As filed with the Securities and Exchange Commission on November 6, 1998
File No. 811-09008
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 13
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: John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. However, beneficial
interests in the Registrant are not being registered under the Securities Act of
1933, as amended (the "1933 Act"), because such interests will be issued solely
in private placement transactions that do not involve any "public offering"
within the meaning of Section 4(2) of the 1933 Act. Investments in the
Registrant may only be made by 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 EMERGING MARKETS DEBT 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 Emerging Markets Debt Portfolio (the
"Portfolio") is described herein. The Portfolio is non-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 J.P. Morgan Investment Management Inc. ("JPMIM"
or the "Advisor").
Investments in the Portfolio are not deposits or obligations of, or
guaranteed or endorsed by, Morgan Guaranty Trust Company of New York ("Morgan"),
an affiliate of the Advisor, or any other bank. Interests in the Portfolio are
not federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other governmental agency. An investment in the Portfolio
is subject to risk, as the net asset value of the Portfolio will fluctuate with
changes in the value of the Portfolio's holdings.
Part B contains more detailed information about the Portfolio,
including information related to (i) the investment policies and restrictions of
the Portfolio, (ii) the Trustees, officers, Advisor and administrators of the
Portfolio, (iii) portfolio transactions, (iv) rights and liabilities of
investors, and (v) the audited financial statements of the Portfolio at December
31, 1997 (which are incorporated by reference in their entirety to the
Portfolio's N-30D filing made on February 27, 1998).
The Portfolio invests in lower quality debt instruments ("junk bonds"),
which are subject to higher risks of untimely interest and principal payments,
default and price volatility than higher quality securities and may present
liquidity and valuation problems. INVESTMENTS IN SECURITIES OF ISSUERS IN
EMERGING MARKETS, INVESTMENTS IN UNRATED AND LOWER RATED DEBT OBLIGATIONS AND
INVESTMENTS DENOMINATED OR QUOTED IN FOREIGN CURRENCIES, AS WELL AS THE
PORTFOLIO'S USE OF INTEREST RATE AND CURRENCY MANAGEMENT TECHNIQUES, ENTAIL
RISKS IN ADDITION TO THOSE THAT ARE CUSTOMARILY ASSOCIATED WITH INVESTING IN
DOLLAR-DENOMINATED FIXED INCOME SECURITIES OF U.S. ISSUERS. INTEREST RATE AND
CURRENCY MANAGEMENT TECHNIQUES MAY BE UNAVAILABLE OR INEFFECTIVE IN MITIGATING
RISKS INHERENT IN THE PORTFOLIO. THE PORTFOLIO MAY NOT BE ABLE TO ACHIEVE ITS
INVESTMENT OBJECTIVE. THE PORTFOLIO IS INTENDED FOR INVESTORS WHO CAN ACCEPT A
HIGH DEGREE OF RISK AND IS NOT SUITABLE FOR ALL 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
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in Part B under Item 13. There can be no assurance that the investment
objective of the Portfolio will be achieved.
THE EMERGING MARKETS DEBT PORTFOLIO
The Portfolio's investment objective, which is non-fundamental and can
be changed without the approval of interest holders, is to seek high total
return. This Portfolio invests primarily in bonds and other fixed income
securities.
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined
investment strategies, J.P. Morgan is the asset management choice for many of
the world's most respected corporations, financial institutions, governments,
and individuals. Today, J.P. Morgan employs over 300 analysts and portfolio
managers around the world and has more than $275 billion in assets under
management, including assets managed by the Portfolio's advisor, Morgan Guaranty
Trust Company of New York.
BEFORE YOU INVEST
Investors considering the Portfolio should understand that:
- - The value of the Portfolio will fluctuate over time. You could lose money if
you sell when the Portfolio's price is lower than when you invested.
- - There is no assurance that the Portfolio will meet its investment goal.
- - Future returns will not necessarily resemble past performance.
- - The Portfolio invests the majority of assets in non-investment-grade bonds
("junk bonds") and emerging markets debt, which offer higher potential yields
but have a higher risk of default and are more sensitive to market risk than
investment-grade bonds.
- - The Portfolio does not represent a complete investment program.
FIXED INCOME MANAGEMENT APPROACH
The Emerging Markets Debt Portfolio invests primarily in bonds and
other fixed income securities.
The Portfolio's investment philosophy, developed by its advisor,
emphasizes the potential for consistently enhancing performance while managing
risk.
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the
depth of its global fixed-income research and the sophistication of its
analytical systems. Using a team-oriented approach, J.P. Morgan seeks to gain
insights in a broad range of distinct areas and takes positions in many
different ones, helping the Portfolio to limit exposure to concentrated sources
of risk.
In managing the Portfolio, J.P. Morgan employs a three-step process
that combines sector allocation, fundamental research for identifying portfolio
securities, and duration management.
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SECTOR ALLOCATION The sector allocation team meets monthly, analyzing
the fundamentals of a broad range of sectors in which the Portfolio may invest.
The team seeks to enhance performance and manage risk by underweighting or
overweighting sectors.
SECURITY SELECTION Relying on the insights of different specialists,
including credit analysts, quantitative researchers, and dedicated fixed income
traders, the portfolio managers make buy and sell decisions according to the
Portfolio's goal and strategy.
DURATION MANAGEMENT Forecasting teams use fundamental economic factors
to develop strategic forecasts of the direction of interest rates. Based on
these forecasts, strategists establish the Portfolio's target duration (a
measure of average weighted maturity of the securities held by the Portfolio and
a common measurement of sensitivity to interest rate movements), typically
remaining relatively close to the duration of the market as a whole, as
represented by the Portfolio's benchmark. The strategists closely monitor the
Portfolio and make tactical adjustments as necessary.
The Portfolio's goal is to provide high total return from a portfolio
of fixed income securities of emerging markets issuers.
INVESTMENT APPROACH
The Portfolio invests primarily in debt securities that it believes
have the potential to provide a high total return from countries whose economies
or bond markets are less developed. This designation currently includes most
countries in the world except Australia, Canada, Hong Kong, Japan, New Zealand,
the U.S., the United Kingdom, and most Western European countries. Issuers of
portfolio securities may include foreign governments, corporations, and
financial institutions. These securities may be of any maturity and quality, but
under normal market conditions the Portfolio's duration (duration is a measure
of average weighted maturity of the securities held by a fund and a common
measurement of sensitivity to interest rate movements) will generally range
between four and six years, similar to that of the Emerging Markets Bond Index
Plus. The Portfolio does not have any minimum quality rating and may invest
without limit in securities that are rated in the lowest rating categories (or
are the unrated equivalent).
In addition to the investment process described above, the management
team makes country allocation decisions, based primarily on financial and
economic forecasts and other macro-economic factors.
Risk/Return Summary
The Portfolio's share price and total return will vary in response to
changes in emerging bond markets, interest rates, and currency exchange rates.
How well the Portfolio's performance compares to that of similar fixed income
funds will depend on the success of the investment process. Because the
Portfolio is non-diversified and may invest more than 5% of its assets in a
single issuer and its primary securities combine the risks of emerging markets
and low credit quality, its performance is likely to be more volatile than that
of other fixed income investments. This volatility will be compounded if the
Portfolio concentrates its investments in a small number of countries. Emerging
market investment risks include foreign government actions, political
instability, currency fluctuations and lack of adequate and accurate
information. The Portfolio may engage in active and frequent trading, leading to
increased portfolio turnover and the possibility of increased capital gains. To
the extent that the Portfolio seeks higher returns by investing in
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non-investment-grade bonds, often called junk bonds, it takes on
additional risks, since these bonds are more sensitive to economic news and
their issuers have a less secure financial position. Investors should be
prepared to ride out periods of negative return. The Portfolio's investments and
their main risks, as well as investment strategies, are described in more detail
below.
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the Portfolio's
overall risk and reward characteristics. It also outlines the Portfolio's
policies toward various securities, including those that are designed to help
the Portfolio manage risk.
