment objective of the Portfolio is described below, together
with the policies it employs in its efforts 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 investment objective of the Portfolio is to provide long term
growth from a portfolio of small company stocks. The Portfolio invests primarily
in stocks of small U.S. companies whose market capitalizations are greater than
$150 million and less than $2 billion, with emphasis on those with a market
capitalization of less than $1.25 billion when purchased.
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The Portfolio is designed for investors who are pursuing a long-term
goal such as retirement; want to add a growth investment to further diversify a
portfolio and want a fund that seeks to consistently outperform the market in
which it invests. The Portfolio is not for investors who want a fund that
pursues market trends or focuses only on particular industries or sectors;
require regular income or stability of principal or are pursuing a short-term
goal or investing emergency reserves.
In managing the Portfolio, the Advisor begins with a three step
process, research, valuation and stock selection. Based on fundamental research,
the Advisor takes an in-depth look at company prospects over a relatively long
period -- often as much as five years -- rather than focusing on near-term
expectations. This approach is designed to provide insight into a company's real
growth potential. The Advisor's in-house research is developed by an extensive
worldwide network of over 120 career analysts. The team of analysts dedicated to
U.S. equities includes more than 20 members, with an average of over ten years
of experience.
The research findings allow the Advisor to rank the companies in each
industry group according to their relative value. The greater a company's
estimated worth compared to the current market price of its stock, the more
undervalued the company. The valuation rankings are produced with the help of a
variety of models that quantify the research team's findings. While the
Portfolio holds stocks in many industries to reduce the impact of poor
performance in any one sector, it tends to emphasize industries with higher
growth potential and does not track the sector weightings of the overall small
company stock market.
The Portfolio buys and sells stocks according to it's own policies,
using the research and valuation rankings as a basis. In general, the management
team buys stocks that are identified as undervalued and considers selling them
when they appear overvalued. Along with attractive valuation, the Advisor often
considers a number of other criteria including catalysts that could trigger a
rise in a stock's price, high potential reward compared to potential risk and
temporary mispricings caused by market overreactions.
Potential Risks and Rewards
The value of your investment in the Portfolio will fluctuate in
response to movements in the stock market. Portfolio performance will also
depend on the effectiveness of the Advisor's research and the management team's
stock picking decisions.
Small-cap stocks have historically offered higher long-term growth than
medium-cap stocks, and have also involved higher risks. The Portfolio's small-
cap emphasis means it is likely to be more sensitive to economic news and is
likely to fall further in value during broad market downturns. Because the
Portfolio seeks to outperform the Russell 2000 Growth Index while not tracking
its industry weightings, investors should expect higher volatility compared to
this index or to more conservatively managed small-cap funds.
The potential risks of the Portfolio are as follows:
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With respect to market conditions, the Portfolio's share price and
performance will fluctuate in response to stock market movements.
With respect to management choices, the Portfolio could underperform
its benchmark due to its asset allocation and securities choices.
With respect to foreign investments, currency exchange rate movements
could reduce gains or create losses. The Portfolio could lose money because of
foreign government actions, political instability, or lack of adequate and
accurate information.
Derivatives such as futures, options, and foreign currency forward
contracts that are used for hedging the Portfolio or specific securities may not
fully offset the underlying positions. Derivatives used for risk management may
not have the intended effects and may result in losses or missed opportunities.
Derivatives that involve leverage could magnify losses.
With respect to illiquid holdings, the Portfolio could have difficulty
valuing these holdings precisely. The Portfolio could be unable to sell these
holdings at the time or price it desired.
With respect to when-issued and delayed delivery securities, when the
Portfolio buys securities before issue or for delayed delivery, it could be
exposed to leverage risk if it does not use segregated accounts.
With respect to short-term trading, increased trading would raise the
Portfolio's brokerage and related costs. Increased short-term capital gains
distributions would raise shareholders' income tax liability.
The potential rewards of the Portfolio are as follows:
With respect to market conditions, stocks have generally outperformed
more stable investments (such as bonds and cash equivalents) over the long term.
With respect to management choices, the Portfolio could outperform its
benchmark due to these same choices.
With respect to foreign investments, favorable exchange rate movements
could generate gains or reduce losses. Foreign investments, which represent a
major portion of the world's securities, offer attractive potential performance
and opportunities for diversification.
With respect to derivatives, hedges that correlate well with underlying
positions can reduce or eliminate losses at low cost. The Portfolio could make
money and protect against losses if management's analysis proves correct.
Derivatives that involve leverage could generate substantial gains at low cost.
With respect to illiquid holdings, these holdings may offer more
attractive yields or potential growth than comparable widely traded securities.
With respect to when-issued and delayed delivery securities, the
Portfolio can take advantage of attractive transaction opportunities.
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With respect to Short-term trading, the Portfolio could realize gains
in a short period of time. The Portfolio could also protect against losses if a
stock is overvalued and its value later falls.
The policies to balance risk and reward are as follows:
With respect to market conditions, under normal circumstances the
portfolio plans to remain fully invested, with at least 65% in stocks; stock
investments may include U.S. and foreign convertible securities, preferred
stocks, trust or partnership interests, warrants, rights, and investment company
securities. The Portfolio seeks to limit risk through diversification. During
severe market downturns, the Portfolio has the option of investing up to 100% of
assets in investment-grade short-term securities.
With respect to management choices, the Advisor focuses its active
management on securities selection, the area where it believes its commitment to
research can most enhance returns.
The Portfolio anticipates that total foreign investments will not
exceed 5% of assets. The Portfolio actively manages the currency exposure of its
foreign investments relative to its benchmark, and may hedge into the U.S.
dollar from time to time.
The Portfolio uses derivatives for hedging and for risk management
(i.e., to establish or adjust exposure to particular securities, markets or
currencies); risk management may include management of the Portfolio's exposure
relative to its benchmark. The Portfolio only establishes hedges that it expects
will be highly correlated with underlying positions. While the Portfolio may use
derivatives that incidentally involve leverage, it does not use them for the
specific purposes of leveraging the Portfolio.
With respect to illiquid holdings, the Portfolio may not invest more
than 15% of net assets in illiquid holdings. To maintain adequate liquidity, the
Portfolio may hold investment grade short-term securities (including repurchase
agreements) and, for temporary or extraordinary purposes, may borrow from banks
up to 33 1/3% of the value of its total assets.
With respect to when-issued and delayed delivery securities, the
Portfolio uses segregated accounts to cover any leverage risk.
