<PAGE>
Marked to Indicate Changes
Filed without Exhibits
File No. 811-9036
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 8
Brinson Relationship Funds
==========================
(Exact name of Registrant as Specified in Charter)
209 South LaSalle Street
Chicago, Illinois 60604-1295
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code 312-220-7940
---------
Carolyn M. Burke
Brinson Relationship Funds
209 South LaSalle Street
Chicago, Illinois 60604-1295
----------------------------
(Name and Address of Agent for Service)
COPIES TO:
Bruce G. Leto, Esq.
Stradley, Ronon, Stevens & Young, L.L.P.
2600 One Commerce Square
Philadelphia, PA 19103-7098
============================================================================
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, shares
of beneficial interest in the Registrant are not being registered under the
Securities Act of 1933, as amended (the "Securities Act"), because such shares
will be issued solely in private placement transactions that do not involve a
"public offering" within the meaning of Section 4(2) of the Securities Act. The
shares have not been registered under any state securities laws in reliance upon
various exemptions provided by those laws. Investments in the shares of the
Registrant may only be made by "accredited investors" within the meaning of
Regulation D under the Securities Act which include common or commingled trust
funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. This Registration Statement does not constitute an offer to sell, or
the solicitation of an offer to buy, any shares of the Registrant.
<PAGE>
OFFEREE NO. ___
BRINSON RELATIONSHIP FUNDS
Brinson Global Securities Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson Global Securities Fund (the
"Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
The Fund will maintain a global portfolio and as such, under normal market
conditions, at least 65% of the Fund's assets will be invested in securities of
issuers in at least three countries, one of which may be the United States. The
Fund seeks to achieve its objective by pursuing active asset allocation
strategies across global equity, fixed income and money markets and active
security selection within each market. Asset allocation decisions are undertaken
relative to the Global Securities Markets Index (the "Benchmark"), which is
compiled by the Fund's investment advisor, Brinson Partners, Inc. ("Brinson
Partners" or the "Advisor").
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
The Advisor's investment style is single focus: investment fundamentals
determine and describe future cash flows that define fundamental investment
value. The Advisor's investment perspective for the Fund is that periodically
there are exploitable discrepancies between market price and fundamental value.
Those price/value discrepancies then become the building blocks for portfolio
construction. The successful identification of price/value discrepancies should
result in enhanced total return performance.
The Benchmark consists of five distinct asset classes representing the
primary wealth-holding public securities markets. These asset classes are U.S.
equity, non-U.S. equity, U.S. bonds, non-U.S. bonds and cash equivalents. Each
asset class is represented in the Benchmark by an index compiled by an
independent data provider. The index relating to U.S. equity is the Wilshire
5000 Index; the index relating to non-U.S. equity is the Morgan Stanley Capital
International Non-U.S. Equity (Free) Index; the index relating to the U.S. bond
portion of the Benchmark is a composite of the Salomon Brothers Broad Investment
Grade Bond Index and the Merrill Lynch Euro-Bond Index; the index for the non-
U.S. bond portion of the Benchmark is the Salomon Brothers Non-U.S. Government
Bond Index; and the index relevant to the cash equivalents portion of the
Benchmark is the 30-day U.S. Treasury Bill rate (calculated from the average of
bid and ask). From time to time, the Advisor may substitute an equivalent index
within a given asset class when it believes that such index more accurately
reflects the relevant global market. In order to compile the Benchmark, the
Advisor determines current relative market capitalizations in the world markets
(U.S. equity, non-U.S. equity, U.S. bond, non-U.S. bond and cash) and then
weights each relevant index. Based on this weighting, the Advisor determines
the return of the relevant indices, applies the index weighting and then
determines the return of the Benchmark.
As a general matter, the Advisor will purchase for the Fund securities
contained in the underlying indices relevant to the Benchmark. The Advisor will
attempt to enhance the long-term return and risk performance of the Fund
relative to the Benchmark by deviating from the normal Benchmark mix of asset
classes and currencies in reaction to discrepancies between current market
prices and fundamental values. Active asset allocation strategy for the Fund
will be defined relative to the Benchmark weights, which represent the Fund's
normal mix. Decisions to deviate from the normal mix are a blend of rigorous
quantitative analysis, an understanding of the fundamental relationships among
global markets and the expertise of investment professionals. In the absence of
views as to the relative attractiveness across asset classes, the actual Fund
weights will be equal to the Benchmark weights. The
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active management process is intended, by the Advisor, to produce superior
performance relative to the Benchmark.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund does not intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning the percentage of the Fund's portfolio securities that may be loaned,
and its policies set forth in Part B concerning borrowing, the issuance of
senior securities and concentration are "fundamental," which means that they may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting shares. As used in this Part A of this Registration
Statement, a vote of "a majority of the outstanding voting shares" of the Trust
or a series of the Trust means the affirmative vote of the lesser of (i) more
than 50% of the outstanding shares of the Trust or series, or (ii) 67% of the
shares of the Trust or series present at a meeting at which more than 50% of the
outstanding shares of the Trust or series are represented in person or by proxy.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes
the securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the Investment Company Act), the Fund may be
subject to greater investment and credit risk than an investment company that
invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the net asset value of the Fund's shares.
Asset Allocation and Market Management
The Advisor believes that, over the long term, investing across global
equity and fixed income markets based upon discrepancies between market prices
and fundamental values may achieve enhanced return and risk characteristics
relative to the Benchmark.
Fundamental value is considered to be the current value of long-term,
sustainable future cash flows derived from a given asset class or security. In
determining fundamental value, the Advisor takes into consideration broadly
based indices representing asset classes or markets and various economic
variables such as productivity, inflation and global competitiveness. The
valuation of asset classes reflects an integrated, fundamental analysis of
global markets. Investment decisions are based on comparisons of current market
prices to fundamental values.
The Fund may invest in the more broadly defined asset classes identified by
the Benchmark. The "Normal Asset Allocation Mix," set forth below, represents
the asset allocation that the Fund would expect to maintain when, in the
judgment of the Advisor, global capital markets are fairly priced relative to
each other and relative to the associated risks.
Global Securities Markets Index
Normal Asset Allocation Mix
<TABLE>
<CAPTION>
Normal Asset Class
Allocation Strategy
Asset Class Mix Ranges
- ----------- --- ------
<S> <C> <C>
Global Equities 67%
</TABLE>
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<TABLE>
<S> <C> <C> <C>
U.S. 50% 15-80%
Non-U.S. 17% 5-30%
Global Bonds 28%
U.S. 20% 5-50%
Non-U.S. 8% 2-15%
Cash and Cash Equivalents 5% 0-45%
--
100%
</TABLE>
The "Asset Class Strategy Ranges" indicated above are the ranges within
which the Fund expects to make its active asset allocations to specific asset
classes. Under all but unusual market conditions, the Fund expects to adhere to
the strategy ranges set forth above. However, the Fund's strategy ranges may be
exceeded by the Fund under unusual market conditions. When unusual market
conditions warrant, the Fund can make substantial temporary defensive
investments in cash equivalents as described below.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. and Non-U.S. Equity Securities
The Fund may invest in a broad range of equity securities of U.S. and non-
U.S. issuers, including common stock of companies or closed-end investment
companies, preferred stock, fixed income securities convertible into or
exchangeable for common stock, securities such as warrants or rights that are
convertible into common stock and sponsored or unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") or Global Depositary
Receipts ("GDRs") for those securities. ADRs are receipts issued by a U.S. bank
or trust company evidencing ownership of underlying securities issued by foreign
issuers. ADRs may be listed on a national securities exchange or may be traded
in the over-the-counter market. EDRs also represent securities of foreign
issuers and are designated for use in European markets. A GDR represents
ownership in a non-U.S. company's publicly traded securities that are traded on
foreign stock exchanges or foreign over-the-counter markets. Holders of
unsponsored ADRs, EDRs or GDRs generally bear all the costs of such facilities
and the depository of an unsponsored facility frequently is under no obligation
to distribute investor communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts in
respect of the deposited securities.
The Fund expects its U.S. equity investments to emphasize both large and
intermediate capitalization companies. In addition, the U.S. equity component
may invest in small capitalization issues. Please see the discussion below
under "Special Risk Considerations of Investing in Small Capitalization Issues"
for a description of the risks of investing in small capitalization issues. The
equity markets in the non-U.S. component of the Fund will typically include
available shares of larger capitalization companies. Capitalization levels are
measured relative to specific markets, thus large and intermediate
capitalization ranges vary country-by-country and may with respect to certain
countries include capitalization levels that would be included in the small
capitalization range in the U.S. market.
U.S. and Non-U.S. Fixed Income Securities
The Fund may invest in all types of fixed income securities of U.S. and
non-U.S. issuers, including governments and governmental entities and
supranational issuers as well as corporations and other business organizations.
The Fund may purchase U.S. dollar denominated securities that reflect a broad
range of investment maturities, qualities and sectors. Please see discussion
below for a description of the high yield/higher risk debt securities in which
the Fund may invest.
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The non-U.S. fixed income component of the Fund will typically be invested
in government and supranational issues. A supranational entity is an entity
established or financially supported by the national governments of one or more
countries to promote reconstruction or development. Examples of supranational
entities include, among others, the World Bank, the European Economic Community,
the European Coal and Steel Community, the European Investment Bank, the Intra-
Development Bank, the Export-Import Bank and the Asian Development Bank.
Emerging Markets Equity and Debt Securities
The Fund may invest in a broad range of equity securities of emerging
market issuers, or securities with respect to which the return is derived
primarily from the equity securities of issuers in emerging markets, including
common and preferred stocks. The Fund considers a country to be an "emerging
market" if it is defined as an emerging or developing economy by any one of the
following: the International Bank for Reconstruction and Development (i.e. the
World Bank), the International Finance Corporation, or the United Nations or its
authorities. Common stocks include securities convertible into common stocks
and securities having common stock characteristics, such as rights and warrants.
The Fund may also invest in all debt securities of emerging market issuers,
including government and government-related entities (including participations
in loans between governments and financial institutions), corporations and
entities organized to restructure outstanding debt of issuers in emerging
markets, or debt securities on which the return is derived primarily from other
emerging markets instruments. The Fund may invest indirectly in emerging market
equity and debt securities by purchasing securities of open-end and closed-end
investment companies. Please see the discussion below under "Investment Company
Securities" for a further explanation of investments in investment companies and
under "Investing in Emerging Markets" for a description of the risks of
investing in emerging market securities.
The Trust has received an exemptive order (the "Exemptive Order") from the
United States Securities and Exchange Commission (the "Commission") to permit,
among other things, the Fund to invest its assets in the Brinson Emerging
Markets Equity Fund (the "EM Equity Fund") and the Brinson Emerging Markets Debt
Fund (the "EM Debt Fund") series of the Trust. Pursuant to the Exemptive Order,
the Fund will may invest that portion of its assets allocated to emerging
markets investments by purchasing shares of the funds listed above. The
investment objective of the EM Equity Fund and the EM Debt Fund is to maximize
total U.S. dollar return, consisting of capital appreciation and current income,
while controlling risk. Under normal circumstances, at least 65% of the assets
of the EM Equity Fund is invested in the equity securities of issuers in
emerging markets or securities with respect to which the return is derived from
the equity securities of issuers in emerging markets. Under normal
circumstances, at least 65% of the total assets of the EM Debt Fund is invested
in the debt securities issued by governments, government-related entities
(including participations in loans between governments and financial
institutions), corporations and entities organized to restructure outstanding
debt of issuers in emerging markets, or debt securities the return of which is
derived primarily from other emerging markets instruments. The EM Equity Fund
and the EM Debt Fund are permitted to invest in the same types of securities as
the Fund may invest in directly and as further described herein.
The Fund may invest its assets directly or indirectly in emerging market
securities as described above. Pursuant to the Exemptive Order, any investment
by the Fund in the EM Equity Fund or the EM Debt Fund of the Trust would not be
subject to the limitations of the Investment Company Act concerning investments
by open-end investment companies in the securities issued by other investment
companies. Please see the discussion below under "Investment Company
Securities" for a description of these limitations.
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Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. or non-U.S. currencies. When unusual market
conditions warrant, the Fund can make substantial temporary defensive
investments in cash equivalents up to a maximum exposure of 100% of the Fund's
assets. The Fund's investment in temporary defensive investments may affect the
Fund's ability to attain its investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a maturity date but which can be called for
repayment by the lender or the borrower at a predetermined interval. Bank
instruments in which the Fund may invest include bank loan participations, bank
holding company commercial paper, deposits, bank notes and other bank related
securities. Bank loan participations are loans sold by lending banks to
investors. Bank holding company commercial paper is a form of short-term
promissory note which is a direct obligation of a bank holding company. Deposits
are obligations of a bank or its branches. Corporate commercial paper is a form
of short-term promissory note issued by corporations primarily to finance short-
term credit needs. Rates vary according to the credit standing of the issuers
and money market conditions. Floating rate instruments are obligations with
various final maturities and interest rates that are tied to other assorted
market indices. The Fund will not invest more than 15% of the value of its net
assets in floating or variable rate demand obligations as to which it cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable.
Pursuant to the Exemptive Order described above, in lieu of investing
directly in the cash and cash equivalents described above, the Fund may invest a
portion of its assets in the Brinson Short-Term Fund (the "Short-Term Fund")
series of the Trust. Any investment by the Fund in the Short-Term Fund would
not be subject to the limitations of the Investment Company Act concerning
investments by open-end investment companies in securities issued by other
investment companies. Please see the discussion below under "Investment Company
Securities" for a description of these limitations.
Zero Coupon Securities
The Fund may invest in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current interest
(the "cash payment date") and therefore are issued at a discount from their face
amounts or par value. Such bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the Fund will realize no
cash until the maturity date or cash payment date and, if the issuer defaults,
the Fund may obtain no return at all on its investment. For federal tax
purposes, the Fund will be required to include in income daily portions of
original issue discount accrued, even if no payment is received before the
maturity date or cash payment date.
Pay-In-Kind Bonds
The Fund may invest in pay-in-kind bonds. Pay-in-kind bonds are securities
which pay interest through the issuance of additional bonds. The Fund will be
deemed to receive interest over the life of such bonds and be treated for
federal income tax purposes as if interest were paid on a current basis,
although no cash interest payments are received by the Fund until the cash
payment date or until the bonds mature.
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Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, representing interests
in pools of mortgage loans. These securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. The Fund may invest in mortgage-backed securities
issued or guaranteed by an agency or instrumentality of the U.S. government. The
Fund may also invest in privately issued mortgage-backed securities issued by
private, non-government corporations, such as financial institutions.
The Fund may also invest in Collateralized Mortgage Obligations ("CMOs")
and Real Estate Mortgage Investment Conduits ("REMICs"). CMOs are debt
securities issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by a pool of mortgages held under an
indenture. CMOs are issued in a number of classes or series with different
maturities. The classes or series are retired in sequence as the underlying
mortgages are repaid. Prepayment may shorten the stated maturity of the
obligation and can result in a loss of premium, if any has been paid. Certain
of these securities may have variable or floating interest rates and others may
be stripped (securities which provide only the principal or interest feature of
the underlying security).
REMICs are private entities formed for the purpose of holding a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. Yields on privately-issued
CMOs have historically been higher than yields on CMOs issued or guaranteed by
U.S. government agencies. However, the risk of loss due to default on such
instruments is higher. For federal income tax purposes, the Fund will be
required to accrue income attributable to its investment in CMOs and regular
interests in REMICs using the "catch-up" method, with an aggregate prepayment
assumption. For further information concerning mortgage-backed securities, see
Part B of this Registration Statement.
Asset-Backed Securities
The Fund may invest in asset-backed securities. Asset-backed securities
are securities that represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool or
pools of similar assets (e.g., receivables on home equity and credit loans and
receivables regarding automobile, credit card, mobile home and recreational
vehicle loans, wholesale dealer floor plans and leases).
Such receivables are securitized in either a pass-through or pay-through
structure. Pass-through securities provide investors with an income stream
consisting of both principal and interest payments with respect to the
receivables in the underlying pool. Pay-through asset-backed securities are debt
obligations issued usually by a special purpose entity, are collateralized by
the various receivables and with respect to which the payments on the underlying
receivables provide the funds to pay the debt service on the debt obligations
issued. The Fund may invest in these securities and obligations and other types
of asset-backed securities that may be developed in the future.
The credit quality of these securities depends primarily upon the quality
of the underlying assets and the level of credit support and/or enhancement
provided. Such asset-backed securities may be subject
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to the same prepayment risks as mortgage-backed securities. For further
information concerning asset-backed securities, see Part B of this Registration
Statement.
When-Issued Securities
The Fund may purchase securities on a "when-issued" basis for payment and
delivery at a later date. The price is generally fixed on the date of
commitment to purchase. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date. At the time of settlement, the market value of the security
may be more or less than the purchase price. For further information concerning
when-issued securities, see Part B of this Registration Statement.
Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Eurodollar Securities
The Fund may invest in Eurodollar securities, which are fixed income
securities of a U.S. issuer or a foreign issuer that are issued outside the
United States. Interest and dividends on Eurodollar securities are payable in
U.S. dollars.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may
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be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
High Yield/Higher Risk Securities
The Fund's U.S. dollar investments in all types of fixed income securities
may include lower quality, higher yielding securities which are below investment
grade. Investment grade securities are securities rated BBB or better by
Standard & Poor's Ratings Group ("S&P") or Baa or better by Moody's Investors
Service, Inc. ("Moody's") or, if unrated, are determined to be of comparable
quality by the Advisor. While securities rated below BBB or Baa are regarded as
having an adequate capacity to pay principal and interest, such securities lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well. In addition, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher rated securities. Securities
rated lower than BBB by S&P and Baa by Moody's are classified as non-investment
grade securities and are commonly referred to as "junk bonds." These securities
are considered to be of poor standing and predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations and involve major risk exposure to adverse
conditions. Securities issued by foreign issuers rated below investment grade
entail greater risks than higher rated securities, including risk of untimely
interest and principal payment, default, price volatility and may present
problems of liquidity and valuation. Investors should carefully consider these
risks before investing. A description of various bond ratings appears in
Appendix A, p. 1-2. Ratings represent S&P's and Moody's respective opinions as
to the quality of the obligations they undertake to rate. However, ratings are
general and are not absolute standards of quality.
Pursuant to the Exemptive Order described above under "Emerging Markets
Equity and Debt Securities," in lieu of investing directly in certain high
yield, higher risk securities, the Fund may invest a portion of its assets in
the Brinson High Yield Fund (the "High Yield Fund") series of the Trust. The
investment objective of the High Yield Fund is to maximize total U.S. dollar
return, consisting of capital appreciation and current income, while controlling
risk. The High Yield Fund maintains a high yield portfolio and as such, at
least 65% of its assets are invested in high yield securities of the type
described herein. Any investment by the Fund in the High Yield Fund would not
be subject to the limitations of the Investment Company Act concerning
investments by open-end investment companies in securities issued by other
investment companies. Please see the discussion below under "Investment Company
Securities" for a description of these limitations.
The Fund currently intends to limit its investment in non-investment grade,
U.S. dollar denominated fixed income securities to no more than 15% of its net
assets. Any investment in the High Yield Fund will be considered within this
limitation. The Fund currently intends to limit its investment in non-
investment grade, non-U.S. dollar denominated fixed income securities to no more
than 15% of its net assets.
Brady Bonds
With regard to emerging market investments, the Fund may invest in Brady
Bonds, which are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented to date in
Argentina, Bulgaria, Brazil, Costa Rica, Jordan, Mexico, Nigeria, the
Philippines, Poland, Uruguay, Panama, Peru and Venezuela. Brady Bonds have been
issued only during recent years, and for that reason do not have a very long
payment history. Brady Bonds
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may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds.
Brady Bonds are often viewed as having three or four valuation components:
the collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds with respect
to commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that the Brady
Bonds in which the Fund invests will not be subject to restructuring or to
requests for a new credit arrangement which may cause the Fund to suffer a loss
of interest or principal in any of its holdings.
Structured Securities
With regard to emerging market investments, the Fund may invest a portion
of its assets in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations. This
type of restructuring involves the deposit with, or purchase by, an entity, such
as a corporation or trust, of specified instruments (such as commercial bank
loans or Brady Bonds) and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. The cash flow of the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics, such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type
in which the Fund anticipates investing typically involve no credit enhancement,
their credit risk generally will be equivalent to that of the underlying
instruments. The Fund is permitted to invest in a class of Structured
Securities that is either subordinated or unsubordinated to the right of payment
of another class. Subordinated Structured Securities typically have higher
yields and present greater risks than unsubordinated Structured Securities.
Structured Securities are typically sold in private placement transactions, and
there currently is no active trading market for Structured Securities. Thus,
the Fund's investments in Structured Securities will be limited by the Fund's
prohibition on investing more than 15% of its net assets in illiquid securities.
Loan Participations and Assignments
With regard to emerging market investments, the Fund may invest in fixed
rate and floating rate loans ("Loans") arranged through private negotiations
between an issuer of sovereign debt obligations and one or more financial
institutions ("Lenders"). The Fund's investment in Loans is expected in most
instances to be in the form of participation in loans ("Participations") and
assignments of all or a portion of Loans ("Assignments") from third parties.
The Fund will have the right to receive payments of principal, interest and
any fees to which it is entitled only from the Lender selling the Participation
and only upon receipt by the Lender of the payments from the borrower. In the
event of the insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. Certain Participations may be structured in
a manner designed to avoid purchasers of Participations being subject to the
credit risk of the Lender with respect to the Participation. Even under such a
structure, in the event of the Lender's insolvency, the Lender's servicing of
the Participation may be delayed and the assignability of the Participation may
be impaired. The Fund will acquire Participations
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only if the Lender interpositioned between the Fund and the borrower is
determined by the Advisor to be creditworthy. When the Fund purchases
Assignments from Lenders, it will acquire direct rights against the borrower on
the Loan. However, because Assignments are arranged through private negotiations
between potential assignees and potential assignors, the rights and obligations
acquired by the Fund as the purchaser of an Assignment may differ from, and be
more limited than, those held by the assigning Lender.
Because there may be no liquid market for Participations and Assignments,
the Fund anticipates that such securities could be sold only to a limited number
of institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and the Fund's ability to dispose
of particular Assignments or Participations when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations also may make it more
difficult for the Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value. To the extent
that the Fund cannot dispose of a Participation or Assignment in the ordinary
course of business within seven days at approximately the value at which it has
valued the Participation or Assignment, it will treat the Participation or
Assignment as illiquid and subject to its overall limit on illiquid investments
of 15% of its net assets.
Non-Publicly Traded Securities, Private Placements and Restricted Securities
With regard to emerging market investments, the Fund may invest in
securities that are neither listed on a stock exchange nor traded over-the-
counter, including privately placed securities and limited partnerships.
Investing in such unregistered or unlisted emerging market securities, including
investments in new and early stage companies, may involve a high degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Fund, or less than what may be
considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which would be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expense of registration. No more
than 15% of the Fund's net assets will be invested in illiquid securities,
including, but not limited to, non-publicly traded securities, private
placements and restricted securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Fund's net assets invested in
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
As described above, the Trust has received an Exemptive Order, which
permits the Fund to invest its assets in securities of other series offered by
the Trust. The Fund will invest in such series only to the extent that the
Advisor determines that it is more efficient for the Fund to gain exposure to a
particular asset class through investment in a series of the Trust as opposed to
investment directly in individual securities. Investments by the Fund in
another series of the Trust may involve transaction costs,
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but not duplication of other fees and expenses because the Advisor and other
service providers will waive fees or reimburse expenses to avoid such
duplication.
The Fund's investments in any other series of the Trust, each of which
invests primarily in one asset class a ("Core Series") will not be subject to
the percentage limitations described above. To the extent that the Fund invests
in the Trust's other series ("Other Series") and particular open-end investment
companies other than the Core Series, the Fund will be subject to the percentage
limitations described above and the Fund's investments in such other investment
companies will be aggregated with its investments in the Other Series for
purposes of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities") over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to
consider the following factors in determining the liquidity of a Rule 144A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Although it has delegated the day-to-day liquidity determination to the Advisor,
the Board of Trustees will continue to monitor and will periodically review the
Advisor's selection of Rule 144A Securities, as well as the Advisor's
determination as to their liquidity.
If the Advisor determines that a Rule 144A Security which was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Advisor will determine what action shall be taken to ensure
that the Fund continues to adhere to such limitation including disposing of
illiquid assets which may include such Rule 144A Securities.
Future Developments
From time to time, the Fund may also invest in certain equity or debt
securities which have features other than those that are typical for such
securities and which have in the past been offered or may be offered in the
future. In the past, for example, such securities have been issued to replicate
the performance of a certain component or components of a particular security or
combination of securities and/or to hedge or reduce the risks associated with
certain securities or market trends. The Fund may invest in these securities if
the Advisor believes that doing so would be consistent with the Fund's
investment objective and policies. Since the market for these securities may be
new, the Fund may have difficulty disposing of them at a suitable price and
time. In addition to limited liquidity, these instruments may present other
risks, such as high price volatility. The unavailability of such innovative
securities would not adversely affect the Fund's ability to achieve its
investment objective.
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Foreign Securities and Currency Considerations
Investments in securities of foreign issuers may involve greater risks than
those of U.S. issuers. There is generally less information available to the
public about non-U.S. issuers and less government regulation and supervision of
non-U.S. stock exchanges, brokers and listed companies. Non-U.S. companies are
not subject to uniform global accounting, auditing and financial reporting
standards, practices and requirements. Securities of some non-U.S. companies
are less liquid and their prices more volatile than securities of comparable
U.S. companies. Securities trading practices abroad may offer less protection
to investors. Settlement of transactions in some non-U.S. markets may be
delayed or may be less frequent than in the United States, which could affect
the liquidity of the Fund. Additionally, in some countries, there is the
possibility of expropriation or confiscatory taxation, limitations on the
removal of securities, property or other assets of the Fund, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries. The Advisor will take these factors into consideration in
managing the Fund's investments. Investments will be made primarily in the
equity securities of companies domiciled in developed countries. The Fund
intends to diversify broadly among countries but reserves the right to invest a
substantial portion of its assets in one or more countries if economic and
business conditions warrant such investments. Gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or liabilities denominated in
a foreign currency and the time the Fund actually collects such receivables, or
pays such liabilities, are generally treated as ordinary income or loss.
Similarly, a portion of the gains or losses realized on disposition of debt
securities denominated in a foreign currency, referred to under the Internal
Revenue Code of 1986, as amended ("the Code"), as "section 988" gains or losses,
may also be treated as ordinary gain or loss rather than as capital gain or
loss.
The U.S. dollar market value of the Fund's investments and of dividends and
interest earned by the Fund may be significantly affected by changes in currency
exchange rates. Some currency prices may be volatile, and there is the
possibility of governmental controls on currency exchange or governmental
intervention in currency markets, which could adversely affect the Fund.
Although the Fund may attempt to manage currency exchange rate risk, there is no
assurance that the Fund will do so at an appropriate time or that it will be
able to predict exchange rates accurately. The Fund will manage currency
exposures relative to the normal currency allocation and will consider return
and risk of currency exposures relative to the Benchmark.
Investing in Emerging Markets
Compared to the United States and other developed countries, emerging
countries may have relatively unstable governments, economies based on only a
few industries, and securities markets that trade only a small number of
securities and employ settlement procedures different from those used in the
United States. Prices in these markets tend to be volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries.
Furthermore, investments by investors foreign to the emerging countries are
subject to a variety of restrictions in many emerging countries. These
restrictions may take the form of prior governmental approval, limits on the
amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional restrictions may be imposed
at any time by these or other countries in which the Fund invests. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including, in
some cases, the need for certain governmental consents. Although these
restrictions may in the future make it undesirable to invest in emerging
countries, the Advisor does not believe that any current repatriation
restrictions would affect its decision to invest in such countries. Countries
such as those in which the Fund may invest have historically experienced and may
continue to experience, high rates of
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inflation, high interest rates, exchange rate fluctuations or currency
depreciation, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. Additional factors which may
influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, its government's policy towards the
International Monetary Fund, the World Bank and other international agencies and
the political constraints to which a government debtor may be subject.
The issuers of the foreign government and government-related debt
securities in which the Fund expects to invest have in the past experienced
substantial difficulties in servicing their external debt obligations, which has
led to defaults on certain obligations and the restructuring of certain
indebtedness. Restructuring arrangements have included, among other things,
reducing and rescheduling interest and principal payments by negotiating new or
amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign government and government-related debt securities may
be requested to participate in the restructuring of such securities and to
extend further loans to the issuers of such securities. There can be no
assurance that the Brady Bonds and other foreign government and government-
related debt securities in which the Fund may invest will not be subject to
similar defaults or restructuring arrangements which may adversely affect the
value of such investments. Furthermore, certain participants in the secondary
market for such debt securities may be directly involved in negotiating the
terms of these arrangements and may therefore have access to information not
available to other market participants.
Payments to holders of the high yield, higher risk foreign debt securities
in which the Fund may invest may be subject to foreign withholding and other
taxes. Although the holders of foreign government and government-related debt
securities may be entitled to tax gross-up payments from the issuers of such
securities, there is no assurance that such payments will be made.
Russian Securities Transactions
The Fund may invest in securities of Russian companies. The registration,
clearing and settlement of securities transactions in Russia are subject to
significant risks not normally associated with securities transactions in the
United States and other more developed markets. Ownership of shares in Russian
companies is evidenced by entries in a company's share register (except where
shares are held through depositories that meet the requirements of the
Investment Company Act) and the issuance of extracts from the register or, in
certain limited cases, by formal share certificates. However, Russian share
registers are frequently unreliable and the Fund could possibly lose its
registration through oversight, negligence or fraud. Moreover, Russia lacks a
centralized registry to record securities transactions and registrars located
throughout Russia or the companies themselves maintain share registers.
Registrars are under no obligation to provide extracts to potential purchasers
in a timely manner or at all and are not necessarily subject to state
supervision. In addition, while registrars are liable under law for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Although Russian companies with more than
1,000 shareholders are required by law to employ an independent company to
maintain share registers, in practice, such companies have not always followed
this law. Because of this lack of independence of registrars, management of a
Russian company may be able to exert considerable influence over who can
purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions on the share register. Furthermore, these
practices may prevent the Fund from investing in the securities of certain
Russian companies deemed suitable by the Advisor and could cause a delay in the
sale of Russian securities by the Fund if the company deems a purchaser
unsuitable, which may expose the Fund to potential loss on its investment.
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In light of the risks described above, the Board of Trustees of the Fund
has approved certain procedures concerning the Fund's investments in Russian
securities. Among these procedures is a requirement that the Fund will not
invest in the securities of a Russian company unless that issuer's registrar has
entered into a contract with the Fund's sub-custodian containing certain
protective conditions including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Fund. This requirement
will likely have the effect of precluding investments in certain Russian
companies that the Fund would otherwise make.
Special Risk Considerations of Investing in Small Capitalization Issues
The Fund may invest in relatively new or unseasoned companies which are in
their early stages of development (sometimes referred to as "post-venture
companies"), or small companies positioned in new and emerging industries where
the opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. The companies in which the Fund may invest may have
relatively small revenues, limited product lines, and may have a small share of
the market for their products or services. Post-venture companies may lack
depth of management, may be unable to generate internally funds necessary for
growth or potential development or to generate such funds through external
financing on favorable terms, or may be developing or marketing new products or
services for which markets are not yet established and may never become
established. Due to these and other factors, such companies may suffer
significant losses as well as realize substantial growth. Investments in such
companies tend to be volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in
price than the larger capitalization stocks. Among the reasons for the greater
price volatility of these securities are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such stocks, and
the greater sensitivity of small companies to changing economic conditions.
Besides exhibiting greater volatility, post-venture company stocks may, to a
degree, fluctuate independently of larger company stocks. Investors should
therefore expect that the value of the Fund's shares may be more volatile than
the shares of a fund that invests in larger capitalization stocks.
Pursuant to the Exemptive Order described above under "Emerging Markets
Equity and Debt Securities," in lieu of investing directly in small
capitalization issues, the Fund may invest a portion of its assets in the Post-
Venture Fund series of the Trust. The investment objective of the Post-Venture
Fund is to maximize total U.S. dollar return, consisting of capital appreciation
and current income, while controlling risk. The Post-Venture Fund invests
primarily in equity securities of publicly traded companies representing the
lower 5% of the Wilshire 5000 Index, and, as such, at least 65% of its assets
are invested in small capitalization equity securities. Any investment by the
Fund in the Post-Venture Fund would not be subject to the limitations of the
Investment Company Act concerning investments by open-end investment companies
in the securities issued by other investment companies. Please see the
discussion above under "Investment Company Securities" for a description of
these limitations.
OTHER INVESTMENT TECHNIQUES
Currency Management
The normal currency allocation of the Fund is identical to the currency mix
of the Benchmark. The Fund expects to maintain this normal currency exposure
when, in the judgment of the Advisor, global currency markets are fairly priced
relative to each other and relative to the associated risks. The Fund may
actively deviate from such normal currency allocations to take advantage of, or
to protect its
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portfolio from risk and return characteristics of, the currencies
and short-term interest rates when those prices deviate significantly from
fundamental value. Deviations from the Benchmark are determined by the Advisor
based upon its research.
To manage exposure to currency fluctuations, the Fund may alter fixed
income or money market exposures (in its normal asset allocation mix as
previously described), enter into forward currency exchange contracts, buy or
sell options, futures or options on futures relating to foreign currencies and
purchase securities indexed to currency baskets. The Fund will also use these
currency exchange techniques in the normal course of business to hedge against
adverse changes in exchange rates in connection with purchases and sales of
securities. Some of these strategies may require the Fund to set aside liquid
assets in a segregated custodial account to cover its obligations. These
techniques are further described below.
Forward Foreign Currency Transactions
The Fund may conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market or through entering into contracts to purchase or sell foreign currencies
at a future date (i.e., a "forward foreign currency contract" or "forward
contract"). A forward contract involves an obligation to purchase or sell a
specific currency amount at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties and at a price set at
the time of the contract. The Fund will convert currency on a spot basis from
time to time and investors should be aware of the potential costs of currency
conversion.
The Fund may enter into forward contracts for hedging purposes as well as
for non-hedging purposes. For hedging purposes, the Fund may enter into
contracts to deliver or receive foreign currency it will receive from or require
for its normal investment activities. It may also use contracts in a manner
intended to protect foreign currency-denominated securities from declines in
value due to unfavorable exchange rate movements. The Fund may also enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes in exchange rates.
When the Fund enters into forward contracts for non-hedging purposes, it
will establish a segregated account with its custodian bank in which it will
maintain cash, U.S. government securities or other liquid assets equal in value
to its obligations with respect to its forward contracts for non-hedging
purposes.
At the maturity of a forward contract, the Fund may either sell a portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions.
Options
The Fund may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Fund
may also purchase and write put and call options on foreign currencies to manage
the Fund's exposure to changes in currency exchange rates. In addition, the
Fund may purchase and write options to buy or sell futures contracts.
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A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund may
purchase call options only to the extent premiums paid on all outstanding call
options do not exceed 20% of the Fund's total assets. The Fund will write call
options only on a covered basis. A call option is "covered" if the Fund owns
the underlying securities or the Fund maintains in a segregated account with its
custodian, cash, U.S. government securities or other liquid assets with a value
sufficient to meet its obligations under the call option, or if the Fund owns an
offsetting call option. The Fund may receive premium income from writing call
options, which may offset the cost of purchasing options and may also contribute
to the Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be
protected should the market value of the security decline or should a particular
index decline. The Fund will, at all times during which it holds a put option,
own the security underlying such option. The Fund will receive premium income
from writing put options, although it may be required, when the put is
exercised, to purchase securities at higher prices than the current market
price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency or maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date.
When a futures contract is sold, the Fund incurs a contractual obligation to
deliver the securities or foreign currency underlying the contract at a
specified
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price on a specified future date. The Fund may enter into futures contracts and
engage in options transactions related thereto for hedging purposes and for non-
hedging purposes, to the extent that not more than 5% of the Fund's assets are
required as futures contract margin deposits and premiums on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally
are not regulated by U.S. authorities and may offer less liquidity and less
protection to the Fund in the event of default by the other party to the
contract. The Fund could also experience losses if the prices of its options or
futures positions are poorly correlated with its other investments, or if it
cannot close out its positions because of an illiquid secondary market. The
loss from investing in futures transactions is potentially unlimited. For
further information concerning the risks of options and futures, see Part B of
this Registration Statement.
Swaps
The Fund may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates), to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to gain exposure
to certain markets.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal. Currency swaps involve the exchange of cash flows on a
notional amount based on changes in the values of referenced currencies.
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The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of an interest rate floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Advisor
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
The equity swaps in which the Fund intends to invest involve agreements
with a counterparty. The return to the Fund on any equity swap contract will be
the total return on the notional amount of the contract as if it were invested
in the stocks comprising the contract index in exchange for an interest
component based on the notional amount of the agreement. The Fund will only
enter into an equity swap contract on a net basis, i.e., the two parties'
obligations are netted out, with the Fund paying or receiving, as the case may
be, only the net amount of the payments. Payments under the equity swap
contracts may be made at the conclusion of the contract or periodically during
its term.
If there is a default by the counterparty to an equity swap contract, the
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction. There is no assurance that an equity swap contract
counterparty will be able to meet its obligations pursuant to an equity swap
contract or that, in the event of default, the Fund will succeed in pursuing
contractual remedies. The Fund thus assumes the risk that it may be delayed in
or prevented from obtaining payments owed to it pursuant to an equity swap
contract. However, the amount at risk is only the net unrealized gain, if any,
on the swap, not the entire notional amount. The Advisor will closely monitor,
subject to the oversight of the Board of Trustees, the creditworthiness of
equity swap counterparties in order to minimize the risk of equity swaps.
The Advisor and the Trust do not believe that the Fund's obligations under
equity swap contracts are senior securities and, accordingly, the Fund will not
treat them as being subject to its borrowing or senior securities restrictions.
However, the net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each equity swap contract will be accrued on a
daily basis and an amount of cash, U.S. government securities or other liquid
assets having an aggregate market value at least equal to the accrued excess
will be maintained in a segregated account by the Fund's custodian. To the
extent that the Fund cannot dispose of a swap in the ordinary course of business
within seven days at approximately the value at which the Fund has valued the
swap, it will treat the swap as illiquid and subject to its overall limit on
illiquid investments of 15% of net assets.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank
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with the required asset coverage of at least 300%. In the event that such asset
coverage falls below 300%, the Fund shall, within three days thereafter (not
including Sunday or holidays) or such longer period as the Commission may
prescribe by rules and regulations, reduce the amount of its borrowings to such
an extent that the asset coverage of such borrowings shall be at least 300%. The
Fund will not pledge more than 10% of its net assets, or issue senior securities
as defined in the Investment Company Act, or as described herein, except for
notes to banks and reverse repurchase agreements. Investment securities will not
be purchased while the Fund has outstanding borrowings that exceed 5% of the
Fund's total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1\3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on a
loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the Fund's
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects that
investment to market risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to
engage in trading for short-term gains, the Fund will effect portfolio
transactions without regard to the holding period if, in the judgment of the
Advisor, such transactions are advisable in light of a change in circumstances
of a particular company, within a particular industry or country, or in general
market, economic or political conditions. Although the portfolio turnover rate
for the Fund may vary greatly from year to year, the Fund expects that under
normal circumstances, the portfolio turnover rate will not exceed 250%. A high
portfolio turnover rate will increase aggregate brokerage commission
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expenses which must be borne directly by the Fund and ultimately by the Fund's
Investors and the incidence of short-term capital gains (which are taxable to
Investors as ordinary income). See "Brokerage Allocation" and "Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust") the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust - International
Growth Portfolio, Enterprise Group of Funds, Inc. - International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust - Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust - International Equity Portfolio, John Hancock Variable Series
Trust I - International Balanced Fund, AON Funds- International Equity Fund and
The Republic Funds - Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Appendix B to the Prospectus sets forth the investment performance of the
Fund, including the performance of the Brinson Trust Company Collective
Investment Trust's Global Securities Fund until April 28, 1995, the commencement
of the Fund's operations. Brinson Trust Company is a wholly-owned subsidiary of
Brinson Partners.
Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
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<PAGE>
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which the MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to the Fund,
including the coordination and monitoring of any third party service providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC" Agreement") with Chase Global Funds
Services Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank,
under which CGFSC provides administrative, accounting, portfolio valuation,
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any third party service provider in providing such
services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for the services
CGFSC provides to MSTC in fulfilling its obligations under the Services
Agreement.
Independent Auditors
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Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering and of noticing the Fund's shares for
sale with the Commission and with various state securities commissions, fees and
expenses of the Administrator and the expenses of obtaining quotations of
portfolio securities and of pricing the Fund's shares. General expenses which
are not associated directly with any particular portfolio within the Trust
(e.g., insurance premiums, Trustees' fees, expenses of maintaining the Trust's
legal existence and of Investors' meetings and fees and expenses of industry
organizations) are allocated between the various series based upon their
relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.05% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. The Fund normally
trades non-U.S. securities in foreign countries, since the best available market
for non-U.S. securities is often in non-U.S. markets. In transactions on non-
U.S. stock exchanges, brokers' commissions are generally fixed and are often
higher than in the United States where commissions are negotiated. Pursuant to
the Advisory Agreement, the Advisor is authorized to utilize the trading
department of its foreign subsidiaries to execute foreign securities
transactions but monitors selection by such subsidiaries of brokers and dealers
used to execute such transactions.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this
research information in managing the Fund's assets, as well as the assets of
other clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as underwriter. The Fund may effect futures transactions
through, and pay commissions to, futures commission merchants who are affiliated
with the Advisor or the Fund in accordance with procedures adopted by the Board
of Trustees of the Trust.
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<PAGE>
Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of
Trustees has the power to designate one or more series or sub-series/classes of
shares of beneficial interest and to classify or reclassify any unissued shares
with respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-
Term Fund, the Brinson High Yield Fund and the Brinson Emerging Markets Debt
Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Pursuant to the Investment Company Act, a control person possesses the
ability to control the outcome of matters submitted for shareholder vote. As of
July 29, 1997, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trust's Global Securities Fund of Chicago, Illinois was a control
person of the Fund and the Trust by nature of its shareholdings.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
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<PAGE>
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the Fund's
investment objective could result in an Investor's withdrawal of its investment
in the Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295,
or an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of
the Fund may be purchased directly by eligible Investors from the Fund at the
net asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $25,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at
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<PAGE>
the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities after such transfers to the Fund
shall become the property of the Fund and must be delivered to the Fund by the
Investor upon receipt from the issuer. Investors that are permitted to transfer
such securities will be required to recognize a gain or loss on such transfer
and pay tax thereon, if applicable, measured by the difference between the fair
market value of the securities and the Investors' basis therein. The Trust will
not accept securities in exchange for shares of the Fund unless: (1) such
securities are, at the time of the exchange, eligible to be included in the
Fund's investment portfolio and current market quotations are readily available
for such securities; and (2) the Investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions upon
their sale by the Fund under the Securities Act or under the laws of the country
in which the principal market for such securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of
regular trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m.
Eastern time) on days when such exchange is open. The net asset value per share
is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment companies are valued using
their respective net asset values for purchase orders placed at the close of the
NYSE. All other securities are valued at their fair value as determined in good
faith and pursuant to a method approved by the Trust's Board of Trustees. For a
detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy,
the Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the fund into which the Investor
wishes to exchange. Requests for telephone exchanges must be received by the
transfer agent, CGFSC, by the close of regular trading hours (generally 4:00
p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
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Redemption of Shares or Repurchase
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose
a fee for wire service. The right of any Investor to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on the NYSE is restricted, or, to the extent
otherwise permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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APPENDIX A
CORPORATE DEBT RATINGS
Moody's Investors Service, Inc. describes classifications of corporate bonds as
follows:
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-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
<PAGE>
Standard & Poor's Ratings Group describes classifications of corporate bonds as
follows:
AAA -- This is the highest rating assigned by Standard & Poor's Rating
Group to a debt obligation and indicates an extremely strong capacity to pay
principal and interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong and in the majority of
instances they differ from the AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lend
to inadequate capacity to meet timely interest and principal payments.
B -- Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC -- Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest or repay principal.
CC -- The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in default, or is expected to default upon maturity or
payment date.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
APPENDIX B
Set forth below is the performance of the Brinson Trust Company Collective
Investment Trust's Global Securities Fund (the "BTC Global Securities Fund") for
periods ended April 28, 1995 linked with the Brinson Relationship Funds' Brinson
Global Securities Fund (the "Brinson Global Securities Fund") for periods ending
December 31, 1996. The Brinson Global Securities Fund assumed the assets of the
BTC Global Securities Fund on April 28, 1995. Brinson Trust Company is a wholly
owned subsidiary of Brinson Partners, Inc., Advisor to the Trust.
Performance is calculated net of administrative expenses. All returns
quoted are time weighted, total rates of return and include the impact of
capital appreciation as well as the reinvestment of interest and dividends. All
performance data was supplied by Brinson Partners, Inc. and has not been
verified or audited. The BTC Global Securities Fund was not registered under
the Investment Company Act and therefore was not subject to certain investment
restrictions imposed by the Investment Company Act which may have adversely
affected its performance. Investors should not consider this performance data
as an indication of the future performance of the Brinson Global Securities
Fund.
<TABLE>
<CAPTION>
For Periods Ending 12/31/96
Annualized
----------------------------------------
Since
1 year 2 years 3 years 5 years 10 years Inception
------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Brinson Global 16.21% 20.88% 13.21% 12.11% 13.68% 15.45%
Securities Fund
Global Securities 12.53% 18.46% 12.49% 11.22% 11.97%
Index (1)
</TABLE>
Inception date was 12/31/81
(1) The Global Securities Index is calculated gross of fees.
The Global Securities Index is the benchmark for both the BTC Global Securities
Fund and the Brinson Global Securities Fund. For a further description of the
benchmark, please review the section titled "Investment Process."
<PAGE>
OFFEREE NO.___
BRINSON RELATIONSHIP FUNDS
Brinson Global Equity Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund, and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson Global Equity Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank; further, such shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
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<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar
return, consisting of capital appreciation and current income, while controlling
risk. The Fund will maintain a global portfolio and as such, under normal market
conditions, at least 65% of the Fund's assets will be invested in securities of
issuers in at least three countries, one of which may be the United States. The
Fund seeks to achieve its objective by pursuing active asset allocation
strategies across global equity markets, active management of currency
exposures and active security selection within each market. The Benchmark for
the Fund is the MSCI World Equity (Free) Index (the "Benchmark").
Investors should understand that all investments involve risk and
there can be no guarantee against loss resulting from an investment in the Fund,
nor can there be any assurance that the Fund's investment objective will be
attained.
Investment Process
The investment style of the Fund's investment advisor, Brinson
Partners, Inc. ("Brinson Partners" or the "Advisor") is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Fund is that
periodically there are exploitable discrepancies between market price and
fundamental value. Those price/value discrepancies then become the building
blocks for portfolio construction. The successful identification of price/value
discrepancies should result in enhanced total return performance.
The Benchmark is a market-driven, broad-based index which includes
U.S. and non-U.S. equity markets in terms of capitalization and performance.
The Benchmark is designed to provide a representative total return for all major
stock exchanges located inside and outside the United States. Although it may
invest anywhere in the world, it is expected that the Fund assets will primarily
be invested in equity markets listed in the Benchmark. From time to time, the
Advisor may substitute securities in an equivalent index within a given asset
class when it believes that such index more accurately reflects the relevant
global market.
The Fund does not intend to concentrate its investments in a
particular industry. The Fund does not intend to issue senior securities except
to the extent consistent with its policies described below and only as permitted
under the Investment Company Act. The Fund's investment objective and its
policies concerning the percentage of the Fund's portfolio securities that may
be loaned, and its policies set forth in Part B concerning borrowing, the
issuance of senior securities and concentration are "fundamental," which means
that they may not be changed without the affirmative vote of the holders of a
majority of the Fund's outstanding voting shares. As used in this Part A of
this Registration Statement, a vote of "a majority of the outstanding voting
shares" of the Trust or a series of the Trust means the affirmative vote of the
lesser of (i) more than 50% of the outstanding shares of the Trust or series, or
(ii) 67% of the shares of the Trust or series present at a meeting at which more
than 50% of the outstanding shares of the Trust or series are represented in
person or by proxy.
The Fund is classified as "non-diversified," as defined in the
Investment Company Act so that it is not limited by the Investment Company Act
as to the proportion of its assets that it may invest in the obligations of a
single issuer. To the extent that the Fund's investment portfolio at times
includes the securities of a smaller number of issuers than permissible if the
Fund were "diversified" (as defined in the Investment Company Act), the Fund may
be subject to greater investment and credit risk than an investment company that
invests in a broader range of securities, because changes in the financial
condition
2
<PAGE>
or market assessment of a single issuer may cause greater fluctuations in the
net asset value of the Fund's shares.
Asset Allocation and Market Management
The Advisor believes that, over the long term, investing across global
equity markets based upon discrepancies between market prices and fundamental
values may achieve enhanced return and risk characteristics relative to the
Benchmark.
Fundamental value is considered to be the current value of long-term,
sustainable future cash flows derived from a given asset class or security. In
determining fundamental value, the Advisor takes into consideration broadly
based indices representing asset classes or markets and various economic
variables such as productivity, inflation and global competitiveness. The
valuation of asset classes reflects an integrated, fundamental analysis of
global markets. Investment decisions are based on comparisons of current market
prices to fundamental values.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. and Non-U.S. Equity Securities
The Fund may invest in a broad range of equity securities of U.S. and
non-U.S. issuers, including common stock of companies or closed-end investment
companies, preferred stock, fixed income securities convertible into or
exchangeable for common stock, securities such as warrants or rights that are
convertible into common stock and sponsored or unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") or Global Depositary
Receipts ("GDRs") for those securities. ADRs are receipts issued by a U.S. bank
or trust company evidencing ownership of underlying securities issued by foreign
issuers. ADRs may be listed on a national securities exchange or may be traded
in the over-the-counter market. EDRs also represent securities of foreign
issuers and are designated for use in European markets. A GDR represents
ownership in a non-U.S. company's publicly traded securities that are traded on
foreign stock exchanges or foreign over-the-counter markets. Holders of
unsponsored ADRs, EDRs or GDRs generally bear all the costs of such facilities
and the depository of an unsponsored facility frequently is under no obligation
to distribute investor communications received from the issuer of the deposited
security or to pass through voting rights to the holders of such receipts in
respect of the deposited securities.
The Fund expects its U.S. equity investments to emphasize both large
and intermediate capitalization companies. In addition, the U.S. equity
component may invest in small capitalization issues. Please see the discussion
below under "Special Risk Considerations of Investing in Small Capitalization
Issues" for a description of the risks of investing in small capitalization
issues. The equity markets in the non-U.S. component of the Fund will typically
include available shares of larger capitalization companies. Capitalization
levels are measured relative to specific markets, thus large and intermediate
capitalization ranges vary country-by-country and may with respect to certain
countries include capitalization levels that would be included in the small
capitalization range in the U.S. market.
Emerging Markets Equity Securities
The Fund may invest in a broad range of equity securities of emerging
market issuers, or securities with respect to which the return is derived
primarily from the equity securities of issuers in emerging markets, including
common and preferred stocks. The Fund considers a country to be an "emerging
market" if it is defined as an emerging or developing economy by any one of the
following: the International
3
<PAGE>
Bank for Reconstruction and Development (i.e. the World Bank), the International
Finance Corporation, or the United Nations or its authorities. Common stocks
include securities convertible into common stocks and securities having common
stock characteristics, such as rights and warrants. The Fund may invest
indirectly in emerging market equity securities by purchasing securities of
open-end and closed-end investment companies. Please see the discussion below
under "Investment Company Securities" for a further explanation of investments
in investment companies and under "Investing in Emerging Markets" for a
description of the risks of investing in emerging market securities.