- ------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE
RISK AND REWARD
- ------------------------------------------------------------------------
MARKET CONDITIONS
- -The Portfolio's price, -Bonds have generally -Under normal circumstances
yield and net asset outperformed money the Portfolio plans to
value will fluctuate in market investments remain fully invested
response to bond market over the long term, in bonds and other fixed
movements with less risk than income securities
stocks
-The Portfolio seeks to
- -The value of most bonds -Most bonds will rise limit risk and enhance
will fall when interest in value when interest yields through careful
rates rise; the longer rates fall management, sector
a bond's maturity and allocation, individual
the lower its credit -Mortgage-backed and securities selection, and
quality, the more its asset-backed duration management
value typically falls securities can offer
attractive returns -During severe market
- -Mortgage-backed and downturns, the Portfolio
asset-backed securities has the option of
(securities representing investing up to 100% of
an interest in, or assets in investment-grade
secured by, a pool of short-term securities
mortgages or other
assets such as -J.P. Morgan monitors
receivables) could interest rate trends, as
generate capital losses well as geographic and
or periods of low yields demographic information
if they are paid off related to mortgage-backed
substantially earlier or securities and mortgage
later than anticipated prepayments
- -Adverse market conditions
may from time to time cause
the Portfolio to take temporary
defensive positions that are
inconsistent with its principal
investment strategies and may
hinder a fund from achieving its
investment objective
<PAGE>
MANAGEMENT CHOICES
- -The Portfolio could -The Portfolio could -J.P. Morgan focuses
underperform its outperform its its active
benchmark due to benchmark due to management on those
its sector, securities, these same choices areas where it
or duration choices believes its
commitment to
research can most
enhance returns and
manage risks in a
consistent way
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POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE
RISK AND REWARD
- ------------------------------------------------------------------------
CREDIT QUALITY
- -The default of an -Investment-grade -The Portfolio
issuer would leave bonds have a lower maintains its own
the Portfolio with risk of default policies for
unpaid interest or balancing credit
principal quality against
potential yields and
gains in light of
its investment
goals
- -Junk bonds (those -Junk bonds offer -J.P. Morgan develops
rated BB/Ba or lower) higher yields and its own ratings of
have a higher risk of higher potential unrated securities
default, tend to be gains and makes a credit
less liquid, and may quality determination
be more difficult to for unrated
value securities
- ------------------------------------------------------------------------
FOREIGN INVESTMENTS
- -The Portfolio could lose -Foreign bonds, which -Foreign bonds are a
money because of foreign represent a major primary investment
government actions, portion of the for the Portfolio
political instability, world's fixed
or lack of adequate and income securities, -To the extent that
accurate information offer attractive the Portfolio invests
potential in foreign bonds, it
- -Currency exchange rate performance and may manage the
movements could reduce opportunities for currency exposure of
gains or create losses diversification its foreign
investments relative
- -Currency and investment -Favorable exchange to its benchmark, and
risks tend to be higher rate movements may hedge back into
in emerging markets could generate gains the U.S. dollar from
or reduce losses time to time (see
also "Derivatives"
-Emerging markets below)
can offer higher
returns
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POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE
RISK AND REWARD
- ------------------------------------------------------------------------
DERIVATIVES
- -Derivatives such as -Hedges that correlate -The Portfolio uses
futures, options, swaps & well with underlying derivatives for
foreign currency forward positions can reduce hedging and for
contracts that are used or eliminate losses risk management
for hedging the portfolio at low cost (i.e., to adjust
or specific securities duration or to
may not fully offset the -The Portfolio could establish or
underlying positions(1) make money and protect adjust exposure to
against losses if particular
-Derivatives used for management's analysis securities,
risk management may not proves correct markets, or
have the intended effects currencies); risk
and may result in losses -Derivatives that management may
or missed opportunities involve leverage could include
generate substantial management of the
gains at low cost Portfolio's
exposure relative
- -The counterparty to a to its benchmark
derivatives contract
could default -The Portfolio only
establishes hedges
- -Derivatives that involve that it expects
leverage could magnify will be highly
losses correlated with
underlying positions
- - Certain types of derivatives
involve costs to the funds which
can reduce returns -While the
Portfolio may use
derivatives that
incidentally
involve leverage,
it does not use
them for the
specific purpose
of leveraging the
Portfolio
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POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE
RISK AND REWARD
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ILLIQUID HOLDINGS
- -The Portfolio could -These holdings may -The Portfolio may
have difficulty valuing offer more attractive not invest more
holdings precisely yields or potential than 15% of net
growth than assets in illiquid
- -The Portfolio could be comparable widely holdings
unable to sell these traded securities
holdings at the time -To maintain
or price desired adequate liquidity
to meet
redemptions, 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
assets
- ------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- -When the Portfolio buys -The Portfolio can -The Portfolio uses
securities before issue take advantage of segregated
or for delayed delivery, attractive transaction accounts to offset
it could be exposed to opportunities leverage risk
leverage risk if it
does not use segregated
accounts
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POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE
RISK AND REWARD
- ------------------------------------------------------------------------
SHORT-TERM TRADING
- -Increased trading -The Portfolio could -The Portfolio
would raise the realize gains in a anticipates a
transaction costs short period of portfolio turnover
time rate of
- -Increased short-term approximately 350%
capital gains -The Portfolio could
distributions would protect against losses -The Portfolio
raise shareholders' if a bond is overvalued generally avoids
income tax liability and its value later short-term trading
falls except to take
advantage of
attractive or
unexpected
opportunities or
to meet demands
generated by
shareholder
activity
- ------------------------------------------------------------------------
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash payment
based on the value of a securities index. An option is the right to buy or sell
securities that is granted in exchange for an agreed-upon sum. A swap is a
privately negotiated agreement to exchange one stream of payments for another A
foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
<PAGE>
INVESTMENTS
This table discusses the customary types of securities which can be held by the
Portfolio. In each case the principal types of risk (along with their
definitions) are listed.
- ------------------------------------------------------------------------
ASSET-BACKED SECURITIES Interests in a stream of payments from specific assets,
such as auto or credit card receivables.
Risk: credit, interest rate, market, prepayment
- ------------------------------------------------------------------------
BANK OBLIGATIONS Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
Risk: credit, currency, liquidity, political
- ------------------------------------------------------------------------
COMMERCIAL PAPER Unsecured short term debt issued by domestic and foreign banks
or corporations. These securities are usually discounted and are rated by S&P or
Moody's.
Risk: credit, currency, interest rate, liquidity, market, political
- ------------------------------------------------------------------------
<PAGE>
CONVERTIBLE SECURITIES Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
Risk: credit, currency, interest rate, liquidity, market, political, valuation
- ------------------------------------------------------------------------
CORPORATE BONDS Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
Risk: credit, currency, interest rate, liquidity, market, political, valuation
- ------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES Domestic and foreign securities (such as Ginnie Maes,
Freddie Macs, Fannie Maes) which represent interests in pools of
mortgages, whereby the principal and interest paid every month is passed through
to the holder of the securities.
Risk: credit, currency, extension, interest rate, leverage, market,
political, prepayment
- ------------------------------------------------------------------------
PARTICIPATION INTERESTS Interests that represent a share of bank debt or similar
securities or obligations.
Risk: credit, currency, extension, interest rate, liquidity, political,
prepayment
- ------------------------------------------------------------------------ PRIVATE
PLACEMENTS Bonds or other investments that are sold directly to an institutional
investor.
Risk: credit, interest rate, liquidity, market, valuation
- ------------------------------------------------------------------------
REPURCHASE AGREEMENTS Contracts whereby the seller of a security agrees to
repurchase the same security from the buyer on a particular date and at a
specific price.
Risk: credit
- ------------------------------------------------------------------------
SOVEREIGN DEBT, BRADY BONDS, AND DEBT OF SUPRANATIONAL ORGANIZATIONS Dollar- or
non-dollar-denominated securities issued by foreign governments or supranational
organizations. Brady bonds are issued in connection with debt restructurings.
Risk: credit, currency, interest rate, market, political
- ------------------------------------------------------------------------
SWAPS Contractual agreement whereby a party agrees to exchange periodic payments
with a counterparty. Segregated accounts are used to offset leverage risk.
Risk: credit, currency, interest rate, leverage, market, political
- ------------------------------------------------------------------------ U.S.
GOVERNMENT SECURITIES Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
Risk: interest rate
- ------------------------------------------------------------------------
ZERO COUPON, PAY-IN-KIND, AND DEFERRED PAYMENT SECURITIES Domestic and foreign
securities offering non-cash or delayed-cash payment. Their prices are
<PAGE>
typically more volatile than those of some other debt instruments and involve
certain special tax considerations.
Risk: credit, currency, interest rate, liquidity, market, political, valuation
- ------------------------------------------------------------------------
DEFINITIONS OF RISK RELATED TO CERTAIN SECURITIES HELD BY THE EMERGING MARKETS
DEBT PORTFOLIO:
CREDIT RISK The risk a financial obligation will not be met by the issuer of a
security or the counterparty to a contract, resulting in a loss to the
purchaser.
INTEREST RATE RISK The risk a change in interest rates will adversely affect the
value of an investment. The value of fixed income securities generally moves in
the opposite direction of interest rates (decreases when interest rates rise and
increases when interest rates fall).
LEVERAGE RISK The risk of gains or losses disproportionately higher than the
amount invested
LIQUIDITY RISK The risk the holder may not be able to sell the security at the
time or price it desires.
MARKET RISK The risk that when the market as a whole declines, the value of a
specific investment will decline proportionately. This systematic risk is common
to all investments and the mutual funds that purchase them.
NATURAL EVENT RISK The risk of a natural disaster, such as a hurricane or
similar event, wil cause severe economic losses and default in payments by the
issuer of the security.
POLITICAL RISK The risk governmental policies or other political actions will
negatively impact the value of the investment.
PREPAYMENT RISK The risk declining interest rates will result in unexpected
prepayments, causing the value of the investment to fall.
VALUATION RISK The risk the estimated value of a security does not match the
actual amount that can be realized if the security is sold.
ITEM 5. MANAGEMENT OF THE PORTFOLIO.
The Board of Trustees provides broad supervision over the affairs of
the Portfolio. The Portfolio has retained the services of JPMIM as investment
adviser and Morgan as 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.
INVESTMENT ADVISOR. Subject to the supervision of the Portfolio's Trustees,
the Advisor makes the Portfolio's day-to-day investment decisions, arranges for
the execution of portfolio transactions and generally manages the Portfolio's
investments. Effective October 1, 1998 the portfolio's investment advisor is
JPMIM. Prior to that date, Morgan, a wholly owned subsidiary of J.P. Morgan &
Co. Incorporated ("J.P. Morgan"), was the Portfolio's investment
<PAGE>
advisor. JPMIM, also a wholly owned subsidiary of J.P. Morgan, is a
registered investment adviser under the Investment Advisers Act of 1940, as
amended. JPMIM manages employee benefit funds of corporations, labor unions and
state and local governments and the accounts of other institutional investors,
including investment companies. Certain of the assets of employee benefit
accounts under its management are invested in commingled pension trust funds for
which Morgan serves as trustee.
The portfolio management team is led by Andrew F. Goldberg, vice
president, who has been at J.P. Morgan since 1990, and Michael Cembalest, vice
president, who has been at J.P. Morgan from 1988 to January 1998 and since June
1998. Prior to joining the portfolio management team, Mr. Goldberg oversaw the
capital research group's research into fixed income and derivatives markets, and
Mr. Cembalest was responsible for sovereign debt analysis in the emerging
markets group. From January 1998 to June 1998, Mr. Cembalest was a portfolio
manager at Morgan Stanley.
As compensation for the services rendered and related expenses borne by
the Advisor under the Investment Advisory Agreement with the Portfolio, the
Portfolio has agreed to pay JPMIM a fee, which is computed daily and may be paid
monthly, at the annual rate of 0.70% of the Portfolio's average daily net
assets.
Under a separate agreement, Morgan 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 J.P. Morgan Funds, the J.P. Morgan Institutional
Funds, the Master Portfolios (defined in Part B) and certain other 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
<PAGE>
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.
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.
For the period March 7, 1997 (commencement of operations) through
December 31, 1997, the Portfolio's total expenses were 0.91%, on an annualized
basis, of its average net assets. Morgan has agreed that it will, at least
through April 30, 1999, maintain the Portfolio's total operating expenses at the
annual rate of 1.25% of the Portfolio's average daily net assets. This expense
limitation does not cover extraordinary expenses during the period. This
reimbursement arrangement can be changed or terminated at any time after 4/30/99
at the option of J.P. Morgan.