With respect to Short-term trading, the Portfolio anticipates a
portfolio turnover rate of approximately 100%. The Portfolio generally avoids
short-term trading, except to take advantage of attractive or unexpected
opportunities or to meet demands generated by shareholder activity.
For a more detailed discussion of associated risks 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 Morgan as investment
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adviser and administrative services agent. The Portfolio has retained the
services of Funds Distributor, 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.
FUND SERVICES AGREEMENT. Pursuant to an Amended and Restated Portfolio
Fund Services Agreement with the Portfolio Trust, Pierpont Group, Inc.
("Pierpont Group"), 461 Fifth Avenue, New York, New York 10017, assists the
Trustees in exercising their overall supervisory responsibilities for the
affairs of the Portfolio Trust. Pierpont Group provides these services for a fee
approximating its reasonable cost for providing these services to the Portfolio
Trust and certain other registered investment companies with similar agreements
with PGI.
See Item 14 in Part B.
INVESTMENT ADVISOR. The Portfolio has retained the services of Morgan
as investment advisor. Morgan, with principal offices 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 a wholly owned subsidiary of J.P. Morgan &
Co. Incorporated ("J.P. Morgan"), a bank holding company organized under the
laws of Delaware. Through offices in New York City and abroad, J.P. Morgan,
through the Advisor and other subsidiaries, offers a wide range of services to
governmental, institutional, corporate and individual customers and acts as
investment adviser to individual and institutional clients with combined assets
under management of more than $240 billion. Morgan provides investment advice
and portfolio management services to the Portfolio. Subject to the supervision
of the Portfolio's Trustees, Morgan, as Advisor, makes the Portfolio's
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolio's investments. See Item 16 in
Part B.
Morgan uses a sophisticated, disciplined, collaborative process for
managing all asset classes. For the Portfolio, this process utilizes fundamental
research, a variety of valuation techniques and stock selection. Morgan believes
that the market price of a security will, over time, move towards its
fundamental value, notwithstanding short-term fluctuations in price. Morgan
maintains an active presence in all of the world's leading financial markets and
employs over 120 full-time analysts devoted to economic research for its
clients.
The following person has been primarily responsible for the day-to-day
management and implementation of Morgan's investment process for the Portfolio
since its inception (business experience for the past five years is indicated
parenthetically): Marian U. Pardo, Managing Director (employed by Morgan since
prior to 1992).
As compensation for the services rendered and related expenses borne by
Morgan under the Investment Advisory Agreement with the Portfolio, the Portfolio
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has agreed to pay Morgan a fee, which is computed daily and may be paid monthly,
at the annual rate of 0.60% 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 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 and certain other registered investment companies managed by the
Advisor 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"), 225
Franklin Street, Boston, Massachusetts 02110 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.
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Morgan has agreed that it will, at least through September 30, 1998,
maintain the Portfolio's total operating expenses at the annual rate of 1.20% of
the Portfolio's average daily net assets. This expense limitation does not cover
extraordinary expenses during the period.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a series of the Portfolio Trust, which 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 one or more series.
Currently, there are eight active subtrusts (series) of the Portfolio Trust.
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.
The Declaration of Trust provides that investors in the Portfolio (other
investment companies, insurance company separate accounts and common and
commingled trust funds) are each 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.
Each investor in the Portfolio is entitled to a vote in proportion to
the amount of its investment in the Portfolio. Investors in the Portfolio will
vote as a separate class, except as to voting of Trustees, as otherwise required
by the 1940 Act, or if determined by the Trustees to be a matter which affects
all series. As to any matter which only affects a specific series, only
investors in that series are entitled to vote. 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. Income includes
dividends and interest, including discount earned (including both original issue
and market
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discount) on discount paper accrued ratably to the date of maturity and any net
realized and unrealized gains or losses on the assets of the Portfolio. All 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 May 31.
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., Elizabethan Square, Shedden Road, George Town, Grand
Cayman, Cayman Islands, BWI ((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 other 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 Trust. The net asset value of the
Portfolio is determined at the Valuation Time 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 Morgan,
appropriate investments for the Portfolio. In addition, securities accepted in
payment for beneficial interests must: (i) meet the investment objective and
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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 reduce 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 Trust. The proceeds of a
reduction will be paid by the Portfolio Trust in federal funds normally on the
next Portfolio Business Day after the reduction 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
reduction 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 Trust, on behalf of 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
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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 . . . . . . . . . . . B4-1
Investment Objective and Policies . . . . . . . . . . B4-1
Management of the Portfolio . . . . . . . . . . . . . B4-18
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . . . . B4-23
Investment Advisory and Other Services . . . . . . . B4-23
Brokerage Allocation and Other Practices . . . . . . B4-27
Capital Stock and Other Securities . . . . . . . . . B4-29
Purchase, Redemption and Pricing of Securities Being
Offered . . . . . . . . . . . . . . . . . . . . . . B4-30
Tax Status . . . . . . . . . . . . . . . . . . . . . B4-32
Underwriters . . . . . . . . . . . . . . . . . . . . B4-34
Calculations of Performance Data . . . . . . . . . . B4-34
Financial Statements . . . . . . . . . . . . . . . . B4-34
Appendix A . . . . . . . . . . . . . . . . . . . . . Appendix-1
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
The investment objective of The U.S. Small Company Opportunities
Portfolio (the "Portfolio") is to provide long-term growth from a portfolio of
small company stocks.
The Portfolio attempts to achieve its investment objective by investing
primarily in securities of small U.S. companies included in the Russell 2000
Growth Index, which is composed of 2,000 growth oriented stocks of U.S.
companies with market capitalizations ranging between $150 million and $2
billion with an emphasis on those with a market capitalization of less than
$1.25 billion when purchased.
The Portfolio is advised by Morgan Guaranty Trust Company of New York
("Morgan" or the "Advisor").
The following discussion supplements the information regarding the
investment objective of the Portfolio and the policies to be employed to achieve
this objective.
INVESTMENT PROCESS
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Research: Morgan's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, continuously
monitor the small cap stocks in their respective sectors with the aim of
identifying companies that exhibit superior financial strength and operating
returns. Meetings with management and on-site visits play a key role in shaping
their assessments. Their research goal is to forecast normalized, long-term
earnings and dividends for the most attractive small cap companies among those
they monitor -- a universe that contains a total of approximately 600 names.
Because Morgan's analysts follow both the larger and smaller companies in their
industries -- in essence, covering their industries from top to bottom -- they
are able to bring broad perspective to the research they do on both.
