As filed with the Securities and Exchange Commission on November 29, 1999
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. 16
THE SERIES PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, MA 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (617) 557-0700
Margaret W. Chambers, 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, 2, 3, 5 and 9 have been omitted pursuant to paragraph 2(b)
of Instruction B of the General Instructions to Form N-1A.
ITEM 4. Investment Objectives, Principal Investment Strategies, and Principal
Risks for The Emerging Markets Debt Portfolio (the "Portfolio").
INVESTMENT OBJECTIVE.
The Portfolio's investment objective, which is non-fundamental and can be
changed without the approval of interest holders, is to provide high total
return from a portfolio of fixed income securities of emerging markets issuers.
PORTFOLIO MANAGER
The portfolio management team is led by Michael Cembalest, managing director,
who has been at J.P. Morgan from 1988 to January 1998 and since June 1998, and
Andrew F. Goldberg, vice president, who has been at J.P. Morgan since 1990.
Prior to joining the portfolio management team, 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. Previously,
Mr. Goldberg oversaw the capital research group's research into fixed income and
derivatives markets.
PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
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 will generally range between
three and five 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).
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. These risks and portfolio
volatility are likely to be compounded when 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. Since the Portfolio seeks higher returns
by investing in 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 returns.
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 when consistent with the Portfolio's investment
approach, takes positions in many different areas, 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.
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 common
measurement of a security's sensitivity to interest rate movements. For
securities owned by the Portfolio, duration measures the average time needed to
receive the present value of all principal and interest payments by analyzing
cash flows and interest rate movements. The Portfolio's duration is generally
shorter than the Portfolio's average maturity because the maturity of a security
only measures the time until final payment is due. The Portfolio's target
duration typically remains 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.
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.
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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
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BANK OBLIGATIONS Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
Risk: credit, currency, liquidity, political
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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
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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
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CORPORATE BONDS Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
Risk: credit, currency, interest rate, liquidity, market, political, valuation
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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
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MORTGAGE DOLLAR ROLLS The purchase of domestic or foreign mortgage-backed
securities with the promise to purchase similar securities upon the maturity of
the original security. Segregated accounts are used to offset leverage risk.
Risk: currency, extension, interest rate, leverage, liquidity, market,
political, prepayment
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PARTICIPATION INTERESTS Interests that represent a share of domestic and foreign
bank debt or similar securities or obligations.
Risk: credit, currency, extension, interest rate, liquidity, political,
prepayment
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PRIVATE PLACEMENTS Bonds or other investments that are sold directly to an
institutional investor.
Risk: credit, interest rate, liquidity, market, valuation
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REPURCHASE AGREEMENTS Contracts whereby the Portfolio agrees to purchase a
security and resell it to the seller on a particular date and at a specific
price.
Risk: credit
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REVERSE REPURCHASE AGREEMENTS Contracts whereby the Portfolio sells a security
and agrees to repurchase it from a buyer on a particular date and at a specific
price. Considered a form of borrowing.
Risk: credit
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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
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SWAPS Contractual agreement whereby a domestic or foreign 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
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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
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ZERO COUPON, PAY-IN-KIND, AND DEFERRED PAYMENT SECURITIES Domestic and foreign
securities offering non-cash or delayed-cash payment. Their prices are 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
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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.
CURRENCY RISK The risk currency exchange rate fluctuations may reduce gains or
increase losses on foreign investments.
EXTENSION RISK The risk rise in interest rates will extend the life of a
mortgage-backed security to a date later than the anticipated prepayment rate,
causing the value of the investment to fall.
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, will 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.
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.