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 October 31, 1998, J.P. Morgan Emerging Markets Debt Fund (the
"Fund") (a series of the J.P. Morgan Funds) owned approximately 99% of the
outstanding beneficial interests in the Portfolio. So long as the Fund controls
the Portfolio, the Fund may take action 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
<PAGE>
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 the close of
trading on the NYSE (normally 4:00 p.m. eastern 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 December 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., Elizabethan Square, Shedden Road, George Town, Grand
Cayman, Cayman Islands, BWI ((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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
PART B (THE EMERGING MARKETS DEBT PORTFOLIO)
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History B3-1
Investment Objective and Policies B3-1
Management of the Portfolio Trust B3-22
Control Persons and Principal Holders
of Securities B3-25
Investment Advisory and Other Services B3-26
Brokerage Allocation and Other Practices B3-29
Capital Stock and Other Securities B3-30
Purchase, Redemption and Pricing of
Securities Being Offered B3-32
Tax Status B3-33
Underwriters B3-35
Calculations of Performance Data B3-35
Financial Statements B3-35
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
The Emerging Markets Debt Portfolio (the "Portfolio") is designed for
the aggressive investor seeking to diversify an investment portfolio by
investing in fixed income securities of emerging markets issuers. The
Portfolio's investment objective, which is non-fundamental and can be changed
without the approval of interest holders, is high total return from a portfolio
of fixed income securities of emerging markets issuers.
The Portfolio invests in lower quality debt instruments ("junk bonds"),
which are subject to higher risks of untimely interest and principal payments,
default and price volatility than higher quality securities and may present
liquidity and valuation problems. Investments in securities of issuers in
emerging markets, investments in unrated and lower rated debt obligations and
investments denominated or quoted in foreign currencies, as well as the
Portfolio's use of interest rate and currency management techniques, entail
risks in addition to those that are customarily associated with investing in
dollar-denominated fixed income securities of U.S. issuers. Interest rate and
currency management techniques may be unavailable or ineffective in mitigating
risks inherent in the Portfolio. The Portfolio may not be able to achieve its
investment objective. The Portfolio is intended for investors who can accept a
high degree of risk and is not suitable for all investors.
The following discussion supplements the information regarding the
investment objective of the Portfolio and the policies to be employed to achieve
this objective by the Portfolio as set forth above and in Part A.
PRIMARY INVESTMENTS. In normal circumstances, substantially all and at
least 65% of the value of the Portfolio's total assets are invested in debt
obligations of governments, government-related agencies and corporate issuers
located in emerging markets around the world. The Advisor considers "emerging
markets" to be any country which is generally considered to be an emerging or
developing country by the World Bank, the International Finance Corporation or
<PAGE>
the United Nations or its authorities. These countries generally
include every country in the world except Australia, Austria, Belgium, Canada,
Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, New
Zealand, Norway, Spain, Sweden, Switzerland, United Kingdom and United States.
An emerging market issuer is one that (i) has its principal securities trading
market in an emerging market country; (ii) is organized under the laws of an
emerging market country; (iii) derives 50% or more of its total revenue from
either goods produced, sales made or services performed in emerging market
countries; (iv) has at least 50% of its assets located in emerging markets; or
(v) is a government, governmental authority or agency of an emerging market
country.
Debt obligations in which the Portfolio may invest include (i) fixed
and floating rate bonds, notes and debentures of corporate issuers, including
convertible securities; (ii) commercial paper and bank certificates of deposit;
(iii) loans and interests therein, including loan participations; (iv)
obligations issued or guaranteed by a foreign government or its agencies,
instrumentalities, political subdivisions and authorities, including obligations
of central banks and Brady bonds; (v) structured notes, bonds and debentures
issued or guaranteed by governmental or corporate issuers; and (vi) any other
debt securities issued or guaranteed by an emerging markets issuer.
Emerging market securities may be denominated in foreign currencies or
the U.S. dollar. The Advisor will not routinely attempt to manage the
Portfolio's exposure to currencies of emerging markets. However, the Portfolio
may from time to time decide to engage in forward foreign currency exchange
transactions if the Advisor believes these transactions would be in the
Portfolio's best interest.
The Portfolio may invest without limit in fixed income securities rated
below investment grade by one or more internationally recognized rating agencies
such as Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service,
Inc. ("Moody's") or in unrated securities determined to be of comparable credit
quality by the Advisor. These below investment grade securities may include
obligations of sovereign and corporate issuers. Below investment grade
obligations, commonly called "junk bonds," are considered speculative and may
include obligations that are unrated or in default.
For temporary defensive purposes, the Portfolio may invest up to 100%
of its assets in cash and money market instruments or invest all or a portion of
its assets in debt securities of the U.S. government or corporate issuers. The
Portfolio may engage in defensive investing if the Advisor determines that
economic or market conditions in emerging markets significantly limit
opportunities for total return or pose undue risk to investors.
FOREIGN INVESTMENTS
The Portfolio makes substantial investments in foreign countries.
Foreign investments may be made directly in securities of foreign issuers or in
the form of American Depositary Receipts ("ADRs"), 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
<PAGE>
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.
The U.S. dollar value of foreign securities denominated in a foreign
currency will vary with changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of these currencies against the U.S.
dollar will result in corresponding changes in the U.S. dollar value of the
Portfolio's assets quoted in those currencies. Exchange rates are generally
affected by the forces of supply and demand in the international currency
markets, the relative merits of investing in different countries and the
intervention or failure to intervene of U.S. foreign governments and central
banks. Some countries in emerging markets also may have managed currencies,
which are not free floating against the U.S. dollar. In addition, emerging
markets may restrict the free conversion of their currencies into other
currencies. Any devaluations in the currencies in which the Portfolio's
securities are denominated may have a detrimental impact on the Portfolio's net
asset value.
The Portfolio may invest any portion of its assets in securities
denominated in foreign currencies or in a particular currency. The Portfolio may
enter into forward foreign currency exchange transactions in an attempt to
manage the Portfolio's foreign currency exposure.
SOVEREIGN AND CORPORATE DEBT OBLIGATIONS. Investment in sovereign debt
obligations involves special risks not present in corporate debt obligations.
The issuer of the sovereign debt or the governmental authorities that control
the repayment of the debt may be unable or unwilling to repay principal or
interest when due, and the Portfolio may have limited recourse in the event of a
default. During periods of economic uncertainty, the market prices of sovereign
debt, and the Portfolio's net asset value, may be more volatile than prices of
U.S. debt obligations. In the past, certain emerging markets have encountered
difficulties in servicing their debt obligations, withheld payments of principal
and interest and declared moratoria on the payment of principal and interest on
their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearages on their debt. The failure of a
sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
<PAGE>
Corporate debt obligations, including obligations of industrial,
utility, banking and other financial issuers, are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
BRADY BONDS. Brady bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructurings. Brady
bonds have been issued since 1989 and do not have a long payment history. In
light of the history of defaults of countries issuing Brady bonds on their
commercial bank loans, investments in Brady bonds may be viewed as speculative.
Brady bonds may be fully or partially collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter ("OTC") secondary markets. Incomplete
collateralization of interest or principal payment obligations results in
increased credit risk. Dollar-denominated collateralized Brady bonds, which may
be either fixed-rate or floating-rate bonds, are generally collateralized by
U.S. Treasury zero coupon bonds having the same maturity as the Brady bonds.
OBLIGATIONS OF SUPRANATIONAL ENTITIES. The Portfolio may invest in
obligations of supranational entities designated or supported by governmental
entities to promote economic reconstruction or development and of international
banking institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the "World Bank"), the
European Coal and Steel Community, the Asian Development Bank and the
Inter-American Development Bank. Each supranational entity's lending activities
are limited to a percentage of its total capital (including "callable capital"
contributed by its governmental members at the entity's call), reserves and net
income. There is no assurance that participating governments will be able or
willing to honor their commitments to make capital contributions to a
supranational entity.
INVESTING IN EMERGING MARKETS
Investing in the securities of emerging market issuers involves
considerations and potential risks not typically associated with investing in
the securities of issuers in the United States and other developed countries.
MARKET CHARACTERISTICS. The fixed income securities markets of emerging
countries generally have substantially less volume than the markets for similar
securities in the United States and may not be able to absorb, without price
disruptions, a significant increase in trading volume or trade size.
Additionally, market making activities may be less extensive in such markets,
which may contribute to increased volatility and reduced liquidity in those
markets. The less liquid the market, the more difficult it may be for the
Portfolio to accurately price its portfolio securities or to dispose of such
securities at the times determined to be appropriate. The risks associated with
reduced liquidity may be particularly acute to the extent that the Portfolio
needs cash to meet redemption requests, to pay dividends and other distributions
or to pay expenses.
Investments in foreign issuers may be affected by changes in currency
rates, changes in foreign or U.S. laws or restrictions applicable to these
investments and in exchange control regulations (e.g., currency blockage). In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, these procedures have on occasion been
<PAGE>
unable to keep pace with the volume of securities transactions, thus
making it difficult to conduct securities transactions.
Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less government
regulation of foreign markets, companies and securities dealers than in the
United States. Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation, or confiscatory taxation, imposition of
withholding taxes on dividend or interest payments, limitations on the removal
of funds or other assets, political or social instability or diplomatic
developments which could affect investments in those countries.
ECONOMIC, POLITICAL AND SOCIAL FACTORS. Emerging markets may be subject
to a greater degree of economic, political and social instability that could
significantly disrupt the principal financial markets than are markets in the
United States and in Western European countries. Such instability may result
from among other things: (i) authoritarian governments or military involvement
in political and economic decision making, including changes or attempted
changes in government through extra constitutional means; (ii) popular unrest
associated with demands for improved economic, political and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring countries;
and (v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economics of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets are vulnerable to weakness in world prices for their commodity
exports. The economies of emerging markets may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments
position.
RESTRICTIONS ON INVESTMENT AND REPATRIATION. Certain emerging markets
require governmental approval prior to investments by foreign persons or limit
investments by foreign persons to only a specified percentage of an issuer's
outstanding securities or a specific class of securities which may have less
advantageous terms (including price) than securities of the company available
for purchase by nationals. Repatriation of investment income and capital from
certain emerging markets is subject to certain governmental consents. Even where
there is no outright restriction on repatriation of capital, the mechanics of
repatriation may affect the operation of the Portfolio.
INVESTMENT IN LOWER RATED OBLIGATIONS
While generally providing higher coupons or interest rates than
investments in higher quality securities, lower quality debt securities involve
greater risk of loss of principal and income, including the possibility of
default or bankruptcy of the issuers of such securities, and have greater price
volatility, especially during periods of economic uncertainty or change. These
lower quality debt obligations tend to be affected by economic changes and
short-term corporate and industry developments to a greater extent than higher
quality securities, which react
<PAGE>
primarily to fluctuations in the general level of interest rates. To
the extent that the Portfolio invests in such lower quality securities, the
achievement of its investment objective may be more dependent on the Advisor's
credit analysis.