The Trust has received an exemptive order (the "Exemptive Order") from
the United States Securities and Exchange Commission (the "Commission") to
permit, among other things, the Fund to invest its assets in the Brinson
Emerging Markets Equity Fund (the "EM Equity Fund")series of the Trust. Pursuant
to the Exemptive Order, the Fund will may invest that portion of its assets
allocated to emerging markets investments by purchasing shares of the funds
listed above. The investment objective of the EM Equity Fund is to maximize
total U.S. dollar return, consisting of capital appreciation and current income,
while controlling risk. Under normal circumstances, at least 65% of the assets
of the EM Equity Fund is invested in the equity securities of issuers in
emerging markets or securities with respect to which the return is derived from
the equity securities of issuers in emerging markets. The EM Equity Fund is
permitted to invest in the same types of securities as the Fund may invest in
directly and as further described herein.
The Fund may invest its assets directly or indirectly in emerging
market securities as described above. Pursuant to the Exemptive Order, any
investment by the Fund in the EM Equity Fund of the Trust would not be subject
to the limitations of the Investment Company Act concerning investments by open-
end investment companies in the securities issued by other investment companies.
Please see the discussion below under "Investment Company Securities" for a
description of these limitations.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt
securities of corporations, governments or agencies and banks and finance
companies which may be denominated in U.S. or non-U.S. currencies. When unusual
market conditions warrant, the Fund can make substantial temporary defensive
investments in cash equivalents up to a maximum exposure of 100% of the Fund's
assets. The Fund's investment in temporary defensive investments may affect the
Fund's ability to attain its investment objective.
The short-term debt securities in which the Fund may invest include
demand notes, bank instruments, commercial paper and floating rate instruments.
Demand notes are securities issued with a maturity date but which can be called
for repayment by the lender or the borrower at a predetermined interval. Bank
instruments in which the Fund may invest include bank loan participations, bank
holding company commercial paper, deposits, bank notes and other bank related
securities. Bank loan participations are loans sold by lending banks to
investors. Bank holding company commercial paper is a form of short-term
promissory note which is a direct obligation of a bank holding company. Deposits
are obligations of a bank or its branches. Corporate commercial paper is a form
of short-term promissory note issued by corporations primarily to finance short-
term credit needs. Rates vary according to the credit standing of the issuers
and money market conditions. Floating rate instruments are obligations with
various final maturities and interest rates that are tied to other assorted
market indices. The Fund will not invest more than 15% of the value of its net
assets in floating or variable rate demand obligations as to which it cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable.
4
<PAGE>
Pursuant to the Exemptive Order described above, in lieu of investing
directly in the cash and cash equivalents described above, the Fund may invest a
portion of its assets in the Brinson Short-Term Fund (the "Short-Term Fund")
series of the Trust. Any investment by the Fund in the Short-Term Fund would
not be subject to the limitations of the Investment Company Act concerning
investments by open-end investment companies in securities issued by other
investment companies. Please see the discussion below under "Investment Company
Securities" for a description of these limitations.
When-Issued Securities
The Fund may purchase securities on a "when-issued" basis for payment
and delivery at a later date. The price is generally fixed on the date of
commitment to purchase. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date. At the time of settlement, the market value of the security
may be more or less than the purchase price. For further information concerning
when-issued securities, see Part B of this Registration Statement.
Convertible Securities
The Fund may invest in convertible securities which generally offer
lower interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-
dealers. Repurchase agreements are considered under the Investment Company Act
to be collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank
in which it will maintain cash, U.S. government securities or other liquid
assets equal in value to its obligations with respect to reverse repurchase
agreements. Reverse repurchase agreements involve the risk that the market value
of the securities retained by the Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Fund's obligation to repurchase the
securities.
5
<PAGE>
Non-Publicly Traded Securities, Private Placements and Restricted Securities
With regard to emerging market investments, the Fund may invest in
securities that are neither listed on a stock exchange nor traded over-the-
counter, including privately placed securities and limited partnerships.
Investing in such unregistered or unlisted emerging market securities, including
investments in new and early stage companies, may involve a high degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Fund, or less than what may be
considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which would be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expense of registration. No more
than 15% of the Fund's net assets will be invested in illiquid securities,
including, but not limited to, non-publicly traded securities, private
placements and restricted securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Fund's net assets invested in
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
As described above, the Trust has received an Exemptive Order, which
permits the Fund to invest its assets in securities of other series offered by
the Trust. The Fund will invest in such series only to the extent that the
Advisor determines that it is more efficient for the Fund to gain exposure to a
particular asset class through investment in a series of the Trust as opposed to
investment directly in individual securities. Investments by the Fund in
another series of the Trust may involve transaction costs, but not duplication
of other fees and expenses because the Advisor and other service providers will
waive fees or reimburse expenses to avoid such duplication.
The Fund's investments in any other series of the Trust, each of which
invests primarily in one asset class (a" Core Series") will not be subject to
the percentage limitations described above. To the extent that the Fund invests
in the Trust's other series ("Other Series") and particular open-end investment
companies other than the Core Series, the Fund will be subject to the percentage
limitations described above and the Fund's investments in such other investment
companies will be aggregated with its investments in the Other Series for
purposes of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the security. Some
examples of illiquid securities are securities purchased under Rule 144A under
the Securities Act ("Rule 144A Securities") over-the-counter options and certain
interest rate swaps described below. While maintaining oversight, the Board of
Trustees has delegated to the Advisor the day-to-day function of determining
whether or not Rule 144A Securities are liquid for purposes of the Fund's 15%
limitation on
6
<PAGE>
investments in illiquid assets. The Board of Trustees has instructed the Advisor
to consider the following factors in determining the liquidity of a Rule 144A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Although it has delegated the day-to-day liquidity determination to the Advisor,
the Board of Trustees will continue to monitor and will periodically review the
Advisor's selection of Rule 144A Securities, as well as the Advisor's
determination as to their liquidity.
If the Advisor determines that a Rule 144A Security which was
previously determined to be liquid is no longer liquid and, as a result, the
Fund's holdings of illiquid securities exceed the Fund's 15% limit on investment
in such securities, the Advisor will determine what action shall be taken to
ensure that the Fund continues to adhere to such limitation including disposing
of illiquid assets which may include such Rule 144A Securities.
Future Developments
From time to time, the Fund may also invest in certain equity
securities which have features other than those that are typical for such
securities and which have in the past been offered or may be offered in the
future. In the past, for example, such securities have been issued to replicate
the performance of a certain component or components of a particular security or
combination of securities and/or to hedge or reduce the risks associated with
certain securities or market trends. The Fund may invest in these securities if
the Advisor believes that doing so would be consistent with the Fund's
investment objective and policies. Since the market for these securities may be
new, the Fund may have difficulty disposing of them at a suitable price and
time. In addition to limited liquidity, these instruments may present other
risks, such as high price volatility. The unavailability of such innovative
securities would not adversely affect the Fund's ability to achieve its
investment objective.
Foreign Securities and Currency Considerations
Investments in securities of foreign issuers may involve greater risks
than those of U.S. issuers. There is generally less information available to
the public about non-U.S. issuers and less government regulation and supervision
of non-U.S. stock exchanges, brokers and listed companies. Non-U.S. companies
are not subject to uniform global accounting, auditing and financial reporting
standards, practices and requirements. Securities of some non-U.S. companies
are less liquid and their prices more volatile than securities of comparable
U.S. companies. Securities trading practices abroad may offer less protection
to investors. Settlement of transactions in some non-U.S. markets may be
delayed or may be less frequent than in the United States, which could affect
the liquidity of the Fund. Additionally, in some countries, there is the
possibility of expropriation or confiscatory taxation, limitations on the
removal of securities, property or other assets of the Fund, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries. The Advisor will take these factors into consideration in
managing the Fund's investments. Investments will be made primarily in the
equity securities of companies domiciled in developed countries. The Fund
intends to diversify broadly among countries but reserves the right to invest a
substantial portion of its assets in one or more countries if economic and
business conditions warrant such investments. Gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or liabilities denominated in
a foreign currency and the time the Fund actually collects such receivables, or
pays such liabilities, are generally treated as ordinary income or loss.
Similarly, a portion of the gains or losses realized on disposition of debt
securities denominated in a foreign currency, referred to
7
<PAGE>
under the Internal Revenue Code of 1986, as amended ("the Code"), as "section
988" gains or losses, may also be treated as ordinary gain or loss rather than
as capital gain or loss.
The U.S. dollar market value of the Fund's investments and of
dividends and interest earned by the Fund may be significantly affected by
changes in currency exchange rates. Some currency prices may be volatile, and
there is the possibility of governmental controls on currency exchange or
governmental intervention in currency markets, which could adversely affect the
Fund. Although the Fund may attempt to manage currency exchange rate risk, there
is no assurance that the Fund will do so at an appropriate time or that it will
be able to predict exchange rates accurately. The Fund will manage currency
exposures relative to the normal currency allocation and will consider return
and risk of currency exposures relative to the Benchmark.
Investing in Emerging Markets
Compared to the United States and other developed countries, emerging
countries may have relatively unstable governments, economies based on only a
few industries, and securities markets that trade only a small number of
securities and employ settlement procedures different from those used in the
United States. Prices in these markets tend to be volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries.
Furthermore, investments by investors foreign to the emerging countries are
subject to a variety of restrictions in many emerging countries. These
restrictions may take the form of prior governmental approval, limits on the
amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional restrictions may be imposed
at any time by these or other countries in which the Fund invests. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including, in
some cases, the need for certain governmental consents. Although these
restrictions may in the future make it undesirable to invest in emerging
countries, the Advisor does not believe that any current repatriation
restrictions would affect its decision to invest in such countries. Countries
such as those in which the Fund may invest have historically experienced and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations or currency depreciation, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and unemployment.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, its
government's policy towards the International Monetary Fund, the World Bank and
other international agencies and the political constraints to which a government
debtor may be subject.
Russian Securities Transactions
The Fund may invest in securities of Russian companies. The
registration, clearing and settlement of securities transactions in Russia are
subject to significant risks not normally associated with securities
transactions in the United States and other more developed markets. Ownership
of shares in Russian companies is evidenced by entries in a company's share
register (except where shares are held through depositories that meet the
requirements of the Investment Company Act) and the issuance of extracts from
the register or, in certain limited cases, by formal share certificates.
However, Russian share registers are frequently unreliable and the Fund could
possibly lose its registration through oversight, negligence or fraud.
Moreover, Russia lacks a centralized registry to record securities transactions
and registrars located throughout Russia or the companies themselves maintain
share registers. Registrars are under no obligation to provide extracts to
potential purchasers in a timely manner or at all and are not necessarily
subject to state supervision. In addition, while registrars are liable under
law for losses resulting from their errors, it
8
<PAGE>
may be difficult for the Fund to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by law to employ an independent company to maintain share registers, in
practice, such companies have not always followed this law. Because of this lack
of independence of registrars, management of a Russian company may be able to
exert considerable influence over who can purchase and sell the company's shares
by illegally instructing the registrar to refuse to record transactions on the
share register. Furthermore, these practices may prevent the Fund from investing
in the securities of certain Russian companies deemed suitable by the Advisor
and could cause a delay in the sale of Russian securities by the Fund if the
company deems a purchaser unsuitable, which may expose the Fund to potential
loss on its investment.
In light of the risks described above, the Board of Trustees of the
Fund has approved certain procedures concerning the Fund's investments in
Russian securities. Among these procedures is a requirement that the Fund will
not invest in the securities of a Russian company unless that issuer's registrar
has entered into a contract with the Fund's sub-custodian containing certain
protective conditions including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Fund. This requirement
will likely have the effect of precluding investments in certain Russian
companies that the Fund would otherwise make.
Special Risk Considerations of Investing in Small Capitalization Issues
The Fund may invest in relatively new or unseasoned companies which
are in their early stages of development (sometimes referred to as "post-venture
companies"), or small companies positioned in new and emerging industries where
the opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. The companies in which the Fund may invest may have
relatively small revenues, limited product lines, and may have a small share of
the market for their products or services. Post-venture companies may lack
depth of management, may be unable to generate internally funds necessary for
growth or potential development or to generate such funds through external
financing on favorable terms, or may be developing or marketing new products or
services for which markets are not yet established and may never become
established. Due to these and other factors, such companies may suffer
significant losses as well as realize substantial growth. Investments in such
companies tend to be volatile and are therefore speculative.
Historically, the small capitalization stocks have been more volatile
in price than the larger capitalization stocks. Among the reasons for the
greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the markets for
such stocks, and the greater sensitivity of small companies to changing economic
conditions. Besides exhibiting greater volatility, post-venture company stocks
may, to a degree, fluctuate independently of larger company stocks. Investors
should therefore expect that the value of the Fund's shares may be more volatile
than the shares of a fund that invests in larger capitalization stocks.
Pursuant to the Exemptive Order described above under "Emerging
Markets Equity Securities," in lieu of investing directly in small
capitalization issues, the Fund may invest a portion of its assets in the Post-
Venture Fund series of the Trust. The investment objective of the Post-Venture
Fund is to maximize total U.S. dollar return, consisting of capital appreciation
and current income, while controlling risk. The Post-Venture Fund invests
primarily in equity securities of publicly traded companies representing the
lower 5% of the Wilshire 5000 Index, and, as such, at least 65% of its assets
are invested in small capitalization equity securities. Any investment by the
Fund in the Post-Venture Fund would not be subject to the limitations of the
Investment Company Act concerning investments by open-end investment
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companies in the securities issued by other investment companies. Please see the
discussion above under "Investment Company Securities" for a description of
these limitations.
OTHER INVESTMENT TECHNIQUES
Currency Management
The normal currency allocation of the Fund is identical to the
currency mix of the Benchmark. The Fund expects to maintain this normal
currency exposure when, in the judgment of the Advisor, global currency markets
are fairly priced relative to each other and relative to the associated risks.
The Fund may actively deviate from such normal currency allocations to take
advantage of, or to protect its portfolio from risk and return characteristics
of, the currencies and short-term interest rates when those prices deviate
significantly from fundamental value. Deviations from the Benchmark are
determined by the Advisor based upon its research.
To manage exposure to currency fluctuations, the Fund may alter money
market exposures (in its normal asset allocation mix as previously described),
enter into forward currency exchange contracts, buy or sell options, futures or
options on futures relating to foreign currencies and purchase securities
indexed to currency baskets. The Fund will also use these currency exchange
techniques in the normal course of business to hedge against adverse changes in
exchange rates in connection with purchases and sales of securities. Some of
these strategies may require the Fund to set aside liquid assets in a segregated
custodial account to cover its obligations. These techniques are further
described below.
Forward Foreign Currency Transactions
The Fund may conduct its foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through entering into contracts to purchase or sell foreign
currencies at a future date (i.e., a "forward foreign currency contract" or
"forward contract"). A forward contract involves an obligation to purchase or
sell a specific currency amount at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties and at a price
set at the time of the contract. The Fund will convert currency on a spot basis
from time to time and investors should be aware of the potential costs of
currency conversion.
The Fund may enter into forward contracts for hedging purposes as well
as for non-hedging purposes. For hedging purposes, the Fund may enter into
contracts to deliver or receive foreign currency it will receive from or require
for its normal investment activities. It may also use contracts in a manner
intended to protect foreign currency-denominated securities from declines in
value due to unfavorable exchange rate movements. The Fund may also enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes in exchange rates.
When the Fund enters into forward contracts for non-hedging purposes,
it will establish a segregated account with its custodian bank in which it will
maintain cash, U.S. government securities or other liquid assets equal in value
to its obligations with respect to its forward contracts for non-hedging
purposes.
At the maturity of a forward contract, the Fund may either sell a
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating
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it to purchase, on the same maturity date, the same amount of the foreign
currency. The Fund may realize a gain or loss from currency transactions.
Options
The Fund may purchase and write put and call options on foreign or
U.S. securities and indices and enter into related closing transactions. The
Fund may also purchase and write put and call options on foreign currencies to
manage the Fund's exposure to changes in currency exchange rates. In addition,
the Fund may purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid,
to purchase securities from the writer of the option at an agreed price at any
time during a period ending on an agreed date. The advantage is that the
purchaser may hedge against an increase in the price of securities it ultimately
wishes to buy or may take advantage of a rise in a particular index. The Fund
may purchase call options only to the extent premiums paid on all outstanding
call options do not exceed 20% of the Fund's total assets. The Fund will write
call options only on a covered basis. A call option is "covered" if the Fund
owns the underlying securities or the Fund maintains in a segregated account
with its custodian, cash, U.S. government securities or other liquid assets with
a value sufficient to meet its obligations under the call option, or if the Fund
owns an offsetting call option. The Fund may receive premium income from
writing call options, which may offset the cost of purchasing options and may
also contribute to the Fund's total return.
A put option enables the purchaser of the option, in return for the
premium paid, to sell the security underlying the option to the writer at the
exercise price during the option period ending on an agreed date and the writer
of the option has the obligation to purchase the security from the purchaser of
the option upon exercise during such period. The Fund may purchase put options
only to the extent that the premiums on all outstanding put options do not
exceed 20% of the Fund's total assets. The advantage is that the purchaser can
be protected should the market value of the security decline or should a
particular index decline. The Fund will, at all times during which it holds a
put option, own the security underlying such option. The Fund will receive
premium income from writing put options, although it may be required, when the
put is exercised, to purchase securities at higher prices than the current
market price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call
options prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
Call options on foreign currency written by the Fund will be
"covered," which means that the Fund will own an equal amount of the underlying
foreign currency or maintain in a segregated account with its custodian, cash,
U.S. government securities or other liquid assets with a value sufficient to
meet its obligations under the call option, or own an offsetting call option.
With respect to put options on foreign currency written by the Fund, the Fund
will establish a segregated account with its custodian bank consisting of cash,
U.S. government securities or other liquid assets in an amount equal to the
amount the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter,
more than 40% of its net assets would be hedged by options. The Fund may use
options traded on U.S. exchanges and to the extent permitted by law, options
traded over-the-counter and on recognized foreign exchanges. It is the position
of
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the Commission that over-the-counter options are illiquid. Accordingly, the
Fund will invest in such options only to the extent consistent with its 15%
limit on investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of
securities, including index contracts or foreign currencies, for hedging
purposes. The purchase of a futures contract by the Fund represents the
acquisition of a contractual right to obtain delivery of the securities or
foreign currency called for by the contract at a specified price on a specified
future date. When a futures contract is sold, the Fund incurs a contractual
obligation to deliver the securities or foreign currency underlying the contract
at a specified price on a specified future date. The Fund may enter into futures
contracts and engage in options transactions related thereto for hedging
purposes and for non-hedging purposes, to the extent that not more than 5% of
the Fund's assets are required as futures contract margin deposits and premiums
on options on futures.
When the Fund enters into a futures transaction, it must deliver to
the futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the
extent required by the Commission, the Fund will maintain with its custodian,
assets in a segregated account to cover its obligations with respect to such
contracts, which assets will consist of cash, cash equivalents or other liquid
assets from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to such
futures contracts.
The Fund will enter into futures transactions on domestic exchanges
and, to the extent such transactions have been approved by the United States
Commodity Futures Trading Commission, for sale to customers in the United
States, on foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally
are not regulated by U.S. authorities and may offer less liquidity and less
protection to the Fund in the event of default by the other party to the
contract. The Fund could also experience losses if the prices of its options or
futures positions are poorly correlated with its other investments, or if it
cannot close out its positions because of an illiquid secondary market. The
loss from investing in futures transactions is potentially unlimited. For
further information concerning the risks of options and futures, see Part B of
this Registration Statement.
Swaps
The Fund may engage in swaps, including but not limited to interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars and other derivative instruments. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
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investment or portion of its portfolio, to protect against currency
fluctuations, as a technique for managing the portfolio's duration (i.e., the
price sensitivity to changes in interest rates), to protect against any increase
in the price of securities the Fund anticipates purchasing at a later date or to
gain exposure to certain markets.
Interest rate swaps involve the exchange by the Fund with another
party of their respective commitments to receive or pay interest (e.g., an
exchange of fixed rate payments for floating rate payments) with respect to a
notional amount of principal. Currency swaps involve the exchange of cash flows
on a notional amount based on changes in the values of referenced currencies.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of an interest rate floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different
from those associated with ordinary portfolio security transactions. If the
Advisor is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
The equity swaps in which the Fund intends to invest involve
agreements with a counterparty. The return to the Fund on any equity swap
contract will be the total return on the notional amount of the contract as if
it were invested in the stocks comprising the contract index in exchange for an
interest component based on the notional amount of the agreement. The Fund will
only enter into an equity swap contract on a net basis, i.e., the two parties'
obligations are netted out, with the Fund paying or receiving, as the case may
be, only the net amount of the payments. Payments under the equity swap
contracts may be made at the conclusion of the contract or periodically during
its term.
If there is a default by the counterparty to an equity swap contract,
the Fund will be limited to contractual remedies pursuant to the agreements
related to the transaction. There is no assurance that an equity swap contract
counterparty will be able to meet its obligations pursuant to an equity swap
contract or that, in the event of default, the Fund will succeed in pursuing
contractual remedies. The Fund thus assumes the risk that it may be delayed in
or prevented from obtaining payments owed to it pursuant to an equity swap
contract. However, the amount at risk is only the net unrealized gain, if any,
on the swap, not the entire notional amount. The Advisor will closely monitor,
subject to the oversight of the Board of Trustees, the creditworthiness of
equity swap counterparties in order to minimize the risk of equity swaps.
The Advisor and the Trust do not believe that the Fund's obligations
under equity swap contracts are senior securities and, accordingly, the Fund
will not treat them as being subject to its borrowing or senior securities
restrictions. However, the net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each equity swap contract will
be accrued on a daily basis and an amount of cash, U.S. government securities or
other liquid assets having an aggregate market value at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. To the extent that
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the Fund cannot dispose of a swap in the ordinary course of business within
seven days at approximately the value at which the Fund has valued the swap, it
will treat the swap as illiquid and subject to its overall limit on illiquid
investments of 15% of net assets.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Fund will not borrow money in excess
of 33 1/3% of the value of its total assets. The Fund has no intention of
increasing its net income through borrowing. Any borrowing will be from a bank
with the required asset coverage of at least 300%. In the event that such asset
coverage falls below 300%, the Fund shall, within three days thereafter (not
including Sunday or holidays) or such longer period as the Commission may
prescribe by rules and regulations, reduce the amount of its borrowings to such
an extent that the asset coverage of such borrowings shall be at least 300%. The
Fund will not pledge more than 10% of its net assets, or issue senior securities
as defined in the Investment Company Act, or as described herein, except for
notes to banks and reverse repurchase agreements. Investment securities will not
be purchased while the Fund has outstanding borrowings that exceed 5% of the
Fund's total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3%
of the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on a
loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the Fund's
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects that
investment to market risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover
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desirable in light of the Fund's investment objective. The Fund will not attempt
to achieve or be limited to a predetermined rate of portfolio turnover, such a
turnover always being incidental to transactions undertaken with a view to
achieving the Fund's investment objective. While it is the policy of the Fund
generally not to engage in trading for short-term gains, the Fund will effect
portfolio transactions without regard to the holding period if, in the judgment
of the Advisor, such transactions are advisable in light of a change in
circumstances of a particular company, within a particular industry or country,
or in general market, economic or political conditions. Although the portfolio
turnover rate for the Fund may vary greatly from year to year, the Fund expects
that under normal circumstances, the portfolio turnover rate will not exceed
250%. A high portfolio turnover rate will increase aggregate brokerage
commission expenses which must be borne directly by the Fund and ultimately by
the Fund's Investors and the incidence of short-term capital gains (which are
taxable to Investors as ordinary income). See "Brokerage Allocation" and
"Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust") the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management
firm managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust - International
Growth Portfolio, Enterprise Group of Funds, Inc. - International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust - Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust - International Equity Portfolio, John Hancock Variable Series
Trust I - International Balanced Fund, AON Funds- International Equity Fund and
The Republic Funds - Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the
"Advisory Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Appendix B to the Prospectus sets forth the investment performance of
the Fund, including the performance of the Brinson Trust Company Collective
Investment Trust's Global Securities Fund until
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April 28, 1995, the commencement of the Fund's operations. Brinson Trust Company
is a wholly-owned subsidiary of Brinson Partners.
Investment decisions for the Fund are made by an investment management
team of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which the MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to the Fund,
including the coordination and monitoring of any third party service providers.
Custody Services. MSTC provides custodian services for the securities
and cash of the Fund. The custody fee schedule is based primarily on the net
amount of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a
Mutual Funds Service Agreement (the "CGFSC" Agreement") with Chase Global Funds
Services Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank,
under which CGFSC provides administrative, accounting, portfolio valuation,
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the
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<PAGE>
0.075% administrative duties fee or the applicability of the expense limitation
on such fee. The foregoing fees include all out-of-pocket expenses or
transaction charges incurred by MSTC and any third party service provider in
providing such services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for
the services CGFSC provides to MSTC in fulfilling its obligations under the
Services Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering and of noticing the Fund's shares for
sale with the Commission and with various state securities commissions, fees and
expenses of the Administrator and the expenses of obtaining quotations of
portfolio securities and of pricing the Fund's shares. General expenses which
are not associated directly with any particular portfolio within the Trust
(e.g., insurance premiums, Trustees' fees, expenses of maintaining the Trust's
legal existence and of Investors' meetings and fees and expenses of industry
organizations) are allocated between the various series based upon their
relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.05% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. The Fund normally
trades non-U.S. securities in foreign countries, since the best available market
for non-U.S. securities is often in non-U.S. markets. In transactions on non-
U.S. stock exchanges, brokers' commissions are generally fixed and are often
higher than in the United States where commissions are negotiated. Pursuant to
the Advisory Agreement, the Advisor is authorized to utilize the trading
department of its foreign subsidiaries to execute foreign securities
transactions but monitors selection by such subsidiaries of brokers and dealers
used to execute such transactions.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this
research information in managing the Fund's assets, as well as the assets of
other clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as underwriter. The Fund may effect futures
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<PAGE>
transactions through, and pay commissions to, futures commission merchants who
are affiliated with the Advisor or the Fund in accordance with procedures
adopted by the Board of Trustees of the Trust.
Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of
Trustees has the power to designate one or more series or sub-series/classes of
shares of beneficial interest and to classify or reclassify any unissued shares
with respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-
Term Fund, the Brinson High Yield Fund, and the Brinson Emerging Markets Debt
Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Pursuant to the Investment Company Act, a control person possesses the
ability to control the outcome of matters submitted for shareholder vote. As of
July 29, 1997, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trust's Global Securities Fund of Chicago, Illinois was a control
person of the Fund and the Trust by nature of its shareholdings.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the
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Fund's investment objective could result in an Investor's withdrawal of its
investment in the Fund, and in increased costs and expenses for the remaining
Investors. Additionally, the failure by certain Investors to approve a change in
their investment objectives and policies parallel to a change that has been
approved for the Fund (thus requiring such Investors to redeem their shares of
the Fund) could lead to a number of adverse consequences, such as the inability
of such Investors to find another investment company in which to invest their
assets or an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295,
or an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of
the Fund may be purchased directly by eligible Investors from the Fund at the
net asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $25,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends,
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<PAGE>
interest, subscription, or other rights pertaining to such securities after such
transfers to the Fund shall become the property of the Fund and must be
delivered to the Fund by the Investor upon receipt from the issuer. Investors
that are permitted to transfer such securities will be required to recognize a
gain or loss on such transfer and pay tax thereon, if applicable, measured by
the difference between the fair market value of the securities and the
Investors' basis therein. The Trust will not accept securities in exchange for
shares of the Fund unless: (1) such securities are, at the time of the exchange,
eligible to be included in the Fund's investment portfolio and current market
quotations are readily available for such securities; and (2) the Investor
represents and warrants that all securities offered to be exchanged are not
subject to any restrictions upon their sale by the Fund under the Securities Act
or under the laws of the country in which the principal market for such
securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of
regular trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m.
Eastern time) on days when such exchange is open. The net asset value per share
is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment companies are valued using
their respective net asset values for purchase orders placed at the close of the
NYSE. All other securities are valued at their fair value as determined in good
faith and pursuant to a method approved by the Trust's Board of Trustees. For a
detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy,
the Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the fund into which the Investor
wishes to exchange. Requests for telephone exchanges must be received by the
transfer agent, CGFSC, by the close of regular trading hours (generally 4:00
p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
20
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Redemption of Shares or Repurchase
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose
a fee for wire service. The right of any Investor to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on the NYSE is restricted, or, to the extent
otherwise permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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OFFEREE NO. ____
BRINSON RELATIONSHIP FUNDS
Brinson U.S. Equity Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson U.S. Equity Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
Under normal market conditions, at least 65% of the Fund's assets will be
invested in equity securities of U.S. companies. The Fund seeks to achieve its
objective by investment in a wide range of equity securities of U.S. companies
that are traded on major stock exchanges as well as on the over-the-counter
markets. The benchmark for the Fund is the Wilshire 5000 Index ( the
"Benchmark"). The Benchmark is a broad weighted index which includes all U.S.
common stocks. The Benchmark is designed to provide a representative indication
of the capitalization and return for the U.S. equity market.
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
The investment style of the Fund's investment advisor, Brinson Partners,
Inc. ("Brinson Partners") or the "Advisor") is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Fund is that
periodically there are exploitable discrepancies between market price and
fundamental value. Those price/value discrepancies then become the building
blocks for portfolio construction. The successful identification of price/value
discrepancies should result in enhanced total return performance.
As a general matter, the Advisor will purchase for the Fund securities
contained in the underlying Benchmark. The Advisor will attempt to enhance the
long-term return and risk performance of the Fund relative to the Benchmark by
deviating from the normal Benchmark mix. Decisions to deviate from the
Benchmark are a blend of rigorous quantitative analysis, an understanding of the
fundamental relationships in U.S. markets and the expertise of investment
professionals. The active management process is intended, by Brinson Partners
to produce superior performance relative to the Benchmark.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund does not intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning the percentage of the Fund's portfolio securities that may be loaned,
and its policies set forth in Part B concerning borrowing, the issuance of
senior securities and concentration are "fundamental," which means that they may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting shares. As used in this Part A of the Registration
Statement, a vote of "a majority of the outstanding voting shares" of the Trust
or a series of the Trust means the affirmative vote of the lesser of (i) more
than 50% of the outstanding shares of the Trust or series, or (ii) 67% of the
shares of the Trust or series present at a meeting at which more than 50% of the
outstanding shares of the Trust or series are represented in person or by proxy.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes
the securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the Investment Company Act), the Fund may be
subject to greater investment and credit risk than an investment company that
invests in a broader range of securities, because changes in the financial
condition
<PAGE>
or market assessment of a single issuer may cause greater fluctuations in the
net asset value of the Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. Equity Securities
The Fund may invest in a broad range of equity securities of U.S. issuers,
including common stock of companies or closed-end investment companies,
preferred stock, debt securities convertible into or exchangeable for common
stock, securities such as warrants or rights that are convertible into common
stock and sponsored or unsponsored American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") or Global Depositary Receipts ("GDRs") for
those securities. ADRs are receipts issued by a U.S. bank or trust company
evidencing ownership of underlying securities issued by foreign issuers. ADRs
may be listed on a national securities exchange or may be traded in the over-
the-counter market. EDRs also represent securities of foreign issuers and are
designated for use in European markets. A GDR represents ownership in a non-
U.S. company's publicly traded securities that are traded on foreign stock
exchanges or foreign over-the-counter markets. Holders of unsponsored ADRs,
EDRs or GDRs generally bear all the costs of such facilities and the depository
of an unsponsored facility frequently is under no obligation to distribute
investor communications received from the issuer of the deposited security or to
pass through voting rights to the holders of such receipts in respect of the
deposited securities.
The Fund expects its U.S. equity investments to emphasize both large and
intermediate capitalization companies. In addition, the Fund may invest in
small capitalization issues. Please see the discussion below under "Special
Risk Considerations of Investing in Small Capitalization Issues" for a
description of the risks of investing in small capitalization issues.
The Trust has received an exemptive order (the "Exemptive Order") from the
United States Securities and Exchange Commission (the "Commission") to permit,
among other things, the Fund to invest its assets in the Brinson U.S. Large
Capitalization Equity Fund (the "Brinson U.S. Large Capitalization Fund") and
the Brinson U.S. Intermediate Capitalization Equity Fund (the "Brinson U.S.
Intermediate Fund") series of the Trust. Pursuant to the Exemptive Order, the
Fund may invest that portion of its assets allocated to large capitalization
investments and intermediate capitalization investments by purchasing shares of
the Brinson U.S. Large Capitalization Fund and the Brinson U.S. Intermediate
Fund. The investment objective of the Brinson U.S. Large Capitalization Fund
and the Brinson U.S. Intermediate Fund is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
Under normal circumstances, at least 65% of the assets of both the Brinson U.S.
Large Capitalization Fund and the Brinson U.S. Intermediate Fund are invested
in the equity securities of U.S. companies. The Brinson U.S. Large
Capitalization Fund and the Brinson U.S. Intermediate Fund are permitted to
invest in the same types of securities as the Fund may invest in directly and as
further described herein.
The Fund may invest its assets directly or indirectly in large
capitalization and intermediate capitalization securities as described above.
Pursuant to the Exemptive Order, any investment by the Fund in the Brinson U.S.
Large Capitalization Fund and the Brinson U.S. Intermediate Fund of the Trust
would not be subject to the limitations of the Investment Company Act concerning
investments by open-end investment companies in the securities issued by other
investment companies. Please see the discussion below under "Investment Company
Securities" for a description of these limitations.
<PAGE>
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. or non-U.S. currencies. When unusual market
conditions warrant, the Fund can make substantial temporary defensive
investments in cash equivalents up to a maximum exposure of 100% of the Fund's
assets. The Fund's investment in temporary defensive investments may affect the
Fund's ability to attain its investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a maturity date but which can be called for
repayment by the lender or the borrower at a predetermined interval. Bank
instruments in which the Fund may invest include bank loan participations, bank
holding company commercial paper, deposits, bank notes and other bank related
securities. Bank loan participations are loans sold by lending banks to
investors. Bank holding company commercial paper is a form of short-term
promissory note which is a direct obligation of a bank holding company. Deposits
are obligations of a bank or its branches. Corporate commercial paper is a form
of short-term promissory note issued by corporations primarily to finance short-
term credit needs. Rates vary according to the credit standing of the issuers
and money market conditions. Floating rate instruments are obligations with
various final maturities and interest rates that are tied to other assorted
market indices. The Fund will not invest more than 15% of the value of its net
assets in floating or variable rate demand obligations as to which it cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable.
Pursuant to the Exemptive Order described above, in lieu of investing
directly in the cash and cash equivalents described above, the Fund may invest a
portion of its assets in the Brinson Short-Term Fund (the "Short-Term Fund")
series of the Trust. Any investments by the Fund in the Short-Term Fund would
not be subject to the limitations of the Investment Company Act concerning
investments by open-end investment companies in securities issued by other
investment companies. Please see the discussion below under "Investment Company
Securities" for a description of these limitations.
Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
<PAGE>
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Non-Publicly Traded Securities, Private Placements and Restricted Securities
The Fund may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities and
limited partnerships. Investing in such unregistered or unlisted securities,
including investments in new and early stage companies, may involve a high
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for these securities, they
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Fund, or less than
what may be considered the fair value of such securities. Furthermore,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which would be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expense of registration. No more
than 15% of the Fund's net assets will be invested in illiquid securities,
including, but not limited to, non-publicly traded securities, private
placements and restricted securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Fund's net assets invested in
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
As described above, the Trust has received an Exemptive Order, which
permits the Fund to invest its assets in securities of other series offered by
the Trust. The Fund will invest in such series only to the extent that the
Advisor determines that it is more efficient for the Fund to gain exposure to a
particular asset class through investment in a series of the Trust as opposed to
investment directly in individual securities. Investments by the Fund in
another series of the Trust may involve transaction costs, but not duplication
of other fees and expenses because the Advisor and other service providers will
waive fees or reimburse expenses to avoid such duplication.
<PAGE>
The Fund's investments in any other series of the Trust, each of which
invests primarily in one particular asset class (a "Core Series") will not be
subject to the percentage limitations described above. To the extent that the
Fund invests in the Trust's other series ("Other Series") and open-end
investment companies other than the Core Series, the Fund will be subject to the
percentage limitations described above and the Fund's investments in such other
investment companies will be aggregated with its investments in the Other Series
for purposes of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities") over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to
consider the following factors in determining the liquidity of a Rule 144 A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Although it has delegated the day-to-day liquidity determination to the Advisor,
the Board of Trustees will continue to monitor and will periodically review the
Advisor's selection of Rule 144A Securities, as well as the Advisor's
determination as to their liquidity.
If the Advisor determines that a Rule 144A Security which was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Advisor will determine what action shall be taken to ensure
that the Fund continues to adhere to such limitation including disposing of
illiquid assets which may include such Rule 144A Securities.
Future Developments
From time to time, the Fund may also invest in certain equity securities
which have features other than those that are typical for such securities and
which have in the past been offered or may be offered in the future. In the
past, for example, such securities have been issued to replicate the performance
of a certain component or components of a particular security or combination of
securities and/or to hedge or reduce the risks associated with certain
securities or market trends. The Fund may invest in these securities if the
Advisor believes that doing so would be consistent with the Fund's investment
objective and policies. Since the market for these securities may be new, the
Fund may have difficulty disposing of them at a suitable price and time. In
addition to limited liquidity, these instruments may present other risks, such
as high price volatility. The unavailability of such innovative securities
would not adversely affect the Fund's ability to achieve its investment
objective.
Special Risk Considerations of Investing in Small Capitalization Issues
The Fund may invest in relatively new or unseasoned companies which are in
their early stages of development (sometimes referred to as "post-venture
companies"), or small companies positioned in new and emerging industries where
the opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. The
<PAGE>
companies in which the Fund may invest may have relatively small revenues,
limited product lines, and may have a small share of the market for their
products or services. Post-venture companies may lack depth of management, may
be unable to generate internally funds necessary for growth or potential
development or to generate such funds through external financing on favorable
terms, or may be developing or marketing new products or services for which
markets are not yet established and may never become established. Due to these
and other factors, such companies may suffer significant losses as well as
realize substantial growth. Investments in such companies tend to be volatile
and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in
price than the larger capitalization stocks. Among the reasons for the greater
price volatility of these securities are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such stocks, and
the greater sensitivity of small companies to changing economic conditions.
Besides exhibiting greater volatility, post-venture company stocks may, to a
degree, fluctuate independently of larger company stocks. Investors should
therefore expect that the value of the Fund's shares may be more volatile than
the shares of a fund that invests in larger capitalization stocks.
Pursuant to the Exemptive Order described above, in lieu of investing
directly in small capitalization issues, the Fund may invest a portion of its
assets in the Brinson Post-Venture Fund (the "Post Venture Fund") series of the
Trust. The investment objective of the Post-Venture Fund is to maximize total
U.S. dollar return, consisting of capital appreciation and current income, while
controlling risk. The Post-Venture Fund invests primarily in equity securities
of publicly traded companies representing the lower 5% of the Wilshire 5000
Index, and, as such, at least 65% of its assets are invested in small
capitalization equity securities. Any investment by the Fund in the Post-Venture
Fund would not be subject to the limitations of the Investment Company Act
concerning investments by open-end investment companies in the securities issued
by other investment companies. Please see the discussion above under "Investment
Company Securities" for a description of these limitations.
OTHER INVESTMENT TECHNIQUES
Options
The Fund may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Fund
may also purchase and write put and call options on foreign currencies to manage
the Fund's exposure to changes in currency exchange rates. In addition, the
Fund may purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund may
purchase call options only to the extent premiums paid on all outstanding call
options do not exceed 20% of the Fund's total assets. The Fund will write call
options only on a covered basis. A call option is "covered" if the Fund owns
the underlying securities or the Fund maintains in a segregated account with its
custodian, cash, U.S. government securities or other liquid assets with a value
sufficient to meet its obligations under the call option, or if the Fund owns an
offsetting call option. The Fund will receive premium income from writing call
options, which may offset the cost of purchasing options and may also contribute
to the Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option
<PAGE>
upon exercise during such period. The Fund may purchase put options only to the
extent that the premiums on all outstanding put options do not exceed 20% of the
Fund's total assets. The advantage is that the purchaser can be protected should
the market value of the security decline or should a particular index decline.
The Fund will, at all times during which it holds a put option, own the security
underlying such option. The Fund will receive premium income from writing put
options, although it may be required, when the put is exercised, to purchase
securities at higher prices than the current market price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency or maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date.
When a futures contract is sold, the Fund incurs a contractual obligation to
deliver the securities or foreign currency underlying the contract at a
specified price on a specified future date. The Fund may enter into futures
contracts and engage in options transactions related thereto for hedging
purposes and for non-hedging purposes, to the extent that not more than 5% of
the Fund's assets are required as futures contract margin deposits and premiums
on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its
<PAGE>
obligations with respect to such contracts, which assets will consist of cash,
cash equivalents or other liquid assets from its portfolio in an amount equal to
the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial and variation margin payments made by the
Fund with respect to such futures contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally
are not regulated by U.S. authorities and may offer less liquidity and less
protection to the Fund in the event of default by the other party to the
contract. The Fund could also experience losses if the prices of its options or
futures positions are poorly correlated with its other investments, or if it
cannot close out its positions because of an illiquid secondary market. The
loss from investing in futures transactions is potentially unlimited. For
further information concerning the risks of options and futures, see Part B of
this Registration Statement.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on
a loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the
Fund's securities lending agreement, the lending agent is obligated to replace
the loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by
<PAGE>
the Board of Trustees. Creditworthiness of the borrowing broker-dealer or
institution will be monitored on an ongoing basis by the Advisor and any lending
agent pursuant to procedures reviewed and adopted by the Board of Trustees. Cash
received through loan transactions may be invested in any security in which the
Fund is authorized to invest. Investing cash subjects that investment to market
risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to engage
in trading for short-term gains, the Fund will effect portfolio transactions
without regard to the holding period if, in the judgment of the Advisor, such
transactions are advisable in light of a change in circumstances of a particular
company, within a particular industry or country, or in general market, economic
or political conditions. Although the portfolio turnover rate for the Fund may
vary greatly from year to year, the Fund expects that under normal
circumstances, the portfolio turnover rate will not exceed 250%. A high
portfolio turnover rate will increase aggregate brokerage commission expenses
which must be borne directly by the Fund and ultimately by the Fund's Investors
and the incidence of short-term capital gains (which are taxable to Investors as
ordinary income). See " Brokerage Allocation" and "Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally
<PAGE>
diversified organization with operations in many aspects of the financial
services industry. Brinson Partners also serves as the investment advisor to
nine other investment companies: The Brinson Funds, Enterprise Accumulation
Trust -International Growth Portfolio, Enterprise Group of Funds, Inc. -
International Growth Portfolio, Fort Dearborn Income Securities, Inc., Managed
Account Services Portfolio Trust -Pace Large Company Value Equity Investments,
The Hirtle Callaghan Trust -International Equity Portfolio, John Hancock
Variable Series Trust I -International Balanced Fund, AON Funds-International
Equity Fund and The Republic Funds -Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which the MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to the Fund,
including the coordination and monitoring of any third party service providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation, and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and
<PAGE>
redemptions of the Fund's shares, acting as dividend and distribution
disbursing agent and performing other service functions.
For its administrative, accounting, transfer agency and custodian weekly
services, MSTC receives the following as compensation from the Trust on an
annual basis: 0.0025% of the average weekly U.S. net assets of the Trust;
0.0525% of net the average weekly non-U.S. net assets of the Trust; 0.3250% of
the average weekly emerging markets equity net assets of the Trust; and 0.019%
of the average weekly emerging markets debt net assets of the Trust. MSTC
receives an additional fee of 0.075% of the average weekly net assets of the
Trust for administrative duties, subject to the expense limitation applicable to
the Trust. No fee (asset based or otherwise) is charged on any investments made
by any fund into any other fund sponsored or managed by the Advisor and assets
of a fund that are invested in another investment company or series thereof
sponsored or managed by the Advisor will not be counted in determining the
0.075% administrative duties fee or the applicability of the expense limitation
on such fee. The foregoing fees include all out-of-pocket expenses or
transaction charges incurred by MSTC and any third party service provider in
providing such services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for
the services CGFSC provides to MSTC in fulfilling its obligations under the
Services Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering and of noticing the Fund's shares for
sale with the Commission and with various state securities commissions, fees and
expenses of the Administrator and the expenses of obtaining quotations of
portfolio securities and of pricing the Fund's shares. General expenses which
are not associated directly with any particular portfolio within the Trust
(e.g., insurance premiums, Trustees' fees, expenses of maintaining the Trust's
legal existence and of Investors' meetings and fees and expenses of industry
organizations) are allocated between the various series based upon their
relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.01% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and
<PAGE>
research-related services which they provide to the Advisor and indirectly to
its clients. These services are of the type described in Section 28(e) of the
Securities Exchange Act of 1934, as amended, and are designed to augment the
Advisor's own internal research and investment strategy capabilities. The
Advisor may use this research information in managing the Fund's assets, as well
as the assets of other clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as underwriter. The Fund may effect futures transactions
through, and pay commissions to, futures commission merchants who are affiliated
with the Advisor or the Fund in accordance with procedures adopted by the Board
of Trustees of the Trust.
Capital Stock and Other Securities
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of
Trustees has the power to designate one or more series or sub-series/classes of
shares of beneficial interest and to classify or reclassify any unissued shares
with respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-
Term Fund, the Brinson High Yield Fund and the Brinson Emerging Markets Debt
Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Trust's Declaration of Trust, Investor
meetings will also be called upon request of Investors holding in the aggregate
10% or more of the outstanding shares. Subject to certain conditions, Investors
may apply to the Fund to communicate with other Investors to request an Investor
meeting.
<PAGE>
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the Fund's
investment objective could result in an Investor's withdrawal of its investment
in the Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295,
or an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of
the Fund may be purchased directly by eligible Investors from the Fund at the
net asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the
<PAGE>
Fund will be valued in accordance with the same procedures used to determine the
Fund's net asset value at the time of the next determination of net asset value
after such receipt. Shares issued by the Fund in exchange for securities will be
issued at net asset value determined as of the same time. All dividends,
interest, subscription, or other rights pertaining to such securities after such
transfers to the Fund shall become the property of the Fund and must be
delivered to the Fund by the Investor upon receipt from the issuer. Investors
that are permitted to transfer such securities will be required to recognize a
gain or loss on such transfer and pay tax thereon, if applicable, measured by
the difference between the fair market value of the securities and the
Investors' basis therein. The Trust will not accept securities in exchange for
shares of the Fund unless: (1) such securities are, at the time of the exchange,
eligible to be included in the Fund's investment portfolio and current market
quotations are readily available for such securities; and (2) the Investor
represents and warrants that all securities offered to be exchanged are not
subject to any restrictions upon their sale by the Fund under the Securities Act
or under the laws of the country in which the principal market for such
securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of
regular trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m.
Eastern time) on days when such exchange is open. The net asset value per share
is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment companies are valued using
their respective net asset values for purchase orders placed at the close of the
NYSE. All other securities are valued at their fair value as determined in good
faith and pursuant to a method approved by the Trust's Board of Trustees. For a
detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy,
the Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the fund into which the Investor
wishes to exchange. Requests for telephone
<PAGE>
exchanges must be received by the transfer agent, CGFSC, by the close of regular
trading hours (generally 4:00 p.m. Eastern time) on the NYSE on any day that the
NYSE is open for regular trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose
a fee for wire service. The right of any Investor to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on the NYSE is restricted, or, to the extent
otherwise permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
<PAGE>
OFFEREE NO.___
BRINSON RELATIONSHIP FUNDS
Brinson U.S. Large Capitalization Equity Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson U.S. Large Capitalization Equity Fund
(the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
Under normal market conditions, at least 65% of the Fund's assets will be
invested in large capitalization equity securities of U.S. companies. The Fund
seeks to achieve its objective by investment in a wide range of equity
securities of U.S. companies that are traded on major stock exchanges as well as
on the over-the-counter markets. The benchmark for the Fund is the Standard &
Poor's 500 Stock Index (the "S&P 500" or "Benchmark"). The Benchmark is a broad
weighted index which includes primarily U.S. common stocks. The Benchmark is
designed to provide a representative indication of the capitalization and return
for the large capitalization U.S. equity market.
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
The investment style of the Fund's investment advisor, Brinson Partners,
Inc. ("Brinson Partners" or the "Advisor") is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Fund is that
periodically there are exploitable discrepancies between market price and
fundamental value. Those price/value discrepancies then become the building
blocks for portfolio construction. The successful identification of price/value
discrepancies should result in enhanced total return performance.
As a general matter, the Advisor will purchase for the Fund securities
contained in the underlying Benchmark. The Advisor will attempt to enhance the
long-term return and risk performance of the Fund relative to the Benchmark by
deviating from the normal Benchmark mix. Decisions to deviate from the
Benchmark are a blend of rigorous quantitative analysis, an understanding of the
fundamental relationships in U.S. markets and the expertise of investment
professionals. The active management process is intended, by Brinson Partners,
to produce superior performance relative to the Benchmark.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund does not intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning the percentage of the Fund's portfolio securities that may be loaned,
and its policies set forth in Part B concerning borrowing, the issuance of
senior securities and concentration are "fundamental," which means that they may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting shares. As used in this Part A of this Registration
Statement, a vote of "a majority of the outstanding voting shares" of the Trust
or a series of the Trust means the affirmative vote of the lesser of (i) more
than 50% of the outstanding shares of the Trust or series, or (ii) 67% of the
shares of the Trust or series present at a meeting at which more than 50% of the
outstanding shares of the Trust or series are represented in person or by proxy.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes the
securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the
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Investment Company Act), the Fund may be subject to greater investment and
credit risk than an investment company that invests in a broader range of
securities, because changes in the financial condition or market assessment of a
single issuer may cause greater fluctuations in the net asset value of the
Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. Equity Securities
The Fund may invest in a broad range of equity securities of U.S. issuers,
including common stock of companies or closed-end investment companies,
preferred stock, debt securities convertible into or exchangeable for common
stock, securities such as warrants or rights that are convertible into common
stock and sponsored or unsponsored American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") or Global Depositary Receipts ("GDRs") for
those securities. ADRs are receipts issued by a U.S. bank or trust company
evidencing ownership of underlying securities issued by foreign issuers. ADRs
may be listed on a national securities exchange or may be traded in the over-
the-counter market. EDRs also represent securities of foreign issuers and are
designated for use in European markets. A GDR represents ownership in a non-U.S.
company's publicly traded securities that are traded on foreign stock exchanges
or foreign over-the-counter markets. Holders of unsponsored ADRs, EDRs or GDRs
generally bear all the costs of such facilities and the depository of an
unsponsored facility frequently is under no obligation to distribute investor
communications received from the issuer of the deposited security or to pass
through voting rights to the holders of such receipts in respect of the
deposited securities.
The Fund expects its U.S. equity investments to emphasize large
capitalization companies. In addition, the Fund may invest in intermediate
capitalization issues.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. or non-U.S. currencies. When unusual market
conditions warrant, the Fund can make substantial temporary defensive
investments in cash equivalents up to a maximum exposure of 100% of the Fund's
assets. The Fund's investment in temporary defensive investments may affect the
Fund's ability to attain its investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a maturity date but which can be called for
repayment by the lender or the borrower at a predetermined interval. Bank
instruments in which the Fund may invest include bank loan participations, bank
holding company commercial paper, deposits, bank notes and other bank related
securities. Bank loan participations are loans sold by lending banks to
investors. Bank holding company commercial paper is a form of short-term
promissory note which is a direct obligation of a bank holding company. Deposits
are obligations of a bank or its branches. Corporate commercial paper is a form
of short-term promissory note issued by corporations primarily to finance short-
term credit needs. Rates vary according to the credit standing of the issuers
and money market conditions. Floating rate instruments are obligations with
various final maturities and interest rates that are tied to other assorted
market indices. The Fund will not invest more than 15% of the value of its net
assets in floating or variable rate demand obligations as to which it cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable.