Valuation: The analysts' forecasts are converted into comparable
expected returns using a proprietary dividend discount model, which calculates
the long-term earnings by comparing a company's current stock price with the its
forecasted dividends and earnings. Within each industry, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
Stock Selection: A diversified portfolio is constructed using
disciplined buy and sell rules. Purchases are concentrated among the stocks in
the top two quintiles of the rankings; the specific names selected reflect the
portfolio manager's judgment concerning the soundness of the underlying
forecasts, the likelihood that the perceived misvaluation will soon be
corrected, and the magnitude of the risks versus the rewards. Once a stock falls
into the third quintile -- because its price has risen or its fundamentals have
deteriorated -- it generally becomes a candidate for sale. While the Portfolio
holds stocks in many industries to reduce the impact of poor performance in any
one sector, it tends to emphasize industries with higher growth potential and
does not track the sector weightings of the overall small company stock market.
MONEY MARKET INSTRUMENTS
Although the Portfolio intends, under normal circumstances and to the
extent practicable, to be fully invested in equity securities, the Portfolio may
invest in money market instruments to the extent consistent with its investment
objective and policies. The Portfolio may make money market investments pending
other investment or settlement, for liquidity or in adverse market conditions. 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
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and credit" of the United States. 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. 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: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
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 have more than $2 billion in total assets and 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,
in its capacity as investment advisor to the Portfolio and as fiduciary for
other clients for whom it exercises investment discretion. The monies loaned to
the borrower come from accounts managed by the Advisor or its affiliates,
pursuant to arrangements with such accounts. Interest and principal payments are
credited to such accounts. The Advisor, acting as a fiduciary on behalf of its
clients, 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
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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 the Portfolio's Advisor. 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. It is
possible that the issuer of a master demand obligation could be a client of
Morgan to whom Morgan, in its capacity as a commercial bank, has made a loan.
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 thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen 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
Portfolio's custodian (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 with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in this Part B.
EQUITY INVESTMENTS
The Portfolio invests primarily in equity securities consisting of
common stock and other securities with equity characteristics. The securities in
which the Portfolio invests include those listed on any domestic or foreign
securities exchange or traded in the over-the-counter (OTC) market as well as
certain
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restricted or unlisted securities. A discussion of the various types of equity
investments which may be purchased by the Portfolio appears below.
EQUITY SECURITIES. The common stock in which the Portfolio may invest
include the common stock of any class or series of domestic or foreign
corporations or any similar equity interest, such as trust or partnership
interests. The Portfolio's equity investments may also include preferred stock,
warrants, rights and convertible securities. These investments may or may not
pay dividends and may or may not carry voting rights. Common stock occupies the
most junior position in a company's capital structure.
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.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
COMMON STOCK WARRANTS. The Portfolio may invest in common stock
warrants, which entitle the holder to buy common stock from the issuer at a
specific price (the strike price) for a specific period of time. The market
price of warrants may be substantially lower than the current market price of
the underlying common stock, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying common stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying securities and do not represent any rights
in the assets of the issuing company. A warrant will expire worthless if it is
not exercised on or prior to the expiration date.
FOREIGN INVESTMENTS
The Portfolio may invest in certain foreign securities. The Portfolio
does not expect more than 5% of its investments to be in securities of foreign
issuers which are not listed on a national securities exchange or which are not
denominated or principally traded in the U.S. dollar.
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
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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 U.S. 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.
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"). ADRs are securities, typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer and deposited with
the depositary. ADRs include American Depositary Shares and New York Shares.
EDRs are receipts issued by a European financial institution. ADRs and EDRs may
be available for investment through "sponsored" or "unsponsored" facilities. A
sponsored facility is established jointly by the issuer of the security
underlying the receipt and a depositary, whereas an unsponsored facility may be
established by a depositary without participation by the issuer of the receipt's
underlying security.
Holders of an unsponsored depositary receipt generally bear all costs
of the unsponsored facility. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through to the
holders of the receipts voting rights with respect to the deposited securities.
In addition, while the volume of transactions effected on foreign stock
exchanges 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. companies. Moreover, the settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. In buying and selling
securities on foreign exchanges, purchasers normally pay fixed commissions that
are generally higher than the negotiated commissions charged in the United
States. 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.
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.
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FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Portfolio may buy and sell securities and receive interest
and dividends in currencies other than the U.S. dollar, the Portfolio may enter
from time to time 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 foreign currency forward 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. Foreign currency forward
exchange contracts establish an exchange rate at a future date. These contracts
are derivative instruments, as their value derives from the spot exchange rates
of the currencies underlying the contract. These contracts are entered into in
the interbank market directly between currency traders (usually large commercial
banks) and their customers. A foreign currency forward exchange contract
generally has no deposit requirement and is traded at a net price without
commission. Neither spot transactions nor foreign currency forward 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 or in exchange
for another foreign currency. 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 vis a vis 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 movements 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.
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ADDITIONAL INVESTMENTS
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 money market instruments and other 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"). These limits 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
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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.
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 before entering into such an agreement, 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 their
securities to any officer, Trustee, Director, employee or other affiliate of the
Portfolio, Advisor, Private Placement Agent or Administrator, unless otherwise
permitted by applicable law.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. The Portfolio may
not acquire any illiquid holdings 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 Securities Act of 1933, as amended
(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 holdings or receives upon resale may be
lower than the price paid or received for similar holdings with a more liquid
market. Accordingly the valuation of these holdings 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.
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
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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
The Portfolio intends to meet the diversification requirements of the
1940 Act. To meet these requirements, 75% of the assets of the Portfolio is
subject to the following fundamental limitations: (1) the Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
and (2) the Portfolio may not own more than 10% of the outstanding voting
securities of any one issuer. As for the other 25% of the Portfolio's assets not
subject to the limitation described above, there is no limitation on investment
of these assets under the 1940 Act, so that all of such assets may be invested
in securities of any one issuer, subject to the limitation of any applicable
state securities laws. Investments not subject to the limitations described
above could involve an increased risk to the Portfolio should an issuer, or a
state or its related entities, be unable to make interest or principal payments
or should the market value of such securities decline.
The Portfolio may invest in convertible debt securities, for which
there are no specific quality requirements. 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
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("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. At the time the Portfolio invests
in any other short-term debt securities, they must be rated A or higher by
Moody's or Standard & Poor's, or if unrated, the investment must be of
comparable quality in the Advisor's opinion. A description of illustrative
credit ratings is set forth in Appendix A attached to this Part B.
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.
OPTIONS AND FUTURES TRANSACTIONS
The Portfolio may (a) purchase and sell exchange traded and
over-the-counter (OTC) put and call options on equity securities or indexes of
equity securities, (b) purchase and sell futures contracts on indexes of equity
securities and (c) purchase and sell put and call options on futures contracts
on indexes of equity securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.