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POTENTIAL RISKS POLICIES TO BALANCE
RISK AND REWARD
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MARKET CONDITIONS
- -The Portfolio's price, -Under normal circumstances
yield and total return the Portfolio plans to
will fluctuate in remain fully invested
response to bond market in bonds and other fixed
movements income securities
-The Portfolio seeks to
- -The value of most bonds limit risk and enhance
will fall when interest total returns or yields
rates rise; the longer through careful management,
a bond's maturity and sector allocation,
the lower its credit individual securities
quality, the more its selection, and
value typically falls duration management
-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
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CREDIT QUALITY
- -The default of an -The Portfolio
issuer would leave maintains its own
the Portfolio with policies for
unpaid interest or balancing credit
principal quality against
potential yields and
gains in light of
its investment goals
- -Junk bonds (those -J.P. Morgan develops
rated BB/Ba or lower) its own ratings of
have a higher risk of unrated securities
default, tend to be and makes a credit
less liquid, and may quality determination
be more difficult to for unrated securities
value
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FOREIGN INVESTMENTS
- -The Portfolio could lose -Foreign bonds are a
money because of foreign primary investment
government actions, for the Portfolio
political instability,
or lack of adequate and -To the extent that
accurate information the Portfolio invests
in foreign bonds, it
- -Currency exchange rate may manage the
movements could reduce currency exposure of
gains or create losses its foreign
investments relative
- -Currency and investment to its benchmark, and
risks tend to be higher may hedge back into
in emerging markets the U.S. dollar from
time to time (see
also "Derivatives"
below); these currency
management techniques may
not be available for
certain emerging markets
investments
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MANAGEMENT CHOICES
- -The Portfolio could -J.P. Morgan focuses
underperform its its active
benchmark due to management on those
its sector, securities, 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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DERIVATIVES
- -Derivatives such as -The Portfolio uses
futures, options, swaps & derivatives for hedging
foreign currency forward and for risk management
contracts that are used (i.e., to adjust
for hedging the portfolio duration or to
or specific securities establish or adjust
may not fully offset the exposure to particular
underlying positions(1) securities, markets, or
and this could result currencies); risk
in losses to the management may include
Portfolio that would management of the
not have otherwise Portfolio's exposure
occurred relative to its
benchmark
-Derivatives used for -The Portfolio only
risk management may not establishes hedges
have the intended effects that it expects
and may result in losses will be highly
or missed opportunities correlated with
underlying positions
- -The counterparty to a -While the
derivatives contract Portfolio may use
could default derivatives that
ncidentally
- -Derivatives that involve involve leverage,
leverage could magnify it does not use
losses them for the
specific purpose
- - Certain types of derivatives of leveraging the
involve costs to the Portfolio Portfolio
which can reduce returns
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SECURITIES LENDING
- -When the Portfolio -J.P. Morgan maintains
lends a security, there a list of approved
is a risk that the borrowers
loaned securities may not
be returned if the borrower -The Portfolio receives
defaults collateral equal to at
least 100% of the
current value of
securities loaned
- -The collateral will be subject
to the risks of the securities in
which it is invested -The lending agents
indemnify the Portfolio
against borrower
default
-J.P. Morgan's
collateral
investment guidelines
limit the quality and
duration of collateral
investment to minimize
losses
-Upon recall, the
borrower must return
the securities loaned
within the normal
settlement period
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ILLIQUID HOLDINGS
- -The Portfolio could -The Portfolio may
have difficulty valuing not invest more
holdings precisely than 15% of net
assets in illiquid
- -The Portfolio could be holdings
unable to sell these
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 reverse repurchase
agreements) and,
for temporary or
extraordinary
purposes, may
borrow from banks
up to 33 1/3% of
the value of its
assets
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WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- -When the Portfolio buys -The Portfolio uses
securities before issue segregated
or for delayed delivery, accounts to offset
it could be exposed to leverage risk
leverage risk if it
does not use segregated
accounts
SHORT-TERM TRADING
- -Increased trading -The Portfolio
would raise the may use short-
transaction costs term trading to
take advantage of
- -Increased short-term attractive or unexpec-
capital gains ted opportunities or
distributions would to meet demands
raise shareholders' generated by share-
income tax liability holder activity. The
Portfolio's
turnover rate for
the seven months
ended 7/31/99
was 555%.
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(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.
ITEM 6. MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
BUSINESS STRUCTURE
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.
MANAGEMENT AND ADMINISTRATION
The Board of Trustees provides broad supervision over the affairs of the
Portfolio. The Portfolio has retained the services of J.P. Morgan Investment
Management Inc. ("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.
The Portfolio Trust has entered into a Portfolio Services Agreement
with Pierpont Group, Inc. ("Pierpont Group") to assist the Trustees in
exercising their overall supervisory responsibilities for the Portfolio Trust's
affairs. The fees to be paid under the agreement approximate the reasonable cost
of Pierpont Group in providing these services to the Portfolio and other
registered investment companies subject to similar agreements with Pierpont
Group. Pierpont Group was organized in 1989 at the request of the Trustees of
The Pierpont Family of Funds for the purpose of providing these services at cost
to those funds. See Item 14 in Part B. The principal offices of Pierpont Group
are located at 461 Fifth Avenue, New York, New York 10017.