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Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value of
the underlying common stock. Convertible securities entail less credit risk than
the issuer's common stock because they rank senior to common stock.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Non-Publicly Traded Securities, Private Placements and Restricted Securities
The Fund may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities and
limited partnerships. Investing in such unregistered or unlisted securities,
including investments in new and early stage companies, may involve a high
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for these securities, they
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Fund, or less than
what may be considered the fair value of such securities. Furthermore, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements which would be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more
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jurisdictions before being resold, the Fund may be required to bear the expense
of registration. No more than 15% of the Fund's net assets will be invested in
illiquid securities, including, but not limited to, non-publicly traded
securities, private placements and restricted securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Fund's net assets invested in
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
The Trust has received an exemptive order (the "Exemptive Order") from the
United States Securities and Exchange Commission (the "Commission"), which
permits the Fund to invest its assets in securities of other series offered by
the Trust. The Fund will invest in such series only to the extent that the
Advisor determines that it is more efficient for the Fund to gain exposure to a
particular asset class through investment in a series of the Trust as opposed to
investment directly in individual securities. Investments by the Fund in another
series of the Trust may involve transaction costs, but not duplication of other
fees and expenses because the Advisor and other service providers will waive
fees or reimburse expenses to avoid such duplication.
The Fund's investments in any other series of the Trust will be subject to
the percentage limitations described above (so long as other series of the Trust
or certain other Brinson Partners-sponsored funds invest in the Fund in excess
of such limitations), and the Fund's investments in other investment companies
will be aggregated with its investments in the Trust's other series for
purposes of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities"), over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to consider
the following factors in determining the liquidity of a Rule 144A Security : (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Although it has delegated
the day-to-day liquidity determination to the Advisor, the Board of Trustees
will continue to monitor and will periodically review the Advisor's selection of
Rule 144A Securities, as well as the Advisor's determination as to their
liquidity.
If the Advisor determines that a Rule 144A Security which was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Advisor will determine what action shall be taken to ensure
that the Fund continues to adhere to such limitation including disposing of
illiquid assets which may include such Rule 144A Securities.
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Future Developments
From time to time, the Fund may also invest in certain equity securities
which have features other than those that are typical for such securities and
which have in the past been offered or may be offered in the future. In the
past, for example, such securities have been issued to replicate the performance
of a certain component or components of a particular security or combination of
securities and/or to hedge or reduce the risks associated with certain
securities or market trends. The Fund may invest in these securities if the
Advisor believes that doing so would be consistent with the Fund's investment
objective and policies. Since the market for these securities may be new, the
Fund may have difficulty disposing of them at a suitable price and time. In
addition to limited liquidity, these instruments may present other risks, such
as high price volatility. The unavailability of such innovative securities would
not adversely affect the Fund's ability to achieve its investment
objective.
OTHER INVESTMENT TECHNIQUES
Options
The Fund may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Fund may
also purchase and write put and call options on foreign currencies to manage the
Fund's exposure to changes in currency exchange rates. In addition, the Fund may
purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund may purchase
call options only to the extent premiums paid on all outstanding call options do
not exceed 20% of the Fund's total assets. The Fund will write call options only
on a covered basis. A call option is "covered" if the Fund owns the underlying
securities or the Fund maintains in a segregated account with its custodian,
cash, U.S. government securities or other liquid assets with a value sufficient
to meet its obligations under the call option, or if the Fund owns an offsetting
call option. The Fund will receive premium income from writing call options,
which may offset the cost of purchasing options and may also contribute to the
Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be protected
should the market value of the security decline or should a particular index
decline. The Fund will, at all times during which it holds a put option, own the
security underlying such option. The Fund will receive premium income from
writing put options, although it may be required, when the put is exercised, to
purchase securities at higher prices than the current market price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing transactions,
it may have to hold a security it would otherwise sell or deliver a security it
might want to hold.
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Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency or maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date. When
a futures contract is sold, the Fund incurs a contractual obligation to deliver
the securities or foreign currency underlying the contract at a specified price
on a specified future date. The Fund may enter into futures contracts and engage
in options transactions related thereto for hedging purposes and for non-hedging
purposes, to the extent that not more than 5% of the Fund's assets are required
as futures contract margin deposits and premiums on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally are
not
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regulated by U.S. authorities and may offer less liquidity and less protection
to the Fund in the event of default by the other party to the contract. The Fund
could also experience losses if the prices of its options or futures positions
are poorly correlated with its other investments, or if it cannot close out its
positions because of an illiquid secondary market. The loss from investing in
futures transactions is potentially unlimited. For further information
concerning the risks of options and futures, see Part B of this Registration
Statement.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on a
loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the Fund's
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects that
investment to market risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
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Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to engage
in trading for short-term gains, the Fund will effect portfolio transactions
without regard to the holding period if, in the judgment of the Advisor, such
transactions are advisable in light of a change in circumstances of a particular
company, within a particular industry or country, or in general market, economic
or political conditions. Although the portfolio turnover rate for the Fund may
vary greatly from year to year, the Fund expects that under normal
circumstances, the portfolio turnover rate will not exceed 250%. A high
portfolio turnover rate will increase aggregate brokerage commission expenses
which must be borne directly by the Fund and ultimately by the Fund's Investors
and the incidence of short-term capital gains (which are taxable to Investors as
ordinary income). See "Brokerage Allocation" and "Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust -International
Growth Portfolio, Enterprise Group of Funds, Inc. -International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust -Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -International Equity Portfolio, John Hancock Variable Series
Trust I -International Balanced Fund, AON Funds-International Equity Fund and
The Republic Funds -Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
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Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which the MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to the Fund,
including the coordination and monitoring of any third party service providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation, and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and net assets
of a fund that are invested in another investment company or series thereof
sponsored or managed by the Advisor will not be counted in determining the
0.075% administrative duties fee or the applicability of the expense limitation
on such fee. The foregoing
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fees include all out-of-pocket expenses or transaction charges incurred by MSTC
and any third party service provider in providing such services. Pursuant to the
CGFSC Agreement, MSTC pays CGFSC for the services CGFSC provides to MSTC in
fulfilling its obligations under the Services Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering and of noticing the Fund's shares for
sale with the Commission and with various state securities commissions, fees and
expenses of the Administrator and the expenses of obtaining quotations of
portfolio securities and of pricing the Fund's shares. General expenses which
are not associated directly with any particular portfolio within the Trust
(e.g., insurance premiums, Trustees' fees, expenses of maintaining the Trust's
legal existence and of Investors' meetings and fees and expenses of industry
organizations) are allocated between the various series based upon their
relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.01% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this
research information in managing the Fund's assets, as well as the assets of
other clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as underwriter. The Fund may effect futures transactions
through, and pay commissions to, futures commission merchants who are affiliated
with the Advisor or the Fund in accordance with procedures adopted by the Board
of Trustees of the Trust.
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Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of Trustees
has the power to designate one or more series or sub-series/classes of shares of
beneficial interest and to classify or reclassify any unissued shares with
respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-
Term Fund, the Brinson High Yield Fund and the Brinson Emerging Markets Debt
Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain Investors
holding a majority of shares in the Fund to change the Fund's investment
objective could result in an Investor's withdrawal of its investment in the
Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
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Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295, or
an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of the
Fund may be purchased directly by eligible Investors from the Fund at the net
asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities after such transfers to the Fund
shall become the property of the Fund and must be delivered to the Fund by the
Investor upon receipt from the issuer. Investors that are permitted to transfer
such securities will be required to recognize a gain or loss on such transfer
and pay tax thereon, if applicable, measured by the difference between the fair
market value of the securities and the Investors' basis therein. The Trust will
not accept securities in exchange for shares
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of the Fund unless: (1) such securities are, at the time of the exchange,
eligible to be included in the Fund's investment portfolio and current market
quotations are readily available for such securities; and (2) the Investor
represents and warrants that all securities offered to be exchanged are not
subject to any restrictions upon their sale by the Fund under the Securities Act
or under the laws of the country in which the principal market for such
securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of regular
trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m. Eastern
time) on days when such exchange is open. The net asset value per share is
computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less than
60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment companies are valued using
their respective net asset values for purchase orders placed at the close of the
NYSE. All other securities are valued at their fair value as determined in good
faith and pursuant to a method approved by the Trust's Board of Trustees. For a
detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy, the
Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the fund into which the Investor
wishes to exchange. Requests for telephone exchanges must be received by the
transfer agent, CGFSC, by the close of regular trading hours (generally 4:00
p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
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An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose a
fee for wire service. The right of any Investor to receive payment with respect
to any redemption may be suspended or the payment of the redemption proceeds
postponed during any period in which the NYSE is closed (other than weekends or
holidays) or trading on the NYSE is restricted, or, to the extent otherwise
permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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OFFEREE NO. _______
BRINSON RELATIONSHIP FUNDS
Brinson U.S. Intermediate Capitalization Equity Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson U.S. Intermediate Capitalization Equity
Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
Under normal market conditions, at least 65% of the Fund's assets will be
invested in equity securities of U.S. companies. The Fund seeks to achieve its
objective by investment in a wide range of equity securities of U.S. companies
that are traded on major stock exchanges as well as on the over-the-counter
markets. The benchmark for the Fund is the Frank Russell Mid-Cap Index (the
"Benchmark"). The Benchmark is a broad weighted index which includes U.S. common
stocks in a defined capitalization range. The Benchmark is designed to provide a
representative indication of the capitalization and return for the intermediate
capitalization sector of the U.S. equity market.
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
The investment style of the Fund's investment advisor, Brinson Partners,
Inc. ("Brinson Partners" or the "Advisor") is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Fund is that
periodically there are exploitable discrepancies between market price and
fundamental value. Those price/value discrepancies then become the building
blocks for portfolio construction. The successful identification of price/value
discrepancies should result in enhanced total return performance.
As a general matter, the Advisor will purchase for the Fund securities
contained in the underlying Benchmark. The Advisor will attempt to enhance the
long-term return and risk performance of the Fund relative to the Benchmark by
deviating from the normal Benchmark mix. Decisions to deviate from the
Benchmark are a blend of rigorous quantitative analysis, an understanding of the
fundamental relationships among global markets and the expertise of investment
professionals. The active management process is intended, by Brinson Partners
to produce superior performance relative to the Benchmark.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund does not intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning the percentage of the Fund's portfolio securities that may be loaned,
and its policies set forth in Part B concerning borrowing, the issuance of
senior securities and concentration are "fundamental," which means that they may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting shares. As used in this Part A of this Registration
Statement, a vote of "a majority of the outstanding voting shares" of the Trust
or a series of the Trust means the affirmative vote of the lesser of (i) more
than 50% of the outstanding shares of the Trust or series, or (ii) 67% of the
shares of the Trust or series present at a meeting at which more than 50% of the
outstanding shares of the Trust or series are represented in person or by proxy.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes
the securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the Investment Company Act), the Fund may be
subject to greater investment and credit risk than an
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investment company that invests in a broader range of securities, because
changes in the financial condition or market assessment of a single issuer may
cause greater fluctuations in the net asset value of the Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. Equity Securities
The Fund may invest in a broad range of equity securities of U.S. issuers,
including common stock of companies or closed-end investment companies,
preferred stock, debt securities convertible into or exchangeable for common
stock, securities such as warrants or rights that are convertible into common
stock and sponsored or unsponsored American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") or Global Depositary Receipts ("GDRs") for
those securities. ADRs are receipts issued by a U.S. bank or trust company
evidencing ownership of underlying securities issued by foreign issuers. ADRs
may be listed on a national securities exchange or may be traded in the over-
the-counter market. EDRs also represent securities of foreign issuers and are
designated for use in European markets. A GDR represents ownership in a non-
U.S. company's publicly traded securities that are traded on foreign stock
exchanges or foreign over-the-counter markets. Holders of unsponsored ADRs,
EDRs or GDRs generally bear all the costs of such facilities and the depository
of an unsponsored facility frequently is under no obligation to distribute
investor communications received from the issuer of the deposited security or to
pass through voting rights to the holders of such receipts in respect of the
deposited securities.
The Fund expects its U.S. equity investments to emphasize intermediate
capitalization companies. In addition, the Fund may invest in small
capitalization issues.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. or non-U.S. currencies. When unusual market
conditions warrant, the Fund can make substantial temporary defensive
investments in cash equivalents up to a maximum exposure of 100% of the Fund's
assets. The Fund's investment in temporary defensive investments may affect the
Fund's ability to attain its investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a maturity date but which can be called for
repayment by the lender or the borrower at a predetermined interval. Bank
instruments in which the Fund may invest include bank loan participations, bank
holding company commercial paper, deposits, bank notes and other bank related
securities. Bank loan participations are loans sold by lending banks to
investors. Bank holding company commercial paper is a form of short-term
promissory note which is a direct obligation of a bank holding company. Deposits
are obligations of a bank or its branches. Corporate commercial paper is a form
of short-term promissory note issued by corporations primarily to finance short-
term credit needs. Rates vary according to the credit standing of the issuers
and money market conditions. Floating rate instruments are obligations with
various final maturities and interest rates that are tied to other assorted
market indices. The Fund will not invest more than 15% of the value of its net
assets in floating or variable rate demand obligations as to which it cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable.
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Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Non-Publicly Traded Securities, Private Placements and Restricted Securities
The Fund may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities and
limited partnerships. Investing in such unregistered or unlisted securities,
including investments in new and early stage companies, may involve a high
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for these securities, they
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Fund, or less than
what may be considered the fair value of such securities. Furthermore,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which would be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expense of registration. No more
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than 15% of the Fund's net assets will be invested in illiquid securities,
including, but not limited to, non-publicly traded securities, private
placements and restricted securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Fund's net assets invested in
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
The Trust has received an exemptive order (the "Exemptive Order") from the
United States Securities and Exchange Commission (the "Commission"), which
permits the Fund to invest its assets in securities of other series offered by
the Trust. The Fund will invest in such series only to the extent that the
Advisor determines that it is more efficient for the Fund to gain exposure to a
particular asset class through investment in a series of the Trust as opposed to
investment directly in individual securities. Investments by the Fund in
another series of the Trust may involve transaction costs, but not duplication
of other fees and expenses because the Advisor and other service providers will
waive fees or reimburse expenses to avoid such duplication.
The Fund's investments in any other series of the Trust will be subject to
the percentage limitations described above (so long as other series of the Trust
or certain other Brinson Partners-sponsored funds invest in the Fund in excess
of such limitations), and the Fund's investments in other investment companies
will be aggregated with its investments in the Trust's other series for purposes
of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities") over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to consider
the following factors in determining the liquidity of a Rule 144A Security : (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Although it has delegated
the day-to-day liquidity determination to the Advisor, the Board of Trustees
will continue to monitor and will periodically review the Advisor's selection of
Rule 144A Securities, as well as the Advisor's determination as to their
liquidity.
If the Advisor determines that a Rule 144A Security which was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Advisor will determine what action shall be taken to ensure
that the Fund continues to adhere to such limitation including disposing of
illiquid assets which may include such Rule 144A Securities.
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Future Developments
From time to time, the Fund may also invest in certain equity securities
which have features other than those that are typical for such securities and
which have in the past been offered or may be offered in the future. In the
past, for example, such securities have been issued to replicate the performance
of a certain component or components of a particular security or combination of
securities and/or to hedge or reduce the risks associated with certain
securities or market trends. The Fund may invest in these securities if the
Advisor believes that doing so would be consistent with the Fund's investment
objective and policies. Since the market for these securities may be new, the
Fund may have difficulty disposing of them at a suitable price and time. In
addition to limited liquidity, these instruments may present other risks, such
as high price volatility. The unavailability of such innovative securities
would not adversely affect the Fund's ability to achieve its investment
objective.
OTHER INVESTMENT TECHNIQUES
Options
The Fund may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Fund
may also purchase and write put and call options on foreign currencies to manage
the Fund's exposure to changes in currency exchange rates. In addition, the
Fund may purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund may purchase
call options only to the extent premiums paid on all outstanding call options do
not exceed 20% of the Fund's total assets. The Fund will write call options only
on a covered basis. A call option is "covered" if the Fund owns the underlying
securities or the Fund maintains in a segregated account with its custodian,
cash, U.S. government securities or other liquid assets with a value sufficient
to meet its obligations under the call option, or if the Fund owns an offsetting
call option. The Fund will receive premium income from writing call options,
which may offset the cost of purchasing options and may also contribute to the
Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be
protected should the market value of the security decline or should a particular
index decline. The Fund will, at all times during which it holds a put option,
own the security underlying such option. The Fund will receive premium income
from writing put options, although it may be required, when the put is
exercised, to purchase securities at higher prices than the current market
price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
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Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency or maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date.
When a futures contract is sold, the Fund incurs a contractual obligation to
deliver the securities or foreign currency underlying the contract at a
specified price on a specified future date. The Fund may enter into futures
contracts and engage in options transactions related thereto for hedging
purposes and for non-hedging purposes, to the extent that not more than 5% of
the Fund's assets are required as futures contract margin deposits and premiums
on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign
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exchanges generally are not regulated by U.S. authorities and may offer less
liquidity and less protection to the Fund in the event of default by the other
party to the contract. The Fund could also experience losses if the prices of
its options or futures positions are poorly correlated with its other
investments, or if it cannot close out its positions because of an illiquid
secondary market. The loss from investing in futures transactions is potentially
unlimited. For further information concerning the risks of options and futures,
see Part B of this Registration Statement.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on a
loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the Fund's
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects that
investment to market risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
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Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to
engage in trading for short-term gains, the Fund will effect portfolio
transactions without regard to the holding period if, in the judgment of the
Advisor, such transactions are advisable in light of a change in circumstances
of a particular company, within a particular industry or country, or in general
market, economic or political conditions. Although the portfolio turnover rate
for the Fund may vary greatly from year to year, the Fund expects that under
normal circumstances, the portfolio turnover rate will not exceed 250%. A high
portfolio turnover rate will increase aggregate brokerage commission expenses
which must be borne directly by the Fund and ultimately by the Fund's Investors
and the incidence of short-term capital gains (which are taxable to Investors
as ordinary income). See " Brokerage Allocation" and " Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust - International
Growth Portfolio, Enterprise Group of Funds, Inc. - International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust - Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust - International Equity Portfolio, John Hancock Variable Series
Trust I - International Balanced Fund, AON Funds-International Equity Fund and
The Republic Funds - Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
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Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which the MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to the Fund,
including the coordination and monitoring of any third party service providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation, and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any
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third party service provider in providing such services. Pursuant to the CGFSC
Agreement, MSTC pays CGFSC for the services CGFSC provides to MSTC in fulfilling
its obligations under the Services Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering and of noticing the Fund's shares for
sale with the Commission and with various state securities commissions, fees and
expenses of the Administrator and the expenses of obtaining quotations of
portfolio securities and of pricing the Fund's shares. General expenses which
are not associated directly with any particular portfolio within the Trust
(e.g., insurance premiums, Trustees' fees, expenses of maintaining the Trust's
legal existence and of Investors' meetings and fees and expenses of industry
organizations) are allocated between the various series based upon their
relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.01% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this
research information in managing the Fund's assets, as well as the assets of
other clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as underwriter. The Fund may effect futures transactions
through, and pay commissions to, futures commission merchants who are affiliated
with the Advisor or the Fund in accordance with procedures adopted by the Board
of Trustees of the Trust.
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Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of Trustees
has the power to designate one or more series or sub-series/classes of shares of
beneficial interest and to classify or reclassify any unissued shares with
respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-
Term Fund, the Brinson High Yield Fund and the Brinson Emerging Markets Debt
Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the Fund's
investment objective could result in an Investor's withdrawal of its investment
in the Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
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Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295,
or an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of
the Fund may be purchased directly by eligible Investors from the Fund at the
net asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities after such transfers to the Fund
shall become the property of the Fund and must be delivered to the Fund by the
Investor upon receipt from the issuer. Investors that are permitted to transfer
such securities will be required to recognize a gain or loss on such transfer
and pay tax thereon, if applicable, measured by the difference between the fair
market value of the securities and the Investors' basis therein. The Trust will
not accept securities in exchange for shares of the Fund unless: (1) such
securities are, at the time of the exchange, eligible to be included in the
Fund's investment portfolio and current market quotations are readily available
for such securities; and (2)
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the Investor represents and warrants that all securities offered to be exchanged
are not subject to any restrictions upon their sale by the Fund under the
Securities Act or under the laws of the country in which the principal market
for such securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of
regular trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m.
Eastern time) on days when such exchange is open. The net asset value per share
is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment companies are valued using
their respective net asset values for purchase orders placed at the close of the
NYSE. All other securities are valued at their fair value as determined in good
faith and pursuant to a method approved by the Trust's Board of Trustees. For a
detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy,
the Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the fund into which the Investor
wishes to exchange. Requests for telephone exchanges must be received by the
transfer agent, CGFSC, by the close of regular trading hours (generally 4:00
p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
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An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose
a fee for wire service. The right of any Investor to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on the NYSE is restricted, or, to the extent
otherwise permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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OFFEREE NO. _____
BRINSON RELATIONSHIP FUNDS
Brinson Post-Venture Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund, the
Brinson High Yield Fund, and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson Post-Venture Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
The Fund will invest primarily in publicly traded companies representing the
lower 5% of the Wilshire 5000 Index with respect to the size of capitalization.
Under normal circumstances, at least 65% of the Fund's assets will be invested
in small capitalization equity securities.
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
Brinson Partners, Inc.'s ("Brinson Partners" or the "Advisor") approach to
investing for the Fund is to invest in the equity securities of U.S. companies
believed to be undervalued based upon internal research and proprietary
valuation systems. Investment decisions are based on fundamental research,
internally developed valuation systems and seasoned judgment. The Advisor's
research focuses on several levels of analysis: first, on understanding wealth
shifts that occur within the equity market, and second, on individual company
research. At the company level, the Advisor quantifies expectations of a
company's ability to generate profit and to grow business into the future.
For each stock under analysis, the Advisor calculates an expected rate of
return from the investment in order to estimate intrinsic value. This value
estimate generated by the Advisor's proprietary valuation model is compared to
observed market price and ranked against other stocks accordingly. The rankings,
in combination with the Advisor's investment judgment, determine which
securities may be included in the portfolio.
The strategy of the Fund is to invest in companies with strong management
teams, significant competitive strengths in growing markets, and strong
financial positions. This entails identifying target companies that exhibit,
among other attributes, innovative management; low price-earnings multiples with
good long-term earnings prospects; strong balance sheets, often with little or
no debt and high cash positions; low ratios of market capitalization to sales;
and previous venture capital backing. Each company selected for inclusion in
the Fund's portfolio is scrutinized through on-site visits, discussions with
investment banking firms and venture capitalists, and intensive valuation
techniques.
The Benchmark for the Fund is the Wilshire Small Stock Index (the
"Benchmark"). The Benchmark represents roughly the lower 5% of the Wilshire 5000
Index with respect to the size of capitalization. As a general matter, the
Advisor will purchase for the Fund only securities contained in the Benchmark.
Brinson Partners will attempt to enhance the long-term return and risk
performance of the Fund relative to the Benchmark by deviating from the normal
Benchmark mix in reaction to discrepancies between current market prices and
fundamental values. The active management process is intended by the Advisor to
produce a superior performance relative to the Benchmark index.
The Fund's emphasis is on companies that were developed with the assistance
of professional venture capitalists. The Fund may also invest up to 20% of its
assets in small market capitalization equity securities of publicly traded
foreign corporations which were financed by venture capital partnerships, and,
in addition, may invest up to 10% of its net assets in the equity securities or
interests in non-public companies for which it is anticipated that the company
will have an initial public security offering within an eighteen-month period.
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The Advisor monitors and assesses the degree to which the Fund's portfolio
emphasizes industries or common types of stocks, and adjusts the portfolio to
balance the price/value opportunities with such industries. The Advisor imposes
limits on the degree of investment in specific industries, although the Fund
does not intend to concentrate its investments in a particular industry. The
Fund does not intend to issue senior securities except to the extent consistent
with its policies concerning options and futures as described below. The Fund's
investment objective, and its policies concerning the percentage of the Fund's
portfolio securities that may be loaned, and its policies set forth in Part B
concerning borrowing, the issuance of senior securities and concentration, are
"fundamental," which means that they may not be changed without the affirmative
vote of the holders of a majority of the Fund's outstanding voting shares. As
used in this Part A of this Registration Statement, a vote of "a majority of the
outstanding voting shares" of the Trust or a series of the Trust means the
affirmative vote of the lesser of (i) more than 50% of the outstanding shares of
the Trust or series, or (ii) 67% of the shares of the Trust or series present at
a meeting at which more than 50% of the outstanding shares of the Trust or
series are represented in person or by proxy.
The Fund and the Advisor believe that, over the long term, investing in
equity markets, based upon discrepancies between market prices and fundamental
values, may achieve a positive enhancement for the Fund's investment performance
relative to the returns from the Benchmark. When unusual market conditions
warrant, the Fund can make substantial defensive investments in cash
equivalents.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes the
securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the Investment Company Act), the Fund may be
subject to greater investment and credit risk than an investment company that
invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the net asset value of the Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. Equity Securities
The Fund may invest in a broad range of equity securities of U.S. issuers,
including common stock of companies or investment companies, preferred stock,
fixed income securities convertible into or exchangeable for common stock, and
securities such as warrants or rights that are convertible into common stock.
The Fund expects its equity investments to emphasize U.S. small capitalization
companies.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. dollars. When unusual market conditions warrant, the
Fund can make substantial temporary defensive investments in cash equivalents up
to a maximum exposure of 100% of the Fund's assets. The Fund's investment in
temporary defensive investments may affect the Fund's ability to attain its
investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a
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maturity date but which can be called for repayment by the lender or the
borrower at a predetermined interval. Bank instruments in which the Fund may
invest include bank loan participations, bank holding company commercial paper,
deposits, bank notes and other bank related securities. Bank loan participations
are loans sold by lending banks to investors. Bank holding company commercial
paper is a form of short-term promissory note which is a direct obligation of a
bank holding company. Deposits are obligations of a bank or its branches.
Corporate commercial paper is a form of short-term promissory note issued by
corporations primarily to finance short-term credit needs. Rates vary according
to the credit standing of the issuers and money market conditions. Floating rate
instruments are obligations with various final maturities and interest rates
that are tied to other assorted market indices. The Fund will not invest more
than 15% of the value of its net assets in floating or variable rate demand
obligations as to which it cannot exercise the demand feature on not more than
seven days' notice if there is no secondary market available for these
obligations, and in other securities that are not readily marketable.
Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
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Non-Publicly Traded Securities, Private Placements and Restricted Securities
The Fund may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities and
limited partnerships. Investing in such unlisted securities, including
investments in new and early stage companies, may involve a high degree of
business and financial risk that can result in substantial losses. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Fund, or less than what may be
considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which would be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expense of registration. No more
than 15% of the Fund's net assets will be invested in illiquid securities,
including, but not limited to, non-publicly traded securities, private
placements and restricted securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Fund's net assets invested in to
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
The Trust has received an Exemptive Order from the United States Securities
and Exchange Commission (the "Commission"), which permits the Fund to invest its
assets in securities of other series offered by the Trust. The Fund will invest
in such series to the extent that the Advisor determines that it is more
efficient for the Fund to gain exposure to a particular asset class through
investment in a series of the Trust as opposed to investment directly in
individual securities. Investment by the Fund in another series of the Trust
may involve transaction costs, but not duplication of other fees and expenses
because the Advisor and other service providers will waive fees or reimburse
expenses to avoid such duplication.
The Fund's investments in any other series of the Trust will be subject to
the percentage limitation described above (so long as other series of the Trust
or certain other Brinson Partners-sponsored funds invest in the Fund in excess
of such limitations) and the Fund's investments in other investment companies
will be aggregated with its investments in the Trust's other series for purposes
of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities") over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities, are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to consider
the following factors in determining the liquidity of a Rule 144A Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security
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and the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Although it has delegated the day-to-day liquidity determination to the Advisor,
the Board of Trustees will continue to monitor and will periodically review the
Advisor's selection of Rule 144A Securities, as well as the Advisor's
determination as to their liquidity.
If the Advisor determines that a Rule 144A Security which was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Advisor will determine what action shall be taken to ensure
that the Fund continues to adhere to such limitation including disposing of
illiquid assets which may include such Rule 144A securities.
Foreign Securities and Currency Considerations
Investments in securities of foreign issuers may involve greater risks than
those of U.S. issuers. There is generally less information available to the
public about non-U.S. issuers and less government regulation and supervision of
non-U.S. stock exchanges, brokers and listed companies. Non-U.S. companies are
not subject to uniform global accounting, auditing and financial reporting
standards, practices and requirements. Securities of some non-U.S. companies are
less liquid and their prices more volatile than securities of comparable U.S.
companies. Securities trading practices abroad may offer less protection to
investors. The value of foreign securities relative to U.S. currency may be
favorably or unfavorably affected by changes in foreign exchange rates or
foreign currency control regulations regardless of the particular
characteristics of the foreign company that issued the securities. Settlement of
transactions in some non-U.S. markets may be delayed or may be less frequent
than in the United States, which could affect the liquidity of the Fund.
Additionally, in some countries, there is the possibility of expropriation or
confiscatory taxation, limitations on the removal of securities, property or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries. The Advisor
will take these factors into consideration in managing the Fund's investments.
Investments will be made primarily in the equity securities of companies
domiciled in developed countries. The Fund intends to diversify broadly among
countries but reserves the right to invest a substantial portion of its assets
in one or more countries if economic and business conditions warrant such
investments. Gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues interest or other receivables or
accrues expenses or liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables, or pays such liabilities, are
generally treated as ordinary income or loss. Similarly, a portion of the gains
or losses realized on disposition of debt securities denominated in a foreign
currency, referred to under the Internal Revenue Code of 1986, as amended (the
"Code"), as "section 988" gains or losses, may also be treated as ordinary gain
or loss rather than as capital gain or loss.
The U.S. dollar market value of the Fund's investments and of dividends and
interest earned by the Fund may be significantly affected by changes in currency
exchange rates. Some currency prices may be volatile, and there is the
possibility of governmental controls on currency exchange or governmental
intervention in currency markets, which could adversely affect the Fund.
Although the Fund may attempt to manage currency exchange rate risk, there is no
assurance that the Fund will do so at an appropriate time or that it will be
able to predict exchange rates accurately.
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Future Developments
From time to time, the Fund may also invest in certain equity securities
which have features other than those that are typical for such securities and
which have in the past been offered or may be offered in the future. In the
past, for example, such securities have been issued to replicate the performance
of a certain component or components of a particular security or combination of
securities and/or to hedge or reduce the risks associated with certain
securities or market trends. The Fund may invest in these securities if the
Advisor believes that doing so would be consistent with the Fund's investment
objective and policies. Since the market for these securities may be new, the
Fund may have difficulty disposing of them at a suitable price and time. In
addition to limited liquidity, these instruments may present other risks, such
as high price volatility. The unavailability of such innovative securities
would not adversely affect the Fund's ability to achieve its investment
objective.
Special Risk Considerations of Investing in Post-Venture Securities
The Fund may invest in relatively new or unseasoned companies which are in
their early stages of development (sometimes referred to as "post-venture
companies"), or small companies positioned in new and emerging industries where
the opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. The companies in which the Fund may invest may have
relatively small revenues, limited product lines, and may have a small share of
the market for their products or services. Post-venture companies may lack depth
of management, may be unable to generate internally funds necessary for growth
or potential development or to generate such funds through external financing on
favorable terms, or may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due to
these and other factors, such companies may suffer significant losses as well as
realize substantial growth. Investments in such companies tend to be volatile
and are therefore speculative.
Historically, the small capitalization stocks have been more volatile in
price than the larger capitalization stocks. Among the reasons for the greater
price volatility of these securities are the less certain growth prospects of
smaller firms, the lower degree of liquidity in the markets for such stocks, and
the greater sensitivity of small companies to changing economic conditions.
Besides exhibiting greater volatility, post-venture company stocks may, to a
degree, fluctuate independently of larger company stocks. Investors should
therefore expect that the value of the Fund's shares may be more volatile than
the shares of a fund that invests in larger capitalization stocks.
OTHER INVESTMENT TECHNIQUES
Options
The Fund may purchase and write put and call options on U.S. securities and
indices and enter into related closing transactions. In addition, the Fund may
purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund will
purchase call options only to the extent premiums paid on all outstanding call
options do not exceed 20% of the Fund's total assets. The Fund will write call
options only on a covered basis. A call option is "covered" if the Fund owns the
underlying securities or the Fund maintains in a segregated account with its
custodian, cash, U.S. government
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securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or if the Fund owns an offsetting call
option. The Fund may receive premium income from writing call options, which may
offset the cost of purchasing options and may also contribute to the Fund's
total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be protected
should the market value of the security decline or should a particular index
decline. The Fund will, at all times during which it holds a put option, own the
security underlying such option. The Fund will receive premium income from
writing put options, although it may be required, when the put is exercised, to
purchase securities at higher prices than the current market price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges. It is the position of the Commission that over-the-
counter options are illiquid. Accordingly, the Fund will invest in such options
only to the extent consistent with its 15% limit on investment in illiquid
securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts for hedging purposes. The purchase of a futures
contract by the Fund represents the acquisition of a contractual right to obtain
delivery of the securities called for by the contract at a specified price on a
specified future date. When a futures contract is sold, the Fund incurs a
contractual obligation to deliver the securities underlying the contract at a
specified price on a specified future date. The Fund may enter into futures
contracts and engage in options transactions related thereto for hedging
purposes and for non-hedging purposes, to the extent that not more than 5% of
the Fund's assets are required as futures contract margin deposits and premiums
on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such
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futures contracts and the aggregate value of the initial and variation margin
payments made by the Fund with respect to such futures contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. The Fund could also experience losses if the prices of its
options or futures positions are poorly correlated with its other investments,
or if it cannot close out its positions because of an illiquid secondary market.
The loss from investing in futures transactions is potentially unlimited. For
further information concerning the risks of options and futures, see Part B of
this Registration Statement.
Swaps
The Fund may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio and as a technique for managing the portfolio's
duration (i.e., the price sensitivity to changes in interest rates), to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date or to gain exposure to certain markets.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
an interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Advisor
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
To the extent that the Fund cannot dispose of a swap in the ordinary course
of business within seven days at approximately the value at which it has valued
the swap, it will treat the swap as illiquid and subject to its overall limit on
illiquid investments of 15% of net assets. The Advisor will closely
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monitor, subject to the oversight of the Board of Trustees, the creditworthiness
of equity swap counterparties in order to minimize the risk.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on a
loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the Fund's
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects that
investment to market risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a
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predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to engage
in trading for short-term gains, the Fund will effect portfolio transactions
without regard to the holding period if, in the judgment of the Advisor, such
transactions are advisable in light of a change in circumstances of a particular
company, within a particular industry or country, or in general market, economic
or political conditions. Although the portfolio turnover rate for the Fund may
vary greatly from year to year, the Fund expects that under normal
circumstances, the portfolio turnover rate will not exceed 100%. A high
portfolio turnover rate will increase aggregate brokerage commission expenses
which must be borne directly by the Fund and ultimately by the Fund's Investors
and the incidence of short-term capital gains (which are taxable to Investors as
ordinary income). See " Brokerage Allocation" and " Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust -International
Growth Portfolio, Enterprise Group of Funds, Inc. -International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust -Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -International Equity Portfolio, John Hancock Variable Series
Trust I -International Balanced Fund, AON Funds -International Equity Fund and
The Republic Funds -Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Appendix A to this Prospectus sets forth the investment performance of the
Fund, including the performance of the Brinson Trust Company Collective
Investment Trust's Post-Venture Fund until April 28, 1995, the commencement of
the Fund's operations. Brinson Trust Company is a wholly-owned subsidiary of
Brinson Partners.
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Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or the "Administrator"),
pursuant to which MSTC is required to provide general administrative,
accounting, portfolio valuation, transfer agency and custodian services to the
Fund, including the coordination and monitoring of any third party service
providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any
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third party service provider in providing such services. Pursuant to the CGFSC
Agreement, MSTC pays CGFSC for the services CGFSC provides to MSTC in fulfilling
its obligations under the Services Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering the Fund's shares for sale with the
Commission and with various state securities commissions, fees and expenses of
the Administrator and the expenses of obtaining quotations of portfolio
securities and of pricing the Fund's shares. General expenses which are not
associated directly with any particular portfolio within the Trust (e.g.,
insurance premiums, Trustees' fees, expenses of maintaining the Trust's legal
existence and of Investors' meetings and fees and expenses of industry
organizations) are allocated between the various series based upon their
relative net assets.
The Advisor has undertaken to pay the Fund's total operating expenses and
may, in its sole discretion, discontinue or modify the extent of such payments.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. The Fund normally
trades non-U.S. securities in foreign countries, since the best available market
for non-U.S. securities is often in non-U.S. markets. In transactions on non-
U.S. stock exchanges, brokers' commissions are generally fixed and are often
higher than in the United States where commissions are negotiated. Pursuant to
the Advisory Agreement, the Advisor is authorized to utilize the trading
department of its foreign subsidiaries to execute foreign securities
transactions but monitors selection by such subsidiaries of brokers and dealers
used to execute such transactions.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this
research information in managing the Fund's assets, as well as the assets of
other clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor of the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as an underwriter. The Fund
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may effect futures transactions through, and pay commissions to, futures
commission merchants who are affiliated with the Advisor or the Fund in
accordance with procedures adopted by the Board of Trustees of the Trust.
Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of Trustees
has the power to designate one or more series or sub-series/classes of shares of
beneficial interest and to classify or reclassify any unissued shares with
respect to such series. Currently, the Trust is offering shares of fourteen
series: the Brinson Global Securities Fund, the Brinson U.S. Equity Fund, the
Brinson U.S. Large Capitalization Equity Fund, the Brinson U.S. Intermediate
Capitalization Equity Fund the Brinson Post-Venture Fund, the Brinson EXDEX/(R)/
Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging Markets Equity
Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the Brinson
Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund, the Brinson
High Yield Fund, and the Brinson Emerging Markets Debt Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Pursuant to the Investment Company Act, a control person possesses the
ability to control the outcome of matters submitted for shareholder vote. As of
July 29, 1997, Brinson Trust Company U.S. International Cap Equity Fund of
Chicago, Illinois was a control person of the Fund and the Trust by nature of
its shareholdings.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the
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Fund's investment objective could result in an Investor's withdrawal of its
investment in the Fund, and in increased costs and expenses for the remaining
Investors. Additionally, the failure by certain Investors to approve a change in
their investment objectives and policies parallel to a change that has been
approved for the Fund (thus requiring such Investors to redeem their shares of
the Fund) could lead to a number of adverse consequences, such as the inability
of such Investors to find another investment company in which to invest their
assets or an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295,
or an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of the
Fund may be purchased directly by eligible Investors from the Fund at the net
asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends,
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interest, subscription, or other rights pertaining to such securities after such
transfers to the Fund shall become the property of the Fund and must be
delivered to the Fund by the Investor upon receipt from the issuer. Investors
that are permitted to transfer such securities will be required to recognize a
gain or loss on such transfer and pay tax thereon, if applicable, measured by
the difference between the fair market value of the securities and the
Investors' basis therein. The Trust will not accept securities in exchange for
shares of the Fund unless: (1) such securities are, at the time of the exchange,
eligible to be included in the Fund's investment portfolio and current market
quotations are readily available for such securities; and (2) the Investor
represents and warrants that all securities offered to be exchanged are not
subject to any restrictions upon their sale by the Fund under the Securities Act
or under the laws of the country in which the principal market for such
securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of regular
trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m. Eastern
time) on days when such exchange is open. The net asset value per share is
computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less than
60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment companies are valued using
their respective net asset values for purchase orders placed at the close of the
NYSE. All other securities are valued at their fair value as determined in good
faith and pursuant to a method approved by the Trust's Board of Trustees. For a
detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege, the Investor agrees that
the Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy,
the Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the series of the Trust into which the
Investor wishes to exchange. Requests for telephone exchanges must be received
by the transfer agent, CGFSC, by the close of regular trading hours (generally
4:00 p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
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Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose a
fee for wire service. The right of any Investor to receive payment with respect
to any redemption may be suspended or the payment of the redemption proceeds
postponed during any period in which the NYSE is closed (other than weekends or
holidays) or trading on the NYSE is restricted, or, to the extent otherwise
permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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OFFEREE NO.______
BRINSON RELATIONSHIP FUNDS
Brinson EXDEX(R) Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson EXDEX/(R)/ Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
Under normal market conditions, at least 65% of the Fund's assets will be
invested in equity securities of U.S. companies. The Fund seeks to achieve its
objective by investment in a wide range of equity securities of U.S. companies
that are traded on major stock exchanges as well as on the over-the-counter
markets. The benchmark for the Fund is the Standard & Poor's 500 Stock Index
(the "S&P 500", or the "Benchmark"). The Benchmark is a broad weighted index
which includes primarily U.S. common stocks. The Benchmark is designed to
provide a representative indication of the capitalization and return for the
large-capitalization U.S. equity market.
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
The investment style of the Fund's investment advisor, Brinson Partners,
Inc. ("Brinson Partners" or the "Advisor") is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Fund is that
periodically there are exploitable discrepancies between market price and
fundamental value. Those price/value discrepancies then become the building
blocks for portfolio construction. The successful identification of price/value
discrepancies should result in enhanced total return performance.
The EXDEX/(R)/ Fund is an index-like U.S. equity portfolio with an active
management overlay designed to deliver above market returns at near market risk
by systematically excluding overvalued stocks from the S&P 500. The EXDEX/(R)/
Fund exploits the benefits of short sale restrictions and a lack of active
management attention to sell decisions. Brinson Partners will pursue the
portfolio's objective by using an analyst-intensive fundamental value approach.
As a general matter, the Advisor will purchase for the Fund securities contained
in the underlying Benchmark.
The Fund is reviewed each month and rebalanced as appropriate utilizing the
Advisor's proprietary equity valuation model which is based upon analysts'
company specific research. The portfolio excludes stocks from the S&P 500 where
price has deviated significantly from fundamental value such that there is
approximately a greater than 60% probability of underperformance relative to the
average S&P 500 stock.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund does not intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning the percentage of the Fund's portfolio securities that may be loaned,
and its policies set forth in Part B concerning borrowing, the issuance of
senior securities and concentration are "fundamental," which means that they may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting shares. As used in this Part A of this Registration
Statement, a vote of "a majority of the outstanding voting shares" of the Trust
or a series of the Trust means the affirmative vote of the lesser of (i) more
than 50% of the outstanding shares of the Trust or series, or (ii) 67% of the
shares of the Trust or series present at a meeting at which more than 50% of the
outstanding shares of the Trust or series are represented in person or by proxy.
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The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes
the securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the Investment Company Act), the Fund may be
subject to greater investment and credit risk than an investment company that
invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the net asset value of the Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. Equity Securities
The Fund may invest in securities included in the S&P 500. At times, the
Fund may hold securities which have recently been eliminated from the Benchmark,
but as a matter of practice, will only hold securities included in the
Benchmark.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. or non-U.S. currencies. When unusual market
conditions warrant, the Fund can make substantial temporary defensive
investments in cash equivalents up to a maximum exposure of 100% of the Fund's
assets. The Fund's investment in temporary defensive investments may affect the
Fund's ability to attain its investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a maturity date but which can be called for
repayment by the lender or the borrower at a predetermined interval. Bank
instruments in which the Fund may invest include bank loan participations, bank
holding company commercial paper, deposits, bank notes and other bank related
securities. Bank loan participations are loans sold by lending banks to
investors. Bank holding company commercial paper is a form of short-term
promissory note which is a direct obligation of a bank holding company. Deposits
are obligations of a bank or its branches. Corporate commercial paper is a form
of short-term promissory note issued by corporations primarily to finance short-
term credit needs. Rates vary according to the credit standing of the issuers
and money market conditions. Floating rate instruments are obligations with
various final maturities and interest rates that are tied to other assorted
market indices. The Fund will not invest more than 15% of the value of its net
assets in floating or variable rate demand obligations as to which it cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the
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meantime, the value of the security purchased has decreased, the Fund could
experience a loss. No more than 15% of the Fund's net assets will be invested in
illiquid securities, including repurchase agreements which have a maturity of
longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Examples of illiquid securities are
securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities") over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to
consider the following factors in determining the liquidity of a Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Although it has delegated
the day-to-day liquidity determination to the Advisor, the Board of Trustees
will continue to monitor and will periodically review the Advisor's selection of
Rule 144A Securities, as well as the Advisor's determination as to their
liquidity.
If the Advisor determines that a Rule 144A Security purchased in reliance
on Rule 144A which was previously determined to be liquid is no longer liquid
and, as a result, the Fund's holdings of illiquid securities exceed the Fund's
15% limit on investment in such securities, the Advisor will determine what
action shall be taken to ensure that the Fund continues to adhere to such
limitation including disposing of illiquid assets which may include such Rule
144A Securities.
OTHER INVESTMENT TECHNIQUES
Options
The Fund may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Fund
may also purchase and write put and call options on
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foreign currencies to manage the Fund's exposure to changes in currency exchange
rates. In addition, the Fund may purchase and write options to buy or sell
futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund may
purchase call options only to the extent premiums paid on all outstanding call
options do not exceed 20% of the Fund's total assets. The Fund will write call
options only on a covered basis. A call option is "covered" if the Fund owns
the underlying securities or the Fund maintains in a segregated account with its
custodian, cash, U.S. government securities or other liquid assets with a value
sufficient to meet its obligations under the call option, or if the Fund owns an
offsetting call option. The Fund will receive premium income from writing call
options, which may offset the cost of purchasing options and may also contribute
to the Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be protected
should the market value of the security decline or should a particular index
decline. The Fund will, at all times during which it holds a put option, own the
security underlying such option. The Fund will receive premium income from
writing put options, although it may be required, when the put is exercised, to
purchase securities at higher prices than the current market price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency or maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the
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acquisition of a contractual right to obtain delivery of the securities or
foreign currency called for by the contract at a specified price on a specified
future date. When a futures contract is sold, the Fund incurs a contractual
obligation to deliver the securities or foreign currency underlying the contract
at a specified price on a specified future date. The Fund may enter into futures
contracts and engage in options transactions related thereto for hedging
purposes and for non-hedging purposes, to the extent that not more than 5% of
the Fund's assets are required as futures contract margin deposits and premiums
on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally
are not regulated by U.S. authorities and may offer less liquidity and less
protection to the Fund in the event of default by the other party to the
contract. The Fund could also experience losses if the prices of its options or
futures positions are poorly correlated with its other investments, or if it
cannot close out its positions because of an illiquid secondary market. The
loss from investing in futures transactions is potentially unlimited. For
further information concerning the risks of options and futures, see Part B of
this Registration Statement.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
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Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on
a loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the
Fund's securities lending agreement, the lending agent is obligated to replace
the loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects that
investment to market risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to
engage in trading for short-term gains, the Fund will effect portfolio
transactions without regard to the holding period if, in the judgment of the
Advisor, such transactions are advisable in light of a change in circumstances
of a particular company, within a particular industry or country, or in general
market, economic or political conditions. Although the portfolio turnover rate
for the Fund may vary greatly from year to year, the Fund expects that under
normal circumstances, the portfolio turnover rate will not exceed 250%. A high
portfolio turnover rate will increase aggregate brokerage commission expenses
which must be borne directly by the Fund and ultimately by the Fund's Investors
and the incidence of short-term capital gains (which are taxable to Investors
as ordinary income). See " Brokerage Allocation" and " Federal Taxes."
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Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust -International
Growth Portfolio, Enterprise Group of Funds, Inc. -International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust -Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -International Equity Portfolio, John Hancock Variable Series
Trust I -International Balanced Fund, AON Funds-International Equity Fund and
The Republic Funds -Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which the MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to the Fund,
including the coordination and monitoring of any third party service providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
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As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation, and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any third party service provider in providing such
services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for the services
CGFSC provides to MSTC in fulfilling its obligations under the Services
Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering and of noticing the Fund's shares for
sale with the Commission and with various state securities commissions, fees and
expenses of the Administrator and the expenses of
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obtaining quotations of portfolio securities and of pricing the Fund's shares.
General expenses which are not associated directly with any particular portfolio
within the Trust (e.g., insurance premiums, Trustees' fees, expenses of
maintaining the Trust's legal existence and of Investors' meetings and fees and
expenses of industry organizations) are allocated between the various series
based upon their relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.01% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this
research information in managing the Fund's assets, as well as the assets of
other clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as underwriter. The Fund may effect futures transactions
through, and pay commissions to, futures commission merchants who are affiliated
with the Advisor or the Fund in accordance with procedures adopted by the Board
of Trustees of the Trust.
Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of
Trustees has the power to designate one or more series or sub-series/classes of
shares of beneficial interest and to classify or reclassify any unissued shares
with respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-
Term Fund, the Brinson High Yield Fund and the Brinson Emerging Markets Debt
Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
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Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the Fund's
investment objective could result in an Investor's withdrawal of its investment
in the Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
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Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295,
or an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of the
Fund may be purchased directly by eligible Investors from the Fund at the net
asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities after such transfers to the Fund
shall become the property of the Fund and must be delivered to the Fund by the
Investor upon receipt from the issuer. Investors that are permitted to transfer
such securities will be required to recognize a gain or loss on such transfer
and pay tax thereon, if applicable, measured by the difference between the fair
market value of the securities and the Investors' basis therein. The Trust will
not accept securities in exchange for shares of the Fund unless: (1) such
securities are, at the time of the exchange, eligible to be included in the
Fund's investment portfolio and current market quotations are readily available
for such securities; and (2) the Investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions upon
their sale by the Fund under the Securities Act or under the laws of the country
in which the principal market for such securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of
regular trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m.
Eastern time) on days when such exchange is open. The net asset value per share
is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment companies are valued using
their respective net asset values for purchase orders placed at the close of the
NYSE. All other securities are valued at their fair value as determined in good
faith and pursuant to a method approved by the Trust's Board of Trustees. For a
detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone
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authorization. The telephone exchange privilege may be difficult to implement
during times of drastic economic or market changes. The Fund reserves the right
to restrict the frequency of, or otherwise modify, condition, terminate or
impose charges upon the exchange privilege and/or telephone transfer privileges
upon 60 days' prior written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy,
the Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the fund into which the Investor
wishes to exchange. Requests for telephone exchanges must be received by the
transfer agent, CGFSC, by the close of regular trading hours (generally 4:00
p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose
a fee for wire service. The right of any Investor to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on the NYSE is restricted, or, to the extent
otherwise permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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OFFEREE NO. ____
BRINSON RELATIONSHIP FUNDS
Brinson Non-U.S. Equity Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson Non-U.S. Equity Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
The Fund will maintain an international portfolio and as such, under normal
market conditions, at least 65% of the Fund's assets will be invested in equity
securities of issuers in at least three countries other than the United States.
The Fund seeks to achieve its objective by investing in a wide range of equity
securities, including: American, European and Global Depositary Receipts, common
and preferred stock; debt securities convertible into or exchangeable for common
stock; and securities such as warrants or rights that are convertible into
common stock. The Fund may engage in futures, options and currency transactions
for hedging and other permissible purposes. The Benchmark for the Fund is the
Morgan Stanley Capital International (MSCI) Non-U.S. Equity (Free) Index (the
"Benchmark").
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
The investment style of the Fund's investment advisor, Brinson Partners,
Inc. ("Brinson Partners" or the "Advisor") is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Fund is that
periodically there are exploitable discrepancies between market price and
fundamental value. Those price/value discrepancies then become the building
blocks for portfolio construction. The successful identification of price/value
discrepancies should result in enhanced total return performance.