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The Portfolio may use futures contracts and options for hedging. 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 a 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.
Each Portfolio may purchase 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 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.
OPTIONS
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
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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. If an option is American style, it may be exercised
on any day up to its expiration date. A European style option may be exercised
only on 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.
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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. 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.
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. 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
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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
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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.
RISK MANAGEMENT
The Portfolio may employ non-hedging risk management techniques. An
example of a risk management strategy includes synthetically altering the mix of
securities in a portfolio. Non-hedging risk management techniques are not
speculative, but because they may involve leverage, the possibility of losses as
well as gains 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 period June 16,
1997 (commencement of operations) through October 31, 1997 was 26%. A rate of
100% indicates that the equivalent of all of the Portfolio's assets have been
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sold and reinvested in a year. High portfolio turnover may result in the
realization of substantial net capital gains. To the extent net short term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income 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 security holders meeting if the holders of more than 50% of the outstanding
voting securities are present and 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 may not:
1. Purchase any security if, as a result, more than 25% of its total
assets would be invested in securities of issuers in any single
industry. This limitation shall not apply to securities issued or
guaranteed as to principal or interest by the U.S. Government, its
agencies or instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing
money in accordance with paragraph 3 below, making loans in accordance
with paragraph 7 below, the issuance of beneficial interests in
multiple classes or series, the purchase or sale of options, futures
contracts, forward commitments, swaps and transactions in repurchase
agreements are not deemed to be senior securities.
3. Borrow money, except in amounts not to exceed one third of the
Portfolio's total assets (including the amount borrowed) less liabilities (other
than borrowings) (i) from banks for temporary or short-term purposes or for the
clearance of transactions, (ii) in connection with withdrawals or to finance
failed settlements of portfolio trades without immediately liquidating portfolio
securities or other assets, (iii) in order to fulfill commitments or plans to
purchase additional securities pending the anticipated sale of other portfolio
securities or assets and (iv) pursuant to reverse repurchase agreements entered
into by the Portfolio.*
- ------------------------
* Although the Portfolio is permitted to fulfill plans to purchase additional
securities pending the anticipated sale or other portfolio securities or assets,
the Portfolio has no current intention of engaging in this form of leverage.
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4. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio may be deemed to be an underwriter under the 1933 Act.
5. Purchase or sell real estate except that the Portfolio may (i) acquire
or lease office space for its own use, (ii) invest in securities of
issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein,
(iv) purchase and sell mortgage-related securities and (v) hold and
sell real estate acquired by the Portfolio as a result of the ownership
of securities.
6. Purchase or sell commodities or commodity contracts, unless acquired as
a result of the ownership of securities or instruments, except the
Portfolio may purchase and sell financial futures contracts, options on
financial futures contracts and warrants and may enter into swap and
forward commitment transactions.
7. Make loans, except that the Portfolio (1) may lend portfolio securities
with a value not exceeding one-third of the Portfolio's total assets,
(2) enter into repurchase agreements, and (3) purchase all or a portion
of an issue of debt obligations (including privately issued debt
obligations), bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
8. With respect to 75% of its total assets, purchase securities of an
issuer (other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities), if:
a. such purchase would cause more than 5% of the Portfolio's total assets
to be invested in the securities of such issuer; or
b. such purchase would cause the Portfolio to hold more than 10% of the
outstanding voting securities of such issuer.
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 may not:
(i) Acquire securities of other investment companies, except as permitted
by the 1940 Act or any rule, order or interpretation thereunder, or in
connection with a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange;
(ii) 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 net assets would be in investments
that are illiquid;
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(iii) Sell any security short, except to the extent permitted by the 1940
Act. Transactions in futures contracts and options shall not constitute selling
securities short; or
(iv) Purchase securities on margin, but the Portfolio may obtain such short
term credits as may be necessary for the clearance of transactions.
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.
For purposes of fundamental investment restrictions regarding industry
concentration, the Advisor may classify issuers by industry in accordance with
classifications set forth in the DIRECTORY OF COMPANIES FILING ANNUAL REPORTS
WITH THE SECURITIES AND EXCHANGE COMMISSION or other sources. In the absence of
such classification or if the Advisor determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Advisor may classify accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.
ITEM 14. MANAGEMENT OF THE PORTFOLIO.
The Trustees and officers of the Portfolio, their business addresses, and
principal occupations during the past five years and dates of birth are set
forth below. Their titles may have varied during that period. A footnote
indicates that a trustee is an "interested person" (as defined in the 1940 Act)
of the Portfolio.
Frederick S. Addy -- Trustee; Retired; Prior to April 1994, Executive
Vice President and Chief Financial Officer, Amoco Corporation. His address is
5300 Arbutus Cove, Austin, TX 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, FL 32779,
and his date of birth is November 2, 1932.
Arthur C. Eschenlauer -- Trustee; Retired; Former Senior Vice
President, Morgan Guaranty Trust Company of New York. His address is 14 Alta
Vista Drive, RD #2, Princeton, NJ 08540, and his date of birth is May 23, 1934.
Matthew Healey* -- Trustee; Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc. ("Pierpont Group") since prior to 1992. His address is Pine
Tree Club Estates, 10286 St. Andrews Road, Boynton Beach, FL 33436, and his date
of birth is August 23, 1937. ------------------------ * Mr. Healey is an
"interested person" of the Portfolio and the Advisor as that term is defined in
the 1940 Act.
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Michael P. Mallardi -- Trustee; Retired; Prior to April 1996, Senior
Vice President, Capital Cities/ABC, Inc. and President, Broadcast Group prior to
April 1996. His address is 10 Charnwood Drive, Suffern, NY 10901, and his date
of birth is March 17, 1934.
Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) 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 accrued by the Master Portfolios(as
defined below), the J.P. Morgan Institutional Funds and the J.P. Morgan Funds
for the calendar year ended December 31, 1996 is set forth below.
<TABLE>
<CAPTION>
TOTAL TRUSTEE COMPENSATION ACCRUED
BY THE MASTER PORTFOLIOS(*), J.P.
MORGAN INSTITUTIONAL FUNDS, J.P.
NAME OF TRUSTEE MORGAN FUNDS AND J.P. MORGAN SERIES
TRUST DURING 1996(***)
<S> <C>
Frederick S. Addy, $65,000
Trustee
William G. Burns, $65,000
Trustee
Arthur C. Eschenlauer, $65,000
Trustee
Matthew Healey, $65,000
Trustee(**), Chairman and Chief
Executive Officer
Michael P. Mallardi, $65,000
Trustee
</TABLE>
(*) Includes 8 Portfolios in the Portfolio Trust and 14 other portfolios
(collectively, the "Master Portfolios") for which Morgan acts as
investment adviser.