Advisory Services 0.70% of the Portfolio's
average net assets
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Administrative services (fee shared Portfolio's pro-rata portions
with Funds Distributor, Inc.) of 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
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J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in a fund.
Year 2000 Portfolio operations and shareholders could be adversely affected if
the computer systems used by J.P. Morgan, the Portfolio's other service
providers and other entities with computer systems linked to the Portfolio do
not properly process and calculate January 1, 2000 and dates thereafter. 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 these date-related problems
from adversely impacting Portfolio operations and shareholders. In addition, to
the extent that operations of issuers of securities held by the Portfolio are
impaired by date-related problems or prices of securities decline as a result of
real or perceived date-related problems of issuers held by the Portfolio or
generally, the net asset value of the Portfolio will decline. While the
Portfolio cannot predict at this time the degree of impact, it is possible that
foreign markets will be less prepared than those in the U.S.
ITEM 7. SHAREHOLDER INFORMATION.
INVESTING
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by other investment companies, insurance company separate accounts,
common or commingled trust funds, or similar organizations or entities which are
"accredited investors" as defined in Rule 501 under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
received in "good order" by the Portfolio Trust. The net asset value of the
Portfolio is determined at the Valuation Time on each Portfolio Business Day.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., monies credited to the account
of the Custodian by a Federal Reserve Bank.)
The Portfolio may, at its own option, accept securities in payment for
investments in its beneficial interests. The securities delivered in kind are
valued by the method described in Net Asset Value as of the business day prior
to the day the Portfolio receives the securities. Securities may be accepted in
payment for beneficial interests only if they are, in the judgment of Morgan,
appropriate investments for the Portfolio. In addition, securities accepted in
payment for beneficial interests must: (i) meet the investment objective and
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.
ADDING TO YOUR ACCOUNT
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.
SELLING SHARES
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.
REDEMPTION IN KIND
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.
ACCOUNT AND TRANSACTION POLICIES
Business Hours and NAV Calculations
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").
DIVIDENDS AND DISTRIBUTIONS
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 at 60 State Street, Boston,
Massachusetts 02109 or by calling FDI at (617)557-7000.
TAX CONSIDERATIONS
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.
ITEM 8. DISTRIBUTION AGREEMENTS: 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 B-1
Investment Objective and Policies B-1
Management of the Portfolio Trust B-22
Control Persons and Principal Holders
of Securities B-25
Investment Advisory and Other Services B-26
Brokerage Allocation and Other Practices B-29
Capital Stock and Other Securities B-30
Purchase, Redemption and Pricing of
Securities Being Offered B-32
Tax Status B-33
Underwriters B-35
Calculations of Performance Data B-35
Financial Statements B-35
<PAGE>
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
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 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.
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 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 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 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 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 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.
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 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 Securities and Exchange Commission ("SEC") has granted the Portfolio an
exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets the following conditions: (1) the Portfolio
may invest in one or more of the permitted money market funds up to an aggregate
limit of 25% of its assets; and (2) the Advisor will waive and/or reimburse its
advisory fee from the Portfolio in an amount sufficient to offset any doubling
up of investment advisory and shareholder servicing fees.
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
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
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
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.
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 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 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. 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, 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. Although the
Portfolio will not be a commodity pool, certain derivatives subject the
Portfolio to the rules of the Commodity Futures Trading Commission which limit
the extent to which the Portfolio can invest in such derivatives. The Portfolio
may invest in futures contracts and options with respect thereto for hedging
purposes without limit. However, the Portfolio may not invest in such contracts
and options for other purposes if the sum of the amount of initial margin
deposits and premiums paid for unexpired options with respect to such contracts,
other than for bona fide hedging purposes, exceeds 5% of the liquidation value
of the Portfolio's assets, after taking into account unrealized profits and
unrealized losses on such contracts and options; provided, however, that in the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation.
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 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%; for the
fiscal year ended December 31, 1998 and for the seven month period ended July
31, 1999: 791% and 555%, respectively. 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 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.
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; Former 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 Country 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.