As a general matter, the Advisor will purchase for the Fund securities
contained in the underlying Benchmark. The Advisor will attempt to enhance the
long-term return and risk performance of the Fund relative to the Benchmark by
deviating from the normal Benchmark mix. Decisions to deviate from the
Benchmark are a blend of rigorous quantitative analysis, an understanding of the
fundamental relationships among global markets and the expertise of investment
professionals. The active management process is intended, by Brinson Partners
to produce superior performance relative to the Benchmark.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund does not intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning the percentage of the Fund's portfolio securities that may be loaned,
and its policies set forth in Part B concerning borrowing, the issuance of
senior securities and concentration are "fundamental," which means that they may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting shares. As used in this Part A of this Registration
Statement, a vote of "a majority of the outstanding voting shares" of the Trust
or a series of the Trust means the affirmative vote of the lesser of (i) more
than 50% of the outstanding shares of the Trust or series, or (ii) 67% of the
shares of the Trust or series present at a meeting at which more than 50% of the
outstanding shares of the Trust or series are represented in person or by proxy.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its total assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes the
securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the
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Investment Company Act), the Fund may be subject to greater investment and
credit risk than an investment company that invests in a broader range of
securities, because changes in the financial condition or market assessment of a
single issuer may cause greater fluctuations in the net asset value of the
Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
Non-U.S. Equity Securities
The Fund may invest in a broad range of equity securities of non-U.S.
issuers, including common stock of companies or closed-end investment companies,
preferred stock, fixed income securities convertible into or exchangeable for
common stock, securities such as warrants or rights that are convertible into
common stock and sponsored or unsponsored American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") or Global Depositary Receipts ("GDRs") for
those securities. ADRs are receipts issued by a U.S. bank or trust company
evidencing ownership of underlying securities issued by foreign issuers. ADRs
may be listed on a national securities exchange or may be traded in the over-
the-counter market. EDRs also represent securities of foreign issuers and are
designated for use in European markets. A GDR represents ownership in a non-U.S.
company's publicly traded securities that are traded on foreign stock exchanges
or foreign over-the-counter markets. Holders of unsponsored ADRs, EDRs or GDRs
generally bear all the costs of such facilities and the depository of an
unsponsored facility frequently is under no obligation to distribute Investor
communications received from the issuer of the deposited security or to pass
through voting rights to the holders of such receipts in respect of the
deposited securities.
Emerging Markets Equity Securities
The Fund may invest in a broad range of equity securities of emerging
market issuers, or securities with respect to which the return is derived
primarily from the equity securities of issuers in emerging markets, including
common and preferred stocks. The Fund considers a country to be an "emerging
market" if it is defined as an emerging or developing economy by any one of the
following: the International Bank for Reconstruction and Development (i.e., the
World Bank), the International Finance Corporation, or the United Nations or its
authorities. Common stocks include securities convertible into common stocks
and securities having common stock characteristics, such as rights and warrants.
The Fund may invest indirectly in emerging market equity securities by
purchasing securities of open-end and closed-end investment companies. Please
see the discussions below under "Investment Company Securities" for a further
explanation of investments in investment companies and under "Investing in
Emerging Markets" for a description of the risks of investing in emerging market
equity securities.
The Trust has received an exemptive order (the "Exemptive Order") from the
United States Securities and Exchange Commission (the "Commission") to permit,
among other things, the Fund to invest its assets in the Brinson Emerging
Markets Equity Fund (the "EM Equity Fund") series of the Trust. Pursuant to the
Exemptive Order, the Fund may invest that portion of its assets allocated to
emerging markets investments by purchasing shares of the EM Equity Fund. The
investment objective of the EM Equity Fund is to maximize total U.S. dollar
return, consisting of capital appreciation and current income, while controlling
risk. Under normal circumstances, at least 65% of the assets of the EM Equity
Fund is invested in the equity securities of issuers in emerging markets, or
securities with respect to which the return is derived primarily from equity
securities of issuers in emerging markets. The EM Equity Fund is permitted to
invest in the same types of securities as the Fund may invest in directly and as
further described herein.
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The Fund may invest its assets directly or indirectly in emerging market
equity securities as described above. Pursuant to the Exemptive Order, any
investment by the Fund in the EM Equity Fund would not be subject to the
limitations of the Investment Company Act concerning investments by open-end
investment companies in the securities issued by other investment companies.
Please see the discussion below under "Investment Company Securities" for a
description of these limitations.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. or non-U.S. currencies. When unusual market
conditions warrant, the Fund can make substantial temporary defensive
investments in cash equivalents up to a maximum exposure of 100% of the Fund's
assets. The Fund's investment in temporary defensive investments may affect the
Fund's ability to attain its investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a maturity date but which can be called for
repayment by the lender or the borrower at a predetermined interval. Bank
instruments in which the Fund may invest include bank loan participations, bank
holding company commercial paper, deposits, bank notes and other bank related
securities. Bank loan participations are loans sold by lending banks to
investors. Bank holding company commercial paper is a form of short-term
promissory note which is a direct obligation of a bank holding company. Deposits
are obligations of a bank or its branches. Corporate commercial paper is a form
of short-term promissory note issued by corporations primarily to finance short-
term credit needs. Rates vary according to the credit standing of the issuers
and money market conditions. Floating rate instruments are obligations with
various final maturities and interest rates that are tied to other assorted
market indices. The Fund will not invest more than 15% of the value of its net
assets in floating or variable rate demand obligations as to which it cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable.
Pursuant to the Exemptive Order described above, in lieu of investing
directly in the cash and cash equivalents described above, the Fund may invest a
portion of its assets in the Brinson Short-Term Fund (the "Short-Term Fund")
series of the Trust. Any investment by the Fund in the Short-Term Fund would
not be subject to the limitations of the Investment Company Act concerning
investments by open-end investment companies in securities issued by other
investment companies. Please see the discussion below under "Investment Company
Securities" for a description of these limitations.
Non-Publicly Traded Securities, Private Placements and Restricted Securities
The Fund may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities and
limited partnerships. Investing in such unregistered or unlisted securities,
including investments in new and early stage companies, may involve a high
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for these securities, they
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Fund, or less than
what may be considered the fair value of such securities. Furthermore, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements which would be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expense of registration. No more
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than 15% of the Fund's net assets will be invested in illiquid securities,
including, but not limited to, non-publicly traded securities, private
placements and restricted securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under the Investment Company Act, the Fund's investment in
such securities, subject to certain exceptions, currently is limited to: (i) no
more than 3% of the total voting stock of any one such investment company, (ii)
no more than 5% of the Fund's net assets invested in any one such investment
company and (iii) no more than 10% of the Fund's net assets in the aggregate.
Investments in the securities of other investment companies may involve
duplication of certain fees and expenses.
As described above, the Trust has received an Exemptive Order, which
permits the Fund to invest its assets in securities of other series offered by
the Trust. The Fund will invest in such series only to the extent that the
Advisor determines that it is more efficient for the Fund to gain exposure to a
particular asset class through investment in a series of the Trust as opposed to
investment directly in individual securities. Investments by the Fund in another
series of the Trust may involve transaction costs, but not duplication of other
fees and expenses because the Advisor and other service providers will waive
fees or reimburse expenses to avoid such duplication.
The Fund's investments in any other series of the Trust, each of which
invests primarily in one particular asset class (a "Core Series") will not be
subject to the percentage limitations described above. To the extent that the
Fund invests in the Trust's other series ("Other Series") and open-end
investment companies other than the Core Series, the Fund will be subject to the
percentage limitations described above and the Fund's investments in such other
investment companies will be aggregated with its investments in the Other Series
for purposes of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities"), over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities, are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to consider
the following factors in determining the liquidity of a Rule 144A Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Although it has delegated
the day-to-day liquidity determination to the Advisor, the Board of Trustees
will continue to monitor and will periodically review the Advisor's selection of
Rule 144A Securities, as well as the Advisor's determination as to their
liquidity.
If the Advisor determines that a Rule 144A Security purchased in reliance
on Rule 144A which was previously determined to be liquid is no longer liquid
and, as a result, the Fund's holdings of illiquid securities exceed the Fund's
15% limit on investment in such securities, the Advisor will determine what
action shall be taken to ensure that the Fund continues to adhere to such
limitation including disposing of illiquid assets which may include such Rule
144A Securities.
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Foreign Securities and Currency Considerations
Investments in securities of foreign issuers may involve greater risks than
those of U.S. issuers. There is generally less information available to the
public about non-U.S. issuers and less government regulation and supervision of
non-U.S. stock exchanges, brokers and listed companies. Non-U.S. companies are
not subject to uniform accounting, auditing and financial reporting standards,
practices and requirements. Securities of some non-U.S. companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Securities trading practices abroad may offer less protection to
investors. Settlement of transactions in some non-U.S. markets may be delayed or
may be less frequent than in the United States, which could affect the liquidity
of the Fund. Additionally, in some countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of
securities, property or other assets of the Fund, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries. The Advisor will take these factors into consideration in
managing the Fund's investments. Investments will be made primarily in the
equity securities of companies domiciled in developed countries. The Fund
intends to diversify broadly among countries, but reserves the right to invest a
substantial portion of its assets in one or more countries if economic and
business conditions warrant such investments. Gains and losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or liabilities denominated in
a foreign currency and the time the Fund actually collects such receivables, or
pays such liabilities, are generally treated as ordinary income or loss.
Similarly, a portion of the gains or losses realized on disposition of debt
securities denominated in a foreign currency , referred to under the Internal
Revenue Code of 1986, as amended, (the "Code"), as "section 988" gains and
losses, may also be treated as ordinary gain or loss rather than as capital gain
or loss.
The U.S. dollar market value of the Fund's investments and of dividends and
interest earned by the Fund may be significantly affected by changes in currency
exchange rates. Some currency prices may be volatile, and there is the
possibility of governmental controls on currency exchange or governmental
intervention in currency markets, which could adversely affect the Fund.
Although the Fund may attempt to manage currency exchange rate risks, there is
no assurance that the Fund will do so at an appropriate time or that they will
be able to predict exchange rates accurately. The Fund will manage currency
exposure relative to the normal currency allocation and will consider return and
risk of currency exposures relative to the Benchmark.
Investing in Emerging Markets
Compared to the United States and other developed countries, emerging
countries may have relatively unstable governments, economies based on only a
few industries, and securities markets that trade only a small number of
securities and employ settlement procedures different from those used in the
United States. Prices in these markets tend to be volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries.
Furthermore, investments by investors foreign to the emerging market countries
are subject to a variety of restrictions in many emerging market countries.
These restrictions may take the form of prior governmental approval, limits on
the amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional restrictions may be imposed
at any time by these or other countries in which the Fund invests. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including, in
some cases, the need for certain governmental consents. Although these
restrictions may in the future make it undesirable to invest in emerging market
countries, the Advisor does not believe that any current repatriation
restrictions would affect its decision to invest in such countries. Countries
such as those in
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which the Fund may invest have historically experienced and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations or currency depreciation, large amounts of external debt, balance
of payments and trade difficulties and extreme poverty and unemployment.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, its
government's policy towards the International Monetary Fund, the World Bank and
other international agencies and the political constraints to which a government
debtor may be subject.
Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value of
the underlying common stock. Convertible securities entail less credit risk than
the issuer's common stock because they rank senior to common stock.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
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OTHER INVESTMENT TECHNIQUES
Currency Management
To manage exposure to currency fluctuations, the Fund may alter fixed
income or money market exposures, enter into forward currency exchange
contracts, buy or sell options or futures relating to foreign currencies and may
purchase securities indexed to currency baskets. The Fund will also use these
currency exchange techniques in the normal course of business to hedge against
adverse changes in exchange rates in connection with purchases and sales of
securities. Some of these strategies may require the Fund to set aside liquid
assets in a segregated custodial account to cover their obligations. These
techniques are further described below.
Forward Foreign Currency Transactions
The Fund may conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market or through entering into contracts to purchase or sell foreign currencies
at a future date (i.e., a "forward foreign currency contract" or "forward
contract"). A forward contract involves an obligation to purchase or sell a
specific currency amount at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties and at a price set at
the time of the contract. The Fund will convert currency on a spot basis from
time to time and investors should be aware of the potential costs of currency
conversion.
The Fund may enter into forward contracts for hedging purposes as well as
for non-hedging purposes. For hedging purposes, the Fund may enter into
contracts to deliver or receive foreign currency it will receive from or require
for its normal investment activities. It may also use contracts in a manner
intended to protect foreign currency-denominated securities from declines in
value due to unfavorable exchange rate movements. The Fund may also enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes in exchange rates.
When the Fund enters into forward contracts for non-hedging purposes, it
will establish a segregated account with its custodian bank in which it will
maintain cash, U.S. government securities or other liquid assets equal in value
to its obligations with respect to its forward contracts for non-hedging
purposes.
At the maturity of a forward contract, the Fund may either sell a portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions.
Options
The Fund may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Fund may
also purchase and write put and call options on foreign currencies to manage the
Fund's exposure to changes in currency exchange rates. In addition, the Fund may
purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage
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is that the purchaser may hedge against an increase in the price of securities
it ultimately wishes to buy or may take advantage of a rise in a particular
index. The Fund may purchase call options only to the extent premiums paid on
all outstanding call options do not exceed 20% of the Fund's total assets. The
Fund will write call options only on a covered basis. A call option is "covered"
if the Fund owns the underlying securities or the Fund maintains in a segregated
account with its custodian, cash, U.S. government securities or other liquid
assets with a value sufficient to meet its obligations under the call option, or
if the Fund owns an offsetting call option. The Fund will receive premium income
from writing call options, which may offset the cost of purchasing options and
may also contribute to the Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be protected
should the market value of the security decline or should a particular index
decline. The Fund will, at all times during which it holds a put option, own the
security underlying such option. The Fund will receive premium income from
writing put options, although it may be required, when the put is exercised, to
purchase securities at higher prices than the current market price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing transactions,
it may have to hold a security it would otherwise sell or deliver a security it
might want to hold.
Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency, maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date. When
a futures contract is sold, the Fund incurs a contractual obligation to deliver
the securities or foreign currency underlying the contract at a specified price
on a specified future date. The Fund may enter into futures contracts and engage
in options transactions related thereto for hedging purposes and for non-hedging
purposes, to the extent that not more
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than 5% of the Fund's assets are required as futures contract margin deposits
and premiums on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally are
not regulated by U.S. authorities and may offer less liquidity and less
protection to the Fund in the event of default by the other party to the
contract. The Fund could also experience losses if the prices of its options or
futures positions are poorly correlated with its other investments, or if it
cannot close out its positions because of an illiquid secondary market. The loss
from investing in futures transactions is potentially unlimited. For further
information concerning the risks of options and futures, see Part B of this
Registration Statement.
Swaps
The Fund may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates), to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to gain exposure
to certain markets.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal. Currency swaps involve the exchange of cash flows on a
notional amount based on changes in the values of referenced currencies.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or
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amount. The purchase of an interest rate floor entitles the purchaser to receive
payments on a notional principal amount from the party selling the floor to the
extent that a specified index falls below a predetermined interest rate or
amount. A collar is a combination of a cap and a floor that preserves a certain
return within a predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Advisor
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
The equity swaps in which the Fund intends to invest involve agreements
with a counterparty. The return to the Fund on any equity swap contract will be
the total return on the notional amount of the contract as if it were invested
in the stocks comprising the contract index in exchange for an interest
component based on the notional amount of the agreement. The Fund will only
enter into an equity swap contract on a net basis, i.e., the two parties'
obligations are netted out, with the Fund paying or receiving, as the case may
be, only the net amount of the payments. Payments under the equity swap
contracts may be made at the conclusion of the contract or periodically during
its term.
If there is a default by the counterparty to an equity swap contract, the
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction. There is no assurance that an equity swap contract
counterparty will be able to meet its obligations pursuant to an equity swap
contract or that, in the event of default, the Fund will succeed in pursuing
contractual remedies. The Fund thus assumes the risk that it may be delayed in,
or prevented from, obtaining payments owed to it pursuant to an equity swap
contract. However, the amount at risk is only the net unrealized gain, if any,
on the swap, not the entire notional amount. The Advisor will closely monitor,
subject to the oversight of the Board of Trustees, the creditworthiness of
equity swap counterparties in order to minimize the risk of equity swaps.
The Advisor and the Trust do not believe that the Fund's obligations under
equity swap contracts are senior securities and, accordingly, the Fund will not
treat them as being subject to its borrowing or senior securities restrictions.
However, the net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each equity swap contract will be accrued on a
daily basis and an amount of cash, U.S. government securities or other liquid
assets having an aggregate market value at least equal to the accrued excess
will be maintained in a segregated account by the Fund's custodian. To the
extent that the Fund cannot dispose of a swap in the ordinary course of business
within seven days at approximately the value at which the Fund has valued the
swap, the Fund will treat the swap as illiquid and subject to the Fund's overall
limit on illiquid investments of 15% of its net assets.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the
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Commission may prescribe by rules and regulations, reduce the amount of its
borrowings to such an extent that the asset coverage of such borrowings shall be
at least 300%. The Fund will not pledge more than 10% of its net assets, or
issue senior securities as defined in the Investment Company Act, or as
described herein, except for notes to banks and reverse repurchase agreements.
Investment securities will not be purchased while the Fund has outstanding
borrowings that exceed 5% of the Fund's total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on a
loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the Fund's
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects that
investment to market risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to engage
in trading for short-term gains, the Fund will effect portfolio transactions
without regard to the holding period if, in the judgment of the Advisor, such
transactions are advisable in light of a change in circumstances of a particular
company, within a particular industry or country, or in general market, economic
or political conditions. Although the portfolio turnover rate for the Fund may
vary greatly from year to year, the Fund expects that under normal
circumstances, the portfolio turnover rate will not exceed 250%. A high
portfolio turnover rate will increase aggregate brokerage commission expenses
which must be borne directly by the Fund and ultimately by the Fund's Investors
and the incidence
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of short-term capital gains (which are taxable to Investors as ordinary income).
See "Brokerage Allocation" and "Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo, and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust -International
Growth Portfolio, Enterprise Group of Funds, Inc. -International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust -Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -International Equity Portfolio, John Hancock Variable Series
Trust I -International Balanced Fund, AON Funds -International Equity Fund and
The Republic Funds -Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or the "Administrator"),
pursuant to which MSTC is required to provide general administrative,
accounting, portfolio valuation, transfer agency and custodian services to the
Fund, including the coordination and monitoring of any third party service
providers.
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Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any third party service provider in providing such
services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for the services
CGFSC provides to MSTC in fulfilling its obligations under the Services
Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may
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include, but are not limited to, legal expenses, audit fees, printing costs
(e.g., cost of printing annual reports, semi-annual reports and Prospectuses
which are distributed to existing Investors), brokerage commissions, the
expenses of registering the Fund's shares for sale with the Commission and of
noticing the Fund's shares for sale with various state securities commissions,
fees and expenses of the Administrator and the expenses of obtaining quotations
of portfolio securities and of pricing the Fund's shares. General expenses which
are not associated directly with any particular portfolio within the Trust
(e.g., insurance premiums, Trustees' fees, expenses of maintaining the Trust's
legal existence and of Investors' meetings and fees and expenses of industry
organizations) are allocated between the various series based upon their
relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.06% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. The Fund normally
trades non-U.S. securities in foreign countries, since the best available market
for non-U.S. securities is often in non-U.S. markets. In transactions on non-
U.S. stock exchanges, brokers' commissions are generally fixed and are often
higher than in the United States where commissions are negotiated. Pursuant to
the Advisory Agreement, the Advisor is authorized to utilize the trading
department of its foreign subsidiaries to execute foreign securities
transactions but monitors selection by such subsidiaries of brokers and dealers
used to execute such transactions.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this research
information in managing the Fund's assets, as well as the assets of other
clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as an underwriter. The Fund may effect futures
transactions through, and pay commissions to, futures commission merchants who
are affiliated with the Advisor or the Fund in accordance with procedures
adopted by the Board of Trustees of the Trust.
Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of Trustees
has the power to designate one or more series or sub-series/classes of shares of
beneficial interest and to classify or reclassify any unissued shares with
respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the
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Brinson Global Equity Fund, the Brinson U.S. Equity Fund, the Brinson U.S. Large
Capitalization Equity Fund, the Brinson U.S. Intermediate Capitalization Equity
Fund, the Brinson Post-Venture Fund, the Brinson EXDEX/(R)/ Fund, the Brinson
Non-U.S. Equity Fund, the Brinson Emerging Markets Equity Fund, the Brinson Bond
Plus Fund, the Brinson U.S. Bond Fund, the Brinson U.S. Short/Intermediate Fixed
Income Fund, the Brinson Short-Term Fund, the Brinson High Yield Fund and the
Brinson Emerging Markets Debt Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
with respect to the incorporation of the Trust; (vi) additional matters relating
to the Trust as required by the Investment Company Act; and (vii) such other
matters as the Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain Investors
holding a majority of shares in the Fund to change the Fund's investment
objective could result in an Investor's withdrawal of its investment in the
Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for
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creditable foreign taxes imposed on the Fund). Each Investor will be required to
report its distributive share of such tax items regardless of whether it has
received or will receive corresponding distributions of cash or property from
the Fund. An allocable share of a tax-exempt Investor's income will be
"unrelated business taxable income" ("UBTI") to the extent that the Fund borrows
money to acquire property or invests in assets that produce UBTI. The Fund will
not be a "regulated investment company" for federal income tax purposes. For a
more complete discussion of the federal income tax consequences of investing in
the Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295, or
an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of
the Fund may be purchased directly by eligible Investors from the Fund at the
net asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities after such transfers to the Fund
shall become the property of the Fund and must be delivered to the Fund by the
Investor upon receipt from the issuer. Investors that are permitted to transfer
such securities will be required to recognize a gain or loss on such transfer
and pay tax thereon, if applicable, measured by the difference between the fair
market value of the securities and the Investors' basis therein. The Trust will
not accept securities in exchange for shares of the Fund unless: (1) such
securities are, at the time of the exchange, eligible to be included in the
Fund's investment portfolio and current market quotations are readily available
for such securities; and (2) the Investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions upon
their sale by the Fund under the Securities Act or under the laws of the country
in which the principal market for such securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of regular
trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m. Eastern
time) on days when such exchange is open. The net asset value per share is
computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of
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shares outstanding. Fund securities for which market quotations are available
are priced at market value. Debt securities are priced at fair value by an
independent pricing service using methods approved by the Trust's Board of
Trustees. Short-term investments having a maturity of less than 60 days are
valued at amortized cost, which approximates market value. Redeemable securities
issued by open-end investment companies are valued using their respective net
asset values for purchase orders placed at the close of the NYSE. All other
securities are valued at their fair value as determined in good faith and
pursuant to a method approved by the Trust's Board of Trustees. For a detailed
description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy, the
Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the series of the Trust into which the
Investor wishes to exchange. Requests for telephone exchanges must be received
by the transfer agent, CGFSC, by the close of regular trading hours (generally
4:00 p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose a
fee for wire service. The right of any Investor to receive payment with respect
to any redemption may be suspended or the payment of the redemption proceeds
postponed during any period in which the NYSE is closed (other than weekends or
holidays) or trading on the NYSE is restricted, or, to the extent otherwise
permitted by the Investment Company Act, if an emergency exists.
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If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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OFFEREE NO. ___
BRINSON RELATIONSHIP FUNDS
Brinson Emerging Markets Equity Fund
Brinson Emerging Markets Debt Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains to both the Brinson Emerging Markets Equity Fund and the
Brinson Emerging Markets Debt Fund (each, a "Fund" and collectively, the
"Funds").
Beneficial interests in the Funds ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Funds may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The Brinson Emerging Markets Equity Fund's investment objective is to
maximize total U.S. dollar return, consisting of capital appreciation and
current income, while controlling risk. Under normal circumstances, at least 65%
of the Fund's assets will be invested in the equity securities of issuers in
emerging markets, or securities with respect to which the return is derived from
the equity securities of issuers in emerging markets, such as equity swaps and
equity index swaps, as further described below. The Fund's performance is
measured relative to its benchmark, the Brinson Emerging Markets Normal Index
(the "Equity Benchmark"). The index is constructed to minimize country specific
risk while providing regional exposure similar to the International Finance
Corporation's Investable Index (IFCI), a market capitalization weighted
benchmark.
The Brinson Emerging Markets Debt Fund's investment objective is to
maximize total U.S. dollar return, consisting of capital appreciation and
current income, while controlling risk. Under normal circumstances, at least 65%
of the Fund's assets will be invested in debt securities issued by governments,
government-related entities (including participations in loans between
governments and financial institutions), corporations and entities organized to
restructure outstanding debt of issuers in emerging markets, or debt securities
on which the return is derived primarily from other emerging market instruments,
such as interest rate swaps and currency swaps, as further described below. The
Fund's performance is measured relative to its benchmark, the J.P. Morgan
Emerging Markets Bond Index Plus (the "Debt Benchmark").
The Funds consider a country to be an "emerging market" if it is defined as
an emerging or developing economy by any one of the following: the International
Bank for Reconstruction and Development (i.e., the World Bank), the
International Finance Corporation, or the United Nations or its authorities. The
Funds intend to invest primarily in securities of issuers located in at least
three emerging market countries which may be located in Asia, Europe, Latin
America, Africa or the Middle East. As these markets change and other countries'
markets develop, the Funds expect the countries in which they invest to change.
An emerging market security is a security issued by a government or other
issuer that, in the opinion of the Advisor, has one or more of the following
characteristics:
1. The principal trading market of the security is an emerging market;
2. The primary revenue of the issuer (at least 50%) is generated from
goods produced or sold, investments made, or services performed in an
emerging market country; or
3. At least 50% of the assets of the issuer are situated in emerging
market countries.
Investors should understand that all investments involve risk and that
there can be no guarantee against loss resulting from an investment in the
Funds, nor can there be any assurance that the Funds' respective investment
objectives will be attained.
Investment Process
The investment style of the Funds' investment advisor, Brinson Partners,
Inc. ("Brinson Partners" or the "Advisor") is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Funds is that
periodically there are exploitable discrepancies between market price and
fundamental value.
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Those price/value discrepancies then become the building blocks for portfolio
construction. The successful identification of price/value discrepancies should
result in enhanced total return performance.
As a general matter, the Advisor will purchase for the Funds securities
contained in the underlying indices relevant to the respective Benchmarks. The
Advisor will attempt to enhance the long-term return and risk performance of the
Funds relative to the respective Benchmarks by identifying discrepancies between
current market prices and fundamental values. The active management process is
intended, by the Advisor, to produce superior performance relative to the
respective Benchmark. When unusual market conditions warrant, the Funds can
make substantial temporary defensive investments in cash equivalents.
The Funds do not intend to concentrate their investments in a particular
industry. The Funds do not intend to issue senior securities except to the
extent consistent with their policies described below and only as permitted
under the Investment Company Act. Each Fund's investment objective and policies
concerning the percentage of the Funds' portfolio securities that may be loaned,
and its policies set forth in Part B concerning borrowing, the issuance of
senior securities and concentration, are "fundamental," which means that they
may not be changed without the affirmative vote of the holders of a majority of
each Fund's outstanding voting shares. As used in this Part A of the
Registration Statement, a vote of "a majority of the outstanding voting shares"
of the Trust or a series of the Trust means the affirmative vote of the lesser
of (i) more than 50% of the outstanding shares of the Trust or series or (ii)
67% of the shares of the Trust or series present at a meeting at which more than
50% of the outstanding shares of the Trust or series are represented in person
or by proxy.
The Funds are classified as "non-diversified," as defined in the Investment
Company Act so that they are not limited by the Investment Company Act as to the
proportion of their assets that they may invest in the obligations of a single
issuer. To the extent that each of the Fund's investment portfolios at times
include the securities of a smaller number of issuers than permissible if the
Funds were "diversified" (as defined in the Investment Company Act), the Funds
may be subject to greater investment and credit risk than an investment company
that invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the net asset value of the Funds' shares.
TYPES OF SECURITIES IN WHICH THE FUNDS MAY INVEST
INVESTMENTS AVAILABLE TO THE BRINSON EMERGING MARKETS EQUITY FUND ONLY
Non-U.S. Equity Securities
The Brinson Emerging Markets Equity Fund will invest at least 65% of its
total assets in a broad range of equity securities of emerging market issuers,
including common and preferred stocks. Common stocks include securities
convertible into common stocks and securities having common stock
characteristics, such as rights and warrants. The Fund may also invest
indirectly in securities of emerging country issuers through sponsored or
unsponsored American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") or Global Depositary Receipts ("GDRs"). ADRs are receipts issued by a
U.S. bank or trust company evidencing ownership of underlying securities issued
by foreign issuers. ADRs may be listed on a national securities exchange or may
be traded in the over-the-counter market. EDRs also represent securities of
foreign issuers and are designed for use in European markets. A GDR represents
ownership in a non-U.S. company's publicly traded securities that are traded on
foreign stock exchanges or foreign over-the-counter markets. Holders of
unsponsored ADRs, EDRs or GDRs generally
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bear all the costs of such facilities and the depository of an unsponsored
facility frequently is under no obligation to distribute investor communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts in respect of the deposited securities.
The issuers of unsponsored ADRs, EDRs and GDRs are not obligated to disclose
material information in the United States and, therefore, there may not be a
correlation between such information and the market value of the ADRs, EDRs and
GDRs. To the extent that the Fund's assets are not invested in emerging markets
equities, the remainder of the assets may be invested in debt securities issued
by governments, government-related entities (including participations in loans
between governments and financial institutions), corporations or entities
organized to restructure outstanding debt of issuers in emerging markets or debt
securities with respect to which the return is derived primarily from other
emerging market instruments.
INVESTMENTS AVAILABLE TO BOTH FUNDS
Non-U.S. Fixed Income Securities
Both Funds may invest in all types of debt securities of emerging market
issuers, including government and governmental-related entities (including
participations in loans between governments and financial institutions), and of
entities organized to restructure outstanding debt of such issuers. The terms
"fixed income securities" and "debt securities" are synonymous and are used
interchangeably in this Part A and in Part B of this Registration Statement.
The Brinson Emerging Markets Equity Fund may invest up to 35% of its assets in
debt securities. The Funds may also invest in debt securities of emerging market
countries' corporate issuers. The Funds may invest a portion of their assets in
short-term and/or long-term debt securities (including repurchase agreements) of
corporations, governments or agencies, banks and finance companies which may be
denominated in non-U.S. or U.S. currencies.
The Funds' investment in emerging market government and government-related
securities may consist of (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging market countries (including
participations in loans between governments and financial institutions), (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging market countries and (iii) interests in
issuers organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by any of the entities described above.
The Advisor intends to invest the Funds' assets in emerging country debt
securities that provide a high level of current income, while at the same time
hold the potential for capital appreciation if the perceived creditworthiness of
the issuer improves due to improving economic, financial, political, social or
other conditions in the country in which the issuer is located.
The Funds' assets may also be invested in government and supranational
issues. A supranational entity is an entity established or financially
supported by the national governments of one or more countries to promote
reconstruction or development. Examples of supranational entities include,
among others, the World Bank, the European Economic Community, the European Coal
and Steel Community, the European Investment Bank, the Intra-Development Bank,
the Export-Import Bank and the Asian Development Bank.
When unusual market conditions warrant, the Funds can make substantial
temporary defensive investments in U.S. cash equivalents.
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Cash and Cash Equivalents
Each Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. or non-U.S. currencies. When unusual market
conditions warrant, the Funds can make substantial temporary defensive
investments in cash equivalents up to a maximum exposure of 100% of the Funds'
assets. The Funds' investment in temporary defensive investments may affect the
Funds' ability to attain their exposure objectives.
The short-term debt securities in which the Funds may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Both
Funds may invest in demand notes, which are securities issued with a maturity
date but which can be called for repayment by the lender or the borrower at a
predetermined interval. Bank instruments in which the Funds may invest include
bank loan participations, bank holding company commercial paper, deposits, bank
notes and other bank related securities. Bank loan participations are loans
sold by lending banks to investors. Bank holding company commercial paper is a
form of short-term promissory note which is a direct obligation of a bank
holding company. Deposits are obligations of a bank or its branches. Corporate
commercial paper is a form of short-term promissory note issued by corporations
primarily to finance short-term credit needs. Rates vary according to the
credit standing of the issuers and money market conditions. Floating rate
instruments are obligations with various final maturities and interest rates
that are tied to other assorted market indices. Each Fund will not invest more
than 15% of the value of its net assets in floating or variable rate demand
obligations as to which it cannot exercise the demand feature on not more than
seven days' notice if there is no secondary market available for these
obligations, and in other securities that are not readily marketable.
Zero Coupon Securities
The Funds may invest in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current interest
(the "cash payment date") and therefore are issued at a discount from their face
amounts or par value. Such bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the Funds will realize no
cash until the maturity date or the cash payment date and, if the issuer
defaults, the Funds may obtain no return at all on its investment. For federal
tax purposes, the Funds will be required to include in income daily portions of
original issue discount accrued, even if no payment is received before the
maturity date or cash payment date.
Pay-In-Kind Bonds
The Funds may invest in pay-in-kind bonds. Pay-in-kind bonds are
securities which pay interest through the issuance of additional bonds. The
Funds will be deemed to receive interest over the life of such bonds and may be
treated for federal income tax purposes as if interest were paid on a current
basis, although no cash interest payments are received by the Funds until the
cash payment date or until the bonds mature.
Mortgage-Backed Securities
The Funds may invest in mortgage-backed securities, representing interests
in pools of mortgage loans. These securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. The Funds may invest in mortgage-backed securities
issued or guaranteed by an agency or instrumentality of the U.S. government.
The Funds
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may also invest in privately issued mortgage-backed securities issued by
private, non-government corporations, such as financial institutions.
The Funds may also invest in Collateralized Mortgage Obligations ("CMOs")
and Real Estate Mortgage Investment Conduits ("REMICs"). CMOs are debt
securities issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by a pool of mortgages held under an
indenture. CMOs are issued in a number of classes or series with different
maturities. The classes or series are retired in sequence as the underlying
mortgages are repaid. Prepayment may shorten the stated maturity of the
obligation and can result in a loss of premium, if any has been paid. Certain
of these securities may have variable or floating interest rates and others may
be stripped (securities which provide only the principal or interest feature of
the underlying security).
REMICs are private entities formed for the purpose of holding a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. Yields on privately-issued CMOs
have historically been higher than yields on CMOs issued or guaranteed by U.S.
government agencies. However, the risk of loss due to default on such
instruments is higher. For federal income tax purposes, the Funds will be
required to accrue income attributable to their investment in CMOs and regular
interests in REMICs using the "catch-up" method, with an aggregate prepayment
assumption. For further information concerning mortgage-backed securities, see
Part B of this Registration Statement.
Asset-Backed Securities
The Funds may invest in asset-backed securities. Asset-backed securities
are securities that represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool or
pools of similar assets (e.g., receivables on home equity and credit loans and
receivables regarding automobile, credit card, mobile home and recreational
vehicle loans, wholesale dealer floor plans and leases).
Such receivables are securitized in either a pass-through or pay-through
structure. Pass-through securities provide investors with an income stream
consisting of both principal and interest payments with respect to the
receivables in the underlying pool. Pay-through asset-backed securities are debt
obligations issued usually by a special purpose entity, are collateralized by
the various receivables and with respect to which the payments on the underlying
receivables provide the funds to pay the debt service on the debt obligations
issued. The Funds may invest in these securities and obligations and other types
of asset-backed securities that may be developed in the future.
The credit quality of these securities depends primarily upon the quality
of the underlying assets and the level of credit support and/or enhancement
provided. Such asset-backed securities may be subject to the same prepayment
risks as mortgage-backed securities. For further information concerning asset-
backed securities, see Part B of this Registration Statement.
When-Issued Securities
The Funds may purchase securities on a "when-issued" basis for payment and
delivery at a later date. The price is generally fixed on the date of
commitment to purchase. A Fund does not earn interest on
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the securities it has committed to purchase until they are paid for and
delivered on the settlement date. At the time of settlement, the market value of
the security may be more or less than the purchase price. For further
information concerning when-issued securities, see Part B of this Registration
Statement.
Convertible Securities
The Funds may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Eurodollar Securities
The Funds may invest in Eurodollar securities, which are fixed income
securities of a U.S. issuer or a foreign issuer that are issued outside the
United States. Interest and dividends on Eurodollar securities are payable in
U.S. dollars.
Repurchase Agreements
The Funds may enter into repurchase agreements with banks or broker-
dealers. Repurchase agreements are considered under the Investment Company Act
to be collateralized loans by a Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Funds may invest in directly. Such collateral will be marked-to-
market daily. If the seller of the underlying security under the repurchase
agreement should default on its obligation to repurchase the underlying
security, a Fund may experience delay or difficulty in recovering its cash. To
the extent that, in the meantime, the value of the security purchased has
decreased, the Fund could experience a loss. No more than 15% of the Fund's net
assets will be invested in illiquid securities, including repurchase agreements
which have a maturity of longer than seven days.
Reverse Repurchase Agreements
The Funds may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Funds of
portfolio assets concurrently with an agreement by the Funds to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Funds continue to receive principal and interest payments
on these securities.
The Funds will establish a segregated account with their custodian bank in
which they will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by a Fund may decline below the price of the securities the
Fund has sold but is obligated to repurchase under the agreement. In the event
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, a Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
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High Yield/Higher Risk Securities
At any one time substantially all of the assets of the Brinson Emerging
Markets Debt Fund and up to 35% of the assets of the Brinson Emerging Markets
Equity Fund may be invested in investments which are lower quality, higher
yielding securities and which are below investment grade, or if unrated, are
determined to be of comparable quality by the Advisor (referred to herein as
"low-grade securities"). Investment grade securities are securities rated BBB or
better by Standard & Poor's Ratings Group ("S&P") or Baa or better by Moody's
Investors Service, Inc. ("Moody's") or, if unrated, are determined to be of
comparable quality by the Advisor (referred to herein as "low-grade
securities"). While securities rated BBB or Baa are regarded as having an
adequate capacity to pay principal and interest, such securities lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well. In addition, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher rated securities. Securities
rated lower than BBB by S&P and Baa by Moody's are classified as non-investment
grade securities and are commonly referred to as "junk bonds." These securities
are considered to be of poor standing and predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations and involve major risk exposure to adverse
conditions. Securities issued by foreign issuers rated below investment grade
entail greater risks than higher rated securities, including risk of untimely
interest and principal payment, default, price volatility and may present
problems of liquidity and valuation. Investors should carefully consider these
risks before investing. A description of various bond ratings appears in
Appendix A, p. 1-2. Ratings represent S&P's and Moody's respective opinions as
to the quality of the obligations they undertake to rate. However, ratings are
general and are not absolute standards of quality. The Funds currently do not
intend to limit investments in low-grade securities.
Low-grade securities generally offer a higher current yield than that
available from higher grade securities, but involve greater risk. In the past,
the high yields from low-grade securities have more than compensated for the
higher default rates on such securities. However, there can be no assurance that
the Funds will be protected from widespread bond defaults brought about by a
sustained economic downturn, or that yields will continue to offset default
rates on low-grade securities in the future. Issuers of these securities are
often highly leveraged, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. In addition, such issuers may not have more traditional methods
of financing available to them and may be unable to repay debt at maturity by
refinancing. The risk of loss due to default by the issuer is significantly
greater for the holders of low-grade securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer. Past
economic recessions have resulted in default levels with respect to such
securities in excess of historic averages.
The value of low-grade securities will be influenced not only by changing
interest rates, but also by the bond market's perception of credit quality and
the outlook for economic growth. When economic conditions appear to be
deteriorating, low-grade securities may decline in market value due to
investors' heightened concern over credit quality, regardless of prevailing
interest rates.
Especially at such times, trading in the secondary market for low-grade
securities may become thin and market liquidity may be significantly reduced.
Even under normal conditions, the market for low-grade securities may be less
liquid than the market for investment grade corporate bonds. There are fewer
securities dealers in the high yield market and purchasers of low-grade
securities are concentrated among a smaller group of securities dealers and
institutional investors. In periods of reduced secondary market liquidity, low
grade securities prices may become more volatile and the Funds' ability to
dispose of
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particular issues when necessary to meet the Funds' liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer may be adversely affected.
Low-grade securities frequently have call or redemption features which
would permit an issuer to repurchase the security from the Funds. If a call
were exercised by the issuer during a period of declining interest rates, the
Funds likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Funds and any
dividends to Investors.
Besides credit and liquidity concerns, prices for low-grade securities may
be affected by legislative and regulatory developments. For example, from time
to time, Congress has considered legislation to restrict or eliminate the
corporate tax deduction for interest payments or to regulate corporate
restructurings such as takeovers or mergers. Such legislation may significantly
depress the prices of outstanding low-grade securities.
Brady Bonds
The Funds may invest in Brady Bonds, which are securities created through
the exchange of existing commercial bank loans to public and private entities in
certain emerging markets for new bonds in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented to date in Argentina, Bulgaria, Brazil, Costa Rica,
Jordan, Mexico, Nigeria, the Philippines, Poland, Uruguay, Panama, Peru and
Venezuela. Brady Bonds have been issued only during recent years, and for that
reason do not have a very long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar), and are actively traded in over-the-counter
secondary markets. Dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds.
Brady Bonds are often viewed as having three or four valuation components:
the collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity, (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds with respect
to commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that the Brady
Bonds in which the Funds invest will not be subject to restructuring
arrangements or to requests for a new credit which may cause the Funds to suffer
a loss of interest or principal in any of their holdings.
Structured Securities
Each Fund may invest a portion of its assets in entities organized and
operated solely for the purpose of restructuring the investment characteristics
of sovereign debt obligations. This type of restructuring involves the deposit
with, or purchase by, an entity, such as a corporation or trust, of specified
instruments (such as commercial bank loans or Brady Bonds) and the issuance by
that entity of one or more classes of securities ("Structured Securities")
backed by, or representing interests in, the underlying instruments. The cash
flow of the underlying instruments may be apportioned among the newly issued
Structured Securities to create securities with different investment
characteristics, such as varying maturities, payment priorities and interest
rate provisions, and the extent of the payments made with respect to Structured
Securities is dependent on the extent of the cash flow on the underlying
instruments. Because Structured Securities of the type in which the Funds
anticipate investing typically involve no credit enhancement, their credit risk
generally will be equivalent to that of the underlying instruments. The
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Funds are permitted to invest in a class of Structured Securities that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Securities typically have higher yields and present
greater risks than unsubordinated Structured Securities. Structured Securities
are typically sold in private placement transactions, and there currently is no
active trading market for Structured Securities. Thus, investments by a Fund in
Structured Securities will be limited by the Fund's prohibition on investing
more than 15% of its net assets in illiquid securities.
Loan Participations and Assignments
The Funds may invest in fixed rate and floating rate loans ("Loans")
arranged through private negotiations between an issuer of debt obligations and
one or more financial institutions ("Lenders"). The Funds' investments in Loans
are expected in most instances to be in the form of participations in loans
("Participations") or assignments of all or a portion of Loans ("Assignments")
from third parties.
The Funds will have the right to receive payments of principal, interest
and any fees to which they are entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In the event of the insolvency of the Lender selling a Participation,
the Funds may be treated as general creditors of the Lender and may not benefit
from any set-off between the Lender and the borrower. Certain Participations may
be structured in a manner designed to avoid purchasers of Participations being
subject to the credit risk of the Lender with respect to the Participation. Even
under such a structure, in the event of the Lender's insolvency, the Lender's
servicing of the Participation may be delayed and the assignability of the
Participation may be impaired. The Funds will acquire Participations only if
the Lender interpositioned between the Fund and the borrower is determined by
the Advisor to be creditworthy. When a Fund purchases Assignments from
Lenders, it will acquire direct rights against the borrower on the Loan.
However, because Assignments are arranged through private negotiations between
potential assignees and potential assignors, the rights and obligations acquired
by the Funds as the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning Lender.
Because there may be no liquid market for Participations and Assignments,
the Funds anticipate that such securities could be sold only to a limited number
of institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and the Funds' ability to dispose
of particular Assignments or Participations when necessary to meet the Funds'
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower or the Lender. The lack of
a liquid secondary market for Assignments and Participation also may make it
more difficult for the Funds to assign a value to these securities for purposes
of valuing the Funds' portfolios and calculating their net asset values. To the
extent that a Fund cannot dispose of a Participation or Assignment in the
ordinary course of business within seven days at approximately the value at
which it has valued the Loan Participation or Assignment, it will treat the
Participation or Assignment as illiquid and subject to its overall limit on
illiquid investments of 15% of its net assets.
Non-Publicly Traded Securities, Private Placements and Restricted Securities
The Funds may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities and
limited partnerships. Investing in such unregistered or unlisted securities,
including investments in new and early stage companies, may involve a high
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for these securities, they
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Funds, or less than
what may be considered the fair value of such
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securities. Furthermore, companies whose securities are not publicly traded may
not be subject to the disclosure and other investor protection requirements
which would be applicable if their securities were publicly traded. If such
securities are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Funds may be required to bear the
expense of registration. No more than 15% of the Funds' net assets will be
invested in illiquid securities, including, but not limited to, non-publicly
traded securities, private placements and restricted securities.
Investment Company Securities
The Funds may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Funds' investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Funds' net assets invested in
any one such investment company and (iii) no more than 10% of the Funds' net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
The Trust has received an Exemptive Order from the United States Securities
and Exchange Commission, which permits the Funds to invest their assets in
securities of other series offered by the Trust. The Funds will only invest in
such series to the extent that the Advisor determines that it is more efficient
for the Funds to gain exposure to a particular asset class through investment in
a series of the Trust as opposed to investment directly in individual
securities. Investments by the Fund in another series of the Trust may involve
transaction costs, but not duplication of other fees and expenses because the
Advisor and other service providers will waive fees or reimburse expenses to
avoid such duplication.
Each of the Fund's investments in any other series of the Trust will b
subject to the percentage limitations described above (so long as other series
of the Trust or certain other Brinson Partners-sponsored funds invest in such
Fund in excess of such limitations) and such Fund's investments in other
investment companies will be aggregated with its investments in the Trust's
other series for purposes of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Funds have valued the security. Some examples of illiquid
securities are securities purchased under Rule 144A under the Securities Act
("Rule 144A Securities"), over-the-counter options and certain interest rate
swaps. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities are liquid for purposes of the Funds' 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to consider
the following factors in determining the liquidity of a Rule 144A Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Although it has delegated
the day-to-day liquidity determination to the Advisor, the Board of Trustees
will continue to monitor and will periodically review the Advisor's selection of
Rule 144A Securities, as well as the Advisor's determination as to their
liquidity.
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If the Advisor determines that a Rule 144A Security purchased in reliance
on Rule 144A which was previously determined to be liquid is no longer liquid
and, as a result, a Fund's holdings of illiquid securities exceed the Funds' 15%
limit on investment in such securities, the Advisor will determine what action
shall be taken to ensure that the Fund continues to adhere to such limitation
including disposing of illiquid assets which may include such Rule 144A
Securities.
Future Developments
From time to time, the Funds may also invest in certain equity or debt
securities which have features other than those that are typical for such
securities and which have in the past been offered or may be offered in the
future. In the past, for example, such securities have been issued to replicate
the performance of a certain component or components of a particular security or
combination of securities and/or to hedge or reduce the risks associated with
certain securities or market trends. The Funds may invest in these securities
if the Advisor believes that doing so would be consistent with the Funds'
investment objectives and policies. Since the market for these securities may
be new, the Funds may have difficulty disposing of them at a suitable price and
time. In addition to limited liquidity, these instruments may present other
risks, such as high price volatility. The unavailability of such innovative
securities would not adversely affect the Funds' ability to achieve their
investment objectives.
Foreign Securities and Currency Considerations
Investments in securities of foreign issuers may involve greater risks than
those of U.S. issuers. There is generally less information available to the
public about non-U.S. issuers and less government regulation and supervision of
non-U.S. stock exchanges, brokers and listed companies. Non-U.S. companies are
not subject to uniform accounting, auditing and financial reporting standards,
practices and requirements. Securities of some non-U.S. companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Securities trading practices abroad may offer less protection to
investors. Settlement of transactions in some non-U.S. markets may be delayed or
may be less frequent than in the United States, which could affect the liquidity
of the Funds. Additionally, in some countries, there is the possibility of
expropriation or confiscatory taxation, limitations on the removal of
securities, property or other assets of the Funds, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries. The Advisor will take these factors into consideration in
managing the Funds' investments. The Funds intend to diversify broadly among
countries but reserve the right to invest a substantial portion of their assets
in one or more countries if economic and business conditions warrant such
investments.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Funds accrue interest or other receivables or accrue
expenses or liabilities denominated in a foreign currency and the time the Funds
actually collect such receivables, or pay such liabilities, are generally
treated as ordinary income or loss. Similarly, a portion of the gains or losses
realized on disposition of debt securities denominated in a foreign currency,
referred to under the Internal Revenue Code of 1986, as amended ("the Code"), as
"section 988" gains or losses, may also be treated as ordinary gain or loss
rather than as capital gain or loss.
The U.S. dollar market value of the Funds' investments and of dividends and
interest earned by the Funds may be significantly affected by changes in
currency exchange rates. Some currency prices may be volatile, and there is the
possibility of governmental controls on currency exchange or governmental
intervention in currency markets, which could adversely affect the Funds.
Although the Funds may attempt to manage currency exchange rate risk, there is
no assurance that the Funds will do so at an appropriate time or that they will
be able to predict exchange rates accurately. The Funds will manage currency
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exposures relative to the normal currency allocation and will consider return
and risk of currency exposures relative to the respective Benchmark.
Investing in Emerging Markets
Compared to the United States and other developed countries, emerging
countries may have relatively unstable governments, economies based on only a
few industries, and securities markets that trade only a small number of
securities and employ settlement procedures different from those used in the
United States. Prices on these exchanges tend to be volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries.
Furthermore, investments by investors foreign to the emerging market countries
are subject to a variety of restrictions in many emerging market countries.
These restrictions may take the form of prior governmental approval, limits on
the amount or type of securities held by foreigners, and limits on the types of
companies in which foreigners may invest. Additional restrictions may be imposed
at any time by these or other countries in which the Funds invest. In addition,
the repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including, in
some cases, the need for certain governmental consents. Although these
restrictions may in the future make it undesirable to invest in emerging market
countries, the Advisor does not believe that any current repatriation
restrictions would affect its decision to invest in such countries. Countries
such as those in which the Funds may invest have historically experienced and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations or currency depreciation, large amounts of external
debt, balance of payments and trade difficulties and extreme poverty and
unemployment. Additional factors which may influence the ability or willingness
to service debt include, but are not limited to, a country's cash flow
situation, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of its debt service burden to the economy as a whole,
its government's policy towards the International Monetary Fund, the World Bank
and other international agencies and the political constraints to which a
government debtor may be subject.
The ability of a foreign government or government-related issuer to make
timely and ultimate payments on its external debt obligations will be strongly
influenced by the issuer's balance of payments, including export performance,
its access to international credits and investments, fluctuations in interest
rates and the extent of its foreign reserves. A country whose exports are
concentrated in a few commodities or whose economy depends on certain strategic
imports could be vulnerable to fluctuations in international prices of these
commodities or imports. To the extent that a country receives payment for its
exports in currencies other than dollars, its ability to make debt payments
denominated in dollars could be adversely affected. If a foreign government or
government-related issuer cannot generate sufficient earnings from foreign trade
to service its external debt, it may need to depend on continuing loans and aid
from foreign governments, commercial banks, and multilateral organizations, and
inflows of foreign investment. The commitment on the part of these foreign
governments, multilateral organizations and others to make such disbursements
may be conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the issuer's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on the level of the relevant government's international
currency reserves and its access to foreign exchange. Currency devaluations may
affect the ability of a government issuer to obtain sufficient foreign exchange
to service its external debt.
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As a result of the foregoing, a governmental issuer may default on its
obligations. If such a default occurs, the Funds may have limited effective
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting party itself, and the ability
of the holder of foreign government and government-related debt securities to
obtain recourse may be subject to the political climate in the relevant country.
In addition, no assurance can be given that the holders of commercial bank debt
will not contest payments to the holders of other foreign government and
government-related debt obligations in the event of default under their
commercial bank loan agreements.
The issuers of the government and government-related debt securities in
which the Funds expect to invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which has led to
defaults on certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds, and obtaining new credit to finance interest payments. Holders of
certain foreign government and government-related debt securities may be
requested to participate in the restructuring of such securities and to extend
further loans to the issuers of such securities. There can be no assurance that
the Brady Bonds and other foreign government and government-related debt
securities in which the Funds may invest will not be subject to similar defaults
or restructuring arrangements which may adversely affect the value of such
investments. Furthermore, certain participants in the secondary market for such
debt securities may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to other
market participants.
Payments to holders of the high yield, high risk, foreign debt securities
in which the Funds may invest may be subject to foreign withholding and other
taxes. Although the holders of foreign government and government-related debt
securities may be entitled to tax gross-up payments from the issuers of such
securities, there is no assurance that such payments will be made.