Lower quality debt obligations are affected by the market's perception
of their credit quality, especially during time of adverse publicity, and the
outlook for economic growth. Economic downturns or an increase in interest rates
may cause a higher incidence of default by the issuers of these securities,
especially issuers that are highly leveraged. The market for these lower quality
fixed income securities is generally less liquid than the market for investment
grade fixed income securities. It may be more difficult to sell these lower
rated securities to meet redemption requests, to respond to changes in the
market, or to value accurately the Portfolio's portfolio holdings for purposes
of determining the Portfolio's net asset value.
MONEY MARKET INSTRUMENTS
The Portfolio may invest in money market instruments to the extent
consistent with its investment objective and policies. A description of the
various types of money market instruments that may be purchased by the Portfolio
appears below.
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
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 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) foreign branches of U.S. banks and U.S. savings
<PAGE>
and loans associations or of foreign banks (Euros) and (ii) U.S.
branches of foreign banks (Yankees). See "Foreign Investments." 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 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 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
the Advisor to whom the Advisor, 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
<PAGE>
transfer to the account of the Custodian. If the seller defaults, the
Portfolio might incur a loss if the value of the collateral securing the
repurchase agreement declines and might incur disposition costs in connection
with liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon disposal
of the collateral by the Portfolio may be delayed or limited.
The Portfolio may make investments in other debt securities 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 Part B.
CORPORATE BONDS AND OTHER DEBT SECURITIES
Corporate Fixed Income Securities. The Portfolio may invest in publicly
and privately issued debt obligations of U.S. and non-U.S. corporations,
including obligations of industrial, utility, banking and other financial
issuers. These securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligation and may also be subject
to price volatility due to such factors as market interest rates, market
perception of the creditworthiness of the issuer and general market liquidity. A
description of these investments appears below. See "Quality and Diversification
Requirements." For information on short-term investments in these securities,
see "Money Market Instruments."
MORTGAGE-BACKED SECURITIES. The Portfolio may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists of
mortgage loans evidenced by promissory notes secured by first mortgages or first
deeds of trust or other similar security instruments creating a first lien on
owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support to these federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
There are several types of guaranteed mortgage-backed securities
currently available, including guaranteed mortgage pass-through certificates
<PAGE>
and multiple class securities, which include guaranteed real estate
mortgage investment conduit certificates ("REMIC Certificates"), other
collateralized mortgage obligations ("CMOs") and stripped mortgage-backed
securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class mortgage-backed securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Portfolio does not intend to purchase residual
interests in REMICs. The REMIC Certificates represent beneficial ownership
interests in a REMIC trust, generally consisting of mortgage loans or Fannie
Mae, Freddie Mac or Ginnie Mae guaranteed mortgage-backed securities (the
"Mortgage Assets"). The obligations of Fannie Mae and Freddie Mac under their
respective guaranty of the REMIC Certificates are obligations solely of Fannie
Mae and Freddie Mac, respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class
of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets underlying
the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or
REMIC Certificates to be retired substantially earlier than their final
scheduled distribution dates. Generally, interest is paid or accrues on all
classes of CMOs or REMIC Certificates on a monthly basis.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed
securities ("SMBS") are derivative multiclass mortgage securities, issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers. Although the market for such securities is increasingly liquid,
privately issued SMBS may not be readily marketable and will be considered
illiquid for purposes of the Portfolio's limitation on investments in illiquid
securities. The Advisor may determine that SMBS which are U.S. Government
securities are liquid for purposes of the Portfolio's limitation on investments
in illiquid securities in accordance with procedures adopted by the Board of
Trustees. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
<PAGE>
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Portfolio accrues income with respect to zero
coupon and pay-in-kind securities prior to the receipt of cash payments.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals. Zero coupon,
pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
While interest payments are not made on such securities, holders of
such securities are deemed to have received "phantom income." Because the
Portfolio will distribute "phantom income" to shareholders, to the extent that
shareholders elect to receive dividends in cash rather than reinvesting such
dividends in additional shares, the Portfolio will have fewer assets with which
to purchase income producing securities.
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Portfolio may invest are subject to the
Portfolio's overall credit requirements. However, asset-backed securities, in
general, are subject to certain risks. Most of these risks are related to
limited interests in applicable collateral. For example, credit card debt
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
ADDITIONAL INVESTMENTS
Convertible Securities. The Portfolio may invest in convertible
securities of domestic and foreign issuers. The convertible securities in which
the Fund may invest include any debt securities or preferred stock which may be
converted into common stock or which carry the right to purchase common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date
<PAGE>
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. Also, the Portfolio may be disadvantaged if the other party to the
transaction defaults.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies
may be acquired by the Portfolio to the extent permitted under the 1940 Act or
any order pursuant thereto. These limits currently require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of the
Portfolio's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group,
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio. As a shareholder of another investment
company, the Portfolio would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that the
Portfolio bears directly in connection with its own operations. 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, reflecting the interest rate effective for the term of the
agreement. 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. Leverage may cause any gains or losses for the Portfolio to be
magnified. The Portfolio will invest the proceeds of borrowings under reverse
repurchase agreements. In addition, the Portfolio will enter into a reverse
repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Portfolio will establish and maintain with the Custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to its purchase obligations under its reverse repurchase agreements. See
"Investment Restrictions" below for the Portfolio's limitations on reverse
repurchase agreements and bank borrowings.
MORTGAGE DOLLAR ROLL TRANSACTIONS. The Portfolio may engage in mortgage
dollar roll transactions with respect to mortgage securities issued by the
<PAGE>
Government National Mortgage Association, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. In a mortgage dollar
roll transaction, the Portfolio sells a mortgage backed security and
simultaneously agrees to repurchase a similar security on a specified future
date at an agreed upon price. During the roll period, the Portfolio will not be
entitled to receive any interest or principal paid on the securities sold. The
Portfolio is compensated for the lost interest on the securities sold by the
difference between the sale price and the lower price for the future repurchase
as well as by the interest earned on the reinvestment of the sale proceeds. The
Portfolio may also be compensated by receipt of a commitment fee. When the
Portfolio enters into a mortgage dollar roll transaction, liquid assets in an
amount sufficient to pay for the future repurchase are segregated with the
Custodian. Mortgage dollar roll transactions are considered reverse repurchase
agreements for purposes of the Portfolio's investment restrictions.
LOANS OF PORTFOLIO SECURITIES. The Portfolio is permitted to lend its
securities in an amount up to 33 1/3% the value of the Portfolio's net assets.
The Portfolio may lend its securities if such loans are secured continuously by
cash or equivalent collateral or by a letter of credit in favor of the Portfolio
at least equal at all times to 100% of the market value of the securities
loaned, plus accrued interest. While such securities are on loan, the borrower
will pay the Portfolio any income accruing thereon. Loans will be subject to
termination by the Portfolio in the normal settlement time, generally three
business days after notice, or by the borrower on one day's notice. Borrowed
securities must be returned when the loan is terminated. Any gain or loss in the
market price of the borrowed securities which occurs during the term of the loan
inures to the Portfolio. The Portfolio may pay reasonable finders' and custodial
fees in connection with a loan. In addition, the Portfolio will consider all
facts and circumstances, including the creditworthiness of the borrowing
financial institution, and the Portfolio will not make any loans in excess of
one year. The Portfolio will not lend its securities to any officer, Trustee,
Director, employee or other affiliate of the Portfolio, the Advisor or the
Distributor, unless otherwise permitted by applicable law.
ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED
SECURITIES. The Portfolio may not acquire any illiquid securities if, as a
result thereof, more than 15% of its 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 securities or
receives upon resale may be lower than the price paid or received for similar
securities with a more liquid market. Accordingly the valuation of these
securities will reflect any limitations on their liquidity.
The Portfolio may also purchase Rule 144A securities sold to
institutional investors without registration under the 1933 Act. These
securities may be determined to be liquid in accordance with guidelines
established by the Advisor and approved by the Trustees. The Trustees will
monitor the Advisor's implementation of these guidelines on a periodic basis.
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
<PAGE>
Portfolio's net assets could be adversely affected. Where an illiquid
security must be registered under the Securities Act of 1933, as amended (the
"1933 Act") before it may be sold, the Portfolio may be obligated to pay all or
part of the registration expenses, and a considerable period may elapse between
the time of the decision to sell and the time the Portfolio may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Portfolio might obtain a
less favorable price than prevailed when it decided to sell.
LOAN PARTICIPATIONS. The Portfolio may invest in fixed- and
floating-rate loans arranged through private negotiations between an issuer of
emerging market debt instruments and one or more financial institutions
("lenders"). Generally, the Portfolio's investments in loans are expected to
take the form of loan participations and assignments of portions of loans from
third parties. When investing in a participation, the Portfolio will have the
right to receive payments only from the lender to the extent the lender receives
payments from the borrower, and not from the borrower itself. Likewise, the
Portfolio will be able to enforce its rights only through the lender, and not
directly against the borrower. As a result, the Portfolio will assume the credit
risk of both the borrower and the lender that is selling the participation. When
the Portfolio purchases assignments from lenders, it will acquire direct rights
against the borrower, but these rights and the Portfolio's obligations may
differ from, and be more limited than, those held by the assigning lender. Loan
participations and assignments may be illiquid and subject to the Portfolio's
restrictions applicable to illiquid securities.
SYNTHETIC INSTRUMENTS. The Portfolio may invest in certain synthetic
instruments. Such instruments generally involve the deposit of asset-backed
securities in a trust arrangement and the issuance of certificates and/or notes
evidencing interests in the trust. These securities are generally sold in
private placements in reliance on Rule 144A.
SWAPS AND RELATED SWAP PRODUCTS. The Portfolio may engage in swap
transactions, specifically interest rate, currency, index and total return swaps
and in the purchase or sale of related caps, floors and collars. In a typical
interest rate swap agreement, one party agrees to make payments equal to a
floating interest rate on a specified amount (the "notional amount") in return
for payments equal to a fixed interest rate on the same amount for a specified
period. If a swap agreement provides for payments in different currencies, the
parties might agree to exchange the notional amount as well. The purchaser of an
interest rate cap or floor, upon payment of a fee, has the right to receive
payments (and the seller of the cap is obligated to make payments) to the extent
a specified interest rate exceeds (in the case of a cap) or is less than (in the
case of a floor) a specified level over a specified period of time or at
specified dates. The purchaser of an interest rate collar, upon payment of a
fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates.