(**) During 1996, Pierpont Group paid Mr. Healey, in his role as Chairman of
Pierpont Group, compensation in the amount of $140,000, contributed
$21,000 to a defined contribution plan on his behalf and paid $21,500
in insurance premiums for his benefit.
(***) No investment company within the fund complex has a pension or
retirement plan. Currently there are 18 investment companies (15
investment companies comprising the Master Portfolios, the J.P. Morgan
Funds, the J.P. Morgan Institutional Funds and J.P. Morgan Series
Trust) in the fund complex.
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The Trustees of the Portfolio Trust are the same as the Trustees of
each of the other Master Portfolios, the J.P. Morgan Funds, the 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, the J.P. Morgan Funds and the J.P. Morgan Institutional
Funds, up to and including creating a separate board of trustees.
The Trustees of the Portfolio Trust, in addition to reviewing actions
of the Portfolio Trust's various service providers, decide upon matters of
general policy. The Portfolio Trust has entered into a Portfolio Fund Services
Agreement with Pierpont Group to assist the Trustees in exercising their overall
supervisory responsibilities for the Portfolio Trust's affairs. Pierpont Group
was organized in July 1989 to provide services for The Pierpont Family of Funds,
and the Trustees are the sole shareholders of Pierpont Group. The Portfolio
Trust has agreed to pay Pierpont Group a fee in an amount representing its
reasonable costs in performing these services to the Portfolio and other
registered investment companies subject to similar agreements with Pierpont
Group. These costs are periodically reviewed by the Trustees. The Portfolio
Trust has no employees; its executive officers (listed below), other than the
Chief Executive Officer, are provided and compensated by Funds Distributor, Inc.
("FDI"), a wholly owned, indirect subsidiary of Boston Institutional Group, Inc.
The Portfolio Trust's officers conduct and supervise the business operations of
the Portfolio Trust.
The aggregate fees paid to Pierpont Group by the Portfolio for the
period June 16, 1997 (commencement of operations) through October 31, 1997 was:
$510.
The officers of the Portfolio Trust, their principal occupations during
the past five years and 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 1992. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, FL 33436. His date of birth is August 23, 1937.
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 advised or administered by the Dreyfus
Corporation ("Dreyfus") or its affiliates. From December 1991 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 Manager of Treasury Services and Administration of FDI and an
officer of certain investment companies advised or administered by Dreyfus or
its affiliates. Prior to April 1997, Mr. Conroy was Supervisor of Treasury
Services and Administration of FDI. From April 1993 to January 1995, Mr. Conroy
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was a Senior Fund Accountant for Investors Bank & Trust Company. Prior to March
1993, Mr. Conroy was employed as a fund accountant at The Boston Company, Inc.
His date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer. 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 for five years was Managing Director of Bank of Nova Scotia Trust Company
(Cayman) Limited from September 1988 to September 1993. Address: P.O. Box 2508
GT, Elizabethan Square, 2nd Floor, Shedden Road, George Town, Grand Cayman,
Cayman Islands. Her date of birth is March 24, 1942.
RICHARD W. INGRAM; President and Treasurer. Executive Vice President
and Director of Client Services and Treasury Administration of FDI, Senior Vice
President of Premier Mutual and an officer of RCM Capital Funds, Inc., RCM
Equity Funds, Inc., Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or Harris Trust and
Savings Bank ("Harris") or their respective affiliates. Prior to April 1997, Mr.
Ingram was Senior Vice President and Director of Client Service and Treasury
Administration of FDI. From March 1994 to November 1995, Mr. Ingram was Vice
President and Division Manager of First Data Investor Services Group, Inc. From
1989 to 1994, Mr. Ingram was Vice President, Assistant Treasurer and Tax
Director - Mutual Funds of The Boston Company, Inc. His date of birth is
September 15, 1955.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Assistant Vice
President of FDI and an officer of RCM Capital Funds, Inc. and RCM Equity Funds,
Inc., Waterhouse Investors Cash Management Fund, Inc. and Harris or their
respective affiliates. From June 1994 to January 1996, Ms. Jacoppo-Wood was a
Manager, SEC Registration, Scudder, Stevens & Clark, Inc. From 1988 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.
ELIZABETH A. KEELEY; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and Premier Mutual and an officer of RCM Capital
Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors Cash Management Fund,
Inc. and certain investment companies advised or administered by Dreyfus or
Harris or their respective affiliates. Prior to August 1996, Ms. Keeley was
Assistant Vice President and Counsel of FDI and Premier Mutual. Prior to
September 1995, Ms. Keeley was enrolled at Fordham University School of Law and
received her JD in May 1995. Address: 200 Park Avenue, New York, New York 10166.
Her date of birth is September 14, 1969.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Associate General Counsel of FDI and Premier Mutual and an officer
of Waterhouse Investors Cash Management Fund, Inc. and certain investment
companies advised or administered by Harris or its affiliates. From April 1994
to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. From
1992 to 1994, Mr. Kelley was employed by Putnam Investments in legal and
compliance capacities. His date of birth is December 24, 1964.
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LENORE J. MCCABE; Assistant Secretary and Assistant Treasurer. Assistant
Vice President, State Street Bank and Trust Company since November 1994.
Assigned as Operations Manager, State Street Cayman Trust Company, Ltd. since
February 1995. Prior to November, 1994, employed by Boston Financial Data
Services, Inc. as Control Group Manager. Address: P.O. Box 2508 GT, Elizabethan
Square, 2nd Floor, Shedden Road, George Town, Grand Cayman, Cayman Islands. Her
date of birth is May 31, 1961.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual, an
officer of RCM Capital Funds, Inc., RCM Equity Funds, Inc., Waterhouse Investors
Cash Management Fund, Inc. and certain investment companies advised or
administered by Dreyfus or Harris or their respective affiliates. From 1989 to
1994, Ms. Nelson was an Assistant Vice President and Client Manager for The
Boston Company, Inc. Her date of birth is April 22, 1964.