Russian Securities Transactions
The Funds may invest in securities of Russian companies. The registration,
clearing and settlement of securities transactions in Russia are subject to
significant risks not normally associated with securities transactions in the
United States and other more developed markets. Ownership of shares in Russian
companies is evidenced by entries in a company's share register (except where
shares are held through depositories that meet the requirements of the
Investment Company Act) and the issuance of extracts from the register or, in
certain limited cases, by formal share certificates. However, Russian share
registers are frequently unreliable and the Funds could possibly lose their
registration through oversight, negligence or fraud. Moreover, Russia lacks a
centralized registry to record securities transactions and registrars located
throughout Russia or the companies themselves maintain share registers.
Registrars are under no obligation to provide extracts to potential purchasers
in a timely manner or at all and are not necessarily subject to state
supervision. In addition, while registrars are liable under law from losses
resulting from their errors, it may be difficult for the Funds to enforce any
rights they may have against the registrar or issuer of the securities in the
event of loss of share registration. Although Russian companies with more than
1,000 shareholders are required by law to employ an independent company to
maintain share registers, in practice, such companies have not always followed
this law. Because of this lack of independence of registrars, management of a
Russian company may be able to exert considerable influence over who can
purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions on the share register. Furthermore, these
practices may prevent the Funds from investing in the securities of certain
Russian companies deemed suitable by the Advisor and could
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cause a delay in the sale of Russian securities by the Funds if the company
deems a purchaser unsuitable, which may expose the Funds to potential loss in
their investment.
In light of the risks described above, the Board of Trustees of the Funds
has approved certain procedures concerning the Funds' investments in Russian
securities. Among these procedures is a requirement that the Funds will not
invest in the securities of a Russian company unless that issuer's registrar has
entered into a contract with the Funds' sub-custodian containing certain
protective conditions including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Funds. This requirement
will likely have the effect of precluding investments in certain Russian
companies that the Funds would otherwise make.
OTHER INVESTMENT TECHNIQUES
Currency Management
The normal currency allocation of the Funds is identical to the currency
mix of the respective Benchmark. The Funds expect to maintain this normal
currency exposure when, in the judgment of the Advisor, global currency markets
are fairly priced relative to each other and relative to the associated risks.
The Funds may actively deviate from such normal currency allocations to take
advantage of, or to protect its portfolio from risk and return characteristics
of, the currencies and short-term interest rates when those prices deviate
significantly from fundamental value. Deviations from the Benchmarks are
determined by the Advisor based upon its research.
To manage exposure to currency fluctuations, the Funds may alter fixed
income or money market exposures, enter into forward currency exchange
contracts, buy or sell options, futures or options on futures relating to
foreign currencies and purchase securities indexed to currency baskets. The
Funds may also use these currency exchange techniques in the normal course of
business to hedge against adverse changes in exchange rates in connection with
purchases and sales of securities. However, the ability to manage foreign
exchange risk through the use of these strategies may be limited in certain
emerging markets because of a lack of appropriate financial instruments. Some
of these strategies may require the Funds to set aside liquid assets in a
segregated custodial account to cover their obligations. These techniques are
further described below.
Forward Foreign Currency Transactions
The Funds may conduct their foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market or through entering into contracts to purchase or sell foreign
currencies at a future date (i.e., a "forward foreign currency contract" or
"forward contract"). A forward contract involves an obligation to purchase or
sell a specific currency amount at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties and at a price
set at the time of the contract. The Funds will convert currency on a spot
basis from time to time and Investors should be aware of the potential costs of
currency conversion.
The Funds may enter into forward contracts for hedging purposes as well as
for non-hedging purposes. For hedging purposes, the Funds may enter into
contracts to deliver or receive foreign currency they will receive from or
require for their normal investment activities. They may also use contracts in
a manner intended to protect foreign currency-denominated securities from
declines in value due to unfavorable exchange rate movements. The Funds may
also enter into contracts with the intent of changing the relative exposure of
the Funds' portfolio of securities to different currencies to take advantage of
anticipated changes in exchange rates.
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When the Funds enter into forward contracts for non-hedging purposes, they
will establish a segregated account with their custodian bank in which they will
maintain cash, U.S. government securities or other liquid assets equal in value
to their obligations with respect to their forward contracts for non-hedging
purposes.
At the maturity of a forward contract, the Funds may either sell a
portfolio security and make delivery of the foreign currency, or they may retain
the security and terminate their contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Funds may realize a gain or loss from currency
transactions.
Options
The Funds may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Funds
may also purchase and write put and call options on foreign currencies to manage
the Funds' exposure to changes in currency exchange rates. In addition, the
Funds may purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Funds may
purchase call options only to the extent premiums paid on all outstanding call
options do not exceed 20% of each Fund's total assets. The Funds will write call
options only on a covered basis. A call option is "covered" if the Funds own the
underlying securities or the Funds maintain in a segregated account with their
custodian, cash, U.S. government securities or other liquid assets with a value
sufficient to meet their obligations under the call option, or if the Funds own
an offsetting call option. The Funds will receive premium income from writing
call options, which may offset the cost of purchasing options and may also
contribute to the Funds' total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Funds may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of each Fund's total assets. The advantage is that the purchaser can be
protected should the market value of the security decline or should a particular
index decline. The Funds will, at all times during which they hold a put option,
own the security underlying such option. The Funds will receive premium income
from writing put options, although they may be required, when the put is
exercised, to purchase securities at higher prices than the current market
price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Funds to offset put options or call options
prior to exercise or expiration. If the Funds cannot effect closing
transactions, they may have to hold a security they would otherwise sell or
deliver a security they might want to hold.
Call options on foreign currency written by the Funds will be "covered,"
which means that the Funds will own an equal amount of the underlying foreign
currency or maintain in a segregated account
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with their custodian, cash, U.S. government securities or other liquid assets
with a value sufficient to meet their obligations under the call option, or own
an offsetting call option. With respect to put options on foreign currency
written by the Funds, the Funds will establish a segregated account with their
custodian bank consisting of cash, U.S. government securities or other liquid
assets in an amount equal to the amount the Funds would be required to pay upon
exercise of the put.
The Funds will not purchase or sell options if, immediately thereafter,
more than 40% of their net assets would be hedged by options. The Funds may use
options traded on U.S. exchanges and to the extent permitted by law, options
traded over-the-counter and on recognized foreign exchanges. It is the position
of the Commission that over-the-counter options are illiquid. Accordingly, the
Funds will invest in such options only to the extent consistent with their 15%
limit on investment in illiquid securities.
Futures Contracts
The Funds may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Funds represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date. When
a futures contract is sold, a Fund incurs a contractual obligation to deliver
the securities or foreign currency underlying the contract at a specified price
on a specified future date. The Funds may enter into futures contracts and
engage in options transactions related thereto for hedging purposes and for non-
hedging purposes, to the extent that not more than 5% of each Fund's assets are
required as futures contract margin deposits and premiums on options on futures.
When a Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Funds engage in futures transactions, to the extent
required by the Commission, the Funds will maintain with their custodian, assets
in a segregated account to cover their obligations with respect to such
contracts, which assets will consist of cash, cash equivalents or other liquid
assets from their portfolios in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial and variation margin payments made by the Funds with respect to such
futures contracts.
The Funds will enter into futures transactions on domestic exchanges and,
to the extent such transactions have been approved by the United States
Commodity Futures Trading Commission, for sale to customers in the United
States, on foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
a Fund's return. Options and futures traded on foreign exchanges generally are
not regulated by U.S. authorities and may offer less liquidity and less
protection to the Funds in the event of default by the other party to the
contract. The Funds could also experience losses if the prices of their options
or futures positions are poorly correlated with their other investments, or if
they cannot close out their positions because of an illiquid secondary market.
The loss from investing in futures
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transactions is potentially unlimited. For further information concerning the
risks of options and futures, see Part B of this Registration Statement.
Swaps
The Funds may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Funds expect to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of their portfolio, to protect against currency fluctuations, as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates), to protect against any increase in the price of
securities the Funds anticipate purchasing at a later date or to gain exposure
to certain markets.
Interest rate swaps involve the exchange by the Funds with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal. Currency swaps involve the exchange of cash flows on a
notional amount based on changes in the values of referenced currencies.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
an interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Advisor
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Funds will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Funds' risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
The equity swaps in which the Funds intend to invest involve agreements
with a counterparty. The return to a Fund on any equity swap contract will be
the total return on the notional amount of the contract as if it were invested
in the stocks comprising the contract index in exchange for an interest
component based on the notional amount of the agreement. A Fund will only enter
into an equity swap contract on a net basis, i.e., the two parties' obligations
are netted out, with the Fund paying or receiving, as the case may be, only the
net amount of the payments. Payments under the equity swap contracts may be made
at the conclusion of the contract or periodically during its term.
If there is a default by the counterparty to an equity swap contract, a
Fund will be limited to contractual remedies pursuant to the agreements related
to the transaction. There is no assurance that an equity swap contract
counterparty will be able to meet its obligations pursuant to an equity swap
contract or that, in the event of default, a Fund will succeed in pursuing
contractual remedies. A Fund thus assumes the risk that it may be delayed in or
prevented from obtaining payments owed to it pursuant to an equity swap
contract. However, the amount at risk is only the net unrealized gain, if any,
on the swap, not the
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entire notional amount. The Advisor will closely monitor, subject to the
oversight of the Board of Trustees, the creditworthiness of equity swap
counterparties in order to minimize the risk of equity swaps.
The Advisor and the Trust do not believe that the Funds' obligations under
equity swap contracts are senior securities and, accordingly, the Funds will not
treat them as being subject to their borrowing or senior securities
restrictions. However, the net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each equity swap contract will
be accrued on a daily basis and an amount of cash, U.S. government securities or
other liquid assets having an aggregate market value at least equal to the
accrued excess will be maintained in a segregated account by the Funds'
custodian. To the extent that a Fund cannot dispose of a swap in the ordinary
course of business within seven days at approximately the value at which the
Fund has valued the swap, it will treat the swap as illiquid and subject to its
overall limit on illiquid investments of 15% of the Fund's total net
assets.
Borrowing
The Funds may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Funds will not borrow money in
excess of 33 1/3% of the value of their respective total assets. The Funds have
no intention of increasing their net income through borrowing. Any borrowing
will be from a bank with the required asset coverage of at least 300%. In the
event that such asset coverage falls below 300%, the Funds shall, within three
days thereafter (not including Sunday or holidays) or such longer period as the
Commission may prescribe by rules and regulations, reduce the amount of their
borrowings to such an extent that the asset coverage of such borrowings shall be
at least 300%. The Funds will not pledge more than 10% of their respective net
assets, or issue senior securities as defined in the Investment Company Act, or
as described herein, except for notes to banks and reverse repurchase
agreements. Investment securities will not be purchased while a Fund has
outstanding borrowings that exceed 5% of the Fund's total assets.
Loans of Portfolio Securities
Each Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Funds will continue to receive any dividends or interest paid
on the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Funds must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Funds will be exposed on
a loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the security increases. However, pursuant to the Funds'
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Funds will lend securities only after a review of
all pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
the lending agent, pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Funds are authorized to invest. Investing cash subjects
that investment to market risk (i.e., capital appreciation or
depreciation).
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Investment Restrictions
The Funds are subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Funds as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Funds. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Funds are free to dispose of their portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Funds' respective investment objectives. The Funds will not attempt to achieve
or be limited to a predetermined rate of portfolio turnover, such a turnover
always being incidental to transactions undertaken with a view to achieving the
Funds' respective investment objectives. While it is the policy of the Funds
generally not to engage in trading for short-term gains, the Funds will effect
portfolio transactions without regard to the holding period if, in the judgment
of the Advisor, such transactions are advisable in light of a change in
circumstances of a particular company, within a particular industry or country,
or in general market, economic or political conditions. Although the portfolio
turnover rate for the Funds may vary greatly from year to year, each Fund
expects that under normal circumstances, its portfolio turnover rate will not
exceed 100%. A high portfolio turnover rate will increase aggregate brokerage
commission expenses which must be borne directly by the Funds and ultimately by
the Funds' Investors and the incidence of short-term capital gains (which are
taxable to Investors as ordinary income. See " Brokerage Allocation" and "
Federal Taxes."
Management of the Funds.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Funds. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Funds.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust - International
Growth Portfolio, Enterprise Group of Funds, Inc. - International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust - Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -
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International Equity Portfolio, John Hancock Variable Series Trust I -
International Balanced Fund, AON Funds - International Equity Fund and The
Republic Funds - Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Investment decisions for the Funds are made by an investment management
team of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Funds, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or the "Administrator"),
pursuant to which MSTC is required to provide general administrative,
accounting, portfolio valuation, transfer agency and custodian services to the
Funds, including the coordination and monitoring of any third party service
providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Funds. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds
Services Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank,
under which CGFSC provides administrative, accounting, portfolio valuation and
transfer agency services to the Funds. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials,
periodic reports to Investors, registration statements and other
documents; and responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of each Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each
Investor's account records, responding to Investors' inquiries
concerning accounts, processing purchases and redemptions of the
Funds' shares, acting as dividend and distribution disbursing agent
and performing other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the
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average weekly emerging markets equity net assets of the Trust; and 0.019% of
the average weekly emerging markets debt assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any third party service provider in providing such
services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for the services
CGFSC provides to MSTC in fulfilling its obligations under the Services
Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Funds will be responsible for all of their own expenses other than
those borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering the Funds' shares for sale with the
Commission and of noticing the Funds' shares for sale with various state
securities commissions, fees and expenses of the Administrator and the expenses
of obtaining quotations of portfolio securities and of pricing the Funds'
shares. General expenses which are not associated directly with any particular
portfolio within the Trust (e.g., insurance premiums, Trustees' fees, expenses
of maintaining the Trust's legal existence and of Investors' meetings and fees
and expenses of industry organizations) are allocated between the various series
based upon their relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Funds for any fiscal year exceed 0.50% of each Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Funds are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. The Funds normally
trade non-U.S. securities in foreign countries, since the best available market
for non-U.S. securities is often on non-U.S. markets. In transactions on non-
U.S. stock exchanges, brokers' commissions are generally fixed and are often
higher than in the United States where commissions are negotiated. Pursuant to
the Advisory Agreement, the Advisor is authorized to utilize the trading
department of its foreign subsidiaries to execute foreign securities
transactions but monitors selection by such subsidiaries of brokers and dealers
used to execute such transactions.
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In executing trades of debt (rather than equity) securities, most of the
Funds' investment portfolio transactions are effected with dealers without the
payment of brokerage commissions, but at net prices which usually include a
spread or a markup.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this
research information in managing the Funds' assets, as well as the assets of
other clients.
When buying or selling securities, the Funds may pay commissions to brokers
who are affiliated with the Advisor or the Funds. The Funds may also purchase
securities in certain underwritten offerings for which an affiliate of the Funds
or the Advisor may act as an underwriter. The Funds may effect futures
transactions through, and pay commissions to, futures commission merchants who
are affiliated with the Advisor or the Funds in accordance with procedures
adopted by the Board of Trustees of the Trust.
Capital Stock and Other Securities
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of
Trustees has the power to designate one or more series or sub-series/classes of
shares of beneficial interest and to classify or reclassify any unissued shares
with respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Fund, the Brinson Post-Venture Fund,
the Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-
Term Fund, the Brinson High Yield Fund and the Brinson Emerging Markets Debt
Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Pursuant to the Investment Company Act, a control person possess the
ability to control the outcome of matters submitted for shareholder vote. As of
July 29, 1997, Bankers Trust Company for Brinson Global Securities Fund of
Chicago, Illinois was a control person of the Fund and the Trust by nature of
its shareholdings.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on
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does not affect the interests of all series, only the Investors of the affected
series shall be entitled to vote on the matter. The Declaration of Trust gives
Investors certain voting powers only with respect to (i) the election and
removal of Trustees; (ii) a termination of the Trust; (iii) amendments reducing
payments upon liquidation or diminishing voting rights; (iv) mergers,
consolidations or sales of assets; (v) the incorporation of the Trust; (vi)
additional matters relating to the Trust as required by the Investment Company
Act; and (vii) such other matters as the Board of Trustees considers necessary
or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Trust's Declaration of Trust, Investor
meetings will also be called upon request of Investors holding in the aggregate
10% or more of the outstanding shares. Subject to certain conditions, Investors
may apply to the Funds to communicate with other Investors to request an
Investors' meeting.
As with any mutual fund, certain Investors of a Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in a Fund to change the Fund's investment
objective could result in an Investor's withdrawal of its investment in the
Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for a Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Funds do not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Funds have received a ruling from the Internal Revenue
Service that the Funds will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as partnerships, the Funds will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Funds). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Funds. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Funds borrow money to acquire
property or invest in assets that produce UBTI. The Funds will not be "regulated
investment companies" for federal income tax purposes. For a more complete
discussion of the federal income tax consequences of investing in the Funds, see
"Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295, or
an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Funds are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments
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in the Funds may be made only by "accredited investors" within the meaning of
Regulation D under the Securities Act which include, but are not limited to,
common or commingled trust funds, investment companies, registered broker-
dealers, investment banks, commercial banks, corporations, group trusts or
similar organizations or entities. The registration statement of which this
Prospectus is a part does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" to the public within the meaning of the
Securities Act. Shares of the Funds may be purchased directly by eligible
Investors from the Funds at the net asset value next determined after receipt of
the order in proper form by the Trust. The minimum initial purchase amount is
$10,000,000. In the sole discretion of the Advisor, the minimum purchase amount
may be waived or modified. There is no sales load in connection with the
purchase of shares. The Trust reserves the right to reject any purchase order
and to suspend the offering of shares of the Funds.
At the discretion of the Funds, Investors may be permitted to purchase Fund
shares by transferring securities to the Funds that meet the specific Fund's
investment objective and policies. Securities transferred to a Fund will be
valued in accordance with the same procedures used to determine the Fund's net
asset value at the time of the next determination of net asset value after such
receipt. Shares issued by a Fund in exchange for securities will be issued at
net asset value determined as of the same time. All dividends, interest,
subscription, or other rights pertaining to such securities after such transfers
to the Fund shall become the property of the Fund and must be delivered to the
Fund by the Investor upon receipt from the issuer. Investors that are permitted
to transfer such securities will be required to recognize a gain or loss on such
transfer and pay tax thereon, if applicable, measured by the difference between
the fair market value of the securities and the Investors' basis therein. The
Trust will not accept securities in exchange for shares of a Fund unless: (1)
such securities are, at the time of the exchange, eligible to be included in the
Fund's investment portfolio and current market quotations are readily available
for such securities; and (2) the Investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions upon
their sale by the Fund under the Securities Act or under the laws of the country
in which the principal market for such securities exists, or otherwise.
Transaction Charges. Effective December 20, 1995, investors in the Brinson
Emerging Markets Equity Fund are subject to a transaction charge equal to 1.50%
on purchases of the Fund's shares. Effective February 20, 1996, Investors in
the Brinson Emerging Markets Equity Fund are subject to a transaction charge
equal to 1.50% on redemptions of the Fund's shares. Investors in the Brinson
Emerging Markets Debt Fund are subject to a transaction charge equal to 0.50% on
purchases of the Fund's shares effective December 20, 1995. Therefore, the
shares of the Funds are sold at a price which is equal to the net asset value of
such shares, plus the transaction charge. Redemption requests for the Brinson
Emerging Markets Equity Fund are paid at the net asset value less the
transaction charge.
The transaction charges are paid to the Funds and used by them to defray
transaction costs associated with the purchase and sale of securities within the
Funds. The amount of the transaction charge on purchases and redemptions
represents the estimate of the costs reasonably anticipated to be associated
with the purchase of securities with cash received from Investors and the sale
of securities to obtain cash to redeem Investors. Therefore, the transaction
charges offset the dilutive effect such costs would otherwise have on the net
asset value of the Funds' shares. Purchases and redemptions which are made in
kind with securities are not subject to the transaction charges. Redemptions by
the Funds investing in the Brinson Emerging Markets Equity Fund will not be
subject to the transaction charge.
Net Asset Value. The net asset value of each Fund is computed as of the
close of regular trading on the New York Stock Exchange ("NYSE") (generally 4:00
p.m. Eastern time) on days when such exchange is open. The net asset value per
share is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the
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number of shares outstanding. Fund securities for which market quotations are
available are priced at market value. Debt securities are priced at fair value
by an independent pricing service using methods approved by the Trust's Board of
Trustees. Short-term investments having a maturity of less than 60 days are
valued at amortized cost, which approximates market value. Redeemable securities
issued by open-end investment companies are valued using their respective net
asset values for purchase orders placed at the close of the NYSE. All other
securities are valued at their fair value as determined in good faith and
pursuant to a method approved by the Trust's Board of Trustees. For a detailed
description, see Item 19 in Part B.
Exchanges of Shares. Shares of a Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Funds reserve the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege, an Investor agrees that the
Funds will not be liable for following instructions communicated by telephone
that the Funds reasonably believe to be genuine. The Funds provide written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy, the
Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Funds or the Administrator fail to employ
this and other appropriate procedures, the Funds or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of a Fund and reinvested in shares of another series of the
Trust. Gains or losses on the shares exchanged are realized by the Investor at
the time of the exchange. Any Investor wishing to make an exchange should first
obtain and review a Prospectus of the series of the Trust into which the
Investor wishes to exchange. Requests for telephone exchanges must be received
by the transfer agent, CGFSC, by the close of regular trading hours (generally
4:00 p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
Redemption of Shares or Repurchase
As stated above, "Purchase of Securities Being Offered," the Funds' shares
are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day that the NYSE is open by furnishing a request to the Trust. The
Funds normally send redemption proceeds on the next business day, but, in any
event, redemption proceeds, except as set forth below, are sent within seven
calendar days of receipt of a redemption request in proper form. There is no
charge for redemptions by wire. Please note, however, that the Investor's bank
may impose a fee for wire service. The right of any Investor to receive payment
with respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or
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holidays) or trading on the NYSE is restricted, or, to the extent otherwise
permitted by the Investment Company Act, if an emergency exists.
If a Fund determines that it would be detrimental to the best interests of
the remaining Investors of a Fund to make payment wholly or partly in cash, the
Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
Effective February 20, 1996, shares of the Brinson Emerging Markets Equity
Fund are subject to a transaction charge equal to 1.50% on redemptions of the
Fund's shares. The charge is paid to the Fund and used by it to defray
transaction costs. This charge is further discussed above under "Purchase of
Securities Being Offered." Purchases and redemptions which are made in kind
with securities are not subject to the transaction charges.
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APPENDIX A
CORPORATE DEBT RATINGS
Moody's Investors Service, Inc. describes classifications of corporate bonds as
follows:
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-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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Standard & Poor's Ratings Group describes classifications of corporate bonds as
follows:
AAA - This is the highest rating assigned by Standard & Poor's Rating Group
to a debt obligation and indicates an extremely strong capacity to pay principal
and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and in the majority of instances
they differ from the AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lend
to inadequate capacity to meet timely interest and principal payments.
B - Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC - Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest or repay principal.
CC - The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
CI - The rating CI is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in default, or is expected to default upon maturity or
payment date.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
2
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OFFEREE NO. ___
BRINSON RELATIONSHIP FUNDS
Brinson Bond Plus Fund
PART A
August 14, 1997
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson Bond Plus Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
Under normal market conditions, at least 65% of the Fund's assets will be
invested in debt securities. The Fund seeks to achieve its objective by
pursuing active asset allocation strategies across global, fixed income and
money markets and active security selection within each market. The Fund's
performance is measured relative to the Salomon Brothers Broad Investment Grade
Bond Index (the "Benchmark").
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
The investment style of the Fund's investment advisor, Brinson Partners,
Inc. ("Brinson Partners" or the "Advisor") is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Fund is that
periodically there are exploitable discrepancies between market price and
fundamental value. Those price/value discrepancies then become the building
blocks for portfolio construction. The successful identification of price/value
discrepancies should result in enhanced total return performance.
The Benchmark is a market capitalization weighted broad based index which
includes investment grade U.S. Bonds with over one year to maturity. From time
to time, the Advisor may substitute an equivalent index within a given asset
class when it believes that such index more accurately reflects the relevant
global market.
As a general matter, the Advisor will purchase for the Fund securities
contained in the Benchmark and will invest opportunistically in securities not
included in the Benchmark. The Advisor will attempt to enhance the long-term
return and risk performance of the Fund relative to the Benchmark by deviating
from the normal Benchmark mix of asset classes and currencies in reaction to
discrepancies between current market prices and fundamental values. Decisions to
deviate from the normal mix are a blend of rigorous quantitative analysis, an
understanding of the fundamental relationships among global markets and the
expertise of investment professionals. The active management process is
intended, by the Advisor, to produce superior performance relative to the
Benchmark.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund does not intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning the percentage of the Fund's portfolio securities that may be loaned,
and its policies set forth in Part B concerning borrowing, the issuance of
senior securities and concentration are "fundamental," which means that they may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting shares. As used in this Part A of this Registration
Statement, a vote of "a majority of the outstanding voting shares" of the Trust
or a series of the Trust means the affirmative vote of the lesser of (i) more
than 50% of the outstanding shares of the Trust or series, or (ii) 67% of the
shares of the Trust or series present at a meeting at which more than 50% of the
outstanding shares of the Trust or series are represented in person or by proxy.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the
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obligations of a single issuer. To the extent that the Fund's investment
portfolio at times includes the securities of a smaller number of issuers than
permissible if the Fund were "diversified" (as defined in the Investment Company
Act), the Fund may be subject to greater investment and credit risk than an
investment company that invests in a broader range of securities, because
changes in the financial condition or market assessment of a single issuer may
cause greater fluctuations in the net asset value of the Fund's shares.
Asset Allocation and Market Management
The Advisor believes that, over the long term, investing across global
fixed income markets based upon discrepancies between market prices and
fundamental values may achieve enhanced return and risk characteristics relative
to the Benchmark.
Fundamental value is considered to be the current value of long-term,
sustainable future cash flows derived from a given asset class or security. In
determining fundamental value, the Advisor takes into consideration broadly
based indices representing asset classes or markets and various economic
variables such as productivity, inflation and global competitiveness. The
valuation of asset classes reflects an integrated, fundamental analysis of
global markets. Investment decisions are based on comparisons of current market
prices to fundamental values.
The Fund may invest in the more broadly defined asset classes than those
contained in the Benchmark. The "Normal Asset Allocation Mix," set forth below,
represents the asset allocation that the Fund would expect to maintain when, in
the judgment of the Advisor, global capital markets are fairly priced relative
to each other and relative to the associated risks.
Brinson Bond Plus Fund
<TABLE>
<S> <C> <C>
Normal Asset Allocation Mix
Normal Asset Class
Asset Class Allocation Strategy
Mix Ranges
U.S. Investment Grade Bond 80% 70-100%
Non-Dollar Bonds 7.5% 0-15%
Emerging Markets Debt 5.0% 0-5%
High Yield Bonds 7.5% 0-15%
</TABLE>
The "Asset Class Strategy Ranges" indicated above are the ranges within
which the Fund expects to make its active asset allocations to specific asset
classes. Under all but unusual market conditions, the Fund expects to adhere to
the strategy ranges set forth above. However, the Fund's strategy ranges be
exceeded by the Fund under unusual market conditions. When unusual market
conditions warrant, the Fund can make substantial defensive investments in cash
equivalents as described below.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. and Non-U.S. Fixed Income Securities
The Fund may invest in all types of debt securities of U.S. and non-U.S.
issuers, including governments and governmental entities and supranational
issuers as well as corporations and other business organizations. The terms
"fixed income securities" and "debt securities" are synonymous and are used
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interchangeably in this Part A and in Part B of this Registration Statement. The
Fund may purchase U.S. dollar denominated fixed income securities that reflect a
broad range of investment maturities, qualities and sectors. Please see
discussion below for a description of the high yield/higher risk debt securities
in which the Fund may invest.
The non-U.S. fixed income component of the Fund will typically be invested
in government, supranational issues, and corporate debt. A supranational entity
is an entity established or financially supported by the national governments of
one or more countries to promote reconstruction or development. Examples of
supranational entities include, among others, the World Bank, the European
Economic Community, the European Coal and Steel Community, the European
Investment Bank, the Intra-Development Bank, the Export-Import Bank and the
Asian Development Bank.
High Yield/Higher Risk Securities
The Fund's investments in all types of fixed income securities may include
lower quality, higher yielding securities which are below investment grade.
Investment grade securities are securities rated BBB or better by Standard &
Poor's Ratings Group ("S&P") or Baa or better by Moody's Investors Service, Inc.
("Moody's") or, if unrated, are determined to be of comparable quality by the
Advisor. While securities rated BBB or Baa are regarded as having an adequate
capacity to pay principal and interest, such securities lack outstanding
investment characteristics and, in fact, have speculative characteristics as
well. In addition, changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher rated securities. Securities rated lower
than BBB by S&P and Baa by Moody's are classified as non-investment grade
securities and are sometimes referred to as "junk bonds." These securities are
considered to be of poor standing and predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse conditions.
Securities issued by foreign issuers rated below investment grade entail greater
risks than higher rated securities, including risk of untimely interest and
principal payment, default, price volatility and may present problems of
liquidity and valuation. Investors should carefully consider these risks before
investing. A description of various bond ratings appears in Appendix A, p. 1-2.
Ratings represent S&P's and Moody's respective opinions as to the quality of the
obligations they undertake to rate. However, ratings are general and are not
absolute standards of quality.
Pursuant to an Exemptive Order for the Trust from the United States
Securities and Exchange Commission (the "Commission"), in lieu of investing
directly in certain high yield, higher risk securities, the Fund may invest a
portion of its assets in the Brinson High Yield Fund (the "High Yield Fund")
series of the Trust. The investment objective of the High Yield Fund is to
maximize total U.S. dollar return, consisting of capital appreciation and
current income, while controlling risk. The High Yield Fund maintains a high
yield portfolio and as such, at least 65% of its assets are normally invested in
high yield securities of the type described herein. Any investment by the Fund
in the High Yield Fund would not be subject to the limitations of the Investment
Company Act concerning investments by open-end investment companies in
securities issued by other investment companies. Please see the discussion below
under "Investment Company Securities" for a description of these limitations.
The Fund currently intends to limit its investment in high yield fixed
income securities to no more than 15% of its net assets. Any investment in the
High Yield Fund will be considered to be subject to this limitation.
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Emerging Markets Debt Securities
The Fund may invest in all debt securities of emerging market issuers,
including government and government-related entities (including participations
in loans between governments and financial institutions), corporations and
entities organized to restructure outstanding debt of issuers in emerging
markets, or debt securities on which the return is derived primarily from other
emerging markets instruments. The Fund may invest indirectly in emerging market
debt securities by purchasing securities of open-end and closed-end investment
companies. Please see the discussion below under "Investment Company Securities"
for a further explanation of investments in investment companies and under
"Investing in Emerging Markets" for a description of the risks of investing in
emerging market debt securities.
The Exemptive Order also permits, among other things, the Fund to invest
its assets in the Brinson Emerging Markets Debt Fund (the "EM Debt Fund") series
of the Trust. Pursuant to the Exemptive Order, the Fund may invest that portion
of its assets allocated to emerging markets investments by purchasing shares of
the EM Debt Fund. The investment objective of the EM Debt Fund is to maximize
total U.S. dollar return, consisting of capital appreciation and current income,
while controlling risk. Under normal circumstances, at least 65% of the assets
of the EM Debt Fund is invested in the debt securities issued by governments,
government-related entities (including participations in loans between
governments and financial institutions), corporations and entities organized to
restructure outstanding debt of issuers in emerging markets, or debt securities
the return of which is derived primarily from other emerging markets
instruments. The EM Debt Fund is permitted to invest in the same types of
securities as the Fund may invest in directly and as further described herein.
The Fund may invest its assets directly or indirectly in emerging market
securities as described above. Pursuant to the Exemptive Order, any investment
by the Fund in the EM Debt Fund would not be subject to the limitations of the
Investment Company Act concerning investments by open-end investment companies
in the securities issued by other investment companies. Please see the
discussion below under "Investment Company Securities" for a description of
these limitations.
U.S. and Non-U.S. Equity Securities
The Fund may invest in a broad range of equity securities of U.S. and non-
U.S. issuers, including common stock of companies or closed-end investment
companies, preferred stock, fixed income securities convertible into or
exchangeable for common stock and securities such as warrants or rights that are
convertible into common stock. Investments in common stock will occur primarily
as a result of the purchase of unit offerings of fixed income securities which
include equity components.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. or non-U.S. currencies. When unusual market
conditions warrant, the Fund can make substantial temporary defensive
investments in cash equivalents up to a maximum exposure of 100% of the Fund's
assets. The Fund's investment in temporary defensive investments may affect the
Fund's ability to attain its investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a maturity date but which can be called for
repayment by the lender or the borrower at a predetermined
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interval. Bank instruments in which the Fund may invest include bank loan
participations, bank holding company commercial paper, deposits, bank notes and
other bank related securities. Bank loan participations are loans sold by
lending banks to investors. Bank holding company commercial paper is a form of
short-term promissory note which is a direct obligation of a bank holding
company. Deposits are obligations of a bank or its branches. Corporate
commercial paper is a form of short-term promissory note issued by corporations
primarily to finance short-term credit needs. Rates vary according to the credit
standing of the issuers and money market conditions. Floating rate instruments
are obligations with various final maturities and interest rates that are tied
to other assorted market indices. The Fund will not invest more than 15% of the
value of its net assets in floating or variable rate demand obligations as to
which it cannot exercise the demand feature on not more than seven days' notice
if there is no secondary market available for these obligations, and in other
securities that are not readily marketable.
Pursuant to the Exemptive Order described above, in lieu of investing
directly in the cash and cash equivalents described above, the Fund may invest a
portion of its assets in the Brinson Short-Term Fund (the "Short-Term Fund")
series of the Trust. Any investment by the Fund in the Short-Term Fund would
not be subject to the limitations of the Investment Company Act concerning
investments by open-end investment companies in securities issued by other
investment companies. Please see the discussion below under "Investment Company
Securities" for a description of these limitations.
Zero Coupon Securities
The Fund may invest in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current interest
(the "cash payment date") and therefore are issued at a discount from their face
amounts or par value. Such bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the Fund will realize no
cash until the maturity date or the cash payment date and, if the issuer
defaults, the Fund may obtain no return at all on its investment. For federal
tax purposes, the Fund will be required to include in income daily portions of
original issue discount accrued, even if no payment is received before the
maturity date or cash payment date.
Pay-In-Kind Bonds
The Fund may invest in pay-in-kind bonds. Pay-in-kind bonds are securities
which pay interest through the issuance of additional bonds. The Fund will be
deemed to receive interest over the life of such bonds and be treated for
federal income tax purposes as if interest were paid on a current basis,
although no cash interest payments are received by the Fund until the cash
payment date or until the bonds mature.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, representing interests
in pools of mortgage loans. These securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. The Fund may invest in mortgage-backed securities
issued or guaranteed by an agency or instrumentality of the U.S. government. The
Fund may also invest in privately issued mortgage-backed securities issued by
private, non-government corporations, such as financial institutions.
The Fund may also invest in Collateralized Mortgage Obligations ("CMOs")
and Real Estate Mortgage Investment Conduits ("REMICs"). CMOs are debt
securities issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by a pool of mortgages held under an
indenture. CMOs are issued in a number of classes or series with different
maturities. The
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classes or series are retired in sequence as the underlying mortgages are
repaid. Prepayment may shorten the stated maturity of the obligation and can
result in a loss of premium, if any has been paid. Certain of these securities
may have variable or floating interest rates and others may be stripped
(securities which provide only the principal or interest feature of the
underlying security).
REMICs are private entities formed for the purpose of holding a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to CMOs
in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. Yields on privately-issued CMOs
have historically been higher than yields on CMOs issued or guaranteed by U.S.
government agencies. However, the risk of loss due to default on such
instruments is higher. For federal income tax purposes, the Fund will be
required to accrue income attributable to its investment in CMOs and regular
interests in REMICs using the "catch-up" method, with an aggregate prepayment
assumption. For further information concerning mortgage-backed securities, see
Part B of this Registration Statement.
Asset-Backed Securities
The Fund may invest in asset-backed securities. Asset-backed securities are
securities that represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool or
pools of similar assets (e.g., receivables on home equity and credit loans and
receivables regarding automobile, credit card, mobile home and recreational
vehicle loans, wholesale dealer floor plans and leases).
Such receivables are securitized in either a pass-through or pay-through
structure. Pass-through securities provide investors with an income stream
consisting of both principal and interest payments with respect to the
receivables in the underlying pool. Pay-through asset-backed securities are debt
obligations issued usually by a special purpose entity, are collateralized by
the various receivables and with respect to which the payments on the underlying
receivables provide the funds to pay the debt service on the debt obligations
issued. The Fund may invest in these securities and obligations and other types
of asset-backed securities that may be developed in the future.
The credit quality of these securities depends primarily upon the quality
of the underlying assets and the level of credit support and/or enhancement
provided. Such asset-backed securities may be subject to the same prepayment
risks as mortgage-backed securities. For further information concerning asset-
backed securities, see Part B of this Registration Statement.
When-Issued Securities
The Fund may purchase securities on a "when-issued" basis for payment and
delivery at a later date. The price is generally fixed on the date of
commitment to purchase. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date. At the time of settlement, the market value of the security may
be more or less than the purchase price. For further information concerning
when-issued securities, see Part B of this Registration Statement.
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Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities reflect changes in the value of
the underlying common stock. Convertible securities entail less credit risk than
the issuer's common stock because they rank senior to common stock.
Eurodollar Securities
The Fund may invest in Eurodollar securities, which are fixed income
securities of a U.S. issuer or a foreign issuer that are issued outside the
United States. Interest and dividends on Eurodollar securities are payable in
U.S. dollars.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Brady Bonds
With regard to emerging market investments, the Fund may invest in Brady
Bonds, which are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructurings under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented to date in
Argentina, Bulgaria, Brazil, Costa Rica, Jordan, Mexico, Nigeria, the
Philippines, Poland, Uruguay, Panama, Peru and Venezuela. Brady Bonds have been
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issued only during recent years, and for that reason do not have a very long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. Dollar-denominated, collateralized
Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds.
Brady Bonds are often viewed as having three or four valuation components:
the collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds with respect
to commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that the Brady
Bonds in which the Fund invests will not be subject to restructuring or to
requests for a new credit arrangement which may cause the Fund to suffer a loss
of interest or principal in any of its holdings.
Structured Securities
The Fund may invest a portion of its assets in entities organized and
operated solely for the purpose of restructuring the investment characteristics
of sovereign debt obligations. This type of restructuring involves the deposit
with, or purchase by, an entity, such as a corporation or trust, of specified
instruments (such as commercial bank loans or Brady Bonds) and the issuance by
that entity of one or more classes of securities ("Structured Securities")
backed by, or representing interests in, the underlying instruments. The cash
flow of the underlying instruments may be apportioned among the newly issued
Structured Securities to create securities with different investment
characteristics, such as varying maturities, payment priorities and interest
rate provisions, and the extent of the payments made with respect to Structured
Securities is dependent on the extent of the cash flow on the underlying
instruments. Because Structured Securities of the type in which the Fund
anticipates investing typically involve no credit enhancement, their credit risk
generally will be equivalent to that of the underlying instruments. The Fund is
permitted to invest in a class of Structured Securities that is either
subordinated or unsubordinated to the right of payment of another class.
Subordinated Structured Securities typically have higher yields and present
greater risks than unsubordinated Structured Securities. Structured Securities
are typically sold in private placement transactions, and there currently is no
active trading market for Structured Securities. Thus, the Fund's investments in
Structured Securities will be limited by the Fund's prohibition on investing
more than 15% of its net assets in illiquid securities.
Loan Participations and Assignments
The Fund may invest in fixed rate and floating rate loans ("Loans")
arranged through private negotiations between an issuer of debt obligations and
one or more financial institutions ("Lenders"). The Fund's investment in Loans
is expected in most instances to be in the form of participation in loans
("Participations") or assignments of all or a portion of Loans ("Assignments")
from third parties.
The Fund will have the right to receive payments of principal, interest and
any fees to which it is entitled only from the Lender selling the Participation
and only upon receipt by the Lender of the payments from the borrower. In the
event of the insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. Certain Participations may be structured in
a manner designed to avoid purchasers of Participations being subject to the
credit risk of the Lender with respect to the Participation. Even under such a
structure, in the event of the Lender's insolvency, the Lender's servicing of
the Participation may be delayed and the assignability of the Participation may
be impaired. The Fund will acquire Participations
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only if the Lender interpositioned between the Fund and the borrower is
determined by the Advisor to be creditworthy. When the Fund purchases
Assignments from Lenders, it will acquire direct rights against the borrower on
the Loan. However, because Assignments are arranged through private negotiations
between potential assignees and potential assignors, the rights and obligations
acquired by the Fund as the purchaser of an Assignment may differ from, and be
more limited than, those held by the assigning Lender.
Because there may be no liquid market for Participations and Assignments,
the Fund anticipates that such securities could be sold only to a limited number
of institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and the Fund's ability to dispose
of particular Assignments or Participations when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower or the Lender. The lack of
a liquid secondary market for Assignments and Participations also may make it
more difficult for the Fund to assign a value to these securities for purposes
of valuing the Fund's portfolio and calculating its net asset value. To the
extent that the Fund cannot dispose of a Participation or Assignment in the
ordinary course of business within seven days at approximately the value at
which it has valued the Participation or Assignment, it will treat the
Participation or Assignment as illiquid and subject to its overall limit on
illiquid investments of 15% of its net assets.
Non-Publicly Traded Securities, Private Placements and Restricted Securities
The Fund may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities and
limited partnerships. Investing in such unregistered or unlisted securities,
including investments in new and early stage companies, may involve a high
degree of business and financial risk that can result in substantial losses. As
a result of the absence of a public trading market for these securities, they
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Fund, or less than
what may be considered the fair value of such securities. Furthermore, companies
whose securities are not publicly traded may not be subject to the disclosure
and other investor protection requirements which would be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Fund may be required to bear the expense of registration. No more
than 15% of the Fund's net assets will be invested in illiquid securities,
including, but not limited to, non-publicly traded securities, private
placements and restricted securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under the Investment Company Act, the Fund's investment in
such securities, subject to certain exceptions, currently is limited to: (i) no
more than 3% of the total voting stock of any one such investment company, (ii)
no more than 5% of the Fund's net assets invested in any one such investment
company and (iii) no more than 10% of the Fund's net assets in the aggregate.
Investments in the securities of other investment companies may involve
duplication of certain fees and expenses.
As described above, the Trust has received an Exemptive Order, which
permits the Fund to invest its assets in securities of other series offered by
the Trust. The Fund will invest in such series only to the extent that the
Advisor determines that it is more efficient for the Fund to gain exposure to a
particular asset class through investment in a series of the Trust as opposed to
investment directly in individual securities. Investments by the Fund in another
series of the Trust may involve transaction costs,
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but not duplication of other fees and expenses because the Advisor and other
service providers will waive fees or reimburse expenses to avoid such
duplication.
The Fund's investments in any other series of the Trust, each of which
invests primarily in one particular asset class (a "Core Series") will not be
subject to the percentage limitations described above. To the extent that the
Fund invests in the Trust's other series ("Other Series") and open-end
investment companies other than the Core Series, the Fund will be subject to the
percentage limitations described above and the Fund's investments in such other
investment companies will be aggregated with its investments in the Other Series
for purposes of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities"), over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities, are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to
consider the following factors in determining the liquidity of a Rule 144A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Although it has delegated the day-to-day liquidity determination to the Advisor,
the Board of Trustees will continue to monitor and will periodically review the
Advisor's selection of Rule 144A Securities, as well as the Advisor's
determination as to their liquidity.
If the Advisor determines that a Rule 144A Security which was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Advisor will determine what action shall be taken to ensure
that the Fund continues to adhere to such limitation including disposing of
illiquid assets which may include such Rule 144A Securities.
Future Developments
From time to time, the Fund may also invest in certain debt securities
which have features other than those that are typical for such securities and
which have in the past been offered or may be offered in the future. In the
past, for example, such securities have been issued to replicate the performance
of a certain component or components of a particular security or combination of
securities and/or to hedge or reduce the risks associated with certain
securities or market trends. The Fund may invest in these securities if the
Advisor believes that doing so would be consistent with the Fund's investment
objective and policies. Since the market for these securities may be new, the
Fund may have difficulty disposing of them at a suitable price and time. In
addition to limited liquidity, these instruments may present other risks, such
as high price volatility. The unavailability of such innovative securities would
not adversely affect the Fund's ability to achieve its investment
objective.
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Foreign Securities and Currency Considerations
Investments in securities of foreign issuers may involve greater risks than
those of U.S. issuers. There is generally less information available to the
public about non-U.S. issuers and less government regulation and supervision of
non-U.S. stock exchanges, brokers and listed companies. Non-U.S. companies are
not subject to uniform accounting, auditing and financial reporting standards,
practices and requirements. Securities of some non-U.S. companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Securities trading practices abroad may offer less protection to
investors. Settlement of transactions in some non-U.S. markets may be delayed or
may be less frequent than in the U.S., which could affect the liquidity of the
Fund. Additionally, in some countries, there is the possibility of expropriation
or confiscatory taxation, limitations on the removal of securities, property or
other assets of the Fund, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries. The Advisor
will take these factors into consideration in managing the Fund's investments.
Investments will be made primarily in the debt securities of companies domiciled
in developed countries. The Fund intends to diversify broadly among countries
but reserves the right to invest a substantial portion of its assets in one or
more countries if economic and business conditions warrant such
investments.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or liabilities denominated in a foreign currency and the time the Fund
actually collects such receivables, or pays such liabilities, are generally
treated as ordinary income or loss. Similarly, a portion of the gains or losses
realized on disposition of debt securities denominated in a foreign currency,
referred to under the Internal Revenue Code of 1986, as amended ("the Code"), as
"section 988" gains or losses, may also be treated as ordinary gain or loss
rather than as capital gain or loss.
Payments to holders of the high yield, higher risk foreign debt securities
in which the Fund may invest may be subject to foreign withholding and other
taxes. Although the holders of foreign government and government-related debt
securities may be entitled to tax gross-up payments from the issuers of such
securities, there is no assurance that such payments will be made.
The U.S. dollar market value of the Fund's investments and of dividends and
interest earned by the Fund may be significantly affected by changes in currency
exchange rates. Some currency prices may be volatile, and there is the
possibility of governmental controls on currency exchange or governmental
intervention in currency markets, which could adversely affect the Fund.
Although the Fund may attempt to manage currency exchange rate risk, there is no
assurance that the Fund will do so at an appropriate time or that it will be
able to predict exchange rates accurately. The Fund will manage currency
exposures relative to the normal currency allocation and will consider return
and risk of currency exposures relative to the Benchmark.
Investing in Emerging Markets
Compared to the United States and other developed countries, emerging
countries may have relatively unstable governments, economies based on only a
few industries, and securities markets that trade only a small number of
securities and employ settlement procedures different from those used in the
United States. Prices in these markets tend to be volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries.
Furthermore, investments by investors foreign to the emerging market countries
are subject to a variety of restrictions in many emerging market countries.
These restrictions may take the form of prior governmental approval, limits on
the amount or type of securities held by foreigners, and limits on the types
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of companies in which foreigners may invest. Additional restrictions may be
imposed at any time by these or other countries in which the Fund invests. In
addition, the repatriation of both investment income and capital from several
foreign countries is restricted and controlled under certain regulations,
including, in some cases, the need for certain governmental consents. Although
these restrictions may in the future make it undesirable to invest in emerging
market countries, the Advisor does not believe that any current repatriation
restrictions would affect its decision to invest in such countries. Countries
such as those in which the Fund may invest have historically experienced and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations or currency depreciation, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and unemployment.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, its
government's policy towards the International Monetary Fund, the World Bank and
other international agencies and the political constraints to which a government
debtor may be subject.
The issuers of the foreign government and government-related debt
securities in which the Fund expects to invest have in the past experienced
substantial difficulties in servicing their external debt obligations, which has
led to defaults on certain obligations and the restructuring of certain
indebtedness. Restructuring arrangements have included, among other things,
reducing and rescheduling interest and principal payments by negotiating new or
amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign government and government-related debt securities may
be requested to participate in the restructuring of such securities and to
extend further loans to the issuers of such securities. There can be no
assurance that the Brady Bonds and other foreign government and government-
related debt securities in which the Fund may invest will not be subject to
similar defaults or restructuring arrangements which may adversely affect the
value of such investments. Furthermore, certain participants in the secondary
market for such debt securities may be directly involved in negotiating the
terms of these arrangements and may therefore have access to information not
available to other market participants.
Russian Securities Transactions
The Fund may invest in securities of Russian companies. The registration,
clearing and settlement of securities transactions in Russia are subject to
significant risks not normally associated with securities transactions in the
United States and other more developed markets. Ownership of shares in Russian
companies is evidenced by entries in a company's share register (except where
shares are held through depositories that meet the requirements of the
Investment Company Act) and the issuance of extracts from the register or, in
certain limited cases, by formal share certificates. However, Russian share
registers are frequently unreliable and the Fund could possibly lose its
registration through oversight, negligence or fraud. Moreover, Russia lacks a
centralized registry to record securities transactions and registrars located
throughout Russia or the companies themselves maintain share registers.
Registrars are under no obligation to provide extracts to potential purchasers
in a timely manner or at all and are not necessarily subject to state
supervision. In addition, while registrars are liable under law for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Although Russian companies with more than
1,000 shareholders are required by law to employ an independent company to
maintain share registers, in practice, such companies have not always followed
this law. Because of this lack of independence of registrars, management of a
Russian company may be able to exert considerable influence over who can
purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions on the share register. Furthermore, these
practices may prevent the Fund from investing in the securities of certain
Russian companies deemed suitable by the Advisor and could cause a delay in the
sale of
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Russian securities by the Fund if the company deems a purchaser unsuitable,
which may expose the Fund to potential loss on its investment.
In light of the risks described above, the Board of Trustees of the Fund
has approved certain procedures concerning the Fund's investments in Russian
securities. Among these procedures is a requirement that the Fund will not
invest in the securities of a Russian company unless that issuer's registrar has
entered into a contract with the Fund's sub-custodian containing certain
protective conditions including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Fund. This requirement
will likely have the effect of precluding investments in certain Russian
companies that the Fund would otherwise make.
OTHER INVESTMENT TECHNIQUES
Currency Management
The normal currency allocation of the Fund is 100% U.S. dollars. The
currency strategy range will be: 0-15% non-U.S. dollars and 85-100% U.S.
dollars. The Fund expects to maintain this normal currency exposure when, in the
judgment of the Advisor, global currency markets are fairly priced relative to
each other and relative to the associated risks. The Fund may actively deviate
from such normal currency allocations to take advantage of, or to protect its
portfolio from risk and return characteristics of, the currencies and short-term
interest rates when those prices deviate significantly from fundamental value.
Deviations from the Benchmark are determined by the Advisor based upon its
research.
To manage exposure to currency fluctuations, the Fund may alter fixed
income or money market exposures (in its normal asset allocation mix as
previously described), enter into forward currency exchange contracts, buy or
sell options, futures or options on futures relating to foreign currencies and
purchase securities indexed to currency baskets. The Fund will also use these
currency exchange techniques in the normal course of business to hedge against
adverse changes in exchange rates in connection with purchases and sales of
securities. Some of these strategies may require the Fund to set aside liquid
assets in a segregated custodial account to cover its obligations. These
techniques are further described below.
Forward Foreign Currency Transactions
The Fund may conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market or through entering into contracts to purchase or sell foreign currencies
at a future date (i.e., a "forward foreign currency contract" or "forward
contract"). A forward contract involves an obligation to purchase or sell a
specific currency amount at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties and at a price set at
the time of the contract. The Fund will convert currency on a spot basis from
time to time and investors should be aware of the potential costs of currency
conversion.
The Fund may enter into forward contracts for hedging purposes as well as
for non-hedging purposes. For hedging purposes, the Fund may enter into
contracts to deliver or receive foreign currency it will receive from or require
for its normal investment activities. It may also use contracts in a manner
intended to protect foreign currency-denominated securities from declines in
value due to unfavorable exchange rate movements. The Fund may also enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes in exchange rates.