Index and currency swaps, caps, floors, and collars are similar to
those described in the preceding paragraph, except that, rather than being
determined by variations in specified interest rates, the obligations of the
parties are determined by variations in specified interest rate or currency
indexes, and, in the case of total return swaps, variations in the total return
of specific securities.
The amount of the Portfolio's potential gain or loss on any swap
transaction is not subject to any fixed limit. Nor is there any fixed limit on
the Portfolio's potential loss if it sells a cap, floor or collar. If the
<PAGE>
Portfolio buys a cap, floor or collar, however, the Portfolio's
potential loss is limited to the amount of the fee that it has paid. Swaps,
caps, floors and collars tend to be more volatile than many other types of
investments. Nevertheless, the Portfolio will use these techniques only as a
risk management tool and not for purposes of leveraging the Portfolio's market
exposure or its exposure to changing interest rates, security values or currency
values. The Portfolio will use these transactions only to preserve a return or
spread on a particular investment or portion of its investments, to protect
against currency fluctuations, as a duration management technique, to protect
against any increase in the price of securities the Portfolio anticipates
purchasing at a later date, or to gain exposure to certain markets in the most
economical way possible. The Portfolio will not sell interest rate caps, floors
or collars if it does not own securities providing the interest that the
Portfolio may be required to pay.
The use of swaps, caps, floors and collars involves investment
techniques and risks different from those associated with other portfolio
security transactions. If the Advisor is incorrect in its forecasts of market
values, interest rates, currency rates and other applicable factors, the
investment performance of the Portfolio will be less favorable than if these
techniques had not been used. These instruments are typically not traded on
exchanges. Accordingly, there is a risk that the other party to certain of these
instruments will not perform its obligations to the Portfolio or that the
Portfolio may be unable to enter into offsetting positions to terminate its
exposure or liquidate its investment under certain of these instruments when it
wishes to do so. Such occurrences could result in losses to the Portfolio. The
Advisor will, however, consider such risks and will enter into swap, cap, floor
and collar transactions only when it believes that the risks are not
unreasonable.
Provided contracts relative to the Portfolio's use of swaps, caps,
floors and collars permit, the Portfolio will usually enter into swaps on a net
basis--that is, the two payment streams are netted out in a cash settlement on
the payment date or dates specified in the instrument--with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments.
The Portfolio will maintain cash or liquid assets in a segregated
account with its custodian in an amount sufficient at all times to cover its
current obligations under swaps, caps, floors and collars. If the Portfolio
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the Portfolio's accrued
obligations under the swap agreement over the accrued amount the Portfolio is
entitled to receive under the agreement. If the Portfolio enters into a swap
agreement on other than a net basis, or sells a cap, floor or collar, it will
segregate assets with a daily value at least equal to the full amount of the
Portfolio's accrued obligations under the agreement.
The Portfolio will not enter into any swap, cap, floor, or collar,
unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years, with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid
caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, for that reason, they are
less liquid than swaps.
<PAGE>
The liquidity of swaps, caps, floors and collars will be determined by
the Advisor based on various factors, including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
instrument (including any demand or tender features) and (5) the nature of the
marketplace for trades (including the ability to assign or offset the
Portfolio's rights and obligations relating to the investment). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.
In connection with such transactions, the Portfolio will segregate cash
or liquid securities to cover any amounts it could owe under swaps that exceed
the amounts it is entitled to receive, and it will adjust that amount daily, as
needed. During the term of a swap, changes in the value of the swap are
recognized as unrealized gains or losses by marking to market to reflect the
market value of the swap. When the swap is terminated, the Portfolio will record
a realized gain or loss equal to the difference, if any, between the proceeds
from (or cost of) the closing transaction and the Portfolio's basis in the
contract. The Portfolio is exposed to credit loss in the event of nonperformance
by the other party to the swap.
The federal income tax treatment with respect to swaps, caps, floors,
and collars may impose limitations on the extend to which the Portfolio may
engage in such transactions.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Although the Portfolio is not limited by the diversification
requirements of the 1940 Act, the Portfolio will comply with the diversification
requirements imposed by the Code for qualification as a regulated investment
company. See Item 20.
The higher total return sought by the Portfolio is generally obtainable
from high yield high risk securities in the lower rating categories of the
established rating services. These securities are rated below Baa by Moody's or
below BBB by Standard & Poor's. The Portfolio may invest in securities that are
speculative to a high degree and in default. Lower rated securities are
generally referred to as junk bonds. See the Appendix attached to this Part B
for a description of the characteristics of the various ratings categories. The
credit ratings of Moody's and Standard & Poor's (the "Rating Agencies"), such as
those ratings described in this Part B, may not be changed by the Rating
Agencies in a timely fashion to reflect subsequent economic events. The credit
ratings of securities do not evaluate market risk. The Portfolio may also invest
in unrated securities.
Below Investment Grade Debt. Certain lower rated securities purchased
by the Fund, such as those rated Ba or B by Moody's or BB or B by Standard &
Poor's (commonly known as junk bonds), may be subject to certain risks with
respect to the issuing entity's ability to make scheduled payments of principal
and interest and to greater market fluctuations. While generally providing
higher coupons or interest rates than investments in higher quality securities,
lower quality fixed income securities involve greater risk of loss of principal
and income, including the possibility of default or bankruptcy of the issuers of
such securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Fund invests in such lower quality
<PAGE>
securities, the achievement of its investment objective may be more
dependent on the Advisor's own credit analysis.
Reduced volume and liquidity in the high yield bond market or the
reduced availability of market quotations may make it more difficult to dispose
of the Portfolio's investments in high yield securities and to value accurately
these assets. The reduced availability of reliable, objective data may increase
the Portfolio's reliance on management's judgment in valuing high yield bonds.
In addition, the Portfolio's investments in high yield securities may be
susceptible to adverse publicity and investor perceptions whether or not
justified by fundamental factors.
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.
DERIVATIVE INSTRUMENTS
The Portfolio may purchase derivative securities to enhance return and
enter into derivative contracts to hedge against fluctuations in securities
prices or currency exchange rates, to change the duration of the Portfolio's
fixed income holdings or as a substitute for the purchase or sale of securities
or currency. The Portfolio's investments in derivative securities may include
structured securities.
All of the Portfolio's transactions in derivative instruments involve a
risk of loss or depreciation due to unanticipated adverse changes in interest
rates, securities prices or currency exchange rates. The loss on derivative
contracts (other than purchased options) may substantially exceed the
Portfolio's initial investment in these contracts. In addition, the Portfolio
may lose the entire premium paid for purchased options that expire before they
can be profitably exercised by the Portfolio.
STRUCTURED SECURITIES. The Portfolio may invest in structured
securities, including currency linked securities. The interest rate or, in some
cases, the principal payable at the maturity of a structured security may change
positively or inversely in relation to one or more interest rates, financial
indices, currency rates or other financial indicators (reference prices). A
structured security may be leveraged to the extent that the magnitude of any
change in the interest rate or principal payable on a structured security is a
multiple of the change in the reference price. Thus, structured securities may
decline in value due to adverse market changes in currency exchange rates and
other reference prices.
DERIVATIVE CONTRACTS. The Portfolio may purchase and sell a variety of
derivative contracts, including futures contracts on securities, indices or
currency; options on futures contracts; options on securities, indices or
currency; forward contracts to purchase or sell securities or currency; and
interest rate, currency, index and total return swaps. The Portfolio incurs
liability to a counterparty in connection with transactions in futures
contracts, forward contracts and swaps and in selling options. The Portfolio
pays a premium for purchased options. In addition, the Portfolio incurs
transaction costs in opening and closing positions in derivative contracts.
RISKS ASSOCIATED WITH DERIVATIVE SECURITIES AND CONTRACTS
The risks associated with the Portfolio's transactions in derivative
securities and contracts may include some or all of the following: market
<PAGE>
risk, leverage and volatility risk, correlation risk, credit risk, and
liquidity and valuation risk.
MARKET RISK. Investments in structured securities are subject to the
market risks described above. Entering into a derivative contract involves a
risk that the applicable market will move against the Portfolio's position and
that the Portfolio will incur a loss. For derivative contracts other than
purchased options, this loss may substantially exceed the amount of the initial
investment made or the premium received by the Portfolio.
LEVERAGE AND VOLATILITY RISK. Derivative instruments may sometimes
increase or leverage the Portfolio's exposure to a particular market risk.
Leverage enhances the price volatility of derivative instruments held by the
Portfolio. If the Portfolio enters into futures contracts, writes options or
engages in certain foreign currency exchange transactions, it is required to
maintain a segregated account consisting of cash or liquid assets, hold
offsetting portfolio securities or currency positions or cover written options
which may partially offset the leverage inherent in these transactions.
CORRELATION RISK. The Portfolio's success in using derivative contracts
to hedge portfolio assets depends on the degree of price correlation between the
derivative contract and the hedged asset. Imperfect correlation may be caused by
several factors, including temporary price disparities among the trading markets
of the derivative contract, the assets underlying the derivative contract and
the Portfolio's assets.
CREDIT RISK. Derivative securities and OTC derivative contracts involve a
risk that the issuer or counterparty will fail to perform its contractual
obligations.
LIQUIDITY AND VALUATION RISK. Some derivative securities are not
readily marketable or may become illiquid under adverse market conditions. In
addition, during periods of extreme market volatility, a commodity exchange may
suspend or limit trading in an exchange-traded derivative contract, which may
make the contract temporarily illiquid and difficult to price. The Portfolio's
ability to terminate OTC derivative contracts may depend on the cooperation of
the counterparties to such contracts. For thinly traded derivative securities
and contracts, the only source of price quotations may be the selling dealer or
counterparty. Segregation of a large percentage of assets could impede portfolio
management or the ability to meet redemption requests.
OPTIONS AND FUTURES TRANSACTIONS
EXCHANGE TRADED AND OTC 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 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.
<PAGE>
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. The Portfolio may
purchase or sell (write) futures contracts and purchase and sell (write) 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
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 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,
<PAGE>
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 that
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 OTC 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.