- --------
1 Mr. Healey is an "interested person" (as defined in the 1940 Act) of the
Portfolio. Mr. Healey is also an "interested person" (as defined in the 1940
Act) of the Advisor due to his son's affiliation with JPMIM.
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.
Trustee compensation expenses paid to each Trustee for the calendar year
ended December 31, 1998 is set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------- ------------------------ -----------------------------------------------
TOTAL TRUSTEE COMPENSATION ACCRUED BY THE
AGGREGATE TRUSTEE MASTER PORTFOLIOS(*), J.P. MORGAN FUNDS, J.P.
COMPENSATION PAID BY MORGAN INSTITUTIONAL FUNDS AND J.P. MORGAN
THE PORTFOLIO DURING SERIES TRUST DURING 1998(**)
1998
NAME OF TRUSTEE
- ---------------------------------- ------------------------ -----------------------------------------------
- ---------------------------------- ------------------------ -----------------------------------------------
$88
Frederick S. Addy, $75,000
Trustee
- ---------------------------------- ------------------------ -----------------------------------------------
- ---------------------------------- ------------------------ -----------------------------------------------
$88
William G. Burns, $75,000
Trustee
- ---------------------------------- ------------------------ -----------------------------------------------
- ---------------------------------- ------------------------ -----------------------------------------------
$88
Arthur C. Eschenlauer, $75,000
Trustee
- ---------------------------------- ------------------------ -----------------------------------------------
- ---------------------------------- ------------------------ -----------------------------------------------
$88
Matthew Healey, $75,000
Trustee(***), Chairman and
Chief Executive Officer
- ---------------------------------- ------------------------ -----------------------------------------------
- ---------------------------------- ------------------------ -----------------------------------------------
$88
Michael P. Mallardi, $75,000
Trustee
- ---------------------------------- ------------------------ -----------------------------------------------
</TABLE>
(*) Includes the Portfolio and 18 other portfolios (collectively, the "Master
Portfolios") for which JPMIM acts as investment advisor.
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 17 investment companies (14 investment
companies comprising the Master Portfolios, J.P. Morgan Funds, J.P. Morgan
Institutional Funds and J.P. Morgan Series Trust) in the fund complex.
(***) During 1998, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $157,400,
contributed $23,610 to a defined contribution plan on his behalf and paid
$17,700 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 For
the period March 7, 1997 (commencement of operations) through December 31, 1997:
$3,074. For fiscal year ended December 31, 1998 and for the seven months ended
July 31, 1999: $423 and $217, respectively. 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 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 Country 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 advised or administered by 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. His date of birth is March 31,
1969.
JOHN P. COVINO; Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of FDI. Prior to
November 1998, Mr. Covino was employed by Fidelity Investments where he held
multiple positions in their Institutional Brokerage Group. Prior to joining
Fidelity, Mr. Covino was employed by SunGard Brokerage systems where he was
responsible for the technology and development of the accounting product group.
His date of birth is October 8, 1963.
JACQUELINE HENNING; Assistant Secretary and Assistant Treasurer of the
Portfolio only. Managing Director, State Street Cayman Trust Company, Ltd. since
October 1994. 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
27, 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. 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. His date of birth is December 24, 1964.
KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
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. Her
date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York since 1990. 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.
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. 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
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 July 31, 1999, 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 $326 billion.
J.P. Morgan has a long history of service as adviser, underwriter and
lender to an extensive roster of major companies and as a financial advisor to
national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt and Singapore to cover companies, industries and countries on
site. In addition, the investment management divisions employ approximately 380
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 was $652,074. For the
fiscal year ended December 31, 1998: $106,372. For the seven months ended July
31, 1999: $73,273.
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 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: $2,152. For the fiscal year ended December 31, 1998: $274. For the
seven months ended July 31, 1999: $129.
ADMINISTRATIVE SERVICES AGENT. The Portfolio Trust has entered into a
Restated Administrative Services Agreement (the "Services Agreement") with
Morgan, pursuant to which Morgan is responsible for certain administrative and
related services provided to the Portfolio.
Under the Services Agreement, effective August 1, 1996, the Portfolio
has agreed to pay Morgan fees equal to its allocable share of an annual
complex-wide charge. This charge is calculated daily based on the aggregate net
assets of the Master Portfolios and J.P. Morgan Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their aggregate
average daily net assets and 0.04% of their aggregate average daily net assets
in excess of $7 billion, less the complex-wide fees payable to FDI. The portion
of this charge payable by the Portfolio is determined by the proportionate share
that its net assets bear to the total net assets of the 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:
$28,564. For the fiscal year ended December 31, 1998: $4,349. For the seven
months ended July 31, 1999: $2,702.