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When the Fund enters into forward contracts for non-hedging purposes, it
will establish a segregated account with its custodian bank in which it will
maintain cash, U.S. government securities or other liquid assets equal in value
to its obligations with respect to its forward contracts for non-hedging
purposes.
At the maturity of a forward contract, the Fund may either sell a portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions.
Options
The Fund may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Fund
may also purchase and write put and call options on foreign currencies to manage
the Fund's exposure to changes in currency exchange rates. In addition, the
Fund may purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund may purchase
call options only to the extent premiums paid on all outstanding call options do
not exceed 20% of the Fund's total assets. The Fund will write call options only
on a covered basis. A call option is "covered" if the Fund owns the underlying
securities or the Fund maintains in a segregated account with its custodian,
cash, U.S. government securities or other liquid assets with a value sufficient
to meet its obligations under the call option, or if the Fund owns an offsetting
call option. The Fund may receive premium income from writing call options,
which may offset the cost of purchasing options and may also contribute to the
Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be protected
should the market value of the security decline or should a particular index
decline. The Fund will, at all times during which it holds a put option, own the
security underlying such option. The Fund will receive premium income from
writing put options, although it may be required, when the put is exercised, to
purchase securities at higher prices than the current market price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing transactions,
it may have to hold a security it would otherwise sell or deliver a security it
might want to hold.
Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency, maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
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obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date. When
a futures contract is sold, the Fund incurs a contractual obligation to deliver
the securities or foreign currency underlying the contract at a specified price
on a specified future date. The Fund may enter into futures contracts and engage
in options transactions related thereto for hedging purposes and for non-hedging
purposes, to the extent that not more than 5% of the Fund's assets are required
as futures contract margin deposits and premiums on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally are
not regulated by U.S. authorities and may offer less liquidity and less
protection to the Fund in the event of default by the other party to the
contract. The Fund could also experience losses if the prices of its options or
futures positions are poorly correlated with its other investments, or if it
cannot close out its positions because of an illiquid secondary market. The loss
from investing in futures transactions is
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potentially unlimited. For further information concerning the risks of options
and futures, see Part B of this Registration Statement.
Swaps
The Fund may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates), to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to gain exposure
to certain markets.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal. Currency swaps involve the exchange of cash flows on a
notional amount based on changes in the values of referenced currencies.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
an interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Advisor
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
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Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on a
loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the Fund's
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects that
investment to market risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to engage
in trading for short-term gains, the Fund will effect portfolio transactions
without regard to the holding period if, in the judgment of the Advisor, such
transactions are advisable in light of a change in circumstances of a particular
company, within a particular industry or country, or in general market, economic
or political conditions. Although the portfolio turnover rate for the Fund may
vary greatly from year to year, the Fund expects that under normal
circumstances, the portfolio turnover rate will not exceed 250%. A high
portfolio turnover rate will increase aggregate brokerage commission expenses
which must be borne directly by the Fund and ultimately by the Fund's Investors
and the incidence of short-term capital gains (which are taxable to Investors as
ordinary income). See "Brokerage Allocation" and "Federal Taxes."
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Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust") the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible
for administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo, and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust -International
Growth Portfolio, Enterprise Group of Funds, Inc. -International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust -Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -International Equity Portfolio, John Hancock Variable Series
Trust I -International Balanced Fund, AON Funds -International Equity Fund and
The Republic Funds -Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or the "Administrator"),
pursuant to which MSTC is required to provide general administrative,
accounting, portfolio valuation, transfer agency and custodian services to the
Fund, including the coordination and monitoring of any third party service
providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
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As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any third party service provider in providing such
services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for the services
CGFSC provides to MSTC in fulfilling its obligations under the Services
Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering the Fund's shares for sale with the
Commission and of noticing the Fund's shares for sale with various state
securities commissions, fees and expenses of the Administrator
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and the expenses of obtaining quotations of portfolio securities and of pricing
the Fund's shares. General expenses which are not associated directly with any
particular portfolio within the Trust (e.g., insurance premiums, Trustees' fees,
expenses of maintaining the Trust's legal existence and of Investors' meetings
and fees and expenses of industry organizations) are allocated between the
various series based upon their relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.05% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. The Fund normally
trades non-U.S. securities in foreign countries, since the best available market
for non-U.S. securities is often in non-U.S. markets. In transactions on non-
U.S. stock exchanges, brokers' commissions are generally fixed and are often
higher than in the United States where commissions are negotiated. Pursuant to
the Advisory Agreement, the Advisor is authorized to utilize the trading
department of its foreign subsidiaries to execute foreign securities
transactions but monitors selection by such subsidiaries of brokers and dealers
used to execute such transactions.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this research
information in managing the Fund's assets, as well as the assets of other
clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as an underwriter. The Fund may effect futures
transactions through, and pay commissions to, futures commission merchants who
are affiliated with the Advisor or the Fund in accordance with procedures
adopted by the Board of Trustees of the Trust.
Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of Trustees
has the power to designate one or more series or sub-series/classes of shares of
beneficial interest and to classify or reclassify any unissued shares with
respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed
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Income Fund, the Brinson Short-Term Fund, the Brinson High Yield Fund and the
Brinson Emerging Markets Debt Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
with respect to the incorporation of the Trust; (vi) additional matters relating
to the Trust as required by the Investment Company Act; and (vii) such other
matters as the Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain Investors
holding a majority of shares in the Fund to change the Fund's investment
objective could result in an Investor's withdrawal of its investment in the
Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in
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assets that produce UBTI. The Fund will not be a "regulated investment company"
for federal income tax purposes. For a more complete discussion of the federal
income tax consequences of investing in the Fund, see "Tax Status" in Part B of
this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295, or
an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of the
Fund may be purchased directly by eligible Investors from the Fund at the net
asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities after such to the Fund shall become
the property of the Fund and must be delivered to the Fund by the Investor upon
receipt from the issuer. Investors that are permitted to transfer such
securities will be required to recognize a gain or loss on such transfer and pay
tax thereon, if applicable, measured by the difference between the fair market
value of the securities and the Investors' basis therein. The Trust will not
accept securities in exchange for shares of the Fund unless: (1) such securities
are, at the time of the exchange, eligible to be included in the Fund's
investment portfolio and current market quotations are readily available for
such securities; and (2) the Investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions upon
their sale by the Fund under the Securities Act or under the laws of the country
in which the principal market for such securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of regular
trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m. Eastern
time) on days when such exchange is open. The net asset value per share is
computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less than
60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment
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<PAGE>
companies are valued using their respective net asset values for purchase orders
placed at the close of the NYSE. All other securities are valued at their fair
value as determined in good faith and pursuant to a method approved by the
Trust's Board of Trustees. For a detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy, the
Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the series of the Trust into which the
Investor wishes to exchange. Requests for telephone exchanges must be received
by the transfer agent, CGFSC, by the close of regular trading hours (generally
4:00 p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose a
fee for wire service. The right of any Investor to receive payment with respect
to any redemption may be suspended or the payment of the redemption proceeds
postponed during any period in which the NYSE is closed (other than weekends or
holidays) or trading on the NYSE is restricted, or, to the extent otherwise
permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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APPENDIX A
CORPORATE DEBT RATINGS
Moody's Investors Service, Inc. describes classifications of corporate bonds as
follows:
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-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C -Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
1
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Standard & Poor's Ratings Group describes classifications of corporate bonds as
follows:
AAA -This is the highest rating assigned by Standard & Poor's Rating Group
to a debt obligation and indicates an extremely strong capacity to pay principal
and interest.
AA -Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and in the majority of instances
they differ from the AAA issues only in small degree.
A -Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lend
to inadequate capacity to meet timely interest and principal payments.
B -Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC -Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest or repay principal.
CC -The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C -The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
CI -The rating CI is reserved for income bonds on which no interest is
being paid.
D -Debt rated D is in default, or is expected to default upon maturity or
payment date.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
2
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OFFEREE NO. ___
BRINSON RELATIONSHIP FUNDS
Brinson U.S. Bond Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson U.S. Bond Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
As a matter of fundamental policy, under normal circumstances, the Fund intends
to invest at least 65% of its assets in U.S. fixed income securities with an
initial maturity of more than one year. The Fund seeks to achieve its objective
by investing primarily in fixed income securities, which may also provide the
potential for capital appreciation. The Benchmark for the Fund is the Salomon
Brothers Broad Investment Grade Bond Index (the "Benchmark"). The Benchmark is a
market driven broad based index which includes U.S. Bonds with over one year to
maturity. From time to time, the Fund's Investment Advisor, Brinson Partners,
Inc. ("Brinson Partners" or the "Advisor") may substitute securities in an
equivalent index when it believes that such securities in the index more
accurately reflect the relevant fixed income securities market.
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
The Advisor's investment style of the Advisor is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Fund is that
periodically there are exploitable discrepancies between market price and
fundamental value. Those price/value discrepancies then become the building
blocks for portfolio construction. The successful identification of price/value
discrepancies should result in enhanced total return performance.
The Fund may invest in a broad range of fixed income securities, including
fixed income securities of the U.S. government, together with its agencies and
instrumentalities and the fixed income securities in which the Series will
invest will possess a minimum rating of BBB-by Standard & Poor's Ratings Group
("S&P") or Baa3 by Moody's Investors Services, Inc. ("Moody's") or, if unrated,
will be determined to be of comparable quality by Brinson Partners. Such
securities are considered to be investment grade. Other fixed income securities
in which the Fund may invest include zero coupon securities, mortgage-backed
securities, asset-backed securities and when-issued securities. The Fund may
invest a portion of its assets in short-term fixed income securities (including
repurchase and reverse repurchase agreements) of corporations, the U.S.
government or its agencies and instrumentalities and banks and finance
companies. The terms "fixed income" and "debt securities" are synonymous and
are used interchangeably in this Part A and in Part B of this Registration
Statement.
As a general matter, the Advisor will purchase for the Fund securities
contained in the underlying Benchmark. The Advisor will attempt to enhance the
long-term return and risk performance of the Fund relative to the Benchmark by
deviating from the normal Benchmark mix. Decisions to deviate from the
Benchmark are a blend of rigorous quantitative analysis, an understanding of the
fundamental relationships in U.S. markets and the expertise of investment
professionals. The active management process is intended, by Brinson Partners,
Inc. (the "Advisor"), to produce superior performance to the Benchmark.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund does not intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning the percentage of the Fund's portfolio securities that may be loaned,
and its policies set forth in
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Part B concerning borrowing, the issuance of senior securities and concentration
are "fundamental," which means that they may not be changed without the
affirmative vote of the holders of a majority of the Fund's outstanding voting
shares. As used in this Part A of this Registration Statement, a vote of "a
majority of the outstanding voting shares" of the Trust or a series of the Trust
means the affirmative vote of the lesser of (i) more than 50% of the outstanding
shares of the Trust or series, or (ii) 67% of the shares of the Trust or series
present at a meeting at which more than 50% of the outstanding shares of the
Trust or series are represented in person or by proxy.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes
the securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the Investment Company Act), the Fund may be
subject to greater investment and credit risk than an investment company that
invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the net asset value of the Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. Fixed Income Securities
The Fund may invest in all types of fixed income securities of U.S.
issuers, including governments and governmental entities and supranational
issuers as well as corporations and other business organizations. The Fund may
purchase U.S. dollar denominated fixed income securities that reflect a broad
range of investment maturities, qualities and sectors.
The Trust has received an exemptive order (the "Exemptive Order") from the
United States Securities and Exchange Commission (the "Commission") to permit,
among other things, the Fund to invest its assets in the Brinson U.S.
Short/Intermediate Fixed Income Fund (the "Short/Intermediate Fund") series of
the Trust. Pursuant to the Exemptive Order, the Fund may invest that portion of
its assets allocated to short and intermediate term investments by purchasing
shares of the Short/Intermediate Fund. The investment objective of the
Short/Intermediate Fund is to maximize total U.S. dollar return, consisting of
capital appreciation and current income, while controlling risk. As a matter of
fundamental policy, under normal circumstances, the Fund intends to invest at
least 65% of its assets in U.S. fixed income securities with an initial maturity
of more than one year. Pursuant to the Exemptive Order, any investment by the
Fund in the Short/Intermediate Fund of the Trust would not be subject to the
limitations of the Investment Company Act concerning investments by open-end
investment companies in the securities issued by other investment companies.
Please see the discussion below under "Investment Company Securities" for a
description of these limitations.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. dollars. When unusual market conditions warrant, the
Fund can make substantial temporary defensive investments in cash equivalents up
to a maximum exposure of 100% of the Fund's assets. The Fund's investment in
temporary defensive investments may affect the Fund's ability to attain its
investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a
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maturity date but which can be called for repayment by the lender or the
borrower at a predetermined interval. Bank instruments in which the Fund may
invest include bank loan participations, bank holding company commercial paper,
deposits, bank notes and other bank related securities. Bank loan participations
are loans sold by lending banks to investors. Bank holding company commercial
paper is a form of short-term promissory note which is a direct obligation of a
bank holding company. Deposits are obligations of a bank or its branches.
Corporate commercial paper is a form of short-term promissory note issued by
corporations primarily to finance short-term credit needs. Rates vary according
to the credit standing of the issuers and money market conditions. Floating rate
instruments are obligations with various final maturities and interest rates
that are tied to other assorted market indices. The Fund will not invest more
than 15% of the value of its net assets in floating or variable rate demand
obligations as to which it cannot exercise the demand feature on not more than
seven days' notice if there is no secondary market available for these
obligations, and in other securities that are not readily marketable.
Pursuant to the Exemptive Order described above, in lieu of investing
directly in the cash and cash equivalents described above, the Fund may invest a
portion of its assets in the Brinson Short-Term Fund (the "Short-Term Fund")
series of the Trust. Any investment by the Fund in the Short-Term Fund would
not be subject to the limitations of the Investment Company Act concerning
investments by open-end investment companies in securities issued by other
investment companies. Please see the discussion below under "Investment Company
Securities" for a description of these limitations.
Zero Coupon Securities
The Fund may invest in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current interest
(the "cash payment date") and therefore are issued at a discount from their face
amounts or par value. Such bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the Fund will realize no
cash until the maturity date or cash payment date and, if the issuer defaults,
the Fund may obtain no return at all on its investment. For federal tax
purposes, the Fund will be required to include in income daily portions of
original issue discount accrued, even if no payment is received before the
maturity date or cash payment date.
Pay-In-Kind Bonds
The Fund may invest in pay-in-kind bonds. Pay-in-kind bonds are securities
which pay interest through the issuance of additional bonds. The Fund will be
deemed to receive interest over the life of such bonds and be treated for
federal income tax purposes as if interest were paid on a current basis,
although no cash interest payments are received by the Fund until the cash
payment date or until the bonds mature.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, representing interests
in pools of mortgage loans. These securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. The Fund may invest in mortgage-backed securities
issued or guaranteed by an agency or instrumentality of the U.S. government.
The Fund may also invest in privately issued mortgage-backed securities issued
by private, non-government corporations, such as financial institutions.
The Fund may also invest in Collateralized Mortgage Obligations ("CMOs")
and Real Estate Mortgage Investment Conduits ("REMICs"). CMOs are debt
securities issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by a pool of mortgages
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held under an indenture. CMOs are issued in a number of classes or series with
different maturities. The classes or series are retired in sequence as the
underlying mortgages are repaid. Prepayment may shorten the stated maturity of
the obligation and can result in a loss of premium, if any has been paid.
Certain of these securities may have variable or floating interest rates and
others may be stripped (securities which provide only the principal or interest
feature of the underlying security).
REMICs are private entities formed for the purpose of holding a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. Yields on privately-issued
CMOs have historically been higher than yields on CMOs issued or guaranteed by
U.S. government agencies. However, the risk of loss due to default on such
instruments is higher. For federal income tax purposes, the Fund will be
required to accrue income attributable to its investment in CMOs and regular
interests in REMICs using the "catch-up" method, with an aggregate prepayment
assumption. For further information concerning mortgage-backed securities, see
Part B of this Registration Statement.
Asset-Backed Securities
The Fund may invest in asset-backed securities. Asset-backed securities
are securities that represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool or
pools of similar assets (e.g., receivables on home equity and credit loans and
receivables regarding automobile, credit card, mobile home and recreational
vehicle loans, wholesale dealer floor plans and leases).
Such receivables are securitized in either a pass-through or pay-through
structure. Pass-through securities provide investors with an income stream
consisting of both principal and interest payments with respect to the
receivables in the underlying pool. Pay-through asset-backed securities are
debt obligations issued usually by a special purpose entity, are collateralized
by the various receivables and with respect to which the payments on the
underlying receivables provide the funds to pay the debt service on the debt
obligations issued. The Fund may invest in these securities and obligations and
other types of asset-backed securities that may be developed in the future.
The credit quality of these securities depends primarily upon the quality
of the underlying assets and the level of credit support and/or enhancement
provided. Such asset-backed securities may be subject to the same prepayment
risks as mortgage-backed securities. For further information concerning asset-
backed securities, see Part B of this Registration Statement.
When-Issued Securities
The Fund may purchase securities on a "when-issued" basis for payment and
delivery at a later date. The price is generally fixed on the date of
commitment to purchase. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date. At the time of settlement, the market value of the security
may be more or less than the purchase price. For further information concerning
when-issued securities, see Part B of this Registration Statement.
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Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Eurodollar Securities
The Fund may invest in Eurodollar securities, which are fixed income
securities of a U.S. issuer or a foreign issuer that are issued outside the
United States. Interest and dividends on Eurodollar securities are payable in
U.S. dollars.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Fund's net assets invested in
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
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As described above, the Trust has received an Exemptive Order from the
United States Securities and Exchange Commission (the "Commission"), which
permits the Fund to invest its assets in securities of other series offered by
the Trust. The Fund will invest in such series to the extent that the Advisor
determines that it is more efficient for the Fund to gain exposure to a
particular asset class through investment in a series of the Trust as opposed to
investment directly in individual securities. Investments by the Fund in
another series of the Trust may involve transaction costs, but not duplication
of other fees and expenses because the Advisor and other service providers will
waive fees or reimburse expenses to avoid such duplication.
The Fund's investments in any other series of the Trust, each of which
invests primarily in one particular asset class (a "Core Series") will not be
subject to the percentage limitations described above. To the extent that the
Fund invests in the Trust's other series ("Other Series") and open-end
investment companies other than the Core Series, the Fund will be subject to the
percentage limitations described above and the Fund's investments in such other
investment companies will be aggregated with its investments in the Other Series
for purposes of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities") over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to
consider the following factors in determining the liquidity of a Rule 144A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Although it has delegated the day-to-day liquidity determination to the Advisor,
the Board of Trustees will continue to monitor and will periodically review the
Advisor's selection of Rule 144A Securities, as well as the Advisor's
determination as to their liquidity.
If the Advisor determines that a Rule 144A Security which was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Advisor will determine what action shall be taken to ensure
that the Fund continues to adhere to such limitation including disposing of
illiquid assets which may include such Rule 144A Securities.
Future Developments
From time to time, the Fund may also invest in certain equity or debt
securities which have features other than those that are typical for such
securities and which have in the past been offered or may be offered in the
future. In the past, for example, such securities have been issued to replicate
the performance of a certain component or components of a particular security or
combination of securities and/or to hedge or reduce the risks associated with
certain securities or market trends. The Fund may invest in these securities if
the Advisor believes that doing so would be consistent with the Fund's
investment objective and policies. Since the market for these securities may be
new, the Fund may have difficulty
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disposing of them at a suitable price and time. In addition to limited
liquidity, these instruments may present other risks, such as high price
volatility. The unavailability of such innovative securities would not adversely
affect the Fund's ability to achieve its investment objective.
OTHER INVESTMENT TECHNIQUES
Options
The Fund may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Fund
may also purchase and write put and call options on foreign currencies to manage
the Fund's exposure to changes in currency exchange rates. In addition, the
Fund may purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund may
purchase call options only to the extent premiums paid on all outstanding call
options do not exceed 20% of the Fund's total assets. The Fund will write call
options only on a covered basis. A call option is "covered" if the Fund owns
the underlying securities or the Fund maintains in a segregated account with its
custodian, cash, U.S. government securities or other liquid assets with a value
sufficient to meet its obligations under the call option, or if the Fund owns an
offsetting call option. The Fund will receive premium income from writing call
options, which may offset the cost of purchasing options and may also contribute
to the Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be
protected should the market value of the security decline or should a particular
index decline. The Fund will, at all times during which it holds a put option,
own the security underlying such option. The Fund will receive premium income
from writing put options, although it may be required, when the put is
exercised, to purchase securities at higher prices than the current market
price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency or maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
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The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date.
When a futures contract is sold, the Fund incurs a contractual obligation to
deliver the securities or foreign currency underlying the contract at a
specified price on a specified future date. The Fund may enter into futures
contracts and engage in options transactions related thereto for hedging
purposes and for non-hedging purposes, to the extent that not more than 5% of
the Fund's assets are required as futures contract margin deposits and premiums
on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally
are not regulated by U.S. authorities and may offer less liquidity and less
protection to the Fund in the event of default by the other party to the
contract. The Fund could also experience losses if the prices of its options or
futures positions are poorly correlated with its other investments, or if it
cannot close out its positions because of an illiquid secondary market. The
loss from investing in futures transactions is potentially unlimited. For
further information concerning the risks of options and futures, see Part B of
this Registration Statement.
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Swaps
The Fund may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates), to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to gain exposure
to certain markets.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal. Currency swaps involve the exchange of cash flows on a
notional amount based on changes in the values of referenced currencies.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of an interest rate floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Advisor
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
To the extent that the Fund cannot dispose of a swap in the ordinary course
of business within seven days at approximately the value at which the Fund has
valued the swap, it will treat the swap as illiquid and subject to its overall
limit on illiquid investments of 15% of net assets. The Advisor will closely
monitor, subject to the oversight of the Board of Trustees, the creditworthiness
of swap counterparties in order to minimize their risk.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
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Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on
a loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the
Fund's securities lending agreement, the lending agent is obligated to replace
the loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects
that investment to market risk (i.e., capital appreciation or
depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to
engage in trading for short-term gains, the Fund will effect portfolio
transactions without regard to the holding period if, in the judgment of the
Advisor, such transactions are advisable in light of a change in circumstances
of a particular company, within a particular industry or country, or in general
market, economic or political conditions. Although the portfolio turnover rate
for the Fund may vary greatly from year to year, the Fund expects that under
normal circumstances, the portfolio turnover rate will not exceed 250%. A high
portfolio turnover rate will increase aggregate brokerage commission expenses
which must be borne directly by the Fund and ultimately by the Fund's Investors
and the incidence of short-term capital gains (which are taxable to Investors
as ordinary income). See " Brokerage Allocation" and " Federal Taxes."
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Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust -International
Growth Portfolio, Enterprise Group of Funds, Inc. -International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust -Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -International Equity Portfolio, John Hancock Variable Series
Trust I -International Balanced Fund, AON Funds-International Equity Fund and
The Republic Funds -Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which the MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to the Fund,
including the coordination and monitoring of any third party service providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
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As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation, and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any third party service provider in providing such
services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for the services
CGFSC provides to MSTC in fulfilling its obligations under the Services
Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering and of noticing the Fund's shares for
sale with the Commission and with various state securities commissions, fees and
expenses of the Administrator and the expenses of
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obtaining quotations of portfolio securities and of pricing the Fund's shares.
General expenses which are not associated directly with any particular portfolio
within the Trust (e.g., insurance premiums, Trustees' fees, expenses of
maintaining the Trust's legal existence and of Investors' meetings and fees and
expenses of industry organizations) are allocated between the various series
based upon their relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.01% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. The Fund normally
trades non-U.S. securities in foreign countries, since the best available market
for non-U.S. securities is often in non-U.S. markets. In transactions on non-
U.S. stock exchanges, brokers' commissions are generally fixed and are often
higher than in the United States where commissions are negotiated. Pursuant to
the Advisory Agreement, the Advisor is authorized to utilize the trading
department of its foreign subsidiaries to execute foreign securities
transactions but monitors selection by such subsidiaries of brokers and dealers
used to execute such transactions.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this research
information in managing the Fund's assets, as well as the assets of other
clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as underwriter. The Fund may effect futures transactions
through, and pay commissions to, futures commission merchants who are affiliated
with the Advisor or the Fund in accordance with procedures adopted by the Board
of Trustees of the Trust.
Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of
Trustees has the power to designate one or more series or sub-series/classes of
shares of beneficial interest and to classify or reclassify any unissued shares
with respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed
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Income Fund, the Brinson Short-Term Fund, the Brinson High Yield Fund and the
Brinson Emerging Markets Debt Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the Fund's
investment objective could result in an Investor's withdrawal of its investment
in the Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or
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invests in assets that produce UBTI. The Fund will not be a "regulated
investment company" for federal income tax purposes. For a more complete
discussion of the federal income tax consequences of investing in the Fund, see
"Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295,
or an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of
the Fund may be purchased directly by eligible Investors from the Fund at the
net asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities after such transfers to the Fund
shall become the property of the Fund and must be delivered to the Fund by the
Investor upon receipt from the issuer. Investors that are permitted to transfer
such securities will be required to recognize a gain or loss on such transfer
and pay tax thereon, if applicable, measured by the difference between the fair
market value of the securities and the Investors' basis therein. The Trust will
not accept securities in exchange for shares of the Fund unless: (1) such
securities are, at the time of the exchange, eligible to be included in the
Fund's investment portfolio and current market quotations are readily available
for such securities; and (2) the Investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions upon
their sale by the Fund under the Securities Act or under the laws of the country
in which the principal market for such securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of
regular trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m.
Eastern time) on days when such exchange is open. The net asset value per share
is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment
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companies are valued using their respective net asset values for purchase
orders placed at the close of the NYSE. All other securities are valued at their
fair value as determined in good faith and pursuant to a method approved by the
Trust's Board of Trustees. For a detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy,
the Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the fund into which the Investor
wishes to exchange. Requests for telephone exchanges must be received by the
transfer agent, CGFSC, by the close of regular trading hours (generally 4:00
p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose
a fee for wire service. The right of any Investor to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on the NYSE is restricted, or, to the extent
otherwise permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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OFFEREE NO. ________
BRINSON RELATIONSHIP FUNDS
Brinson U.S. Short/Intermediate Fixed Income Fund
PART A
August 13, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund, the
Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson Emerging
Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond Fund, the
Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-Term Fund,
the Brinson High Yield Fund and the Brinson Emerging Markets Debt Fund. This
Prospectus pertains only to the Brinson U.S. Short/Intermediate Fixed Income
Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
As a matter of fundamental policy, under normal circumstances, the Fund intends
to invest at least 65% of its assets in U.S. fixed income securities with an
initial maturity of more than one year. The Fund seeks to achieve its objective
by investing primarily in fixed income securities, which may also provide the
potential for capital appreciation. The Benchmark for the Fund is the one-year
U.S. Treasury Bill (the "Benchmark").
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
The investment style of the Fund's investment advisor, Brinson Partners,
Inc. ("Brinson Partners" or the "Advisor") is single focus: investment
fundamentals determine and describe future cash flows that define fundamental
investment value. The Advisor's investment perspective for the Fund is that
periodically there are exploitable discrepancies between market price and
fundamental value. Those price/value discrepancies then become the building
blocks for portfolio construction. The successful identification of price/value
discrepancies should result in enhanced total return performance.
The Fund may invest in a broad range of fixed income securities, including
debt securities of the U.S. government, together with its agencies and
instrumentalities and the fixed income securities in which the Series will
invest will possess a minimum rating of BBB-by Standard & Poor's Ratings Group
("S&P") or Baa3 by Moody's Investors Services, Inc. ("Moody's") or, if unrated,
will be determined to be of comparable quality by Brinson Partners. Such
securities are considered to be investment grade. Other fixed income securities
in which the Fund may invest include zero coupon securities, mortgage-backed
securities, asset-backed securities and when-issued securities. The Fund may
invest a portion of its assets in short-term debt securities (including
repurchase and reverse repurchase agreements)of corporations, the U.S.
government or its agencies and instrumentalities and banks and finance
companies. The terms "fixed income" and "debt securities" are synonymous and are
used interchangeably in this Part A and in Part B of this Registration
Statement.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund does not intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning the percentage of the Fund's portfolio securities that may be loaned,
and its policies set forth in Part B concerning borrowing, the issuance of
senior securities and concentration are "fundamental," which means that they may
not be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting shares. As used in this Part A of this Registration
Statement, a vote of "a majority of the outstanding voting shares" of the Trust
or a series of the Trust means the affirmative vote of the lesser of (i) more
than 50% of the outstanding shares of the Trust or series, or (ii) 67% of the
shares of the Trust or series present at a meeting at which more than 50% of the
outstanding shares of the Trust or series are represented in person or by proxy.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes
the securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the
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Investment Company Act), the Fund may be subject to greater investment and
credit risk than an investment company that invests in a broader range of
securities, because changes in the financial condition or market assessment of a
single issuer may cause greater fluctuations in the net asset value of the
Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. Fixed Income Securities
The Fund may invest in all types of fixed income securities of U.S.
issuers, including governments and governmental entities and supranational
issuers as well as corporations and other business organizations. The Fund may
purchase U.S. dollar denominated fixed income securities that reflect a broad
range of investment maturities, qualities and sectors.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies which
may be denominated in U.S. dollars. When unusual market conditions warrant, the
Fund can make substantial temporary defensive investments in cash equivalents up
to a maximum exposure of 100% of the Fund's assets. The Fund's investment in
temporary defensive investments may affect the Fund's ability to attain its
investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a maturity date but which can be called for
repayment by the lender or the borrower at a predetermined interval. Bank
instruments in which the Fund may invest include bank loan participations, bank
holding company commercial paper, deposits, bank notes and other bank related
securities. Bank loan participations are loans sold by lending banks to
investors. Bank holding company commercial paper is a form of short-term
promissory note which is a direct obligation of a bank holding company. Deposits
are obligations of a bank or its branches. Corporate commercial paper is a form
of short-term promissory note issued by corporations primarily to finance short-
term credit needs. Rates vary according to the credit standing of the issuers
and money market conditions. Floating rate instruments are obligations with
various final maturities and interest rates that are tied to other assorted
market indices. The Fund will not invest more than 15% of the value of its net
assets in floating or variable rate demand obligations as to which it cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable.
Zero Coupon Securities
The Fund may invest in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current interest
(the "cash payment date") and therefore are issued at a discount from their face
amounts or par value. Such bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the Fund will realize no
cash until the maturity date or cash payment date and, if the issuer defaults,
the Fund may obtain no return at all on its investment. For federal tax
purposes, the Fund will be required to include in income daily portions of
original issue discount accrued, even if no payment is received before the
maturity date or cash payment date.
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Pay-In-Kind Bonds
The Fund may invest in pay-in-kind bonds. Pay-in-kind bonds are securities
which pay interest through the issuance of additional bonds. The Fund will be
deemed to receive interest over the life of such bonds and be treated for
federal income tax purposes as if interest were paid on a current basis,
although no cash interest payments are received by the Fund until the cash
payment date or until the bonds mature.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, representing interests
in pools of mortgage loans. These securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. The Fund may invest in mortgage-backed securities
issued or guaranteed by an agency or instrumentality of the U.S. government.
The Fund may also invest in privately issued mortgage-backed securities issued
by private, non-government corporations, such as financial institutions.
The Fund may also invest in Collateralized Mortgage Obligations ("CMOs")
and Real Estate Mortgage Investment Conduits ("REMICs"). CMOs are debt
securities issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by a pool of mortgages held under an
indenture. CMOs are issued in a number of classes or series with different
maturities. The classes or series are retired in sequence as the underlying
mortgages are repaid. Prepayment may shorten the stated maturity of the
obligation and can result in a loss of premium, if any has been paid. Certain
of these securities may have variable or floating interest rates and others may
be stripped (securities which provide only the principal or interest feature of
the underlying security).
REMICs are private entities formed for the purpose of holding a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. Yields on privately-issued
CMOs have historically been higher than yields on CMOs issued or guaranteed by
U.S. government agencies. However, the risk of loss due to default on such
instruments is higher. For federal income tax purposes, the Fund will be
required to accrue income attributable to its investment in CMOs and regular
interests in REMICs using the "catch-up" method, with an aggregate prepayment
assumption. For further information concerning mortgage-backed securities, see
Part B of this Registration Statement.
Asset-Backed Securities
The Fund may invest in asset-backed securities. Asset-backed securities
are securities that represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool or
pools of similar assets (e.g., receivables on home equity and credit loans and
receivables regarding automobile, credit card, mobile home and recreational
vehicle loans, wholesale dealer floor plans and leases).
Such receivables are securitized in either a pass-through or pay-through
structure. Pass-through securities provide investors with an income stream
consisting of both principal and interest payments with respect to the
receivables in the underlying pool. Pay-through asset-backed securities are debt
obligations issued usually by a special purpose entity, are collateralized by
the various receivables and with respect to
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which the payments on the underlying receivables provide the funds to pay the
debt service on the debt obligations issued. The Fund may invest in these
securities and obligations and other types of asset-backed securities that may
be developed in the future.
The credit quality of these securities depends primarily upon the quality
of the underlying assets and the level of credit support and/or enhancement
provided. Such asset-backed securities may be subject to the same prepayment
risks as mortgage-backed securities. For further information concerning asset-
backed securities, see Part B of this Registration Statement.
When-Issued Securities
The Fund may purchase securities on a "when-issued" basis for payment and
delivery at a later date. The price is generally fixed on the date of
commitment to purchase. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date. At the time of settlement, the market value of the security
may be more or less than the purchase price. For further information concerning
when-issued securities, see Part B of this Registration Statement.
Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Eurodollar Securities
The Fund may invest in Eurodollar securities, which are fixed income
securities of a U.S. issuer or a foreign issuer that are issued outside the
United States. Interest and dividends on Eurodollar securities are payable in
U.S. dollars.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
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The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Fund's net assets invested in
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
The Trust has received an Exemptive Order from the United States Securities
and Exchange Commission (the "Commission), which permits the Fund to invest its
assets in securities of other series offered by the Trust. The Fund will invest
in such series only to the extent that the Advisor determines that it is more
efficient for the Fund to gain exposure to a particular asset class through
investment in a series of the Trust as opposed to investment directly in
individual securities. Investments by the Fund in another series of the Trust
may involve transaction costs, but not duplication of other fees and expenses
because the Advisor and other service providers will waive or reimburse expenses
to avoid such duplication.
The Fund's investments in any other series of the Trust will be subject to
the percentage limitations described above (so long as other series of the Trust
or certain other Brinson Partners-sponsored funds invest in the Fund in excess
of such limitations), and the Fund's investments in other investment companies
will be aggregated with its investments in the Trust's other series for purposes
of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144 A
Securities") over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to consider
the following factors in determining the liquidity of a Rule 144A Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Although it has delegated
the day-to-day liquidity determination to the Advisor, the Board of Trustees
will continue to monitor and will periodically review the Advisor's selection of
Rule 144A Securities, as well as the Advisor's determination as to their
liquidity.
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If the Advisor determines that a Rule 144A Security which was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Advisor will determine what action shall be taken to ensure
that the Fund continues to adhere to such limitation including disposing of
illiquid assets which may include such Rule 144A Securities.
Future Developments
From time to time, the Fund may also invest in certain equity or debt
securities which have features other than those that are typical for such
securities and which have in the past been offered or may be offered in the
future. In the past, for example, such securities have been issued to replicate
the performance of a certain component or components of a particular security or
combination of securities and/or to hedge or reduce the risks associated with
certain securities or market trends. The Fund may invest in these securities if
the Advisor believes that doing so would be consistent with the Fund's
investment objective and policies. Since the market for these securities may be
new, the Fund may have difficulty disposing of them at a suitable price and
time. In addition to limited liquidity, these instruments may present other
risks, such as high price volatility. The unavailability of such innovative
securities would not adversely affect the Fund's ability to achieve its
investment objective.
OTHER INVESTMENT TECHNIQUES
Options
The Fund may purchase and write put and call options on foreign or U.S.
securities and indices and enter into related closing transactions. The Fund
may also purchase and write put and call options on foreign currencies to manage
the Fund's exposure to changes in currency exchange rates. In addition, the
Fund may purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund may
purchase call options only to the extent premiums paid on all outstanding call
options do not exceed 20% of the Fund's total assets. The Fund will write call
options only on a covered basis. A call option is "covered" if the Fund owns
the underlying securities or the Fund maintains in a segregated account with its
custodian, cash, U.S. government securities or other liquid assets with a value
sufficient to meet its obligations under the call option, or if the Fund owns an
offsetting call option. The Fund will receive premium income from writing call
options, which may offset the cost of purchasing options and may also contribute
to the Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be
protected should the market value of the security decline or should a particular
index decline. The Fund will, at all times during which it holds a put option,
own the security underlying such option. The Fund will receive premium income
from writing put options, although it may be required, when the put is
exercised, to purchase securities at higher prices than the current market
price.
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An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency or maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date.
When a futures contract is sold, the Fund incurs a contractual obligation to
deliver the securities or foreign currency underlying the contract at a
specified price on a specified future date. The Fund may enter into futures
contracts and engage in options transactions related thereto for hedging
purposes and for non-hedging purposes, to the extent that not more than 5% of
the Fund's assets are required as futures contract margin deposits and premiums
on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
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The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally
are not regulated by U.S. authorities and may offer less liquidity and less
protection to the Fund in the event of default by the other party to the
contract. The Fund could also experience losses if the prices of its options or
futures positions are poorly correlated with its other investments, or if it
cannot close out its positions because of an illiquid secondary market. The
loss from investing in futures transactions is potentially unlimited. For
further information concerning the risks of options and futures, see Part B of
this Registration Statement.
Swaps
The Fund may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates), to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to gain exposure
to certain markets.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal. Currency swaps involve the exchange of cash flows on a
notional amount based on changes in the values of referenced currencies.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of an interest rate floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Advisor
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
To the extent that the Fund cannot dispose of a swap in the ordinary course
of business within seven days at approximately the value at which the Fund has
valued the swap, it will treat the swap as
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illiquid and subject to its overall limit on illiquid investments of 15% of net
assets. The Advisor will closely monitor, subject to the oversight of the Board
of Trustees, the creditworthiness of swap counterparties in order to minimize
their risk.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on
a loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the
Fund's securities lending agreement, the lending agent is obligated to replace
the loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will lend securities only after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects
that investment to market risk (i.e., capital appreciation or
depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover
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desirable in light of the Fund's investment objective. The Fund will not attempt
to achieve or be limited to a predetermined rate of portfolio turnover, such a
turnover always being incidental to transactions undertaken with a view to
achieving the Fund's investment objective. While it is the policy of the Fund
generally not to engage in trading for short-term gains, the Fund will effect
portfolio transactions without regard to the holding period if, in the judgment
of the Advisor, such transactions are advisable in light of a change in
circumstances of a particular company, within a particular industry or country,
or in general market, economic or political conditions. Although the portfolio
turnover rate for the Fund may vary greatly from year to year, the Fund expects
that under normal circumstances, the portfolio turnover rate will not exceed
250%. A high portfolio turnover rate will increase aggregate brokerage
commission expenses which must be borne directly by the Fund and ultimately by
the Fund's Investors and the incidence of short-term capital gains (which are
taxable to Investors as ordinary income). See "Brokerage Allocation" and
"Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust -International
Growth Portfolio, Enterprise Group of Funds, Inc. -International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust -Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -International Equity Portfolio, John Hancock Variable Series
Trust I -International Balanced Fund, AON Funds-International Equity Fund and
The Republic Funds -Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
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Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which the MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to the Fund,
including the coordination and monitoring of any third party service providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation, and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office pace,
equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing gent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any third party service provider in providing such
services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for the services
CGFSC provides to MSTC in fulfilling its obligations under the Services
Agreement.
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Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering and of noticing the Fund's shares for
sale with the Commission and with various state securities commissions, fees and
expenses of the Administrator and the expenses of obtaining quotations of
portfolio securities and of pricing the Fund's shares. General expenses which
are not associated directly with any particular portfolio within the Trust
(e.g., insurance premiums, Trustees' fees, expenses of maintaining the Trust's
legal existence and of Investors' meetings and fees and expenses of industry
organizations) are allocated between the various series based upon their
relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.01% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
In determining the brokers through whom, and commission rates and other
transaction costs at which, securities transactions for the Fund are to be
executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. The Fund normally
trades non-U.S. securities in foreign countries, since the best available market
for non-U.S. securities is often in non-U.S. markets. In transactions on non-
U.S. stock exchanges, brokers' commissions are generally fixed and are often
higher than in the United States where commissions are negotiated. Pursuant to
the Advisory Agreement, the Advisor is authorized to utilize the trading
department of its foreign subsidiaries to execute foreign securities
transactions but monitors selection by such subsidiaries of brokers and dealers
used to execute such transactions.
While the selection of brokers is made primarily on the basis of their
execution capabilities, the direction of transactions to such brokers may also
be based on the quality and amount of the research and research-related services
which they provide to the Advisor and indirectly to its clients. These services
are of the type described in Section 28(e) of the Securities Exchange Act of
1934, as amended, and are designed to augment the Advisor's own internal
research and investment strategy capabilities. The Advisor may use this
research information in managing the Fund's assets, as well as the assets of
other clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as underwriter. The Fund may effect futures transactions
through, and pay commissions to, futures commission merchants who are affiliated
with the Advisor or the Fund in accordance with procedures adopted by the Board
of Trustees of the Trust.
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Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of
Trustees has the power to designate one or more series or sub-series/classes of
shares of beneficial interest and to classify or reclassify any unissued shares
with respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-
Term Fund, the Brinson High Yield Fund and the Brinson Emerging Markets Debt
Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the Fund's
investment objective could result in an Investor's withdrawal of its investment
in the Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
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Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295,
or an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of
the Fund may be purchased directly by eligible Investors from the Fund at the
net asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities after such transfers to the Fund
shall become the property of the Fund and must be delivered to the Fund by the
Investor upon receipt from the issuer. Investors that are permitted to transfer
such securities will be required to recognize a gain or loss on such transfer
and pay tax thereon, if applicable, measured by the difference between the fair
market value of the securities and the Investors' basis therein. The Trust will
not accept securities in exchange for shares of the Fund unless: (1) such
securities are, at the time of the exchange, eligible to be included in the
Fund's investment portfolio and current market quotations are readily available
for such securities; and (2) the
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Investor represents and warrants that all securities offered to be exchanged are
not subject to any restrictions upon their sale by the Fund under the Securities
Act or under the laws of the country in which the principal market for such
securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of
regular trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m.
Eastern time) on days when such exchange is open. The net asset value per share
is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment companies are valued using
their respective net asset values for purchase orders placed at the close of the
NYSE. All other securities are valued at their fair value as determined in good
faith and pursuant to a method approved by the Trust's Board of Trustees. For a
detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege the Investor agrees that the
Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy,
the Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the fund into which the Investor
wishes to exchange. Requests for telephone exchanges must be received by the
transfer agent, CGFSC, by the close of regular trading hours (generally 4:00
p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
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An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose
a fee for wire service. The right of any Investor to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on the NYSE is restricted, or, to the extent
otherwise permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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OFFEREE NO. _____
BRINSON RELATIONSHIP FUNDS
Brinson Short-Term Fund
PART A
August 14, 1997
[ART APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson Short/Intermediate Fixed Income Fund, the Brinson Short-Term
Fund, the Brinson High Yield Fund, and the Brinson Emerging Markets Debt Fund.
This Prospectus pertains only to the Brinson Short-Term Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors"). This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
The Fund seeks to achieve this objective by investing in U.S. dollar and non-
dollar denominated fixed income securities and money market instruments, with an
average weighted maturity not to exceed three years, that may also provide the
potential for capital appreciation. Under normal market conditions, the Fund
will invest at least 65% of its assets in short-term securities having an
average weighted maturity of not more than three years.
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
Brinson Partners, Inc., the Fund's investment advisor ("Brinson Partners"
or the "Advisor") is an active manager of non-U.S. and U.S. short-term fixed
income securities. The Advisor believes that markets do not always efficiently
price fixed income securities and that a fundamental value-based investment
process can increase portfolio returns. Brinson Partners' fixed income
strategies consider many factors in addition to maturity and current yield in
the evaluation of securities. These factors include interest rate sensitivity,
quality, yield curve analysis and individual issue selection. Accordingly,
Brinson Partners will pursue the Fund's objective by investing its assets in
debt securities which are believed to be undervalued. The Advisor's proprietary
valuation model determines which securities are potential candidates for
inclusion in the Fund.
The Benchmark for the Fund will be calculated based on the British Bankers'
Association (the "BBA") 30-day LIBOR (the "Benchmark"). BBA Interest Settlement
Rates are based on rates quoted by 16 BBA designated banks as being, in their
view, the offered rate at which deposits are being quoted to prime banks in the
London Interbank market at 11:00 a.m. London time. The Advisor will attempt to
enhance the return and risk performance of the Fund relative to the Benchmark by
implementing an investment process which manages portfolio maturity structure,
while emphasizing careful security selection, credit risk management and
efficiency in the execution of securities transactions. The scale of the
Advisor's short-term fixed income operation allows it to execute trades on terms
which are often more favorable than those available to smaller investors.
Brinson Partners will attempt to enhance the long-term return and risk
performance of the Fund relative to the Benchmark by identifying exploitable
discrepancies between market price and fundamental value. The active management
process is intended, by the Advisor, to produce superior performance relative to
the Benchmark.
The Fund does not intend to concentrate its investments in a particular
industry, nor does the Fund intend to issue senior securities except to the
extent consistent with its policies described below and only as permitted under
the Investment Company Act. The Fund's investment objective and its policies
concerning portfolio securities lending, borrowing, the issuance of senior
securities and concentration, are "fundamental," which means that they may not
be changed without the affirmative vote of the holders of a majority of the
Fund's outstanding voting shares. As used in this Prospectus, a vote of "a
majority of the outstanding voting shares" of the Trust or a series of the Trust
means the affirmative vote of the lesser of (i) more than 50% of the outstanding
shares of the Trust or series, or (ii) 67% of the shares of the Trust or series
present at a meeting at which more than 50% of the outstanding shares of the
Trust or series are represented in person or by proxy.
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The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times may include
the securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the Investment Company Act), the Fund may be
subject to greater investment and credit risk than an investment company that
invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the net asset value of the Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. and Non-U.S. Fixed Income Securities
The Fund may invest in all types of fixed income securities of U.S. and
non-U.S. issuers, including governments and governmental entities and
supranational issuers as well as corporations and other business organizations.
The Fund may purchase U.S. dollar denominated securities that reflect a broad
range of investment maturities (with no limitation on maturities except to the
extent provided herein), qualities and sectors. Please see discussion below for
a description of the high yield/higher risk debt securities in which the Fund
may invest.
The non-U.S. fixed income component of the Fund may be invested in
government and supranational issues. A supranational entity is an entity
established or financially supported by the national governments of one or more
countries to promote reconstruction or development. Examples of supranational
entities include, among others, the World Bank, the European Economic Community,
the European Coal and Steel Community, the European Investment Bank, the Intra-
Development Bank, the Export-Import Bank and the Asian Development Bank.
Demand Notes
The Fund may invest in demand notes. Demand notes are securities issued
with a maturity date but which can be called for repayment by the lender or the
borrower at a predetermined interval.
Bank Instruments
Bank instruments in which the Fund may invest include bank loan
participations, bank holding company commercial paper, deposits, bank notes and
other bank related securities. Bank loan participations are loans sold by
lending banks to investors. Bank holding company commercial paper is a form of
short-term promissory note which is a direct obligation of a bank holding
company. Deposits are obligations of a bank or its branches.
Commercial Paper
The Fund may invest in commercial paper. Corporate commercial paper is a
form of short-term promissory note issued by corporations primarily to finance
short-term credit needs. Rates vary according to the credit standing of the
issuers and money market conditions.
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Floating Rate Instruments
Floating rate instruments are obligations with various final maturities and
interest rates that are tied to other assorted market indices. The Fund will not
invest more than 15% of the value of its net assets in floating or variable rate
demand obligations as to which it cannot exercise the demand feature on not more
than seven days' notice if there is no secondary market available for these
obligations, and in other securities that are not readily marketable.
Zero Coupon Securities
The Fund may invest in zero coupon securities. Zero coupon securities are
debt obligations that do not entitle the holder to any periodic payments of
interest prior to maturity or a specified date when the securities begin paying
current interest (the "cash payment date") and therefore are issued at a
discount from their face amounts or par value. Such bonds carry an additional
risk in that, unlike bonds which pay interest throughout the period to maturity,
the Fund will realize no cash until the maturity date or the cash payment date
and, if the issuer defaults, the Fund may obtain no return at all on its
investment. For federal tax purposes, the Fund will be required to include in
income daily portions of original issue discount accrued, even if no payment is
received before the maturity date or cash payment date.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, representing interests
in pools of mortgage loans. These securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. The Fund may invest in mortgage-backed securities
issued or guaranteed by an agency or instrumentality of the U.S. government.
The Fund may also invest in privately issued mortgage-backed securities issued
by private, non-government corporations, such as financial institutions.
The Fund may also invest in Collateralized Mortgage Obligations ("CMOs")
and Real Estate Mortgage Investment Conduits ("REMICs"). CMOs are debt
securities issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by a pool of mortgages held under an
indenture. CMOs are issued in a number of classes or series with different
maturities. The classes or series are retired in sequence as the underlying
mortgages are repaid. Prepayment may shorten the stated maturity of the
obligation and can result in a loss of premium, if any has been paid. Certain
of these securities may have variable or floating interest rates and others may
be stripped (securities which provide only the principal or interest feature of
the underlying security).
REMICs are private entities formed for the purpose of holding a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. Yields on privately-issued
CMOs have historically been higher than yields on CMOs issued or guaranteed by
U.S. government agencies. However, the risk of loss due to default on such
instruments is higher. For federal income tax purposes, the Fund will be
required to accrue income attributable to its investment in CMOs and regular
interests in REMICs using the "catch-up" method, with an aggregate repayment
assumption. For further information concerning mortgage-backed securities, see
Part B of this Registration Statement.
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Asset-Backed Securities
The Fund may invest in asset-backed securities. Asset-backed securities
are securities that represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool or
pools of similar assets (e.g., receivables on home equity and credit loans and
receivables regarding automobile, credit card, mobile home and recreational
vehicle loans, wholesale dealer floor plans and leases).
Such receivables are securitized in either a pass-through or pay-through
structure. Pass-through securities provide investors with an income stream
consisting of both principal and interest payments in respect of the receivables
in the underlying pool. Pay-through asset-backed securities are debt obligations
issued usually by a special purpose entity, are collateralized by the various
receivables and with respect to which the payments on the underlying receivables
provide the funds to pay the debt service on the debt obligations issued. The
Fund may invest in these securities and obligations and other types of asset-
backed securities that may be developed in the future.
The credit quality of these securities depends primarily upon the quality
of the underlying assets and the level of credit support and/or enhancement
provided. Such asset-backed securities may be subject to the same prepayment
risks as mortgaged-backed securities. For further information concerning asset-
backed securities, see Part B of this Registration Statement.
When-Issued Securities
The Fund may purchase securities on a "when-issued" basis for payment and
delivery at a later date. The price is generally fixed on the date of
commitment to purchase. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date. At the time of settlement, the market value of the security
may be more or less than the purchase price. For further information concerning
when-issued securities, see Part B of this Registration Statement.
Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Eurodollar Securities
The Fund may invest in Eurodollar securities, which are fixed income
securities of a U.S. issuer or a foreign issuer that are issued outside the
United States. Interest and dividends on Eurodollar securities are payable in
U.S. dollars.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying
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security, the Fund may experience delay or difficulty in recovering its cash. To
the extent that, in the meantime, the value of the security purchased has
decreased, the Fund could experience a loss. No more than 15% of the Fund's net
assets will be invested in illiquid securities, including repurchase agreements
which have a maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
High Yield/Higher Risk Securities
The Fund's U.S. dollar investments may include lower quality, higher
yielding securities which are below investment grade. Investment grade
securities are securities rated BBB or better by Standard & Poor's Ratings Group
("S&P") or Baa or better by Moody's Investors Service, Inc. ("Moody's") or, if
unrated, are determined to be of comparable quality by the Advisor. While
securities rated below BBB or Baa are regarded as having an adequate capacity to
pay principal and interest, such securities lack outstanding investment
characteristics and, in fact, have speculative characteristics as well. In
addition, changes in economic conditions or other circumstances are more likely
to lead to a weakened capacity to make principal and interest payments than is
the case with higher rated securities. Securities rated lower than BBB by S&P
and Baa by Moody's are classified as non-investment grade securities and are
commonly referred to as "junk bonds." These securities are considered to be of
poor standing and predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligations and involve major risk exposure to adverse conditions. Securities
issued by foreign issuers rated below investment grade entail greater risks than
higher rated securities, including risk of untimely interest and principal
payment, default, price volatility and may present problems of liquidity and
valuation. Investors should carefully consider these risks before investing. A
description of the various bond ratings appears in Appendix A, p. 1-2. Ratings
represent S&P's and Moody's respective opinions as to the quality of the
obligations they undertake to rate. However, ratings are general and are not
absolute standards of quality. The Fund currently intends to limit its
investment in non-investment grade debt securities of U.S. dollar denominated
fixed income assets to no more than 50% of its net assets. The Fund currently
intends to limit its investment in non-investment grade debt securities of the
non-U.S. dollar denominated fixed income assets to no more than 50% of its net
assets.
Low-grade securities generally offer a higher current yield than that
available from higher grade issues, but involve greater risk. In the past, the
high yields from low-grade securities have more than compensated for the higher
default rates on such securities. However, there can be no assurance that the
Fund will be protected from widespread bond defaults brought about by a
sustained economic downturn, or that yields will continue to offset default
rates on low-grade securities in the future. Issuers of these
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securities are often highly leveraged, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. In addition, such issuers may not have
more traditional methods of financing available to them and may be unable to
repay debt at maturity by refinancing. The risk of loss due to default by the
issuer is significantly greater for the holders of low-grade securities because
such securities may be unsecured and may be subordinated to other creditors of
the issuer. Past economic recessions have resulted in default levels with
respect to such securities in excess of historic averages.
The value of low-grade securities will be influenced not only by changing
interest rates, but also by the bond market's perception of credit quality and
the outlook for economic growth. When economic conditions appear to be
deteriorating, low and medium-rated bonds may decline in market value due to
investors' heightened concern over credit quality, regardless of prevailing
interest rates.
Especially at such times, trading in the secondary market for low-grade
securities may become thin and market liquidity may be significantly reduced.
Even under normal conditions, the market for low-grade securities may be less
liquid than the market for investment grade corporate bonds. There are fewer
securities dealers in the high yield market and purchasers of low-grade
securities are concentrated among a smaller group of securities dealers and
institutional investors. In periods of reduced secondary market liquidity, high
yield bond prices may become more volatile and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer may be adversely affected.
Low-grade securities frequently have call or redemption features which
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund.
Besides credit and liquidity concerns, prices for low-grade securities may
be affected by legislative and regulatory developments. For example, from time
to time, Congress has considered legislation to restrict or eliminate the
corporate tax deduction for interest payments or to regulate corporate
restructurings such as takeovers or mergers. Such legislation may significantly
depress the prices of outstanding low-grade securities. A description of various
bond ratings appears in Appendix A of this Prospectus.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one such
investment company, (ii) no more than 5% of the Fund's net assets invested in
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses. Investments by
the Fund in another series of the Trust may involve transaction costs.
The Trust has received an Exemptive Order from the United States Securities
and Exchange Commission (the "Commission"), which permits the Fund to invest its
assets in securities of other series offered by the Trust. The Fund will invest
in such series only to the extent that the Advisor determines that it is more
efficient for the Fund to gain exposure to a particular asset class through
investment in a series of the Trust as opposed to investment directly in
individual securities. Investments by the Fund in another series of the Trust
may involve transaction costs, but not duplication of other fees and
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expenses because the Advisor and other service providers will waive fees or
reimburse expenses to avoid such duplication.
The Fund's investments in any other series of the Trust will be subject to
the percentage limitations described above (so long as other series of the Trust
or certain other Brinson Partners-sponsored funds invest in the Fund in excess
of such limitations) and the Fund's investments in other investment companies
will be aggregated with its investments in the Trust's other series for purposes
of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are securities purchased under Rule 144A under the Securities Act ("Rule 144A
Securities") over-the-counter options and certain interest rate swaps described
below. While maintaining oversight, the Board of Trustees has delegated to the
Advisor the day-to-day function of determining whether or not Rule 144A
Securities, are liquid for purposes of the Fund's 15% limitation on investments
in illiquid assets. The Board of Trustees has instructed the Advisor to consider
the following factors in determining the liquidity of a Rule 144A Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). Although it has delegated
the day-to-day liquidity determination to the Advisor, the Board of Trustees
will continue to monitor and will periodically review the Advisor's selection of
Rule 144A Securities, as well as the Advisor's determination as to their
liquidity.
If the Advisor determines that a Rule 144A Security purchased in reliance
on Rule 144A which was previously determined to be liquid is no longer liquid
and, as a result, the Fund's holdings of illiquid securities exceed the Fund's
15% limit on investment in such securities, the Advisor will determine what
action shall be taken to ensure that the Fund continues to adhere to such
limitation including disposing of illiquid assets which may include such Rule
144A securities.
Future Developments
From time to time, the Fund may also invest in certain equity or debt
securities which have features other than those that are typical for such
securities and which have in the past been offered or may be offered in the
future. In the past, for example, such securities have been issued to replicate
the performance of a certain component or components of a particular security or
combination of securities and/or to hedge or reduce the risks associated with
certain securities or market trends. The Fund may invest in these securities if
the Advisor believes that doing so would be consistent with the Fund's
investment objective and policies. Since the market for these securities may be
new, the Fund may have difficulty disposing of them at a suitable price and
time. In addition to limited liquidity, these instruments may present other
risks, such as high price volatility. The unavailability of such innovative
securities would not adversely affect the Fund's ability to achieve its
investment objective.
Foreign Securities and Currency Considerations
Investments in securities of foreign issuers may involve greater risks than
those of U.S. issuers. There is generally less information available to the
public about non-U.S. issuers and less government regulation and supervision of
non-U.S. stock exchanges, brokers and listed companies. Non-U.S.
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companies are not subject to uniform global accounting, auditing and financial
reporting standards, practices and requirements. Securities of some non-U.S.
companies are less liquid and their prices more volatile than securities of
comparable U.S. companies. Securities trading practices abroad may offer less
protection to investors. Settlement of transactions in some non-U.S. markets may
be delayed or may be less frequent than in the United States, which could affect
the liquidity of the Fund. Additionally, in some countries, there is the
possibility of expropriation or confiscatory taxation, limitations on the
removal of securities, property or other assets of the Fund, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries. The Advisor will take these factors into consideration in
managing the Fund's investments. Investments will be made primarily in the
securities of issuers in developed countries. The Fund intends to diversify
broadly among countries but reserves the right to invest a substantial portion
of its assets in one or more countries if economic and business conditions
warrant such investments. Gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues interest or other
receivables or accrues expenses or liabilities denominated in a foreign currency
and the time the Fund actually collects such receivables, or pays such
liabilities, are generally treated as ordinary income or loss. Similarly, a
portion of the gains or losses realized on disposition of debt securities
denominated in a foreign currency, referred to under the Internal Revenue Code
of 1986, as amended (the "Code"), as "section 988" gains or losses, may also be
treated as ordinary gain or loss rather than as capital gain or loss.
The U.S. dollar market value of the Fund's investments and of dividends and
interest earned by the Fund may be significantly affected by changes in currency
exchange rates. Some currency prices may be volatile, and there is the
possibility of governmental controls on currency exchange or governmental
intervention in currency markets, which could adversely affect the Fund.
Although the Fund may attempt to manage currency exchange rate risk, there is no
assurance that the Fund will do so at an appropriate time or that it will be
able to predict exchange rates accurately.
OTHER INVESTMENT TECHNIQUES
Currency Management
To manage exposure to currency fluctuations, the Fund may alter fixed
income or money market exposures, enter into forward currency exchange
contracts, buy or sell options, futures or options on futures relating to
foreign currencies and purchase securities indexed to currency baskets. The
Fund will also use these currency exchange techniques in the normal course of
business to hedge against adverse changes in exchange rates in connection with
purchases and sales of securities. Some of these strategies may require the
Fund to set aside liquid assets in a segregated custodial account to cover its
obligations. These techniques are further described below.
Forward Foreign Currency Transactions
The Fund may conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market or through entering into contracts to purchase or sell foreign currencies
at a future date (i.e., a "forward foreign currency contract" or "forward
contract"). A forward contract involves an obligation to purchase or sell a
specific currency amount at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties and at a price set at
the time of the contract. The Fund will convert currency on a spot basis from
time to time and investors should be aware of the potential costs of currency
conversion.
The Fund may enter into forward contracts for hedging purposes as well as
for non-hedging purposes. For hedging purposes, the Fund may enter into
contracts to deliver or receive foreign currency it
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will receive from or require for its normal investment activities. It may also
use contracts in a manner intended to protect foreign currency-denominated
securities from declines in value due to unfavorable exchange rate movements.
The Fund may also enter into contracts with the intent of changing the relative
exposure of the Fund's portfolio of securities to different currencies to take
advantage of anticipated changes in exchange rates.
When the Fund enters into forward contracts for non-hedging purposes, it
will establish a segregated account with its custodian bank in which it will
maintain cash, U.S. government securities or other liquid assets equal in value
to its obligations with respect to its forward contracts for non-hedging
purposes.
At the maturity of a forward contract, the Fund may either sell a portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions.
Options
The Fund may purchase and write put and call options on foreign and U.S.
securities and indices and enter into related closing transactions. The Fund
may also purchase and write put and call options on foreign currencies to manage
the Fund's exposure to change in currency exchange rates. In addition, the Fund
may purchase and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or may take advantage of a rise in a particular index. The Fund will
purchase call options only to the extent premiums paid on all outstanding call
options do not exceed 20% of the Fund's total assets. The Fund may write call
options only on a covered basis. A call option is "covered" if the Fund owns the
underlying securities or the Fund maintains in a segregated account with its
custodian, cash, U.S. government securities or other liquid assets with a value
sufficient to meet its obligations under the call option, or if the Fund owns an
offsetting call option. The Fund will receive premium income from writing call
options, which may offset the cost of purchasing put options and may also
contribute to the Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may purchase put options only
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be protected
should the market value of the security decline or should a particular index
decline. The Fund will, at all times during which it holds a put option, own the
security underlying such option. The Fund will receive premium income from
writing put options, although it may be required, when the put is exercised, to
purchase securities at higher prices than the current market price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
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Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
Call options on foreign currency written by the Fund will be "covered,"
which means that the Fund will own an equal amount of the underlying foreign
currency, or maintain in a segregated account with its custodian, cash, U.S.
government securities or other liquid assets with a value sufficient to meet its
obligations under the call option, or own an offsetting call option. With
respect to put options on foreign currency written by the Fund, the Fund will
establish a segregated account with its custodian bank consisting of cash, U.S.
government securities or other liquid assets in an amount equal to the amount
the Fund would be required to pay upon exercise of the put.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges and to the extent permitted by law, options traded
over-the-counter and on recognized foreign exchanges. It is the position of the
Commission that over-the-counter options are illiquid. Accordingly, the Fund
will invest in such options only to the extent consistent with its 15% limit on
investment in illiquid securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities or foreign currency
called for by the contract at a specified price on a specified future date. When
a futures contract is sold, the Fund incurs a contractual obligation to deliver
the securities or foreign currency underlying the contract at a specified price
on a specified future date. The Fund may enter into futures contracts and engage
in options transactions related thereto for hedging purposes and for non-hedging
purposes, to the extent that not more than 5% of the Fund's assets are required
as futures contract margin deposits and premiums on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
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Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. Options and futures traded on foreign exchanges generally
are not regulated by U.S. authorities and may offer less liquidity and less
protection to the Fund in the event of default by the other party to the
contract. The Fund could also experience losses if the prices of its options or
futures positions are poorly correlated with its other investments, or if it
cannot close out its positions because of an illiquid secondary market. The
loss from investing in futures transactions is potentially unlimited. For
further information concerning the risks of options and futures, see Part B of
this Registration Statement.
Swaps
The Fund may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates), to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to gain exposure
to certain markets.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal. Currency swaps involve the exchange of cash flows on a
notional amount based on changes in the values of referenced currencies.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
an interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Advisor
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
To the extent that the Fund cannot dispose of a swap in the ordinary course
of business within seven days at approximately the value at which the Fund has
valued the swap, it will treat the swap as illiquid and subject to its overall
limit on illiquid investments of 15% of net assets. The Advisor will closely
monitor, subject to the oversight of the Board of Trustees, the creditworthiness
of equity swap counterparties in order to minimize their risk.
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Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on a
loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the loaned security increases. However, pursuant to the Fund's
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the arrangements between the borrower
and the lending agent. The Fund will only lend securities after a review of all
pertinent facts by the Advisor and the lending agent, subject to overall
supervision by the Board of Trustees. Creditworthiness of the borrowing broker-
dealer or institution will be monitored on an ongoing basis by the Advisor and
any lending agent pursuant to procedures reviewed and adopted by the Board of
Trustees. Cash received through loan transactions may be invested in any
security in which the Fund is authorized to invest. Investing cash subjects that
investment to market risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to
engage in trading for short-term gains, the Fund will effect portfolio
transactions without regard to the
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holding period if, in the judgment of the Advisor, such transactions are
advisable in light of a change in circumstances of a particular company, within
a particular industry or country, or in general market, economic or political
conditions. Although the portfolio turnover rate for the Fund may vary greatly
from year to year, the Fund expects that under normal circumstances, the
portfolio turnover rate will not exceed 100%. High portfolio turnover rates will
increase aggregate brokerage commission expenses which must be borne directly by
the Fund and ultimately by the Fund's Investors and the incidence of short-term
capital gains (which are taxable to Investors as ordinary income). See
"Brokerage Allocation" and "Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust -International
Growth Portfolio, Enterprise Group of Funds, Inc. -International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust -Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -International Equity Portfolio, John Hancock Variable Series
Trust I -International Balanced Fund, AON Funds--International Equity Fund and
The Republic Funds--Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
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Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or the "Administrator"),
pursuant to which MSTC is required to provide general administrative,
accounting, portfolio valuation, transfer agency and custodian services to the
Fund, including the coordination and monitoring of any third party service
providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation and
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any third party service provider in providing such
services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for the services
CGFSC provides to MSTC in fulfilling its obligations under the Services
Agreement.
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Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors), brokerage
commissions, the expenses of registering the Fund's shares for sale with the
Commission and of noticing the Fund's shares for sale with various state
securities commissions, fees and expenses of the Administrator and the expenses
of obtaining quotations of portfolio securities and of pricing the Fund's
shares. General expenses which are not associated directly with any particular
portfolio within the Trust (e.g., insurance premiums, Trustees' fees, expenses
of maintaining the Trust's legal existence and of Investors' meetings and fees
and expenses of industry organizations) are allocated between the various series
based upon their relative net assets.
The Advisor has agreed to pay the amount, if any, by which the total
operating expenses of the Fund for any fiscal year exceed 0.05% of the Fund's
average net assets. The Advisor, however, may discontinue this expense
limitation at any time in its sole discretion.
Brokerage Allocation
Because the Fund is exclusively composed of debt (rather than equity)
securities, most of the Fund's investment portfolio transactions are effected
with dealers without the payment of brokerage commissions, but at net prices
which usually include a spread or a markup. In determining the brokers through
whom, and other transaction costs at which, securities transactions for the Fund
are to be executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. However, the
direction of transactions to brokers may also be based on the quality and amount
of the research and research-related services which they provide to the Advisor
and indirectly to its clients. These services are of the type described in
Section 28(e) of the Securities Exchange Act of 1934, as amended, and are
designed to augment the Advisor's own internal research and investment strategy
capabilities. The Advisor may use this research information in managing the
Fund's assets, as well as the assets of other clients.
In the event that the Fund does purchase or sell certain equity securities,
the Fund may pay commissions to brokers who are affiliated with the Advisor or
the Fund. The Fund may also purchase securities in certain underwritten
offerings for which an affiliate of the Advisor may act as an underwriter. The
Fund may also effect futures transactions through, and pay commissions to,
futures commission merchants who are affiliated with the Advisor or the Fund in
accordance with procedures adopted by the Board of Trustees of the Trust.
Capital Stock and Other Securities
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no
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par value. The Board of Trustees has the power to designate one or more series
or sub-series/classes of shares of beneficial interest and to classify or
reclassify any unissued shares with respect to such series. Currently, the Trust
offers fifteen series of shares: the Brinson Global Securities Fund, the Brinson
Global Equity Fund, the Brinson U.S. Equity Fund, the Brinson U. S. Large
Capitalization Equity Fund, the Brinson U.S. Intermediate Capitalization Equity
Fund, the Brinson Post-Venture Fund, the Brinson EXDEX/(R)/ Fund, the Brinson
Non-U.S. Equity Fund, the Brinson Emerging Markets Equity Fund, the Brinson Bond
Plus Fund, the Brinson U.S. Bond Fund, the Brinson Short/Intermediate Fixed
Income Fund, the Brinson Short-Term Fund, the Brinson High Yield Fund, and the
Brinson Emerging Markets Debt Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Pursuant to the Investment Company Act, a control person possesses the
ability to control the outcome of matters submitted for shareholder vote. As of
July 29, 1997, Ameritech Pension Trust of North Quincy, Massachusetts was a
control person of the Fund and the Trust by nature of its shareholdings.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) amendments reducing payments upon liquidation or
diminishing voting rights; (iv) mergers, consolidations or sales of assets; (v)
the incorporation of the Trust; (vi) additional matters relating to the Trust as
required by the Investment Company Act; and (vii) such other matters as the
Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the Fund's
investment objective could result in an Investor's withdrawal of its investment
in the Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by Investors to approve a change in their investment
objectives and policies parallel to a change that has been approved for the Fund
(thus requiring such Investors to redeem their shares of the Fund) could lead to
a number of adverse consequences, such as the inability of such Investors to
find another investment company in which to invest their assets or an equivalent
investment advisor to manage the assets.
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Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295, or
an Investor may call 312-220-7940.
Purchase of Securities Being Offered.
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act, which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of the
Fund may be purchased directly by eligible Investors from the Fund at the net
asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such receipt.
Shares issued by the Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities after such transfers to the Fund
shall become the property of the Fund and must be delivered to the Fund by the
Investor upon receipt from the issuer. Investors that are permitted to transfer
such securities will be required to recognize a gain or loss on such transfer
and pay tax thereon, if applicable, measured by the difference between the fair
market value of the securities and the Investors' basis therein. The Trust will
not accept securities in exchange for shares of the Fund unless: (1) such
securities are, at the time of the exchange, eligible to be included in the
Fund's investment portfolio and current market quotations are readily available
for such securities; and (2) the
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<PAGE>
Investor represents and warrants that all securities offered to be exchanged are
not subject to any restrictions upon their sale by the Fund under the Securities
Act or under the laws of the country in which the principal market for such
securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of the close of
regular trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m.
Eastern time) on days when such exchange is open. The net asset value per share
is computed by adding the value of all securities and other assets in the
portfolio, deducting any liabilities (expenses and fees are accrued daily) and
dividing by the number of shares outstanding. Fund securities for which market
quotations are available are priced at market value. Debt securities are priced
at fair value by an independent pricing service using methods approved by the
Trust's Board of Trustees. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value.
Redeemable securities issued by open-end investment companies are valued using
their respective net asset values for purchase orders placed at the close of the
NYSE. All other securities are valued at their fair value as determined in good
faith and pursuant to a method approved by the Trust's Board of Trustees. For a
detailed description, see Item 19 in Part B of this Registration Statement.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege, the Investor agrees that
the Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy, the
Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of a series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review a Prospectus of the series of the Trust into which the
Investor wishes to exchange. Requests for telephone exchanges must be received
by the transfer agent, CGFSC, by the close of regular trading hours (generally
4:00 p.m. Eastern time) on the NYSE on any day that the NYSE is open for regular
trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
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<PAGE>
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose
a fee for wire service. The right of any Investor to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on the NYSE is restricted, or, to the extent
otherwise permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
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<PAGE>
APPENDIX A
CORPORATE DEBT RATINGS
Moody's Investors Service, Inc. describes classifications of corporate bonds as
follows:
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-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa --Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A --Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa --Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba --Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B --Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa --Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca --Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C --Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
1
<PAGE>
Standard & Poor's Ratings Group describes classifications of corporate bonds as
follows:
AAA --This is the highest rating assigned by Standard & Poor's Rating Group
to a debt obligation and indicates an extremely strong capacity to pay principal
and interest.
AA --Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and in the majority of instances
they differ from the AAA issues only in small degree.
A --Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB --Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lend
to inadequate capacity to meet timely interest and principal payments.
B -Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC -Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest or repay principal.
CC -The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C -The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-rating.
CI -The rating CI is reserved for income bonds on which no interest is
being paid.
D -Debt rated D is in default, or is expected to default upon maturity or
payment date.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
2
<PAGE>
OFFEREE NO. ____
BRINSON RELATIONSHIP FUNDS
Brinson High Yield Fund
PART A
August 14, 1997
[LOGO APPEARS HERE]
Introduction
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). The Trust currently offers fifteen series of shares:
the Brinson Global Securities Fund, the Brinson Global Equity Fund, the Brinson
U.S. Equity Fund, the Brinson U. S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the Brinson
Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson U.S. Bond
Fund, the Brinson Short/Intermediate Fixed Income Fund, the Brinson Short-Term
Fund, the Brinson High Yield Fund, and the Brinson Emerging Markets Debt Fund.
This Prospectus pertains only to the Brinson High Yield Fund (the "Fund").
Beneficial interests in the Fund ("shares") are issued solely in private
placement transactions that do not involve a "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). Investments in the Fund may only be made by "accredited
investors" within the meaning of Regulation D under the Securities Act which
include, but are not limited to, common or commingled trust funds, investment
companies, registered broker-dealers, investment banks, commercial banks,
corporations, group trusts or similar organizations or entities. Each such
accredited investor that holds shares of the Trust is referred to herein as an
"Investor" and collectively, the "Investors". This Prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank; further, such shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency. The Fund may invest up to 100% of its assets in lower rated fixed income
securities, commonly known as "junk bonds," which involve greater risks,
including default risks, then higher rated fixed income securities. Investors
should carefully assess these risks before investing in the Fund. See
"Investment Objective, Policies and Risk Factors," "High Yield/Higher Risk
Securities" and Appendix A -Corporate Debt Ratings.
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<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize total U.S. dollar return,
consisting of capital appreciation and current income, while controlling risk.
The Fund will maintain a high yield portfolio and as such, under normal market
conditions, at least 65% of the Fund's assets will be invested in high yield
securities. The Fund seeks to achieve its objective by investing its assets
primarily in the high yield market. The Fund's performance is measured relative
to its benchmark, the First Boston High Yield Index (the "Benchmark").
Investors should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Fund, nor can
there be any assurance that the Fund's investment objective will be attained.
Investment Process
Brinson Partners, Inc., the Fund's investment advisor ("Brinson Partners"
or the "Advisor"), is an active manager of high yield fixed income securities.
The Advisor maintains a long-term fundamental value investment approach. The
Advisor's investment philosophy is premised on the belief that discrepancies
often exist between observed market prices and fundamental value. Exploiting
these discrepancies then becomes the building block for portfolio construction.
The successful identification of price/value discrepancies through intensive
credit analysis should lead to enhanced total return performance.
The Advisor believes that inefficiencies exist within the high yield bond
market that a fundamental value-based investment process can exploit. The
Advisor's portfolio is constructed using both top-down and bottom-up investment
processes. The Advisor considers macroeconomic variables and industry outlooks
in its top-down analysis. The bottom-up approach is the most integral to
portfolio construction and forms the basis for credit selection. The Advisor
engages in extensive due diligence of individual credits that includes
assessments of management, market position, competitive environment, financial
flexibility, ability to deliver and review of historical operating results. The
Advisor compiles this data into a form which lends itself to forecasting future
cash flows. The Advisor will identify those securities which are believed to
have market prices that differ from their fundamental value and invest
accordingly. By following a disciplined investment approach, the Advisor
expects to pursue the Fund's investment objective.
The Advisor will diversify the Fund's portfolio by security type, industry,
quality and maturity. The Advisor will focus on cash payment, zero coupon and
pay-in-kind bonds, but may invest in convertibles, preferred stocks and common
stock equivalents. The Advisor will consider investments across a wide spectrum
of industries. The Advisor will focus on the middle tier quality segment of the
market, but will invest across all quality tiers, including the not-rated
segment. Various maturities and durations will allow for further
diversification. The Advisor believes that diversification is one of the most
important components in the construction of a high yield portfolio.
The Benchmark is a broad-based index comprised of high yield securities,
including split-rated bonds. The Benchmark has been designed to provide a
representative indication of the performance of the high yield market in the
United States. The Benchmark was created in 1981 and represents over $100
billion of securities. The Advisor will deviate from the normal Benchmark mix
in an effort to enhance the long-term returns while controlling risk. The
Advisor may invest in issues which are not included in the Benchmark. The
active management process is intended, by the Advisor, to identify discrepancies
between market prices and fundamental value that will produce superior
investment
A-2
<PAGE>
performance relative to the Benchmark. When unusual market conditions warrant,
the Fund can make substantial temporary defensive investments in cash
equivalents.
The Fund does not intend to concentrate its investments in a particular
industry. The Fund also does not intend to issue senior securities except to
the extent consistent with its policies described below and only as permitted
under the Investment Company Act. The Fund's investment objective and its
policies concerning the percentage of the Fund's portfolio securities that may
be loaned, and its policies set forth in Part B concerning borrowing, the
issuance of senior securities and concentration, are "fundamental," which means
that they may not be changed without the affirmative vote of the holders of a
majority of the Fund's outstanding voting shares. As used in this Part A of
this Registration Statement, a vote of "a majority of the outstanding voting
shares" of the Trust or a series of the Trust means the affirmative vote of the
lesser of (i) more than 50% of the outstanding shares of the Trust or series,
or (ii) 67% of the shares of the Trust or series present at a meeting at which
more than 50% of the outstanding shares of the Trust or series are represented
in person or by proxy.
The Fund is classified as "non-diversified," as defined in the Investment
Company Act so that it is not limited by the Investment Company Act as to the
proportion of its assets that it may invest in the obligations of a single
issuer. To the extent that the Fund's investment portfolio at times includes
the securities of a smaller number of issuers than permissible if the Fund were
"diversified" (as defined in the Investment Company Act), the Fund may be
subject to greater investment and credit risk than an investment company that
invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the net asset value of the Fund's shares.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. and Non-U.S. Equity Securities
The Fund may invest in a broad range of equity securities of U.S. and non-
U.S. issuers, including common stock of companies or closed-end investment
companies, preferred stock, fixed income securities convertible into or
exchangeable for common stock and securities such as warrants or rights that are
convertible into common stock. Investments in common stock will occur primarily
as a result of the purchase of unit offerings of fixed income securities which
include equity components.
U.S. and Non-U.S. Fixed Income Securities
The Fund may invest in all types of U.S. dollar denominated fixed-income
securities of U.S. and non-U.S. issuers, including governments and governmental
entities, supranational issuers as well as corporations and other business
organizations. The Fund may purchase U.S. dollar denominated securities that
reflect a broad range of investment maturities, qualities and sectors. A
supranational entity is an entity established or financially supported by the
national governments of one or more countries to promote reconstruction or
development. Examples of supranational entities include, among others, the
World Bank, the European Economic Community, the European Coal and Steel
Community, the European Investment Bank, the Intra-Development Bank, the Export-
Import Bank and the Asian Development Bank.
High Yield/Higher Risk Securities
The Fund will invest predominantly in U.S. dollar investments which are
below investment grade. Investment grade securities are securities rated BBB or
better by Standard & Poor's Ratings Group ("S&P") or Baa or better by Moody's
Investors Service, Inc. ("Moody's") or, if unrated, are determined to
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be of comparable quality by the Advisor (referred to herein as "low-grade
securities"). While securities rated below BBB or Baa are regarded as having an
adequate capacity to pay principal and interest, such securities lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well. In addition, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher rated securities. Securities
rated lower than BBB-by S&P and Baa3 by Moody's are classified as non-investment
grade securities and are commonly referred to as "junk bonds." These securities
are considered to be of poor standing and predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations and involve major risk exposure to adverse
conditions. The table below shows the weighted average ratings of the bonds in
the Fund's portfolio for the period ended December 31, 1996. The credit rating
categories are those provided by S&P and Moody's, both nationally recognized
statistical rating organizations. Ratings represent S&P's and Moody's respective
opinions as to the quality of the obligations they undertake to rate. Ratings
are general and are not absolute standards of quality. A description of various
bond ratings appears in Appendix A, p. 1-2.
<TABLE>
<CAPTION>
Credit Rating Rated
------------- -----
<S> <C>
BB 11.51%
Split BB 9.70
B 61.01
Split B 6.75
CCC 0.00
D 0.04
Not Rated 10.99
-----
Total 100.00
</TABLE>
Note: Those securities categorized as "Not Rated" have not received a rating
from either S&P or Moody's. Split BB and Split B securities reflect
differing opinions by the rating agencies as to an issuer's credit
quality.
Investors should carefully consider these risks before investing. The Fund
currently does not intend to limit its investment in low-grade securities of
U.S. dollar denominated fixed income securities.
Low-grade securities generally offer a higher current yield than that
available from higher grade issues, but involve greater risk. In the past, the
high yields from low-grade securities have more than compensated for the higher
default rates on such securities. However, there can be no assurance that the
Fund will be protected from widespread bond defaults brought about by a
sustained economic downturn, or that yields will continue to offset default
rates on high yield bonds in the future. Issuers of these securities are often
highly leveraged, so that their ability to service their debt obligations during
an economic downturn or during sustained periods of rising interest rates may be
impaired. In addition, such issuers may not have more traditional methods of
financing available to them and may be unable to repay debt at maturity by
refinancing. The risk of loss due to default by the issuer is significantly
greater for the holders of low-grade securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer. Past
economic recessions have resulted in default levels with respect to such
securities in excess of historic averages.
The value of lower-rated debt securities will be influenced not only by
changing interest rates, but also by the bond market's perception of credit
quality and the outlook for economic growth. When
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<PAGE>
economic conditions appear to be deteriorating, low-grade securities may decline
in market value due to investors' heightened concern over credit quality,
regardless of prevailing interest rates.
Especially at such times, trading in the secondary market for low-grade
securities may become thin and market liquidity may be significantly reduced.
Even under normal conditions, the market for low-grade securities may be less
liquid than the market for investment grade corporate bonds. There are fewer
securities dealers in the high yield market and purchasers of low-grade
securities are concentrated among a smaller group of securities dealers and
institutional investors. In periods of reduced secondary market liquidity, low-
grade securities prices may become more volatile and the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer may be adversely affected.
Low-grade securities frequently have call or redemption features which
would permit an issuer to repurchase the security from the Funds. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund.
Besides credit and liquidity concerns, prices for low-grade securities may
be affected by legislative and regulatory developments. For example, from time
to time, Congress has considered legislation to restrict or eliminate the
corporate tax deduction for interest payments or to regulate corporate
restructurings such as takeovers or mergers. Such legislation may significantly
depress the prices of outstanding low-grade securities. A description of
various bond ratings appears in Appendix A.
For federal income tax purposes, the Fund will accrue interest income on
bonds and debt securities without giving effect to delays and reductions in
receipt of such interest income, except possibly to the extent that the Fund can
establish that any accrual of interest on a bond or securities is uncollectible.
Moreover, in a recent technical advice memorandum, the Internal Revenue Service
ruled that a holder (such as the Fund) of a debt instrument having original
issue discount (i.e., in general, the difference between the stated
redemption--price at maturity of a debt security and its issue price) ("OID")
must continue to accrue OID, as distinguished from the accrual of interest, even
when the issuer's financial condition is such that there is no reasonable
expectation that the instrument will be redeemed according to its terms. As a
result, the amount of interest income (including OID) reportable by the Fund
and, in turn, its investors could significantly exceed the amount of interest
income actually received by the Fund.
Cash and Cash Equivalents
The Fund may invest a portion of its assets in short-term debt securities
of corporations, governments or agencies and banks and finance companies
denominated in U.S. dollars. When unusual market conditions warrant, the Fund
can make substantial temporary defensive investments in cash equivalents up to a
maximum exposure of 100% of the Fund's assets. The Fund's investment in
temporary defensive investments may affect the Fund's ability to attain its
investment objective.
The short-term debt securities in which the Fund may invest include demand
notes, bank instruments, commercial paper and floating rate instruments. Demand
notes are securities issued with a maturity date but which can be called for
repayment by the lender or the borrower at a predetermined interval. Bank
instruments in which the Fund may invest include bank loan participations, bank
holding company commercial paper, deposits, bank notes and other bank related
securities. Bank loan participations are loans sold by lending banks to
investors. Bank holding company commercial paper is a form of short-term
promissory note which is a direct obligation of a bank holding company. Deposits
are obligations of a bank or its branches. Corporate commercial paper is a form
of short-term promissory note
A-5
<PAGE>
issued by corporations primarily to finance short-term credit needs. Rates vary
according to the credit standing of the issuers and money market conditions.
Floating rate instruments are obligations with various final maturities and
interest rates that are tied to other assorted market indices. The Fund will not
invest more than 15% of the value of its net assets in floating or variable rate
demand obligations as to which it cannot exercise the demand feature on not more
than seven days' notice if there is no secondary market available for these
obligations, and in other securities that are not readily marketable.
Zero Coupon Securities
The Fund may invest in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current interest
(the "cash payment date") and therefore are issued at a discount from their face
amounts or par value. Such bonds carry an additional risk in that, unlike bonds
which pay interest throughout the period to maturity, the Fund will realize no
cash until the maturity date or the cash payment date and, if the issuer
defaults, the Fund may obtain no return at all on its investment. For federal
tax purposes, the Fund will be required to include in income daily portions of
original issue discount accrued, even if no payment is received before the
maturity date or cash payment date.
Pay-In-Kind Bonds
The Fund may invest in pay-in-kind bonds. Pay-in-kind bonds are securities
which pay interest through the issuance of additional bonds. The Fund will be
deemed to receive interest over the life of such bonds and be treated for
federal income tax purposes as if interest were paid on a current basis,
although no cash interest payments are received by the Fund until the cash
payment date or until the bonds mature.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, representing interests
in pools of mortgage loans. These securities provide investors with payments
consisting of both interest and principal as the mortgages in the underlying
mortgage pools are paid off. The Fund may invest in mortgage-backed securities
issued or guaranteed by an agency or instrumentality of the U.S. government. The
Fund may also invest in privately issued mortgage-backed securities issued by
private, non-government corporations, such as financial institutions.
The Fund may also invest in Collateralized Mortgage Obligations ("CMOs")
and Real Estate Mortgage Investment Conduits ("REMICs"). CMOs are debt
securities issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by a pool of mortgages held under an
indenture. CMOs are issued in a number of classes or series with different
maturities. The classes or series are retired in sequence as the underlying
mortgages are repaid. Prepayment may shorten the stated maturity of the
obligation and can result in a loss of premium, if any has been paid. Certain
of these securities may have variable or floating interest rates and others may
be stripped (securities which provide only the principal or interest feature of
the underlying security).
REMICs are private entities formed for the purpose of holding a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. Yields on privately-issued
CMOs have historically been higher than yields on CMOs issued or guaranteed
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<PAGE>
by U.S. government agencies. However, the risk of loss due to default on such
instruments is higher. For federal income tax purposes, the Fund will be
required to accrue income attributable to its investment in CMOs and regular
interests in REMICs using the "catch-up" method, with an aggregate prepayment
assumption. For further information concerning mortgage-backed securities, see
Part B of this Registration Statement.
Asset-Backed Securities
The Fund may invest in asset-backed securities. Asset-backed securities
are securities that represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool or
pools of similar assets (e.g., receivables on home equity and credit loans and
receivables regarding automobile, credit card, mobile home and recreational
vehicle loans, wholesale dealer floor plans and leases).
Such receivables are securitized in either a pass-through or pay-through
structure. Pass-through securities provide investors with an income stream
consisting of both principal and interest payments with respect to the
receivables in the underlying pool. Pay-through asset-backed securities are
debt obligations issued usually by a special purpose entity, are collateralized
by the various receivables and with respect to which the payments on the
underlying receivables provide the funds to pay the debt service on the debt
obligations issued. The Fund may invest in these securities and obligations and
other types of asset-backed securities that may be developed in the future.
The credit quality of these securities depends primarily upon the quality
of the underlying assets and the level of credit support and/or enhancement
provided. Such asset-backed securities may be subject to the same prepayment
risks as mortgage-backed securities. For further information concerning asset-
backed securities, see Part B of this Registration Statement.
When-Issued Securities
The Fund may purchase securities on a "when-issued" basis for payment and
delivery at a later date. The price is generally fixed on the date of
commitment to purchase. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date. At the time of settlement, the market value of the security
may be more or less than the purchase price. For further information concerning
when-issued securities, see Part B of this Registration Statement.
Convertible Securities
The Fund may invest in convertible securities which generally offer lower
interest or dividend yields than nonconvertible debt securities of similar
quality. The value of convertible securities may reflect changes in the value
of the underlying common stock. Convertible securities entail less credit risk
than the issuer's common stock because they rank senior to common stock.
Eurodollar Securities
The Fund may invest in Eurodollar securities, which are fixed income
securities for a U.S. issuer or a foreign issuer that are issued outside the
United States. Interest and dividends on Eurodollar securities are payable in
U.S. dollars.
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Repurchase Agreements
The Fund may enter into repurchase agreements with banks or broker-dealers.
Repurchase agreements are considered under the Investment Company Act to be
collateralized loans by the Fund to the seller, secured by the securities
transferred to the Fund. In accordance with requirements under the Investment
Company Act, repurchase agreements will be fully collateralized by securities
which the Fund may invest in directly. Such collateral will be marked-to-market
daily. If the seller of the underlying security under the repurchase agreement
should default on its obligation to repurchase the underlying security, the Fund
may experience delay or difficulty in recovering its cash. To the extent that,
in the meantime, the value of the security purchased has decreased, the Fund
could experience a loss. No more than 15% of the Fund's net assets will be
invested in illiquid securities, including repurchase agreements which have a
maturity of longer than seven days.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with banks and
broker-dealers. Reverse repurchase agreements involve sales by the Fund of
portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will establish a segregated account with its custodian bank in
which it will maintain cash, U.S. government securities or other liquid assets
equal in value to its obligations with respect to reverse repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
Brady Bonds
The Fund may invest in Brady Bonds, which are securities created through
the exchange of existing commercial bank loans to public and private entities in
certain emerging markets for new bonds in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented to date in Argentina, Bulgaria, Brazil, Costa Rica,
Jordan, Mexico, Nigeria, the Philippines, Poland, Panama, Peru, Uruguay and
Venezuela. Brady Bonds have been issued only during recent years, and for that
reason do not have a very long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. The Fund will only invest in U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed-rate bonds or floating-rate bonds and are
generally collateralized in full as to principal by U.S. Treasury zero coupon
bonds having the same maturity as the bonds.
Brady Bonds are often viewed as having three or four valuation components:
the collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity(these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds with respect
to commercial bank loans by public and private entities, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that the Brady
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Bonds in which the Fund invests will not be subject to restructuring
arrangements or to requests for a new credit agreement which may cause the Fund
to suffer a loss of interest or principal in any of its holdings.
Non-Publicly Traded Securities, Private Placements and Restricted Securities
The Fund may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities and
limited partnerships. Investing in such securities, including investments in
new and early stage companies, may involve a high degree of business and
financial risk that can result in substantial losses. As a result of the
absence of a public trading market for these securities, they may be less liquid
than publicly traded securities. Although these securities may be resold in
privately negotiated transactions, the prices realized from these sales could be
less than those originally paid by the Fund, or less than what may be considered
the fair value of such securities. Furthermore, companies whose securities are
not publicly traded may not be subject to the disclosure and other investor
protection requirements which would be applicable if their securities were
publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expense of registration. No more than 15% of the Fund's
net assets will be invested in illiquid securities, including, but not limited
to, non-publicly traded securities, private placements and restricted
securities.
Investment Company Securities
The Fund may invest in securities issued by open-end and closed-end
investment companies. Under Section 12(d)(1) of the Investment Company Act, the
Fund's investment in such securities, subject to certain exceptions, currently
is limited to: (i) no more than 3% of the total voting stock of any one
investment company, (ii) more than 5% of the Fund's net assets invested in to
any one such investment company and (iii) no more than 10% of the Fund's net
assets in the aggregate. Investments in the securities of other investment
companies may involve duplication of certain fees and expenses.
The Trust has received an Exemptive Order from the United States Securities
and Exchange Commission (the "Commission"), which permits the Fund to invest its
assets in securities of other series offered by the Trust. The Fund will invest
in such series to the extent that the Advisor determines that it is more
efficient for the Fund to gain exposure to a particular asset class through
investment in a series of the Trust as opposed to investment directly in
individual securities. Investments by the Fund in another series of the Trust
may involve transactions costs, but not duplication of other fees and expenses
because the Advisor and other service providers will waive fees on reimburse
expenses to avoid such duplication.
The Fund's investments in any other series of the Trust will be subject to
the percentage limitations described above (so long as other series of the Trust
or certain other Brinson Partners-sponsored funds invest in the Fund in excess
of such limitations) and the Fund's investments in other investment companies
will be aggregated with its investments in the Trust's other series for purposes
of these limitations.
Rule 144A and Illiquid Securities
Generally, an illiquid security is any security that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Some examples of illiquid securities
are over-the-counter options and certain interest rate swaps described below.
While maintaining oversight, the Board of Trustees has delegated to the Advisor
the day-to-day function of determining whether or not Rule 144A Securities, are
liquid for purposes of the Fund's 15% limitation on investments in illiquid
assets. The Board of Trustees has instructed the Advisor to
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consider the following factors in determining the liquidity of a Rule 144A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
Although it has delegated the day-to-day liquidity determination to the Advisor,
the Board of Trustees will continue to monitor and will periodically review the
Advisor's selection of Rule 144A Securities, as well as the Advisor's
determination as to their liquidity.
If the Advisor determines that a Rule 144A Security purchased in reliance
on Rule 144A which was previously determined to be liquid is no longer liquid
and, as a result, the Fund's holdings of illiquid securities exceed the Fund's
15% limit on investment in such securities, the Advisor will determine what
action shall be taken to ensure that the Fund continues to adhere to such
limitation including disposing of illiquid assets which may include such Rule
144A Securities.
Future Developments
From time to time, the Fund may also invest in certain equity or debt
securities which have features other than those that are typical for such
securities and which have in the past been offered or may be offered in the
future. In the past, for example, such securities have been issued to replicate
the performance of a certain component or components of a particular security or
combination of securities and/or to hedge or reduce the risks associated with
certain securities or market trends. The Fund may invest in these securities if
the Advisor believes that doing so would be consistent with the Fund's
investment objective and policies. Since the market for these securities may be
new, the Fund may have difficulty disposing of them at a suitable price and
time. In addition to limited liquidity, these instruments may present other
risks, such as high price volatility. The unavailability of such innovative
securities would not adversely affect the Fund's ability to achieve its
investment objective.
Non-U.S. Issuers
Investments may be made in U.S. dollar-denominated equity and debt
securities of non-U.S. issuers, including investments in Brady Bonds.
Investments in securities of foreign issuers may involve greater risks than
those of U.S. issuers. There is generally less information available to the
public about non-U.S. issuers and less government regulation and supervision of
non-U.S. stock exchanges, brokers and listed companies. Non-U.S. issuers are
not subject to uniform global accounting, auditing and financial reporting
standards, practices and requirements. Securities of some non-U.S. companies
are less liquid and their prices more volatile than securities of comparable
U.S. companies. Securities trading practices abroad may offer less protection
to investors.
OTHER INVESTMENT TECHNIQUES
Options
The Fund may purchase and write put and call options on U.S. securities and
indices and enter into related closing transactions. The Fund may also purchase
and write options to buy or sell futures contracts.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price at any time
during a period ending on an agreed date. The advantage is that the purchaser
may hedge against an increase in the price of securities it ultimately wishes to
buy or
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may take advantage of a rise in a particular index. The Fund will purchase call
options only to the extent premiums paid on all outstanding call options do not
exceed 20% of the Fund's total assets. The Fund will write call options only on
a covered basis. A call option is "covered" if the Fund owns the underlying
securities or the Fund maintains in a segregated account with its custodian,
cash, U.S. government securities or other liquid assets with a value sufficient
to meet its obligations under the call option, or if the Fund owns an offsetting
call option. The Fund may receive premium income from writing call options,
which may offset the cost of purchasing put options and may also contribute to
the Fund's total return.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer at the exercise
price during the option period ending on an agreed date and the writer of the
option has the obligation to purchase the security from the purchaser of the
option upon exercise during such period. The Fund may only purchase put options
to the extent that the premiums on all outstanding put options do not exceed 20%
of the Fund's total assets. The advantage is that the purchaser can be
protected should the market value of the security decline or should a particular
index decline. The Fund will, at all times during which it holds a put option,
own the security underlying such option. The Fund will receive premium income
from writing put options, although it may be required, when the put is
exercised, to purchase securities at higher prices than the current market
price.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions permit the Fund to offset put options or call options
prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
The Fund will not purchase or sell options if, immediately thereafter, more
than 40% of its net assets would be hedged by options. The Fund may use options
traded on U.S. exchanges. It is the position of the Commission that over-the-
counter options are illiquid. Accordingly, the Fund will invest in such options
only to the extent consistent with its 15% limit on investment in illiquid
securities.
Futures Contracts
The Fund may enter into contracts for the purchase or sale of securities,
including index contracts or foreign currencies, for hedging purposes. The
purchase of a futures contract by the Fund represents the acquisition of a
contractual right to obtain delivery of the securities called for by the
contract at a specified price on a specified future date. When a futures
contract is sold, the Fund incurs a contractual obligation to deliver the
securities underlying the contract at a specified price on a specified future
date. The Fund may enter into futures contracts and engage in options
transactions related thereto for hedging purposes and for non-hedging purposes,
to the extent that not more than 5% of the Fund's assets are required as futures
contract margin deposits and premiums on options on futures.
When the Fund enters into a futures transaction, it must deliver to the
futures commission merchant selected by the Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in a segregated account at the custodian bank. Thereafter, a "variation margin"
may be paid by the Fund to, or drawn by the Fund from, such account in
accordance with controls set for such accounts, depending upon changes in the
price of the underlying securities subject to the futures contract.
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In addition, when the Fund engages in futures transactions, to the extent
required by the Commission, the Fund will maintain with its custodian, assets in
a segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or other liquid assets from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The Fund will enter into futures transactions on domestic exchanges and, to
the extent such transactions have been approved by the United States Commodity
Futures Trading Commission, for sale to customers in the United States, on
foreign exchanges.
Risks and Special Considerations of Options and Futures
Options and futures can be volatile investments and may not perform as
expected. If the Advisor applies a hedge at an inappropriate time or price
trends are judged incorrectly, options, futures and similar strategies may lower
the Fund's return. The Fund could also experience losses if the prices of its
options or futures positions are poorly correlated with its other investments,
or if it cannot close out its positions because of an illiquid secondary market.
The loss from investing in futures transactions is potentially unlimited. For
further information concerning the risks of options and futures, see Part B of
this Registration Statement.
Swaps
The Fund may engage in swaps, including but not limited to interest rate,
currency and index swaps and the purchase or sale of related caps, floors and
collars and other derivative instruments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio and as a technique for managing the portfolio's
duration (i.e., the price sensitivity to changes in interest rates), to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date or to gain exposure to certain markets.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to receive or pay interest (e.g., an exchange of
fixed rate payments for floating rate payments) with respect to a notional
amount of principal.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase
of an interest rate floor entitles the purchaser to receive payments on a
notional principal amount from the party selling the floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The use of swaps involves investment techniques and risks different from
those associated with ordinary portfolio security transactions. If the Advisor
is incorrect in its forecasts of market values, interest rates or other
applicable factors, the investment performance of the Fund will be less
favorable than it would have been if this investment technique were not used.
Swaps do not involve the delivery of securities or other underlying assets or
principal. Thus, if the other party to a swap defaults, the Fund's risk of loss
consists of the net amount of payments that the Fund is contractually entitled
to receive. Under Internal Revenue Service rules, any lump sum payment received
or due under the notional principal contract must be amortized over the life of
the contract using the appropriate methodology prescribed by the Internal
Revenue Service.
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To the extent that the Fund cannot dispose of a swap in the ordinary course
of business within seven days at approximately the value at which it has valued
the swap, it will treat the swap as illiquid and subject to its overall limit on
illiquid investments of 15% of net assets. The Advisor will closely monitor,
subject to the oversight of the Board of Trustees, the creditworthiness of
equity swap counterparties in order to minimize their risk.
Borrowing
The Fund may borrow money as a temporary measure for extraordinary purposes
or to facilitate redemptions. The Fund will not borrow money in excess of 33
1/3% of the value of its total assets. The Fund has no intention of increasing
its net income through borrowing. Any borrowing will be from a bank with the
required asset coverage of at least 300%. In the event that such asset coverage
falls below 300%, the Fund shall, within three days thereafter (not including
Sunday or holidays) or such longer period as the Commission may prescribe by
rules and regulations, reduce the amount of its borrowings to such an extent
that the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the Investment Company Act, or as described herein, except for notes
to banks and reverse repurchase agreements. Investment securities will not be
purchased while the Fund has outstanding borrowings that exceed 5% of the Fund's
total assets.
Loans of Portfolio Securities
The Fund may loan its portfolio securities in an amount up to 33 1/3% of
the value of its total assets to qualified broker-dealers or institutional
investors for their use relating to short sales or other security transactions.
Such loans must be secured by collateral, consisting of any combination of cash
and U.S. government securities in an amount at least equal (on each business
day) to the current market value of the securities loaned. During the terms of
these loans, the Fund will continue to receive any dividends or interest paid on
the loaned securities as well as the interest on the investment of the
collateral minus a fee paid to the borrower or a fee directly deducted by the
borrower. The Fund must have a right to reacquire the loaned securities on five
business days' notice. The principal risk to which the Fund will be exposed on
a loan transaction is the risk that the borrower would become bankrupt at a time
when the value of the security increases. However, pursuant to the Fund's
securities lending agreement, the lending agent is obligated to replace the
loaned securities with a like amount of the loaned securities of the same
issuer, class and denomination in the event the loaned securities are not
returned by a borrower in accordance with the applicable securities lending
agreement. The Fund will lend securities only after a review of all pertinent
facts by the Advisor and the lending agent, subject to overall supervision by
the Board of Trustees. Creditworthiness of the borrowing broker-dealer or
institution will be monitored on an ongoing basis by the Advisor and any lending
agent pursuant to procedures reviewed and adopted by the Board of Trustees. Cash
received through loan transactions may be invested in any security in which the
Fund is authorized to invest. Investing cash subjects that investment to market
risk (i.e., capital appreciation or depreciation).
Investment Restrictions
The Fund is subject to certain investment restrictions which have been
adopted by the Trust on behalf of the Fund as fundamental policies that cannot
be changed without the approval of a majority of the outstanding shares of the
Fund. A list of these restrictions and more information concerning the
investment policies are included in Part B of this Registration Statement.
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Portfolio Turnover
The Fund is free to dispose of its portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such turnover desirable in light of the
Fund's investment objective. The Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. While it is the policy of the Fund generally not to engage
in trading for short-term gains, the Fund will effect portfolio transactions
without regard to the holding period if, in the judgment of the Advisor, such
transactions are advisable in light of a change in circumstances of a particular
company, within a particular industry or country, or in general market, economic
or political conditions. Although the portfolio turnover rate for the Fund may
vary greatly from year to year, the Fund expects that under normal
circumstances, the portfolio turnover rate will not exceed 100%. A high
portfolio turnover rate will increase aggregate brokerage commission expenses
which must be borne directly by the Fund and ultimately by the Fund's Investors
and the incidence of short-term capital gains (which are taxable to Investors as
ordinary income). See "Brokerage Allocation" and "Federal Taxes."