Examples of risk management strategies include synthetically altering the
duration of a portfolio or the mix of securities in a portfolio. For example, if
the Advisor wishes to extend maturities in a fixed income portfolio in order to
take advantage of an anticipated decline in interest rates, but does
<PAGE>
not wish to purchase the underlying long term securities, it might
cause the Portfolio to purchase futures contracts on long term debt securities.
Similarly, if the Advisor wishes to decrease fixed income securities or purchase
equities, it could cause the Portfolio to sell futures contracts on debt
securities and purchase futures contracts on a stock index. Such non-hedging
risk management techniques are not speculative, but because they involve
leverage include, as do all leveraged transactions, the possibility of losses as
well as gains that are greater than if these techniques involved the purchase
and sale of the securities themselves rather than their synthetic derivatives.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Portfolio for the period March 7,
1997 (commencement of operations) through December 31, 1997 was 182% and for the
six months ended June 30, 1998 it was 137%, (unaudited). The Portfolio may sell
a portfolio security without regard to the length of time such security has been
held if, in the Advisor's view, the security meets the criteria for sale. 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. This policy is
subject to certain requirements so that certain investors can qualify as
regulated investment companies under the Internal Revenue Code of 1986, as
amended (the "Code"). See Item 20 below.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Portfolio.
Except where otherwise noted, these investment restrictions are "fundamental"
policies which, under the 1940 Act, may not be changed without the vote of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the Portfolio. A "majority of the outstanding voting securities" is defined in
the 1940 Act as the lesser of (a) 67% or more of the voting securities present
at a meeting if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy, or (b) more than 50% of the
outstanding voting securities. The percentage limitations contained in the
restrictions below apply at the time of the purchase of securities.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof, are amended or modified, the Portfolio may not:
1. May not purchase any security which would cause the Portfolio to concentrate
its investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;
2. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
3. May not borrow money, except to the extent permitted by applicable law;
4. May not underwrite securities of other issuers, except to the extent that the
Portfolio, in disposing of portfolio securities, may be deemed an underwriter
within the meaning of the 1933 Act;
5. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Portfolio may (a) invest in securities or other
<PAGE>
instruments directly or indirectly secured by real estate, (b) invest in
securities or other instruments issued by issuers that invest in real estate,
and (c) make direct investments in mortgages;
6. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodities contracts; but this shall not
prevent the Portfolio from purchasing, selling and entering into financial
futures contracts (including futures contracts on indices of securities,
interest rates and currencies), options on financial futures contracts
(including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and
forward contracts or other derivative instruments that are not related to
physical commodities; and
7. May make loans to other persons, in accordance with the Portfolio's
investment objective and policies and to the extent permitted by applicable law.
Non-Fundamental Investment Restrictions. The investment restrictions
described below are not fundamental policies of the Portfolio and may be changed
by their Trustees. These non-fundamental investment policies require that the
Portfolio:
(i) May not acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the market value
of a Portfolio's net assets would be in investments which are illiquid;
(ii) May not purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued or delayed delivery
securities, or to short sales that are covered in accordance with SEC rules; and
(iii) May not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of fundamental investment restriction 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.
<PAGE>
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. An
asterisk indicates that a Trustee is an "interested person" (as defined in the
1940 Act) of the Portfolio.
TRUSTEES AND OFFICERS
FREDERICK S. ADDY--Trustee; Retired; 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 1993. His
address is Pine Tree Club Estates, 10286 Saint 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 10910, and his date of birth is March 17,
1934.
The Trustees of the Portfolio Trust are the same as the Trustees of
each of the other Master Portfolios (as defined below), 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, the J.P. Morgan
Institutional Funds and J.P. Morgan Series Trust, up to and including creating a
separate board of trustees.
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.
<PAGE>
Trustee compensation expenses paid to each Trustee for the calendar year
ended December 31, 1997 is set forth below.
- ------------------------------ ------------------- -----------------------------
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
PORTFOLIOS(*), J.P. MORGAN
AGGREGATE TRUSTEE FUNDS, J.P. MORGAN
COMPENSATION PAID INSTITUTIONAL FUNDS AND J.P.
BY THE PORTFOLIO MORGAN SERIES TRUST DURING
NAME OF TRUSTEE DURING 1997 1997(**)
- ------------------------------ ------------------- -----------------------------
- ------------------------------ ------------------- -----------------------------
$222
Frederick S. Addy, $72,500
Trustee
- ------------------------------ ------------------- -----------------------------
- ------------------------------ ------------------- -----------------------------
$222
William G. Burns, $72,500
Trustee
- ------------------------------ ------------------- -----------------------------
- ------------------------------ ------------------- -----------------------------
$222
Arthur C. Eschenlauer, $72,500
Trustee
- ------------------------------ ------------------- -----------------------------
- ------------------------------ ------------------- -----------------------------
$222
Matthew Healey, $72,500
Trustee(***), Chairman and
Chief Executive Officer
- ------------------------------ ------------------- -----------------------------
- ------------------------------ ------------------- -----------------------------
$222
Michael P. Mallardi, $72,500
Trustee
- ------------------------------ ------------------- -----------------------------
(*) Includes the Portfolio and 19 other portfolios (collectively, the
"Master Portfolios") for which Morgan acts as investment adviser.
(**) 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.
(***) During 1997, Pierpont Group paid Mr. Healey, in his role as Chairman of
Pierpont Group, compensation in the amount of $147,500, contributed
$22,100 to a defined contribution plan on his behalf and paid $20,500
in insurance premiums for his benefit.
The Trustees of the Portfolio 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 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 aggregate fees paid to Pierpont Group by the Portfolio for the
period March 7, 1997 (commencement of operations) through December 31, 1997 were
$3,074. The Portfolio Trust has no employees; its executive officers (listed
below), other than the Chief Executive Officer and the officers who are
employees of the Advisor, are provided and compensated by Funds
<PAGE>
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 their dates of birth are set forth below. The business
address of each of the officers unless otherwise noted is 60 State Street, Suite
1300, Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, Florida 33436. His date of birth is August 23, 1937.
MARGARET W. CHAMBERS; Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI.
Prior to July 1994, she was President and Chief Compliance Officer of FDI. Her
date of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. From April 1993 to January 1995,
Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust Company. His
date of birth is March 31, 1969.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Portfolios only. Managing Director, State Street Cayman Trust Company, Ltd.
since October 1994. Prior to October 1994, Mrs. Henning was head of mutual funds
at Morgan Grenfell in Cayman and was Managing Director of Bank of Nova Scotia
Trust Company (Cayman) Limited prior to September 1993. Address: P.O. Box 2508
GT, Elizabethan Square, 2nd Floor, Shedden Road, George Town, Grand Cayman,
Cayman Islands, BWI. Her date of birth is March 24, 1942.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Prior to May 1994, Ms. Jacoppo-Wood was a senior paralegal at The Boston Company
Advisors, Inc. ("TBCA"). Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. Prior to April 1994, Mr. Kelley was employed by Putnam Investments in
legal and compliance capacities. His date of birth is December 24, 1964.
<PAGE>
KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
Prior to July 1994 she was a finance student at Stonehill College. Her date of
birth is July 5, 1972.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to August 1994, Ms. Nelson was an Assistant Vice President and Client
Manager for The Boston Company, Inc. Her date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Manager for the Budgeting and Expense Processing Group. Prior to September 1995,
Ms. Pace served as a Fund Administrator for Morgan Guaranty Trust Company of New
York. Her address is 60 Wall Street, New York, New York 10260. Her date of birth
is March 13, 1966.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.
STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice President
and Client Development Manager for FDI since April 1998. From April 1997 to
March 1998, Ms. Pierce was employed by Citibank, NA as an officer of Citibank
and Relationship Manager on the Business and Professional Banking team handling
over 22,000 clients. Address: 200 Park Avenue, New York, New York 10166. Her
date of birth is August 18, 1968.
GEORGE A. RIO; President and Treasurer. Executive Vice President and Client
Service Director of FDI since April 1998. From June 1995 to March 1998, Mr. Rio
was Senior Vice President and Senior Key Account Manager for Putnam Mutual
Funds. From May 1994 to June 1995, Mr. Rio was Director of Business Development
for First Data Corporation. From September 1983 to May 1994, Mr. Rio was Senior
Vice President & Manager of Client Services and Director of Internal Audit at
The Boston Company. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves in the Funds Administration group
as a Manager of the Tax Group and is responsible for U.S. mutual fund tax
matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax Manager in
the Investment Company Services Group of Deloitte & Touche LLP. Her address is
60 Wall Street, New York, New York 10260. Her date of birth is September 26,
1965.
The Portfolio 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
<PAGE>
investors, it is finally adjudicated that they engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in their offices, or unless with respect to any other matter it is
finally adjudicated that they did not act in good faith in the reasonable belief
that their actions were in the best interests of the Portfolio. In the case of
settlement, such indemnification will not be provided unless it has been
determined by a court or other body approving the settlement or other
disposition, or by a reasonable determination, based upon a review of readily
available facts, by vote of a majority of disinterested Trustees or in a written
opinion of independent counsel, that such officers or Trustees have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of October 31, 1998, J.P. Morgan Emerging Markets Debt Fund (the
"Fund") (a series of the J.P. Morgan Funds) owned approximately 99% of the
outstanding beneficial interests in the Portfolio. So long as the Fund controls
the Portfolio, the Fund may take action without the approval of any other holder
of beneficial interests in the Portfolio.
Potential investors should inform the Portfolio Trust that whenever
they are requested to vote on matters pertaining to the Portfolio Trust or the
Portfolio (other than a vote by the Portfolio to continue its operations upon
the withdrawal of another investor in the Portfolio), they will hold meetings of
their respective shareholders and will cast their votes as instructed by those
shareholders.
None of the officers or Trustees of the Portfolio Trust own any of the
outstanding beneficial interests in the Portfolio.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISOR. The investment advisor to the Portfolio is JPMIM, a
wholly-owned subsidiary of J.P. Morgan. Subject to the supervision of the
Portfolio's Trustees, the Advisor makes the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Portfolio's investments. Prior to October 1, 1998, Morgan was the
investment advisor. JPMIM, a wholly owned subsidiary of J.P. Morgan, is a
registered investment adviser under the Investment Advisers Act of 1940, as
amended, manages employee benefit funds of corporations, labor unions and state
and local governments and the accounts of other institutional investors,
including investment companies. Certain of the assets of employee benefit
accounts under its management are invested in commingled pension trust funds for
which Morgan serves as trustee.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of approximately $275 billion.