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, until further notice, 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. For the period March 7, 1997 (commencement of
operations) through December 31, 1997: N/A. For the fiscal year ended December
31, 1998 and for the seven months ended July 31, 1999, J.P. Morgan reimbursed
the Portfolio $27,722 and $47,534, respectively.
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.
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.
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 Portfolio's business days.
The Portfolio values securities that are listed on an exchange using
prices supplied daily by an independent pricing service that are based on the
last traded price on a national securities exchange or in the absence of
recorded trades, at the readily available mean of the bid and asked prices on
such exchange, if such exchange or market constitutes the broadest and most
representative market for the security. Securities listed on a foreign exchange
are valued at the last traded price or, in the absence of recorded trades, at
the readily available mean of the bid and asked prices on such exchange
available before the time when net assets are valued. Independent pricing
service procedures may also include the use of prices based on yields or prices
of securities of comparable quality, coupon, maturity and type, indications as
to values from dealer, operating data, and general market conditions. Unlisted
securities may be valued at the quoted bid price in the over-the-counter market
provided by a principal market maker or dealer. If prices are not supplied by
the portfolio's independent pricing service or principal market maker or dealer,
such securities are priced using fair values in accordance with procedures
adopted by the portfolio's Trustees. All short-term securities with a remaining
maturity of sixty days or less are valued by the amortized cost method.
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 following discussion of tax consequences is based on U.S. federal
tax laws in effect on the date of this Statement of Additional Information.
These laws and regulations are subject to change by legislative or
administrative action, possibly on a retroactive basis.
The Portfolio Trust is organized as a New York trust. The Portfolio
Trust should not be subject to any income or franchise tax in the State of New
York. The Portfolio should be taxed as a partnership for Federal income tax
purposes and should not be subject to Federal income tax. Each investor in the
Portfolio will be required to include in its own tax return its share (as
determined in accordance with the governing instruments of the Portfolio) of the
Portfolio's ordinary income, capital gains and losses, deductions and other
items of income in determining its income tax liability. The determination of
such share will be made in accordance with the Code, and regulations promulgated
thereunder.
Although, as described above, the Portfolio will not be subject to
federal income tax, it will file appropriate income tax returns.
It is intended that the Portfolio's assets will be managed in such a
way that an investor in the Portfolio will be able to satisfy the requirements
of Subchapter M of the Code. To ensure that investors will be able to satisfy
the requirements of subchapter M, the Portfolio must satisfy certain gross
income and diversification requirements.
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 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.
The Portfolio may invest in equity securities of foreign issuers. If
the Portfolio purchases shares in certain foreign corporations (referred to as
passive foreign investment companies ("PFICs") under the Code, the Fund may be
subject to federal income tax on a portion of any "excess distribution" from
such foreign corporation including any gain from the disposition of such shares,
even though a portion of such income may have to be distributed as a taxable
dividend by the Fund to its shareholders. In addition, certain interest charges
may be imposed on the Fund as a result of any such distributions. Alternatively,
a Fund may in some cases be permitted to include each year in its income and
distribute to shareholders a pro rata portion of the PFIC's income, whether or
not distributed to the Fund.
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.
THE YEAR 2000 INITIATIVE. With the new millennium rapidly approaching,
organizations will continue to examine their computer systems to ensure they are
year 2000 compliant. The issue, in simple terms, is that many existing computer
systems use only two numbers to identify a year in the date field with the
assumption that the first two digits are always "19." As the century is implied
in the date, on January 1, 2000, computers that are not year 2000 compliant will
assume the year is 1900. Systems that calculate, compare or sort using the
incorrect date will cause erroneous results, ranging from system malfunctions to
incorrect or incomplete transaction processing. If not remedied, potential risks
include business interruption or shutdown, financial loss, reputation loss
and/or legal liability.