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.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Executive Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director Of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of Waterhouse Investors Cash Management Fund, Inc. and certain
investment companies advised or administered by Dreyfus or its affiliates. Prior
to April 1997, Mr. Tower was Senior Vice President, Treasurer and Chief
Financial Officer, Chief Administrative Officer and Director of FDI. From July
1988 to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
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 wilful 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 wilful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
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ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of December 5, 1997, J.P. Morgan U.S. Small Company Opportunities
Fund (series of the J.P. Morgan Funds)(the "Fund") owned 100% of the outstanding
beneficial interests in the Portfolio. So long as the Fund controls the
Portfolio, it may take actions without the approval of any other holder of
beneficial interests in the Portfolio.
The Fund has informed the Portfolio that whenever it is requested to
vote on matters pertaining to the Portfolio (other than a vote by the Portfolio
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 own none of the outstanding
beneficial interests in the Portfolio.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. The investment advisor to the Portfolio is Morgan
Guaranty Trust Company of New York, a wholly-owned subsidiary of J.P. Morgan &
Co. Incorporated ("J.P. Morgan"), a bank holding company organized under the
laws of the State of Delaware. The Advisor, 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. The Advisor 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, the Advisor
offers a wide range of services, primarily to governmental, institutional,
corporate and high net worth individual customers in the U.S. and throughout the
world.
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 more than $240 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 conclusions of the equity analysts' fundamental research is quantified into
a set of projected returns for individual companies through the use of a
dividend discount model. These returns are projected for 2 to 5 years to enable
analysts to take a longer term view. These returns, or normalized earnings, are
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used to establish relative values among stocks in each industrial sector. These
values may not be the same as the markets' current valuations of these
companies. This provides the basis for ranking the attractiveness of the
companies in an industry according to five distinct quintiles or rankings. This
ranking is one of the factors considered in determining the stocks purchased and
sold in each sector.
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 the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Portfolio is currently the
Russell 2000 Growth Index.
J.P. Morgan Investment Management Inc., also a wholly-owned subsidiary
of J.P. Morgan , is a registered investment adviser under the Investment
Advisers Act of 1940, as amended, which 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 the Advisor serves as trustee. J.P.
Morgan Investment Management Inc. advises the Advisor on investment of the
commingled pension trust funds.
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 J.P.
Morgan Investment Management Inc. and 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 Trust on behalf of 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 0.60% of the Portfolio's average daily net assets. For the
period June 16, 1997 (commencement of operations) through October 31, 1997 the
Portfolio paid Morgan $93,167 in advisory fees.
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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 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 of the Portfolio or by a
vote of the holders of a majority of the Portfolio's 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 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 Trust's Co-Administration
Agreement dated August 1, 1996, FDI serves as the Portfolio Trust's
Co-Administrator. The Co-Administration Agreement may be renewed or amended by
the Trustee without an investor vote. The Co-Administration Agreement is
terminable at any time without penalty by a vote of a majority of the Trustees
of the Portfolio Trust 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 Trust, 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
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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
Trust 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 Trust is based on the ratio of its net assets to the
aggregate net assets of the Master Portfolios and certain other investment
companies subject to similar agreements with FDI.
The following administrative fees were paid by the Portfolio to FDI for
the period June 16, 1997 (commencement of operations) through October 31, 1997:
$345. See "Expenses" and below for applicable expense limitations.
ADMINISTRATIVE SERVICES AGENT. The Portfolio Trust 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 aggregate 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 Master Portfolios, the
other investors in the Master Portfolios for which Morgan provides similar
services and J.P.
Morgan Series Trust.
CUSTODIAN. State Street Bank and Trust Company ("State Street"), 225
Franklin Street, Boston, Massachusetts 02110, serves as the Portfolio Trust's
custodian and fund accounting 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 the 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 Trust 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 Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036.
Price Waterhouse 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 usual and customary expenses
associated with its operations. Such expenses include organization expenses,
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legal fees, 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 registration fees under
foreign securities laws and brokerage expenses.
Morgan has agreed that it will reimburse the Portfolio through at least
October 31, 1998 to the extent necessary to maintain the daily total operating
expenses at an annual rate of 1.20% of the Portfolio's average daily net assets.
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.
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek best execution on a competitive basis for both of
purchases and sales of securities.
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; as well as the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
the Advisor decides that the broker chosen will provide the best execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. 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.
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The Portfolio paid the following approximate brokerage commissions for
the period June 16, 1997 (commencement of operations) through October 31, 1997:
$31,543.
Subject to the overriding objective of obtaining the best 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 Trust'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 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.
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ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is a subtrust (or series) of the Portfolio Trust, which
is organized as a trust under the laws of the State of New York. Under the
Portfolio Trust's Declaration of Trust, the Trustees are authorized to issue
beneficial interests in one or more series (each a "Series"), including the
Portfolio. Investors in a Series will be held personally liable for the
obligations and liabilities of that Series (and of no other Series), subject,
however, to indemnification by the Portfolio Trust in the event that there is
imposed upon an investor a greater portion of the liabilities and obligations of
the Series than its proportionate beneficial interest in the Series. The
Declaration of Trust also provides that the Portfolio Trust shall maintain
appropriate insurance (for example, a fidelity bond and errors and omissions
insurance) for the protection of the Portfolio Trust, its investors, Trustees,
officers, employees and agents, and 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 Trust itself was unable to meet its
obligations.
Investors in a Series are entitled to participate pro rata in
distributions of taxable income, loss, gain and credit of their respective
Series only. Upon liquidation or dissolution of a Series, investors are entitled
to share pro rata in that Series' (and no other Series) net assets available for
distribution to its investors. The Portfolio Trust reserves the right to create
and issue additional Series of beneficial interests, in which case the
beneficial interests in each new Series would participate equally in the
earnings, dividends and assets of that particular Series only (and no other
Series). Any property of the Portfolio Trust is allocated and belongs to a
specific Series to the exclusion of all other Series. All consideration received
by the Portfolio Trust for the issuance and sale of beneficial interests in a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings and proceeds thereof, and any funds
or payments derived from any reinvestment of such proceeds, is held by the
Trustees in a separate subtrust (a Series) for the benefit of investors in that
Series and irrevocably belongs to that Series for all purposes. Neither a Series
nor investors in that Series possess any right to or interest in the assets
belonging to any other Series.
Investments in a Series have no preference, preemptive, conversion or
similar rights and are fully paid and nonassessable, except as set forth below.