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
<PAGE>
industry, in its investment management divisions located in New York,
London, Tokyo, Frankfurt 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 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.
Morgan, also a wholly owned subsidiary of J.P. Morgan, is a bank
holding company organized under the laws of the State of Delaware. Morgan, whose
principal offices are at 60 Wall Street, New York, New York 10260, is a New York
trust company which conducts a general banking and trust business. Morgan is
subject to regulation by the New York State Banking Department and is a member
bank of the Federal Reserve System. Through offices in New York City and abroad,
Morgan offers a wide range of services, primarily to governmental,
institutional, corporate and high net worth individual customers in the United
States and throughout the world.
The Portfolio is managed by officers of the Advisor who, in acting for
their customers, including the Portfolio, do not discuss their investment
decisions with any personnel of J.P. Morgan or any personnel of other divisions
of the Advisor or with any of its affiliated persons, with the exception of
certain other investment management affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Portfolio 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 0.70% of the Portfolio's average daily net assets. The
advisory fees paid by the Portfolio to the Advisor for the period March 7, 1997
(commencement of operations) through December 31, 1997 were $652,074.
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 Portfolio's Trustees who are not parties to the
Investment Advisory Agreement or "interested persons" as defined by the 1940 Act
cast in person at a meeting called for the purpose of voting on such approval.
The Investment Advisory Agreement will terminate automatically if assigned and
is terminable at any time without penalty by a vote of a majority of the
Trustees of the Portfolio Trust, or by a vote of the holders of a majority of
the Portfolio's outstanding voting securities, on 60 days' written notice to the
Advisor and by the Advisor on 90 days' written notice to the Portfolio.
The Glass-Steagall Act and other applicable laws generally prohibit
banks and their subsidiaries, such as the Advisor, from engaging in the business
of underwriting or distributing securities, and the Board of
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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. The
Advisor 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
the Advisor 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 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 provides administrative and related
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 is based on the ratio of its net assets to the
aggregate net assets of the J.P. Morgan Funds, the J.P. Morgan Institutional
Funds, the Master Portfolios, and certain other investment companies subject to
similar agreements with FDI. The administrative fees paid by the Portfolio to
FDI for the period March 7, 1997 (commencement of operations) through December
31, 1997 were $2,152.
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
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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 J.P.
Morgan Funds, the J.P. Morgan Institutional Funds, the Master Portfolios, the
other investors in the Master Portfolios for which Morgan provides similar
services and J.P. Morgan Series Trust. The fees paid by the Portfolio to Morgan
as services agent for the period March 7, 1997 (commencement of operations)
through December 31, 1997 were $28,564.
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
Trust are PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York 10036. PricewaterhouseCoopers LLP conducts an annual audit of the financial
statements of the Portfolio, assists in the preparation and/or review of 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
extraordinary expenses applicable to the Portfolio Trust. Such expenses also
include brokerage expenses.
Morgan has agreed that it will, at least through April 30, 1999,
maintain the Portfolio's total operating expenses at the annual rate of 1.25% of
the Portfolio's average daily net assets. This expense limitation does not cover
extraordinary expenses during the period. There is no assurance that J.P. Morgan
will continue this waiver beyond 4/30/99.
THE YEAR 2000 INITIATIVE. With the new millennium rapidly approaching,
organizations are examining their computer systems to ensure they are year 2000
compliant. The issue, in simple terms, is that many existing computer systems
use only two numbers to identify a year in the date field with the assumption
that the first two digits are always 19. As the century is implied in the date,
on January 1, 2000, computers that are not year 2000 compliant will assume the
year is 1900. Systems that calculate, compare, or sort using the incorrect date
will cause erroneous results, ranging from system malfunctions to incorrect or
incomplete transaction processing. If not remedied, potential risks include
business interruption or shutdown, financial loss, reputation loss, and/or legal
liability.
J.P. Morgan has undertaken a firmwide initiative to address the year 2000
issue and has developed a comprehensive plan to prepare, as appropriate,
<PAGE>
its computer systems. Each business line has taken responsibility for
identifying and fixing the problem within its own area of operation and for
addressing all interdependencies. A multidisciplinary team of internal and
external experts supports the business teams by providing direction and firmwide
coordination. Working together, the business and multidisciplinary teams have
completed a thorough education and awareness initiative and a global inventory
and assessment of J.P. Morgan's technology and application portfolio to
understand the scope of the year 2000 impact at J.P. Morgan. J.P. Morgan
presently is renovating and testing these technologies and applications in
partnership with external consulting and software development organizations, as
well as with year 2000 tool providers. J.P. Morgan is on target with its plan to
substantially complete renovation, testing, and validation of its key systems by
year-end 1998 and to participate in industry-wide testing (or streetwide
testing) in 1999. J.P. Morgan is also working with key external parties,
including clients, counterparties, vendors, exchanges, depositories, utilities,
suppliers, agents and regulatory agencies, to stem the potential risks the year
2000 problem poses to J.P. Morgan and to the global financial community.
Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $95 million in 1997. In 1998, J.P. Morgan will continue
its efforts to prepare its systems for the year 2000. The total cost to become
year-2000 compliant is estimated at $250 million, for internal systems
renovation and testing, testing equipment, and both internal and external
resources working on the project. Remaining costs will be incurred primarily in
1998. The costs associated with J.P. Morgan becoming year-2000 compliant will be
borne by J.P. Morgan and not the Portfolio.
THE EURO. Effective January 1, 1999 the euro, a single multinational
currency, will replace the national currencies of certain countries in the
Economic Monetary Union (EMU). Conversion rates among EMU countries will be
fixed on December 31, 1998, however, existing currencies will still be used
through July 1, 2002. During this transition period, transactions may be settled
in either euro or existing currencies, but financial markets and payment systems
are expected to use the euro exclusively. Beginning January 1, 1999, J.P. Morgan
intends to conduct and settle all Portfolio transactions, where appropriate, in
the euro.
J.P. Morgan has identified the following potential risks to the
Portfolio, after the conversion: The risk that valuation of assets are not
properly redenominated; currency risk resulting from increased volatility in
exchange rates between EMU countries and non-participating countries; the
inability any of the Portfolio, its service providers and the issuers of the
Portfolio's portfolio securities to make information technology updates timely;
and the potential unenforceability of contracts. There have been recent laws and
regulations designed to ensure the continuity of contracts, however there is a
risk that the valuation of contracts will be negatively impacted after the
conversion. J.P. Morgan is working to avoid these problems and to obtain
assurances from other service providers that they are taking similar steps.
However, it is not certain that these actions will be sufficient to prevent
problems associated with the conversion from adversely impacting Portfolio
operations and interest holders.
The I.R.S has concluded that euro conversion will not cause a U.S.
taxpayer to realize gain or loss to the extent taxpayer's rights and obligations
are altered solely by reason of the conversion.
<PAGE>
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Advisor places orders for the Portfolio for all purchases and sales
of portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Portfolio. See Item 13 above.
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolio will be undertaken principally
to accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolio may engage in short term trading
consistent with its objective.
In connection with portfolio transactions for the Portfolio, the
Advisor intends to seek best execution on a competitive basis for both purchases
and sales of securities.
Subject to the overriding objective of obtaining the best possible
execution of orders, the Advisor may allocate a portion of the Portfolio's
portfolio brokerage transactions to affiliates of the Advisor. In order for
affiliates of the Advisor to effect any portfolio transactions for the
Portfolio, the commissions, fees or other remuneration received by such
affiliates must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the
Trustees of the Portfolio 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.
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If the Portfolio effects a closing purchase transaction with respect to
an option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Portfolio will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Portfolio may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
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.
<PAGE>
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 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 willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES 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 Portfolio computes its net asset value once daily on Monday through
Friday at the time described in Part A. The net asset value 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. The Portfolio may also
close for purchases and redemptions at such other times as may be determined by
the Board of Trustees to the extent permitted by applicable law. The days on
which net asset value is determined are the
<PAGE>
Portfolio's business days.
The value of investments listed on a domestic securities exchange, is
based on the last sale prices on such exchange. In the absence of recorded
sales, investments are valued 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 prices on such exchange. Unlisted securities are
valued at the average of the quoted bid and asked prices in the OTC 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, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S.
dollars at the prevailing currency exchange rate on the valuation date.
Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) 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 of the New York Stock Exchange
(normally 4:00 p.m.) 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.
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.
<PAGE>
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.
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 is acquired or a 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.
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 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 or 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
<PAGE>
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 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 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 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 exclusive 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.
<PAGE>
ITEM 23. FINANCIAL STATEMENTS.
The Portfolio Trust's December 31, 1997 annual report to investors
filed with the Securities and Exchange Commission pursuant to Section 30(b) of
the 1940 Act and Rule 30b2-1 thereunder with respect to The Emerging Markets
Debt Portfolio is incorporated herein by reference (Accession Number
0001047469-98-008098, filed February 27, 1998).
<PAGE>
APPENDIX A3
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small
degree.
A - Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face 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.
B - An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
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.
<PAGE>
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.
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.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
<PAGE>
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Commercial Paper, including Tax Exempt
Prime-1 - Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Short-Term Tax Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
<PAGE>
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
THE EMERGING MARKETS DEBT PORTFOLIO
Schedule of Investments at December 31, 1997
Statement of Assets and Liabilities at December 31, 1997
Statement of Operations for the period March 7, 1997 (commencement of
operations) to December 31, 1997 Statement of Changes in Net Assets for
the period March 7, 1997 (commencement of operations) to December 31,
1997 Supplementary Data for the period March 7, 1997 (commencement of
operations) to December 31, 1997 Notes to Financial Statements at
December 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.3
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) Investment Advisory Agreement between the Registrant and J.P. Morgan
Investment Management Inc. (filed herewith)
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
27 Financial Data Schedule. (filed herewith)
<PAGE>
- ----------------------
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).
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
Number of record holders as of October 31, 1998: 2
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.
JPMIM is a Delaware corporation which is a wholly-owned subsidiary of J.P.
Morgan & Co. Incorporated.
JPMIM is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, and is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated. JPMIM manages employee benefit funds of corporations, labor unions
and state and local governments and the accounts of other institutional
investors, including investment companies.
To the knowledge of the Registrant, none of the directors or
executive officers of JPMIM is or has been during the past two fiscal years
engaged in any other business, profession, vocation or employment of a
substantial nature, except that certain officers and directors of JPMIM also
hold various positions with, and engage in business for, J.P. Morgan & Co.