J.P. Morgan has undertaken a firmwide initiative to address the year
2000 issue and has developed a comprehensive plan to prepare, as appropriate,
its computer systems. Each business line has taken responsibility for
identifying and fixing the problem within its own area of operation and for
addressing all interdependencies. A multidisciplinary team of internal and
external experts supports the business teams by providing direction and firmwide
coordination. Working together, the business and multidisciplinary teams have
completed a thorough education and awareness initiative and a global inventory
and assessment of J.P. Morgan's technology and application portfolio to
understand the scope of the year 2000 impact at J.P. Morgan. J.P. Morgan
presently is renovating and testing these technologies and applications in
partnership with external consulting and software development organizations, as
well as with year 2000 tool providers. J.P. Morgan has substantially completed
renovation, testing, and validation of its key systems and is preparing 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. For potential failure
scenarios where the risks are deemed significant and where such risk is
considered to have a higher probability of occurrence, J.P. Morgan is attempting
to develop business recovery/contingency plans. These plans will define the
infrastructure that should be put in place for managing a failure during the
millennium event itself.
Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $93.3 million in 1997, $132.7 million in 1998 and $36.6
million for the first eight months of 1999. Over the next month, 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 $300 million, for internal
systems renovation and testing, testing equipment and both internal and external
resources working on the project. The costs associated with J.P. Morgan becoming
year-2000 compliant will be borne by J.P. Morgan and not 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.
ITEM 23. FINANCIAL STATEMENTS.
The Portfolio Trust's July 31, 1999 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 0001047469-99-036629,
filed September 23, 1999).
<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.
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.
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 23. EXHIBITS
(a) Declaration of Trust of the Registrant.1
(a)(1) Amendment No. 1 to Declaration of Trust.3
(a)(2) Amendment No. 2 to Declaration of Trust.3
(b) Restated By-Laws of the Registrant.3
(c ) None
(d) Investment Advisory Agreement between the Registrant and Morgan
Guaranty Trust Company of New York ("Morgan Guaranty").1
(d)(1) Investment Advisory Agreement between the Registrant and J.P.
Morgan Investment Management Inc. 4
(e) None
(f) N/A
(g) Custodian Contract between the Registrant and State Street Bank
and Trust Company ("State Street").3
(h) Co-Administration Agreement between the Registrant and Funds
Distributor, Inc. dated August 1, 1996 ("Co-Administration
Agreement").2
(h)(1) Amended Exhibit I to Co-Administration Agreement.3
(h)(2) Transfer Agency and Service Agreement between the Registrant
and State Street.3
(h)(3) Restated Administrative Services Agreement between the Registrant and
Morgan dated August 1, 1996 ("Administrative
Services Agreement").2
(h)(4) Amended Exhibit I to Administrative Services Agreement.3
(h)(5) Amended and Restated Portfolio Fund Services Agreement between
the Registrant and Pierpont Group, Inc. dated July 11, 1996.2
(h)(6) Investment representation letters of initial investors.3
(i) None
(j) None
(k) N/A
(l) N/A
(m) N/A
(n) N/A
(o) None
- ----------------------
1 Incorporated herein by reference from Amendment No. 2 to Registrant's
Registration Statement as filed with the Securities and Exchange
Commission (the "SEC") on May 1, 1996 (Accession No.
0000943185-96-000061).
2 Incorporated herein by reference from Amendment No. 3 to Registrant's
Registration Statement as filed with the SEC on October 9, 1996
(Accession No. 0000912057-96-022359).
3 Incorporated herein by reference from Amendment No. 4 to Registrant's
Registration Statement as filed with the SEC on December 27, 1996
(Accession No. 0001016964-96-000062).
4 Incorporated herein by reference from Amendment No. 14 to Registrant's
Registration Statement as filed with the SEC on March 3, 1999
(Accession No. 0001016964-99-000018).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 25. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit hereto.
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 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
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, except those
set forth below, 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 27. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
Morgan Guaranty Trust Company of New York, 60 Wall Street, New York,
New York 10260-0060 or 522 Fifth Avenue, New York, New York 10036 (records
relating to its functions as investment adviser and administrative services
agent).
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 or 40 King Street West, Toronto, Ontario, Canada M5H 3Y8
(records relating to its functions as custodian and fund accounting and transfer
agent).
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts 02109 (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 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. 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 New
York, State of New York, on the 29th day of November, 1999.
THE SERIES PORTFOLIO
By: /s/ Stephanie D. Pierce
--------------------------------------------
Stephanie D. Pierce
Vice President and Assistant Secretary
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
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NONE