Investments in a Series may not be transferred. Certificates representing an
investor's beneficial interest in a Series 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 each Series. Investors in a Series do not have cumulative voting
rights, and investors holding more than 50% of the aggregate beneficial
interests in all outstanding Series may elect all of the Trustees if they choose
to do so and in such event other investors would not be able to elect any
Trustees. Investors in each Series will vote as a separate class except as to
voting of Trustees, as otherwise required by the 1940 Act, or if determined by
the Trustees to be a matter which affects all Series. As to any matter which
does not affect the interest of a particular Series, only investors in the one
or more affected
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<PAGE>
Series are entitled to vote. The Portfolio Trust is not required and has no
current intention of holding annual meetings of investors, but the Portfolio
Trust will hold special meetings of investors when in the judgment of the
Portfolio Trust's Trustees it is necessary or desirable to submit matters for an
investor vote. The Portfolio Trust's Declaration of Trust may be amended without
the vote of investors, except that investors have the right to approve by
affirmative majority vote any amendment which would affect their voting rights,
alter the procedures to amend the Declaration of Trust of the Portfolio Trust,
or as required by law or by the Portfolio Trust's registration statement, or as
submitted to them by the Trustees. Any amendment submitted to investors which
the Trustees determine would affect the investors of any Series shall be
authorized by vote of the investors of such Series and no vote will be required
of investors in a Series not affected.
The Portfolio Trust or any Series (including 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
Series), except that if the Trustees recommend such sale of assets, the approval
by vote of a majority of the investors (with the vote of each being in
proportion to its percentage of the beneficial interests in the Series) will be
sufficient. The Portfolio Trust or any Series (including any 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 Trust's Declaration of Trust provides that obligations of
the Portfolio Trust are not binding upon the Trustees individually but only upon
the property of the Portfolio Trust 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 wilful 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 BEING OFFERED.
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.
The value of investments listed on a domestic securities exchange,
other than options on stock indexes, is generally based on the last sale prices
on the New York Stock Exchange at 4:00 P.M. or, in the absence of recorded
sales, at the average of readily available closing bid and asked prices on such
exchange. Securities listed on a foreign exchange are valued at the last quoted
sale price available before the time when net assets are valued. Unlisted
securities are valued at the average of the quoted bid and asked prices in the
over-the-counter market. The value of each security for which readily available
market quotations exist is based on a decision as to the broadest and most
representative market for such security. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be
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<PAGE>
converted into United States dollars at the prevailing market rates available at
the time of valuation.
Options on stock indexes traded on national securities exchanges are
valued at the close of options trading on such exchanges which is currently 4:10
P.M., New York time. Stock index futures and related options, which are traded
on commodities exchanges, are valued at their last sales price as of the close
of such commodities exchanges which is currently 4:15 P.M., New York time.
Securities or other assets for which market quotations are not readily available
are valued at fair value in accordance with procedures established by and under
the general supervision and responsibility of the Trustees. Such procedures
include the use of independent pricing services which use prices based upon
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Short-term
investments which mature in 60 days or less are valued at amortized cost if
their original maturity was 60 days or less, or by amortizing their value on the
61st day prior to maturity, if their original maturity when acquired by the
Portfolio was more than 60 days, unless this is determined not to represent fair
value by the Trustees.
Trading in securities on most foreign exchanges and OTC markets is
normally completed before the close of trading on the New York Stock Exchange
and may also take place on days on which the New York Stock Exchange is closed.
If events materially affecting the value of securities occur between the time
when the exchange on 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 has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which the Portfolio is obligated to redeem interests solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the
Portfolio during any 90 day period for any one investor. 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 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 Portfolio may also close for
purchases and withdrawals at such other times as may be determined by the
Trustees to the extent permitted by applicable law. The days on which net asset
value is determined are the Portfolio's business days.
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<PAGE>
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 Internal Revenue Code of 1986, as
amended (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. To ensure that investors will be able to satisfy
the requirements of subchapter M, the Portfolio must satisfy certain gross
income and diversification requirements, including, among other things, 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 than
three months. Effective as of June 1, 1998, the 30% of gross income test will no
longer apply to the Portfolio.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put is acquired or a
call option is written thereon. 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
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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. Effective as
of June 1, 1998, the 30% of gross income test will no longer apply to the
Portfolio.
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.
The Portfolio may invest in equity securities of foreign issuers. If
the Portfolio purchases shares in certain foreign investment funds (referred to
as passive foreign investment companies ("PFICs") under the Code), investors who
are U.S. persons generally would be subject to special rules on any "excess
distribution" from such foreign investment fund, including any gain from the
disposition of such shares. Under these special rules, (i) the gain or excess
distribution would be allocated ratably over the investor's holding period for
such shares, (ii) the amount allocated to the taxable year in which the gain or
excess distribution was realized would be taxable as ordinary income, (iii) the
amount allocated to each prior year, with certain exceptions, would be subject
to tax at the highest tax rate in effect for that year and (iv) the interest
charge generally applicable to underpayments of tax would be imposed in respect
of the tax attributable to each such year. Alternatively, an investor may, if
certain conditions are met, include in its income each year a pro rata portion
of the foreign investment fund's income, whether or not distributed to the
Portfolio.
For taxable years of the Portfolio beginning after 1997, the Portfolio
will be permitted to "mark to market" any marketable stock held by the Portfolio
in a PFIC. If the Portfolio made such an election, the investor in the Portfolio
would include in income each year an amount equal to its share of the excess, if
any, of the fair market value of the PFIC stock as of the close of the taxable
year over the adjusted basis of such stock. The investor would be allowed a
deduction for its share of the excess, if any, of the adjusted basis of the PFIC
stock over its fair market value as of the close of the taxable year, but only
to the extent of any net mark-to-market gains with respect to the stock included
by the investor for prior taxable years.
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
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<PAGE>
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 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
Trust.
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The Portfolio's financial statements for the period June 16, 1997
(commencement of operations) through October 31, 1997 (unaudited) are attached
hereto.
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APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA - Debt rated AAA has 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 has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only
in a small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt 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.
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Appendix A-1
<PAGE>
SP-2 - The short-term tax-exempt note rating of SP-2 has a
satisfactory 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.
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Appendix A-2
<PAGE>
- 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.