Incorporated, which owns all the outstanding stock of JPMIM.
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
<PAGE>
J.P. Morgan Investment Management Inc. and Morgan Trust Guaranty Company of
New York, 522 Fifth Avenue, New York, New York 10036 and/or 60 Wall Street, New
York, New York 10260-0060 (records relating to their functions as investment
adviser and administrative services agent).
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02109 or 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as custodian and 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.
<PAGE>
SIGNATURE
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 6th day of November,
1998.
THE SERIES PORTFOLIO
By: /s/ Jacqueline Henning
--------------------------------------------
Jacqueline Henning
Assistant Secretary and Assistant Treasurer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
EX-5(a) Investment Advisory Agreement
EX-27 Financial Data Schedule for The Emerging Markets Debt
Portfolio
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE REPORT ON
FORM N-SAR DATED DECEMBER 31, 1997 FOR THE EMERGING MARKETS DEBT PORTFOLIO AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<CIK>0000943180
<NAME> J.P. MORGAN FUNDS
<SERIES>
<NUMBER> 01
<NAME> THE EMERGING MARKETS DEBT PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 16982
<INVESTMENTS-AT-VALUE> 16739
<RECEIVABLES> 1622
<ASSETS-OTHER> 167
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18528
<PAYABLE-FOR-SECURITIES> 6240
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 116
<TOTAL-LIABILITIES> 6356
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12172
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 12172
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9768
<OTHER-INCOME> 0
<EXPENSES-NET> 851
<NET-INVESTMENT-INCOME> 8917
<REALIZED-GAINS-CURRENT> (5257)
<APPREC-INCREASE-CURRENT> (225)
<NET-CHANGE-FROM-OPS> 3435
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 12172
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 652
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 851
<AVERAGE-NET-ASSETS> 113716
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> .91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
THE SERIES PORTFOLIO
INVESTMENT ADVISORY AGREEMENT
Agreement, made this 1st day of October, 1998, between The Series
Portfolio, a master trust organized under the law of the State of New York (the
"Series Portfolio") and J.P. Morgan Investment Management, Inc., a Delaware
corporation (the "Advisor"),
WHEREAS, the Series Portfolio is an open-end diversified management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Series Portfolio desires to retain the Advisor to render
investment advisory services to the Series Portfolio's existing separate and
distinct subtrusts or series (each, a "Portfolio") and other future Portfolios
as agreed to from time to time between the Series Portfolio and the Advisor, and
the Advisor is willing to render such services;
NOW, THEREFORE, this Agreement
W I T N E S S E T H:
that in consideration of the premises and mutual promises hereinafter set forth,
the parties hereto agree as follows:
1. The Series Portfolio hereby appoints the Advisor to act as
investment adviser to the Portfolios for the period and on the terms set forth
in this Agreement. The Advisor accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. Subject to the general supervision of the Trustees of the Series
Portfolio, the Advisor shall manage the investment operations of each Portfolio
and the composition of the Portfolio's holdings of securities and investments,
including cash, the purchase, retention and disposition thereof and agreements
relating thereto, in accordance with the Portfolio's investment objectives and
policies as stated in the Series Portfolio's registration statement on Form
N-1A, as such may be amended from time to time (the "Registration Statement"),
with respect to the Portfolio, under the Investment Company Act of 1940, as
amended (the "1940 Act"), and subject to the following understandings:
(a) the Advisor shall furnish a continuous investment program
for each Portfolio and determine from time to time what investments or
securities will be purchased, retained, sold or lent by the Portfolio,
and what portion of the assets will be invested or held uninvested as
cash;
(b) the Advisor shall use the same skill and care in the
management of each Portfolio's investments as it uses in the
administration of other accounts for which it has investment
responsibility as agent;
(c) the Advisor, in the performance of its duties and
obligations under this Agreement, shall act in conformity with the
Series Portfolio's Declaration of Trust (such Declaration of Trust, as
presently in effect and as amended from time to time, is herein called
the "Declaration of Trust"), the Series Portfolio's By-Laws (such
By-Laws, as presently in effect and as amended from time to time, are
herein called the "By-Laws") and the Registration Statement and with
the instructions and directions of the Trustees of the Series Portfolio
and will conform to and comply with the requirements of the 1940 Act
and all other applicable federal and state laws and regulations;
(d) the Advisor shall determine the securities to be
purchased, sold or lent by each Portfolio and as agent for the
Portfolio will effect portfolio transactions pursuant to its
determinations either directly with the issuer or with any broker
and/or dealer in such securities; in placing orders with brokers and/or
dealers the Advisor intends to seek best price and execution for
purchases and sales; the Advisor shall also determine whether the
Portfolio shall enter into repurchase or reverse repurchase agreements;
On occasions when the Advisor deems the purchase or sale of a
security to be in the best interest of one of the Portfolios as well as
other customers of the Advisor, including any other of the Portfolios,
the Advisor may, to the extent permitted by applicable laws and
regulations, but shall not be obligated to, aggregate the securities to
be so sold or purchased in order to obtain best execution, including
lower brokerage commissions, if applicable. In such event, allocation
of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Advisor in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Portfolio;
(e) the Advisor shall maintain books and records with respect
to each Portfolio's securities transactions and shall render to the
Series Portfolio's Trustees such periodic and special reports as the
Trustees may reasonably request; and
(f) the investment management services of the Advisor to any
of the Portfolios under this Agreement are not to be deemed exclusive,
and the Advisor shall be free to render similar services to others.
3. The Series Portfolio has delivered copies of each of the following
documents to the Advisor and will promptly notify and deliver to it all future
amendments and supplements, if any:
(a) The Declaration of Trust;
(b) The By-Laws;
(c) Certified resolutions of the Trustees of the Series
Portfolio authorizing the appointment of the Advisor and approving the
form of this Agreement;
(d) The Series Portfolio's Notification of Registration on
Form N-8A and Registration Statement as filed with the Securities and
Exchange Commission (the "Commission").
4. The Advisor shall keep each Portfolio's books and records required
to be maintained by it pursuant to paragraph 2(e). The Advisor agrees that all
records which it maintains for any Portfolio are the property of the Series
Portfolio and it will promptly surrender any of such records to the Series
Portfolio upon the Series Portfolio's request. The Advisor further agrees to
preserve for the periods prescribed by Rule 31a-2 of the Commission under the
1940 Act any such records as are required to be maintained by the Advisor with
respect to any Portfolio by Rule 31a-1 of the Commission under the 1940 Act.
5. During the term of this Agreement the Advisor will pay all expenses
incurred by it in connection with its activities under this Agreement, other
than the cost of securities and investments purchased for a Portfolio (including
taxes and brokerage commissions, if any).
6. For the services provided and the expenses borne pursuant to this
Agreement, each Portfolio will pay to the Advisor as full compensation therefor
a fee at an annual rate set forth on Schedule A attached hereto. Such fee will
be computed daily and payable as agreed by the Series Portfolio and the Advisor,
but no more frequently than monthly.
7. The Advisor shall not be liable for any error of judgment or mistake
of law or for any loss suffered by any Portfolio in connection with the matters
to which this Agreement relates, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the 1940 Act) or a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement.
8. This Agreement shall continue in effect with respect to each
Portfolio for a period of more than two years from the Portfolio's commencement
of investment operations only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated with respect to each
Portfolio at any time, without the payment of any penalty, by vote of a majority
of all the Trustees of the Series Portfolio or by vote of a majority of the
outstanding voting securities of that Portfolio on 60 days' written notice to
the Advisor, or by the Advisor at any time, without the payment of any penalty,
on 90 days' written notice to the Series Portfolio. This Agreement will
automatically and immediately terminate in the event of its "assignment" (as
defined in the 1940 Act).
9. The Advisor shall for all purposes herein be deemed to be an
independent contractor and shall, unless otherwise expressly provided herein or
authorized by the Trustees of the Series Portfolio from time to time, have no
authority to act for or represent the Series Portfolio in any way or otherwise
be deemed an agent of the Portfolios.
10. This Agreement may be amended, with respect to any Portfolio, by
mutual consent, but the consent of the Series Portfolio must be approved (a) by
vote of a majority of those Trustees of the Series Portfolio who are not parties
to this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of the Portfolio.
11. Notices of any kind to be given to the Advisor by the Portfolio
shall be in writing and shall be duly given if mailed or delivered to the
Advisor at 522 Fifth Avenue, New York, New York 10036, Attention: Funds
Management, or at such other address or to such other individual as shall be
specified by the Advisor to the Portfolio. Notices of any kind to be given to
the Portfolio by the Advisor shall be in writing and shall be duly given if
mailed or delivered to the Portfolio c/o State Street Cayman Trust Company at
Elizabethan Square, Shedden Road, George Town, Grand Cayman, Cayman Islands,
BWI, Attention: Treasurer, or at such other address or to such other individual
as shall be specified by the Portfolio to the Advisor.
12. The Trustees of the Series Portfolio have authorized the execution
of this Agreement in their capacity as Trustees and not individually, and the
Advisor agrees that neither the Trustees nor any officer or employee of the
Series Portfolio nor any Portfolio's investors nor any representative or agent
of the Series Portfolio or of the Portfolio(s) shall be personally liable upon,
or shall resort be had to their private property for the satisfaction of,
obligations given, executed or delivered on behalf of or by the Series Portfolio
or the Portfolio(s), that such Trustees, officers, employees, investors,
representatives and agents shall not be personally liable hereunder, and that it
shall look solely to the trust property for the satisfaction of any claim
hereunder.
13. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original.
14. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the 1st day of October,
1998.
THE SERIES PORTFOLIO
By:/s/Jacqueline Henning
Jacqueline Henning
Assistant Secretary
and Assistant Treasurer
J.P. MORGAN INVESTMENT MANAGEMENT, INC.
By:/s/Diane J. Minardi
Diane J. Minardi
Vice President
Schedule A - The Series Portfolio
Investment Advisory Fees
The European Equity Portfolio (effective 10/1/98)
.65% of the average daily net assets of the Portfolio
The Disciplined Equity Portfolio (effective 10/1/98)
.35% of the average daily net assets of the Portfolio
The International Opportunities Portfolio (effective 10/1/98)
.60% of the average daily net assets of the Portfolio
The Emerging Markets Debt Portfolio (effective 10/28/98)
.70% of the average daily net assets of the Portfolio
The U.S. Small Company Opportunities Portfolio (effective 10/1/98)
.60% of the average daily net assets of the Portfolio