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Appendix A-5
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
The audited financial statements included in Part B, Item 23 of this
Registration Statement are as follows:
Schedule of Investments at May 31, 1997
Statement of Assets and Liabilities at May 31, 1997
Statement of Operations for the period December 30, 1996 (commencement
of operations) through May 31, 1997 Statement of Changes in Net Assets
Supplementary Data at May 31, 1997 Notes to Financial Statements at May
31, 1997
(B) EXHIBITS
1 Declaration of Trust of the Registrant.1
1(a) Amendment No. 1 to Declaration of Trust.3
1(b) Amendment No. 2 to Declaration of Trust.4
2 Restated By-Laws of the Registrant.3
5 Investment Advisory Agreement between the Registrant and Morgan Guaranty
Trust Company of New York ("Morgan Guaranty").1
5(a) Amended Schedule A to Investment Advisory Agreement.3
8 Custodian Contract between the Registrant and State Street Bank and Trust
Company ("State Street").3
9(a) Co-Administration Agreement between the Registrant and Funds
Distributor, Inc. dated August 1, 1996 ("Co-Administration Agreement").2
9(a)1 Amended Exhibit I to Co-Administration Agreement.3
9(b) Transfer Agency and Service Agreement between the Registrant and State
Street.3
9(c) Restated Administrative Services Agreement between the Registrant and
Morgan dated August 1, 1996 ("Administrative Services Agreement").2
9(c)1 Amended Exhibit I to Administrative Services Agreement.3
9(d) Amended and Restated Portfolio Fund Services Agreement between the
Registrant and Pierpont Group, Inc. dated July 11, 1996.2
13 Investment representation letters of initial investors.3
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27 Financial Data Schedule
- ----------------------
1 Incorporated herein by reference from Amendment No. 2 to Registrant's
Registration Statement as filed with the Securities and Exchange
Commission (the "SEC") on May 1, 1996 (Accession No. 0000943185-96-
000061).
2 Incorporated herein by reference from Amendment No. 3 to Registrant's
Registration Statement as filed with the SEC on October 9, 1996 (Accession No.
0000912057-96-022359).
3 Incorporated herein by reference from Amendment No. 4 to Registrant's
Registration Statement as filed with the SEC on December 27, 1996
(Accession No. 0001016964-96-000062).
4 Incorporated herein by reference from Amendment No. 6 to Registrant's
Registration Statement as filed with the SEC on April 29, 1997 (Accession No.
0001016964-97-000057).
5 Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
No person is controlled by or under common control with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
TITLE OF CLASS: Beneficial Interests
As of December 5, 1997, the number of record holders were as follows:
The Disciplined Equity Portfolio: 2
The U.S. Small Company Opportunities Portfolio: 1
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an exhibit herewith.
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.
Morgan is a New York trust company which is a wholly-owned subsidiary of
J.P. Morgan & Co. Incorporated. Morgan conducts a general Banking and trust
business.
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To the knowledge of the Registrant, none of the directors, except those
set forth below, or executive officers of Morgan 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 Morgan also hold various positions with, and engage in business for, J.P.
Morgan & Co. Incorporated, which owns all the outstanding stock of Morgan. Set
forth below is the name, address, and principal business of each director of
Morgan who is engaged in another business, profession, vocation or employment of
a substantial nature.
Paul A. Allaire: Chairman and Chief Executive Officer, Xerox Corporation
(office imaging systems). His address is Xerox Corporation, P.O. Box 1600, 800
Long Ridge Road, Stamford, CT 06904.
Riley P. Bechtel: Chairman and Chief Executive Officer, Bechtel Group, Inc.
(architectural design and construction). His address is Bechtel Group, Inc.,
P.O. Box 193965, San Francisco, CA 94119-3965.
Martin Feldstein: President and Chief Executive Officer, National Bureau of
Economic Research, Inc. (national research institution). His address is National
Bureau of Economic Research, Inc., 1050 Massachusetts Avenue, Cambridge, MA
02138-5398.
Ellen V. Futter: President, American Museum of Natural History (not-for-
profit organization). Her address is American Museum of Natural History, Central
Park West at 79th Street, New York, NY 10024.
Hanna H. Gray: President Emeritus and Harry Pratt Judson Distinguished
Service Professor of History, The University of Chicago (academic institution).
Her address is The University of Chicago, Department of History, 1126 East 59th
Street, Chicago, IL 60637.
James R. Houghton: Retired Chairman of the Board, Corning Incorporated
(glass products). His address is R.D. #2 Spencer Hill Road, Corning, NY 14830.
James L. Ketelsen: Retired Chairman and Chief Executive Officer, Tenneco
Inc. (oil, pipe-lines, and manufacturing). His address is 10 South Briar Hollow
7, Houston, TX 77027.
John A. Krol: President and Chief Executive Officer, E.I. du Pont de
Nemours and Company (chemicals and energy company). His address is E.I. du Pont
de Nemours and Company, 1007 Market Street, Wilmington, DE 19898.
Lee R. Raymond: Chairman of the Board and Chief Executive Officer, Exxon
Corporation (oil, natural gas, and other petroleum products). His address is
Exxon Corporation, 5959 Las Colinas Boulevard, Irving, TX 75039-2298.
Richard D. Simmons: Retired; Former President, The Washington Post Company
and International Herald Tribune (newspapers). His address is P.O. Box 242,
Sperryville, VA 22740.
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Douglas C. Yearley: Chairman, President and Chief Executive Officer, Phelps
Dodge Corporation (chemicals). His address is Phelps Dodge Corporation, 2600 N.
Central Avenue, Phoenix, AZ 85004-3014.
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:
Morgan Trust Guaranty Company of New York, 60 Wall Street, New York,
New York 10260-0060 or 522 Fifth Avenue, New York, New York 10036 (records
relating to its functions as investment adviser and administrative services
agent).
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 or 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as custodian and fund accounting and transfer
agent).
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts 02109 or c/o State Street Cayman Trust Company, Ltd., Elizabethan
Square, Shedden Road, George Town, Grand Cayman, Cayman Islands, BWI (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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Registration Statement on Form N-1A to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
George Town, Grand Cayman, Cayman Islands, B.W.I., on the 30th day of December,
1997.
THE SERIES PORTFOLIO
By: /S/ LENORE J. MCCABE
------------------------
Lenore J. McCabe
Assistant Secretary and
Assistant Treasurer
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<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
EX-27 Financial Data Schedule
C-6
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial data extracted from the annual report
dated May 31, 1997 for The Series Portfolio - The Disciplined Equity Portfolio
and is qualified in its entirety by reference to such annual report.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 70369
<INVESTMENTS-AT-VALUE> 75876
<RECEIVABLES> 323
<ASSETS-OTHER> 1491
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 77690
<PAYABLE-FOR-SECURITIES> 1056
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 86
<TOTAL-LIABILITIES> 1142
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 70374
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 325
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 158
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5691
<NET-ASSETS> 76548
<DIVIDEND-INCOME> 383
<INTEREST-INCOME> 37
<OTHER-INCOME> 0
<EXPENSES-NET> 95
<NET-INVESTMENT-INCOME> 325
<REALIZED-GAINS-CURRENT> 158
<APPREC-INCREASE-CURRENT> 5691
<NET-CHANGE-FROM-OPS> 76548
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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</TABLE>