Management of the Fund.
The Board of Trustees
Under Delaware law and the Trust's Amended and Restated Agreement and
Declaration of Trust (the "Declaration of Trust"), the Board of Trustees has
overall responsibility for managing the business and affairs of the Trust and
the Fund. The Trustees elect the officers of the Trust, who are responsible for
administering the day-to-day operations of the Fund.
The Advisor
Brinson Partners, a Delaware corporation, is an investment management firm
managing, as of March 31, 1997, approximately $124.5 billion, primarily for
institutional pension and profit sharing funds. Brinson Partners was organized
in 1989 when it acquired the institutional asset management business of The
First National Bank of Chicago and First Chicago Investment Advisors, N.A.
Brinson Partners and its predecessor entities have managed domestic and
international investment assets since 1974 and global investment assets since
1982. Brinson Partners has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich in addition to
its principal office at 209 South LaSalle Street, Chicago, IL 60604-1295.
Brinson Partners is controlled by Swiss Bank Corporation ("Swiss Bank"). Swiss
Bank, with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
Brinson Partners also serves as the investment advisor to nine other investment
companies: The Brinson Funds, Enterprise Accumulation Trust -International
Growth Portfolio, Enterprise Group of Funds, Inc. -International Growth
Portfolio, Fort Dearborn Income Securities, Inc., Managed Account Services
Portfolio Trust -Pace Large Company Value Equity Investments, The Hirtle
Callaghan Trust -International Equity Portfolio, John Hancock Variable Series
Trust I -International Balanced Fund, AON Funds-International Equity Fund and
The Republic Funds-Republic Equity Fund.
Pursuant to its investment advisory agreement with the Trust (the "Advisory
Agreement"), the Advisor is authorized, at its own expense, to obtain
statistical and other factual information and advice regarding economic factors
and trends from its foreign subsidiaries, but it does not generally receive
advice or recommendations regarding the purchase or sale of securities from such
subsidiaries. The Advisor does not receive any compensation under the Advisory
Agreement.
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Appendix B to this Prospectus sets forth the performance of the Fund,
including the performance of the Brinson Trust Company Collective Investment
Trust's U.S. High Yield Fund until April 28, 1995, the commencement of the
Fund's operations. Brinson Trust Company is a wholly-owned subsidiary of
Brinson Partners.
Investment decisions for the Fund are made by an investment management team
of the Advisor. No member of the investment management team is primarily
responsible for making recommendations for portfolio purchases or sales.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of the Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which the MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to the Fund,
including the coordination and monitoring of any third party service providers.
Custody Services. MSTC provides custodian services for the securities and
cash of the Fund. The custody fee schedule is based primarily on the net amount
of assets held during the period for which payment is being made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC" Agreement") with Chase Global Funds
Services Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank,
under which CGFSC provides administrative, accounting, portfolio valuation,
transfer agency services to the Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of the Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of the Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, transfer agency and custodian services,
MSTC receives the following as compensation from the Trust on an annual basis:
0.0025% of the average weekly U.S. net assets of the Trust; 0.0525% of the
average weekly non-U.S. net assets of the Trust; 0.3250% of the average weekly
emerging markets equity net assets of the Trust; and 0.019% of the average
weekly emerging markets debt net assets of the Trust. MSTC receives an
additional fee of 0.075% of the average weekly net assets of the Trust for
administrative duties, subject to the expense limitation applicable to the
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Trust. No fee (asset based or otherwise) is charged on any investments made by
any fund into any other fund sponsored or managed by the Advisor and assets of a
fund that are invested in another investment company or series thereof sponsored
or managed by the Advisor will not be counted in determining the 0.075%
administrative duties fee or the applicability of the expense limitation on such
fee. The foregoing fees include all out-of-pocket expenses or transaction
charges incurred by MSTC and any third party service provider in providing such
services. Pursuant to the CGFSC Agreement, MSTC pays CGFSC for the services
CGFSC provides to MSTC in fulfilling its obligations under the Services
Agreement.
Independent Auditors
Ernst & Young LLP, Chicago, Illinois, is the independent accounting and
auditing firm which services the Trust.
Expenses
The Fund will be responsible for all of its own expenses other than those
borne by the Advisor pursuant to the Advisory Agreement and organizational
expenses. Such expenses may include, but are not limited to, legal expenses,
audit fees, printing costs (e.g., cost of printing annual reports, semi-annual
reports and Prospectuses which are distributed to existing Investors),
brokerage commissions, the expenses of registering the Fund's shares for sale
with the Commission and with various state securities commissions, fees and
expenses of the Administrator and the expenses of obtaining quotations of
portfolio securities and of pricing the Fund's shares. General expenses which
are not associated directly with any particular portfolio within the Trust
(e.g., insurance premiums, Trustees' fees, expenses of maintaining the Trust's
legal existence and of Investors' meetings and fees and expenses of industry
organizations) are allocated between the various series based upon their
relative net assets.
The Advisor has undertaken to pay the Fund's total operating expenses and
may, in its sole discretion, discontinue or modify the extent of such payments.
Brokerage Allocation
Because the Fund is primarily composed of debt (rather than equity)
securities, most of the Fund's investment portfolio transactions are effected
with dealers without the payment of brokerage commissions, but at net prices
which usually include a spread or a markup. In determining the brokers through
whom, and other transaction costs at which, securities transactions for the Fund
are to be executed, except as discussed below, the Advisor seeks to negotiate a
combination of the most favorable execution and the best price obtainable on
each transaction. Consequently, the Advisor selects brokers primarily on the
basis of their execution capability and trading expertise. However, the
direction of transactions to brokers may also be based on the quality and amount
of the research and research-related services which they provide to the Advisor
and indirectly to its clients. These services are of the type described in
Section 28(e) of the Securities Exchange Act of 1934, as amended, and are
designed to augment the Advisor's own internal research and investment strategy
capabilities. The Advisor may use this research information in managing the
Fund's assets, as well as the assets of other clients.
When buying or selling securities, the Fund may pay commissions to brokers
who are affiliated with the Advisor or the Fund. The Fund may also purchase
securities in certain underwritten offerings for which an affiliate of the Fund
or the Advisor may act as an underwriter. The Fund may effect futures
transactions through, and pay commissions to, futures commission merchants who
are
A-16
<PAGE>
affiliated with the Advisor or the Fund in accordance with procedures adopted by
the Board of Trustees of the Trust.
Capital Stock and Other Securities.
The Trust was organized as a Delaware business trust on August 16, 1994.
The Declaration of Trust permits the Board of Trustees to issue an unlimited
number of shares of beneficial interest with no par value. The Board of
Trustees has the power to designate one or more series or sub-series/classes of
shares of beneficial interest and to classify or reclassify any unissued shares
with respect to such series. Currently, the Trust is offering shares of fifteen
series: the Brinson Global Securities Fund, the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U. S. Large Capitalization Equity Fund,
the Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-
Venture Fund, the Brinson EXDEX/(R)/ Fund, the Brinson Non-U.S. Equity Fund, the
Brinson Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the Brinson
U.S. Bond Fund, the Brinson Short/Intermediate Fixed Income Fund, the Brinson
Short-Term Fund, the Brinson High Yield Fund, and the Brinson Emerging Markets
Debt Fund.
The shares of the Trust, when issued, will be fully paid and non-
assessable, and within each series, have no preference as to conversion,
exchange, dividends, retirement or other features. Any shares the issuance of
which the Board of Trustees may, from time to time, authorize, shall have no
preemptive rights. The shares are not transferable except to the Trust.
Pursuant to the Investment Company Act, a control person possesses the
ability to control the outcome of matters submitted for shareholder vote. As of
July 29, 1997, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trust's U.S. High Yield Fund of Chicago, Illinois and Bankers
Trust Company, Chicago, Illinois were control persons of the Fund and the Trust
by nature of their shareholdings.
Voting Rights and Investor Meetings. The shares of the Trust have non-
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for the election of members of the Board of Trustees can elect
100% of the Trustees if they choose to do so. An Investor is entitled to vote
based on the ratio the shares of such Investor bear to the shares of all
Investors entitled to vote. On any matter submitted to a vote of Investors, all
shares of the Trust then issued and outstanding and entitled to vote on a matter
shall vote by individual series except that, if required by the Investment
Company Act, the shares shall be voted in the aggregate. If the Board of
Trustees determines that a matter to be voted on does not affect the interests
of all series, only the Investors of the affected series shall be entitled to
vote on the matter. The Declaration of Trust gives Investors certain voting
powers only with respect to (i) the election and removal of Trustees; (ii) a
termination of the Trust; (iii) with respect to amendments reducing payments
upon liquidation or diminishing voting rights; (iv) mergers, consolidations or
sales of assets; (v) the incorporation of the Trust; (vi) additional matters
relating to the Trust as required by the Investment Company Act; and (vii) such
other matters as the Board of Trustees considers necessary or desirable.
The Trust does not presently intend to hold annual or special meetings of
Investors except when required to elect members of the Board of Trustees, or
with respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor meetings
will also be called upon request of Investors holding in the aggregate 10% or
more of the outstanding shares. Subject to certain conditions, Investors may
apply to the Fund to communicate with other Investors to request an Investor
meeting.
A-17
<PAGE>
As with any mutual fund, certain Investors of the Fund could control the
results of voting in certain instances. For example, a vote by certain
Investors holding a majority of shares in the Fund to change the Fund's
investment objective could result in an Investor's withdrawal of its investment
in the Fund, and in increased costs and expenses for the remaining Investors.
Additionally, the failure by certain Investors to approve a change in their
investment objectives and policies parallel to a change that has been approved
for the Fund (thus requiring such Investors to redeem their shares of the Fund)
could lead to a number of adverse consequences, such as the inability of such
Investors to find another investment company in which to invest their assets or
an equivalent investment advisor to manage the assets.
Dividends and Distributions. The Fund does not currently intend to declare
and pay dividends or pay distributions to Investors except as may be determined
by the Board of Trustees of the Trust.
Federal Taxes. The Fund has received a ruling from the Internal Revenue
Service that the Fund will be treated as a partnership for federal income tax
purposes rather than as an association taxable as a corporation. By being
treated as a partnership, the Fund will not be subject to U.S. federal income
tax. Instead, each Investor will be required to report separately on its own
income tax return its distributive share of items of Fund income, gains, losses,
deductions and credits (including foreign tax credits for creditable foreign
taxes imposed on the Fund). Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from the Fund. An
allocable share of a tax-exempt Investor's income will be "unrelated business
taxable income" ("UBTI") to the extent that the Fund borrows money to acquire
property or invests in assets that produce UBTI. The Fund will not be a
"regulated investment company" for federal income tax purposes. For a more
complete discussion of the federal income tax consequences of investing in the
Fund, see "Tax Status" in Part B of this Registration Statement.
Redemptions of Fund shares and the exchange of shares between two series,
are taxable events and, accordingly, Investors may realize capital gains or
losses on these transactions.
Investor Inquiries. Investor inquiries should be addressed to the Trust,
c/o Carolyn M. Burke, 209 South LaSalle Street, Chicago, Illinois 60604-1295, or
an Investor may call 312-220-7940.
Purchase of Securities Being Offered
Shares of the Fund are restricted securities and are issued solely in
private placement transactions that do not involve a "public offering" within
the meaning of Section 4(2) of the Securities Act. Investments in the Fund may
be made only by "accredited investors" within the meaning of Regulation D under
the Securities Act which include, but are not limited to, common or commingled
trust funds, investment companies, registered broker-dealers, investment banks,
commercial banks, corporations, group trusts or similar organizations or
entities. The registration statement of which this Prospectus is a part does
not constitute an offer to sell, or the solicitation of an offer to buy, any
"security" to the public within the meaning of the Securities Act. Shares of
the Fund may be purchased directly by eligible Investors from the Fund at the
net asset value next determined after receipt of the order in proper form by the
Trust. The minimum initial purchase amount is $10,000,000. In the sole
discretion of the Advisor, the minimum purchase amount may be waived or
modified. There is no sales load in connection with the purchase of shares. The
Trust reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund.
At the discretion of the Fund, Investors may be permitted to purchase Fund
shares by transferring securities to the Fund that meet the Fund's investment
objective and policies. Securities transferred to the Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at
A-18
<PAGE>
the time of the next determination of net asset value after such receipt. Shares
issued by the Fund in exchange for securities will be issued at net asset value
determined as of the same time. All dividends, interest, subscription, or other
rights pertaining to such securities after such transfers to the Fund shall
become the property of the Fund and must be delivered to the Fund by the
Investor upon receipt from the issuer. Investors that are permitted to transfer
such securities will be required to recognize a gain or loss on such transfer
and pay tax thereon, if applicable, measured by the difference between the fair
market value of the securities and the Investors' basis therein. The Trust will
not accept securities in exchange for shares of the Fund unless: (1) such
securities are, at the time of the exchange, eligible to be included in the
Fund's investment portfolio and current market quotations are readily available
for such securities; and (2) the Investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions upon
their sale by the Fund under the Securities Act or under the laws of the country
in which the principal market for such securities exists, or otherwise.
Net Asset Value. The net asset value is computed as of one hour prior to
the close of the New York Stock Exchange ("NYSE"), which currently is 3:00 p.m.
(Eastern time), on each day the NYSE is open for regular trading. The net asset
value per share is computed by adding the value of all securities and other
assets in the portfolio, deducting any liabilities (expenses and fees are
accrued daily) and dividing by the number of shares outstanding. Fund
securities for which market quotations are available are priced at market value.
Debt securities are priced at fair value by an independent pricing service using
methods approved by the Trust's Board of Trustees. Short-term investments
having a maturity of less than 60 days are valued at amortized cost, which
approximates market value. Redeemable securities issued by open-end investment
companies are valued using their respective net asset value for purchase orders
placed at the close of the NYSE. All other securities are valued at their fair
value as determined in good faith and pursuant to a method approved by the
Trust's Board of Trustees. For a detailed description, see Item 19 in Part B.
Exchanges of Shares. Shares of the Fund may be exchanged for shares of the
other series of the Trust on the basis of current net asset values per share at
the time of exchange. Fund shares may be exchanged by written request or by
telephone if the Investor has previously signed a telephone authorization. The
telephone exchange privilege may be difficult to implement during times of
drastic economic or market changes. The Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate or impose charges upon
the exchange privilege and/or telephone transfer privileges upon 60 days' prior
written notice to Investors.
By exercising the telephone exchange privilege, the Investor agrees that
the Fund will not be liable for following instructions communicated by telephone
that the Fund reasonably believes to be genuine. The Fund provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone transactions are genuine. As a result of this policy,
the Investor may bear the risk of any financial loss resulting from such
transaction; provided, however, if the Fund or the Administrator fails to employ
this and other appropriate procedures, the Fund or the Administrator may be
liable for any losses incurred.
Exchanges may be made only for shares of another series of the Trust then
offering its shares for sale in the Investor's state of residence and are
subject to the minimum initial investment requirement and the payment of any
transaction charges that may be due to such series of the Trust. For federal
income tax purposes, an exchange of shares would be treated as if the Investor
had redeemed shares of the Fund and reinvested in shares of another series of
the Trust. Gains or losses on the shares exchanged are realized by the Investor
at the time of the exchange. Any Investor wishing to make an exchange should
first obtain and review the Prospectus of the series of the Trust into which the
Investor wishes to exchange. Requests for
A-19
<PAGE>
telephone exchanges must be received by the transfer agent, CGFSC, by the close
of regular trading hours (generally 4:00 p.m. Eastern time) on the NYSE on any
day that the NYSE is open for regular trading.
Redemption of Shares or Repurchase.
As stated above in "Purchase of Securities Being Offered," the Fund's
shares are restricted securities which may not be sold to investors other than
"accredited investors" within the meaning of Regulation D under the Securities
Act unless registered under, or pursuant to another available exemption from,
the Securities Act.
An Investor may redeem its shares of the Fund without charge on any
business day the NYSE is open by furnishing a request to the Trust. The Fund
normally sends redemption proceeds on the next business day, but, in any event,
redemption proceeds, except as set forth below, are sent within seven calendar
days of receipt of a redemption request in proper form. There is no charge for
redemptions by wire. Please note, however, that the Investor's bank may impose
a fee for wire service. The right of any Investor to receive payment with
respect to any redemption may be suspended or the payment of the redemption
proceeds postponed during any period in which the NYSE is closed (other than
weekends or holidays) or trading on the NYSE is restricted, or, to the extent
otherwise permitted by the Investment Company Act, if an emergency exists.
If the Fund determines that it would be detrimental to the best interests
of the remaining Investors of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price, in lieu of cash, in whole or in part by a
distribution in kind of securities of the Fund.
A-20
<PAGE>
APPENDIX A
CORPORATE DEBT RATINGS
Moody's Investors Service, Inc. describes classifications of corporate bonds as
follows:
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-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa --Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A --Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa --Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba --Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B --Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa --Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca --Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C --Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
1
<PAGE>
Standard & Poor's Ratings Group describes classifications of corporate bonds as
follows:
AAA --This is the highest rating assigned by Standard & Poor's Ratings
Group to a debt obligation and indicates an extremely strong capacity to pay
principal and interest.
AA --Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and in the majority of instances
they differ from the AAA issues only in small degree.
A --Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB --Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lend
to inadequate capacity to meet timely interest and principal payments.
B -Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC -Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest or repay principal.
CC -The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C -The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
CI -The rating CI is reserved for income bonds on which no interest is
being paid.
D -Debt rated D is in default, or is expected to default upon maturity or
payment date.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
2
<PAGE>
APPENDIX B
Set forth below is the performance of the Brinson Trust Company Collective
Investment Trust's High Yield Fund ("BTC High Yield Fund") for periods ended
April 28, 1995 linked with the Brinson Relationship Funds' High Yield Fund
("Brinson High Yield Fund") for periods ending December 31, 1996. The Brinson
High Yield Fund assumed the assets of the BTC High Yield Portfolio on April 28,
1995. Brinson Trust Company is a wholly owned subsidiary of Brinson Partners,
Inc., Advisor to the Trust.
Performance is calculated net of administrative expenses. All returns
quoted are time weighted, total rates of return and include the impact of
capital appreciation as well as the reinvestment of interest and dividends. All
performance data was supplies by Brinson Partners, Inc. and has not been
verified or audited. The BTC High Yield Fund is not registered under the
Investment Company Act and therefore is not subject to certain investment
restrictions imposed by the Investment Company Act which may have adversely
affected its performance. Investors should not consider this performance data
as an indication of the future performance of the Brinson High Yield Fund.
For Periods Ending 12/31/96
<TABLE>
<CAPTION>
Annualized
--------------------------------------
Since
1 year 2 years 3 years 5 years Inception
------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Brinson High Yield Fund 14.71% 14.46% 8.75% 13.73% 11.30%
First Boston High Yield/(1)/ 12.42% 14.88% 9.33% 12.63% 11.48%
</TABLE>
Inception date is 12/31/86
/(1)/ The First Boston High Yield Index is calculated gross of fees.
The First Boston High Yield Index is the benchmark for both the BTC High Yield
Fund and the Brinson High Yield Fund. For the further description of the
benchmark, please review the section titled "Investment Process".
3
<PAGE>
BRINSON RELATIONSHIP FUNDS
PART B
STATEMENT OF ADDITIONAL INFORMATION
August 14, 1997
Item 10. Cover Page.
Brinson Relationship Funds (the "Trust"), a Delaware business trust
established on August 16, 1994, is a no-load, open-end management investment
company which currently offers shares of fifteen separate and distinct series
representing separate portfolios of investments, each with its own investment
objective (individually referred to as a "Fund" and collectively referred to as
the "Funds") and each of which is non-diversified as defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The fifteen
current Funds are: the Brinson Global Securities Fund, the Brinson Global Equity
Fund, the Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity
Fund, the Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson
Post-Venture Fund, the Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund,
the Brinson Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the
Brinson U.S. Bond Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund,
the Brinson Short-Term Fund, the Brinson High Yield Fund and the Brinson
Emerging Markets Debt Fund. Information concerning the Funds is included in the
separate Part A of this Registration Statement (each, a "Part A" and
collectively, the "Parts A") dated August 14, 1997.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Trust's current Parts A relating to the
Funds dated August 14, 1997. Much of the information contained herein expands
upon subjects discussed in the Parts A. No investment in shares of the Funds
should be made without first reading the applicable Part A. A copy of each Part
A may be obtained without charge from the Trust at 209 South LaSalle Street,
Chicago, IL 60604-1295, or by calling the Trust at 312-220-7940.
All terms used in this Part B and not otherwise defined herein have
the meanings assigned to them in the Parts A.
<TABLE>
<CAPTION>
Item 11. Table of Contents.
<S> <C> <C>
Item 12. General Information and History...............................B-2
Item 13. Investment Objective and Policies.............................B-2
Item 14. Management of the Trust..................................... B-13
Item 15. Control Persons and Principal Holders of Securities......... B-16
Item 16. Investment Advisory and Other Services...................... B-20
Item 17. Brokerage Allocation and Other Practices.................... B-22
Item 18. Capital Stock and Other Securities.......................... B-24
Item 19. Purchase, Redemption and Pricing of Securities Being Offered B-27
Item 20. Tax Status.................................................. B-26
Item 21. Underwriters................................................ B-34
Item 22. Calculation of Performance Data............................. B-34
Item 23. Financial Statements........................................ B-36
</TABLE>
B-1
<PAGE>
Item 12. General Information and History.
Not applicable.
Item 13. Investment Objective and Policies.
INVESTMENT VEHICLES AVAILABLE TO THE FUNDS
The following disclosure supplements disclosure contained in the applicable
Parts A relating to the Funds:
High Yield/Higher Risk Debt Securities
As set forth in Parts A, all Funds, except the Brinson Global Equity
Fund. the Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity
Fund, the Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson
Post-Venture Fund, the Brinson Non-U.S. Equity Fund, the Brinson U.S. Bond Fund,
the Brinson U.S. Short/Intermediate Fixed Income Fund and the Brinson EXDEX(R)
Fund, may invest, to varying extents, a portion of their net assets in
convertible and other debt securities rated below "Baa" by Moody's Investors
Service, Inc. ("Moody's") or "BBB" by Standard & Poor's Ratings Group ("S&P")
or, if unrated, securities that are deemed to be of comparable quality by the
Funds' investment advisor, Brinson Partners, Inc. ("Brinson Partners" or the
"Advisor") (referred to herein as "low-grade securities"). Ratings represent
S&P's and Moody's respective opinions as to the quality of the debt securities
they undertake to rate. However, the ratings are general and are not absolute
standards of quality. Low-grade securities that are classified as non-
investment-grade securities are commonly referred to as "junk bonds." These
securities are considered to be of poor standing and predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the debt securities and involve major risk exposure
to adverse conditions. Such securities are subject to a substantial degree of
credit risk. Low-grade securities held by the Funds may be issued as a
consequence of corporate restructurings, such as leveraged buy-outs, mergers,
acquisitions, debt recapitalizations or similar events. Also, low-grade
securities are often issued by smaller, less creditworthy companies or by highly
leveraged (indebted) firms, which are generally less able than more financially
stable firms to make scheduled payments of interest and principal. The risks
posed by securities issued under such circumstances are substantial.
Low-grade securities generally offer a higher current yield than that
available from higher grade securities, but involve greater risk. In the past,
the high yields from low-grade securities have more than compensated for the
higher default rates on such securities. However, there can be no assurance
that the Funds will be protected from widespread bond defaults brought about by
a sustained economic downturn, or that yields will continue to offset default
rates on low-grade securities in the future. Issuers of these securities are
often highly leveraged, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest rates
may be impaired. In addition, such issuers may not have more traditional
methods of financing available to them and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default by the issuer is
significantly greater for the holders of low-grade securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer. Past economic recessions have resulted in default levels with respect to
such securities in excess of historic averages.
The value of low-grade securities will be influenced not only by
changing interest rates, but also by the bond market's perception of credit
quality and the outlook for economic growth. When economic
B-2
<PAGE>
conditions appear to be deteriorating, low-grade securities may decline in
market value due to investors' heightened concern over credit quality,
regardless of prevailing interest rates.
Especially at such times, trading in the secondary market for low-
grade securities may become thin and market liquidity may be significantly
reduced. Even under normal conditions, the market for low-grade securities may
be less liquid than the market for investment grade corporate bonds. There are
fewer securities dealers in the high yield market and purchasers of low-grade
securities are concentrated among a smaller group of securities dealers and
institutional investors.
In periods of reduced secondary market liquidity, low-grade securities
prices may become more volatile and the Funds' ability to dispose of particular
issues when necessary to meet the Funds' liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer may be adversely affected.
Low-grade securities frequently have call or redemption features which
would permit an issuer to repurchase the security from the Funds. If a call
were exercised by the issuer during a period of declining interest rates, the
Funds likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Funds.
Besides credit and liquidity concerns, prices for low-grade securities
may be affected by legislative and regulatory developments. For example, from
time to time, Congress has considered legislation to restrict or eliminate the
corporate tax deduction for interest payments or to regulate corporate
restructurings such as takeovers or mergers. Such legislation may significantly
depress the prices of outstanding low-grade securities. A description of
various bond ratings appears in Appendix A of the applicable Parts A.
Bank Instruments
Bank instruments in which the Funds may invest include bank loan
participations, bank holding company commercial paper, deposits, bank notes and
other bank related securities. Bank loan participations are loans sold by
lending banks to investors. Bank holding company commercial paper is a form of
short-term promissory note which is a direct obligation of a bank holding
company. Deposits are obligations of a bank or branches of a bank.
Zero Coupon and Delayed Interest Securities
All Funds, with the exception of the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture
Fund, the Brinson Non-U.S. Equity Fund and the Brinson EXDEX(R) Fund, may invest
in zero coupon or delayed interest securities which pay no cash income until
maturity or a specified date when the securities begin paying current interest
(the "cash payment date") and are sold at substantial discounts from their value
at maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the purchase price and
value at maturity. The discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, decreases as the final maturity
or cash payment date of the security approaches. The market prices of zero
coupon and delayed interest securities are generally more volatile and more
likely to respond to changes in interest rates than the market prices of
securities having similar maturities and credit quality that pay interest
periodically. Current federal income tax law requires that a holder of a zero
coupon security report as income each
B-3
<PAGE>
year the portion of the original issue discount on such security (other than
tax-exempt original issue discount from a zero coupon security) that accrues
that year, even though the holder receives no cash payments of interest during
the year.
Zero coupon convertible securities offer the opportunity for capital
appreciation as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks as they usually are issued with short
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and unmatured interest coupons and receipts for underlying principal
("coupons") of U.S. Treasury securities, which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A holder will
separate the interest coupons from the underlying principal (the "corpus") of
the U.S. Treasury security. A number of securities firms and banks have stripped
the interest coupons and receipts and then resold them in custodial receipt
programs with a number of different names, including "Treasury Income Growth
Receipts" ("TIGRs") and Certificate of Accrual on Treasuries ("CATs"). The
underlying U.S. Treasury bonds and notes themselves are held in book-entry form
at the Federal Reserve Bank or, in the case of bearer securities (i.e.,
unregistered securities which are owned ostensibly by the bearer or holder
thereof), in trust on behalf of the owners thereof. The staff of the United
States Securities and Exchange Commission (the "Commission") does not consider
such privately stripped obligations to be U.S. government securities, as defined
in the Investment Company Act of 1940.
The U.S. Treasury has facilitated transfers of ownership of zero
coupon securities by accounting separately for the beneficial ownership of
particular interest coupon and corpus payments on U.S. Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the U.S. Treasury is known as "Separate
Trading of Registered Interest and Principal of Securities" or "STRIPS." Under
the STRIPS program, a Fund will be able to have its beneficial ownership of zero
coupon securities recorded directly in the book-entry record-keeping system in
lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
When U.S. Treasury securities have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the U.S. Treasury
sells itself. These stripped securities are also treated as zero coupon
securities with original issue discount for federal tax purposes.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
All Funds, with the exception of the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson PostVenture
Fund, the Brinson Non-U.S. Equity Fund and the Brinson EXDEX(R) Fund, may invest
in mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks
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and others. Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related and private organizations
as further described below. The Funds may also invest in debt securities which
are secured with collateral consisting of mortgage-backed securities (see
"Collateralized Mortgage Obligations") and in other types of mortgage-related
securities.
The timely payment of principal and interest on mortgage-backed
securities issued or guaranteed by the Government National Mortgage Association
("GNMA") is backed by GNMA and the full faith and credit of the U.S. government.
These guarantees, however, do not apply to the market value of the Funds'
shares. Also, securities issued by GNMA and other mortgage-backed securities may
be purchased at a premium over the maturity value of the underlying mortgages.
This premium is not guaranteed and would be lost if prepayment occurs.
Mortgage-backed securities issued by U.S. government agencies or
instrumentalities other than GNMA are not "full faith and credit" obligations.
Certain obligations, such as those issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") are supported by the issuer's right to borrow from the
U.S. Treasury; while others such as those issued by the Federal National
Mortgage Association ("FNMA"), are supported only by the credit of the issuer.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments.
Unscheduled or early payments on the underlying mortgage may shorten
the securities' effective maturities and reduce returns. The Funds may agree to
purchase or sell these securities with payment and delivery taking place at a
future date. A decline in interest rates may lead to a faster rate of repayment
of the underlying mortgages and expose the Funds to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by
the Funds, the prepayment right of mortgagors may limit the increase in net
asset value of a Fund, because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of noncallable debt
securities.
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage
Investment Conduits ("REMICs"). All Funds, with the exception of the Brinson
U.S. Large Capitalization Equity Fund, the Brinson Non-U.S. Equity Fund, the
Brinson Global Equity Fund, the Brinson U.S. Equity Fund, the Brinson U.S.
Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund and the
Brinson EXDEX(R) Fund, may invest in CMOs and REMICs. A CMO is a debt security
on which interest and prepaid principal are paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payments of principal
received from the pool of underlying mortgages, including prepayments, are first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner than desired
return of principal because of the sequential payments.
REMICs are similar to CMOs in that they issue multiple classes of
securities. Most, if not all, newly issued debt securities backed by pools of
real estate mortgages will be issued as regular and residual interests in REMICs
because as of January 1, 1992, new CMOs which do not make REMIC
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elections will be treated as "taxable mortgage pools," a wholly undesirable tax
result. Under certain transition rules, CMOs in existence on December 31, 1991
are unaffected by this change. The Funds will purchase only regular interests in
REMICs. REMIC regular interests are treated as debt of the REMIC and
income/discount thereon must be accounted for on the "catch-up method," using a
reasonable prepayment assumption under the original issue discount rules of the
Internal Revenue Code of 1986, as amended (the "Code").
Other Mortgage-Backed Securities. All Funds, with the exception of
the Brinson U.S. Large Capitalization Equity Fund, the Brinson Non-U.S. Equity
Fund, the Brinson Global Equity Fund, the Brinson U.S. Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson Post-Venture Fund and
the Brinson EXDEX(R) Fund, may invest in other mortgage securities. The Advisor
expects that governmental, government-related or private entities may create
mortgage loan pools and other mortgage-related securities offering mortgage
pass-through and mortgage-collateralized investments in addition to those
described above. The mortgages underlying these securities may include
alternative mortgage instruments, that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may differ from
customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Advisor will, consistent
with each Fund's investment objective, policies and quality standards, consider
making investments in such new types of mortgage-related securities. The Advisor
will not purchase any such other mortgage-backed securities until the applicable
Fund's Part A and this Part B have been supplemented.
Asset-Backed Securities
All Funds, with the exception of the Brinson Global Equity Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Intermediate Capitalization Equity
Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson Post-
Venture Fund, the Brinson Non-U.S. Equity Fund and the Brinson EXDEX(R) Fund,
may invest a portion of their assets in debt obligations known as "asset-backed
securities." The credit quality of most asset-backed securities depends
primarily on the credit quality of the assets underlying such securities, how
well the entity issuing the security is insulated from the credit risk of the
originator or any other affiliated entities, and the amount and quality of any
credit support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety of
economic and other factors. As a result, the yield on any asset-backed security
is difficult to predict with precision and actual yield to maturity may be more
or less than the anticipated yield to maturity. Asset-backed securities may be
classified as "pass through certificates" or "collateralized obligations."
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties.
Due to the shorter maturity of the collateral backing such securities,
there is less of a risk of substantial prepayment than with mortgage-backed
securities. Such asset-backed securities do, however, involve certain risks not
associated with mortgage-backed securities, including the risk that security
interests cannot adequately or in many cases, ever, be established.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceeds that required to make
payments of the securities and
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pay any servicing or other fees). The degree of credit support provided for each
issuance of asset-backed securities is generally based on historical credit
information about the degree of credit risk associated with the underlying
assets. Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issuance of asset- backed securities.
When-Issued Securities
The Funds, with the exception of the Brinson U.S. Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the U.S. Large
Capitalization Equity Fund, the Brinson Post-Venture Fund, the Brinson Non-U.S.
Equity Fund and the Brinson EXDEX(R) Fund, may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. A Fund does not earn interest on
such securities it has committed to purchase until they are paid for and
delivered on the settlement date. While when-issued or forward delivery
securities may be sold prior to the settlement date, it is intended that the
Funds will commit to purchase such securities with the purpose of actually
acquiring them unless a sale appears desirable for investment reasons. At the
time a Fund makes the commitment to purchase a security on a when-issued or
forward delivery basis, it will record the transaction and reflect the value of
the security in determining its net asset value. The market value of when-issued
or forward delivery securities may be more or less than the purchase price. The
Advisor does not believe that a Fund's net asset value or income will be
adversely affected by its purchase of securities on a when-issued or forward
delivery basis. Each Fund will establish a segregated account in which it will
maintain cash, U.S. government securities or other liquid assets equal in value
to the Fund's commitments for when-issued or forward delivery securities.
Convertible Securities
All of the Funds may, with the exception of the Brinson EXDEX(R) Fund,
to varying degrees, invest in convertible securities. Convertible securities are
fixed income securities (i.e., a bond or preferred stock) which may be exchanged
for a specified number of shares of common stock, usually of the same company,
at specified prices within a certain period of time. The provisions of any
convertible security determine its seniority in a company's capital structure.
In the case of subordinated convertible debentures, the holder's claims on the
company's assets and earnings are subordinated to the claims of other creditors
and are senior to the claims of preferred and common shareholders. In the case
of preferred stock and convertible preferred stock, the holder's claims on the
company's assets and earnings are subordinated to the claims of all creditors
but are senior to the claims of common shareholders. While providing a fixed
income (generally higher in yield than the income derivable from common stock
but lower than the income afforded by a similar non-convertible security) a
convertible security enables the investor also to participate in capital
appreciation should the market price of the underlying common stock rise.
Repurchase Agreements
Each Fund may enter into repurchase agreements. When a Fund enters
into a repurchase agreement, it purchases securities from a bank or broker-
dealer which simultaneously agrees to repurchase the securities at a mutually
agreed upon time and price, thereby determining the yield during the term of the
agreement.
As a result, a repurchase agreement provides a fixed rate of return
insulated from market fluctuations during the term of the agreement. The term
of a repurchase agreement generally is short,
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possibly overnight or for a few days, although it may extend over a number of
months (up to one year) from the date of delivery. Repurchase agreements will be
fully collateralized and the collateral will be marked-to-market daily. A Fund
may not enter into a repurchase agreement having more than seven days remaining
to maturity if, as a result, such agreement, together with any other securities
which are not readily marketable (illiquid securities), would exceed 15% of the
value of the net assets of such Fund.
In the event of bankruptcy or other default by the seller of the
security under a repurchase agreement, a Fund may suffer time delays and incur
costs or possible losses in connection with the disposition of the collateral.
In such event, instead of the contractual fixed rate of return, the rate of
return to a Fund would be dependent upon intervening fluctuations of the market
value of, and the accrued interest on, the underlying security. Although a Fund
would have rights against the seller for breach of contract with respect to any
losses arising from market fluctuations following the failure of the seller to
perform, the ability of a Fund to recover damages from a seller in bankruptcy or
otherwise in default would be reduced.
Reverse Repurchase Agreements
Each Fund may enter into reverse repurchase agreements. Reverse
repurchase agreements involve sales of portfolio securities of a Fund to member
banks of the Federal Reserve System or securities dealers believed creditworthy,
concurrently with an agreement by the Fund to repurchase the same securities at
a later date at a fixed price which is generally equal to the original sales
price plus interest. The Funds retain record ownership and the right to receive
interest and principal payments on the portfolio security involved. In
connection with each reverse repurchase transaction, a Fund will direct its
custodian bank to place cash or U.S. government securities or other liquid
assets in a segregated account of the Fund in an amount equal to the repurchase
price. Reverse repurchase agreements have the same risk characteristics as
borrowing transactions of a Fund.
Foreign and Emerging Market Investments
All Funds, with the exception of the Brinson U.S. Equity Fund, the
Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson U.S. Large
Capitalization Fund, the Brinson Post-Venture Fund, the Brinson EXDEX(R) Fund,
the Brinson U.S. Bond Fund, the Brinson Short-Term Fund, the Brinson High Yield
Fund and the Brinson U.S. Short/Intermediate Fixed Income Fund, may invest in
securities of foreign issuers that are not publicly traded in the United States,
and of governmental and supranational entities (entities established or
financially supported by national governments of two or more countries to
promote reconstruction or development).
Risks of Investing in Foreign Securities. Investors should recognize
that investing in foreign issuers involves certain considerations, including
those set forth in the Funds' Parts A, that are not typically associated with
investing in U.S. issuers. Since the securities of foreign issuers are
frequently denominated in foreign currencies, and since the Funds may
temporarily hold uninvested reserves in bank deposits in foreign currencies, the
Funds will be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations and may incur costs in connection with
conversions between various currencies. The investment policies of the Funds
permit them to enter into forward foreign currency exchange contracts, futures,
options or swaps in order to hedge or enhance portfolio holdings and commitments
against changes in currency rates.
In the past, there has been and there may be again, an interest
equalization tax levied by the United States in connection with the purchase of
foreign securities such as those purchased by the Funds.
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Payment of such interest equalization tax, if imposed, would reduce the Funds'
rates of return on investment. Dividends paid by foreign issuers may be subject
to withholding and other foreign taxes which may decrease the net return on such
investments as compared to dividends paid to the Funds by U.S. issuers. Special
rules govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules generally include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
Regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract and similar financial instruments other than any
"regulated futures contract" or "non-equity option" which would be marked-to-
market under the rules of Section 1256 of the Code if held at the end of the tax
year.
The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency rules.
Foreign currency-related regulated futures contracts and non-equity options,
however, are generally not subject to these special currency rules. If subject
to such rules, the non-U.S. dollar denominated investments and foreign currency
contracts are or would be treated as sold for their fair market value at year-
end under the marked-to-market rules applicable to other futures contracts,
unless an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable gain or loss. A taxpayer may elect to treat as capital gain or
loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. Certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Code and the Treasury Regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. The income tax effects of integrating and treating a
transaction as a single transaction are generally to create a synthetic debt
instrument that is subject to the original discount provisions. It is
anticipated that some of the non-U.S. dollar denominated investments and foreign
currency contracts the Funds may make or enter into will be subject to the
special currency rules described above.
Risks of Investing in Emerging Markets. The ability of a foreign
government or government-related issuer to make timely and ultimate payments on
its external debt obligations will be strongly influenced by the issuer's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign government or government-related issuer cannot
generate sufficient earnings from foreign trade to service its external debt, it
may need to depend on continuing loans and aid from foreign governments,
commercial banks, and multilateral organizations, and inflows of foreign
investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may curtail the willingness of such third parties
to lend funds, which may further impair the issuer's ability or willingness to
service its debts in a timely manner. The cost of servicing external debt will
also generally be adversely affected by rising international interest rates,
because many external debt obligations bear interest at rates which are adjusted
based upon international interest rates. The ability to service external debt
will also depend on
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the level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
governmental issuer to obtain sufficient foreign exchange to service its
external debt.
As a result of the foregoing, a governmental issuer may default on its
obligations. If such a default occurs, a Fund may have limited effective legal
recourse against the issuer and/or guarantor. Remedies must, in some cases, be
pursued in the courts of the defaulting country itself, and the ability of the
holder of foreign government and government-related debt securities to obtain
recourse may be subject to the political climate in the relevant country. In
addition, no assurance can be given that the holders of commercial bank debt
will not contest payments to the holders of other foreign government and
government-related debt obligations in the event of default under their
commercial bank loan agreements.
Borrowing
All Funds are authorized to borrow money from time to time as a
temporary measure for extraordinary purposes or to facilitate redemptions in
amounts up to 33 1/3% of the value of each Fund's total assets. The use of
borrowing by a Fund involves special risk considerations that may not be
associated with other portfolios having similar objectives. Since substantially
all the assets of the Funds fluctuate in value while the interest obligations
remain fixed, an increase or decrease of the asset value per share of a Fund
will be greater than would be the case if the Fund did not borrow funds. In
addition, interest costs on borrowings may fluctuate with changing market rates
of interest and may partially offset or exceed the return earned on borrowed
funds. Under adverse market conditions, a Fund might have to sell portfolio
securities in order to meet interest or principal payments, or to satisfy
restrictions on borrowings, at a time when investment considerations would
otherwise not favor such sales.
Loans of Portfolio Securities
All Funds may lend portfolio securities to broker-dealers and
financial institutions provided the following conditions are satisfied: (1) the
loan is secured continuously by collateral in the form of cash or U.S.
government securities marked-to-market daily and maintained in an amount at
least equal to the current market value of the loaned securities; (2) after
giving notice the applicable Fund may call the loan and receive the securities
loaned; (3) the applicable Fund will receive any interest or dividends paid on
the loaned securities; (4) the aggregate market value of securities loaned by
the applicable Fund will not at any time exceed 33 1/3% of the total assets of
such Fund; and (5) the Fund must pay only reasonable custodian fees in
connection with the loan.
Collateral will consist of cash and U.S. government securities. Loans
of securities involve a risk that the borrower may fail to return the loaned
securities or may fail to maintain the proper amount of collateral. Therefore,
a Fund will enter into portfolio securities loans only after a review of all
pertinent facts by the Advisor and the lending agent, subject to the overall
supervision by the Board of Trustees of the Trust (the "Board of Trustees").
Such reviews will be monitored on an ongoing basis. In addition, the lending
agent is obligated to replace the loaned securities with a like amount of
securities of the same issuer, class and denomination in the event the loaned
securities are not returned by a borrower in accordance with the arrangements
between the borrower and the lending agent. Creditworthiness of the borrower
will be monitored on an ongoing basis by the Advisor or the lending agent, as
discussed in Part A.
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Illiquid Securities
The Funds may invest in securities that are exempt under Rule 144A
under the Securities Act of 1933, as amended (the "Securities Act") from the
registration requirements of the Securities Act. Securities purchased under
Rule 144A are traded among qualified institutional buyers.
Investing in securities under Rule 144A could have the effect of
increasing the levels of the Funds' illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. After the purchase of a security under Rule 144A, however, the
Board of Trustees and the Advisor will continue to monitor the liquidity of that
security to ensure that the Funds have no more than 15% of their net assets
invested in illiquid securities.
The Funds will limit investments in securities of issuers which the
Funds are restricted from selling to the public without registration under the
Securities Act ("Restricted Securities") to no more than 15% of each Fund's net
assets, excluding Restricted Securities eligible for resale pursuant to Rule
144A that have been determined to be liquid by the Board of Trustees.
Other Investment Vehicles Available to the Funds
The Board of Trustees may, in the future, authorize a Fund to invest
in securities other than those listed in Parts A or Part B of this Registration
Statement, provided such investment would be consistent with the applicable
Fund's investment objective and would not violate any fundamental investment
policies or restrictions applicable to such Fund. The investment policies
described above, except for the discussion of percentage limitations with
respect to portfolio lending transactions and borrowing, are not fundamental and
may be changed by the Board of Trustees without the approval of the Investors.
Investment Practices Available to the Funds
The Funds may buy and sell put and call options and may attempt to
manage the overall risk of portfolio investments through hedging strategies,
enhance income, or replicate a fixed income return by using swaps (with the
exception of the Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization
Equity Fund, the Brinson U.S. Intermediate Capitalization Equity Fund, the
Brinson Post Venture Fund, the Brinson EXDEX(R) Fund, the Brinson U.S. Bond
Fund, the Brinson U.S. Short/Intermediate Fixed Income Fund, the Brinson Short-
Term Fund and the Brinson High Yield Fund), options, futures contracts and
forward currency contracts. Hedging strategies may also be used in an attempt
to manage the Funds' average durations, foreign currency exposures and other
risks of the Funds' investments which can affect fluctuations in the Funds' net
asset values. The Funds intend to use such investment practices at the
discretion of the Advisor. A detailed discussion of these various investment
practices, the limitations on the portion of the Funds' assets that may be used
in connection with these investment practices and the risks associated with such
investment practices are described in the Funds' Parts A and Appendix A of this
Part B.
Limitations On Futures and Options Transactions. The Trust has filed
a notice of eligibility for exclusion from the definition of "commodity pool
operator" within the meaning provided in the Commodity Exchange Act and
regulations promulgated thereunder by the Commodity Futures Trading Commission
and the National Futures Association, which regulate trading in the futures
markets. The Funds intend to comply with Section 4.5 of the regulations under
the Commodity Exchange Act, which limits, in non-hedging situations, the extent
to which the Funds can commit assets to initial margin deposits and options
premiums.
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Investment Restrictions of the Funds
Each Fund is subject to the investment restrictions set forth below
adopted by the Board of Trustees, which constitute fundamental policies and may
not be changed, as to a Fund, without the approval of a majority of the
outstanding voting shares of the Fund. As used in this Part B, a vote of "a
majority of the outstanding voting shares" of the Trust or a series of the Trust
means the affirmative vote of the lesser of: (i) more than 50% of the
outstanding shares of the Trust or series, or (ii) 67% of the shares of the
Trust or series present at a meeting at which more than 50% of the outstanding
shares of the Trust or series are represented in person or by proxy. Unless
otherwise indicated, all percentage limitations listed below apply to the Funds
and apply only at the time of the transaction. Accordingly, if a percentage
restriction is adhered to at the time of investment, a later increase or
decrease in the percentage which results from a relative change in values or
from a change in a Fund's total assets will not be considered a violation.
Except as set forth in the Parts A or below in this Part B, a Fund may
not:
(i) Invest in real estate or interests in real estate (provided that
this will not prevent a Fund from investing in publicly-held real
estate investment trusts or marketable securities of companies which
may represent indirect interests in real estate), interests in oil,
gas and/or mineral exploration or development programs or leases;
(ii) Purchase or sell commodities or commodity contracts, except each
Fund may enter into futures contracts and options thereon in
accordance with this Registration Statement and may engage in
forward foreign currency contracts and swaps;
(iii) Make investments in securities for the purpose of exercising control
over or management of the issuer;
(iv) Sell securities short, except "short sales against the box" or
purchase securities on margin, and also except such short-term
credits as are necessary for the clearance of transactions. For this
purpose, the deposit or payment by a Fund for initial or maintenance
margin in connection with futures contracts is not considered to be
the purchase or sale of a security on margin;
(v) Make loans, except that this restriction shall not prohibit: (a) the
purchase and holding of a portion of an issue of publicly
distributed or privately placed debt securities; (b) the lending of
portfolio securities; or (c) entry into repurchase agreements with
banks or broker-dealers;
(vi) Borrow money except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions and in no event in
excess of 33 1/3% of the value of its total assets. All borrowings
will be from a bank and to the extent that such borrowing exceeds 5%
of the value of a Fund's assets, asset coverage of at least 300% is
required. A Fund will not purchase securities while borrowings
exceed 5% of that Fund's total assets;
(vii) Issue senior securities as defined in the Investment Company Act
except that this restriction will not prevent the Funds from
entering into repurchase agreements or reverse repurchase
agreements, borrowing money in accordance with restriction (vi)
above or purchasing when-issued, delayed delivery or similar
securities;
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(viii) Purchase the securities of issuers conducting their principal
business activities in the same industry (other than obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities or by foreign governments or their political
subdivisions, or by supranational organizations) if immediately
after such purchase the value of a Fund's investments in such
industry would exceed 25% of the value of the total assets of the
Fund;
(ix) Act as an underwriter of securities issued by other persons, except
that, in connection with the disposition of a security, a Fund may
technically be deemed to be an "underwriter" as that term is
defined in the Securities Act, in selling a portfolio security; and
(x) Invest in securities of any open-end or closed-end investment
company, except in accordance with the Investment Company Act or
any exemptive order therefrom obtained from the Commission which
permits investment by a Fund in other funds or other investment
companies or series thereof advised by the Advisor, and also may
invest in the securities of closed-end investment companies at
customary brokerage commission rates.
Item 14. Management of the Trust.
The Board of Trustees has the responsibility for the overall management of
the Trust, including general supervision and review of its investment
activities. The Trustees elect the officers of the Trust who are responsible for
administering the day-to-day operations of the Trust and the Funds. The
affiliations of the Trustees and officers and their principal occupations for
the past five years are listed below. There are no Trustees who are deemed to be
"interested persons" as defined in the Investment Company Act.
B-13
<PAGE>
<TABLE>
<CAPTION>
Position(s)
Held with Principal Occupation(s)
Name & Address Age Registrant During Past 5 Years
- --------------------------- --- ------------- -------------------------------
<S> <C> <C> <C>
Walter E. Auch 76 Trustee Retired; prior thereto,
6001 N. 62nd Place Chairman and CEO of the
Paradise Valley, AZ 85253 Chicago Board Options
Exchange, 1979-1986; Trustee,
The Brinson Funds since 1992;
Present Director of the
following companies: Thomson
Asset Mgmt. Corp. (NYSE),
Geotek Industries, Inc.
(NASD), Smith Barney VIP Fund,
SB Advisors Fund, SB TRAK
Fund, Banyan Realty Trust
(NASD), Banyan Land Fund II
(NASD), Banyan Mortgage
Investment Fund (NYSE),
Express America Holdings Corp.
(NASD), and Nicholas
Applegate, Legend Properties,
Inc. Prior Director, Fort
Dearborn Income Securities,
Inc. (NYSE)
Frank K. Reilly 61 Trustee Professor, University of Notre
College of Business and Dame since 1982; Trustee, The
Administration Chairman Brinson Funds since 1992;
University of Notre Dame Trustee, Brinson Trust Company
208 Hurley Building 1992-1993; Director, Discover
Notre Dame, IN 46556 Receivables Financing Corp.,
Discover Receivables Financing
Group and SCFC Receivables
Financing Corp. (wholly-owned
subsidiaries of Sears Roebuck
& Co.) since 1991; Director,
Fort Dearborn Income
Securities, Inc. since 1993;
Director, Greenwood Trust
Company since 1993; Director,
Dean Witter Trust, FSB, since
1996.
Edward M. Roob 62 Trustee Retired; prior thereto, Senior
841 Woodbine Lane Vice President, Daiwa
Northbrook, IL 60062 Securities America, Inc.
(1986-1993);Trustee, The
Brinson Funds since 1995;
Director, Fort Dearborn Income
Securities, Inc. since 1993;
Director, Brinson Trust
Company since 1993; Committee
Member, Chicago Stock Exchange
since 1993; Member, Board of
Governors Chicago Stock
Exchange (1987-1991).
E. Thomas McFarlan 53 President Managing Partner and Director,
209 South LaSalle Street Brinson Partners, Inc. since
Chicago, IL 60604 1991; prior thereto Executive
Vice-President of Washington
Mutual Savings Bank; President
and Trustee, The Brinson Funds
since 1992; Treasurer, The
Brinson Funds from 1995-1997;
President and Trustee, Brinson
Trust Company since 1991.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
Position(s)
Held with Principal Occupation(s)
Name & Address Age Registrant During Past 5 Years
- --------------------------- --- ------------- -------------------------------
<S> <C> <C>
Thomas J. Digenan 33 Vice Partner, Brinson Partners, Inc.
209 South LaSalle Street President since 1993; prior thereto
Chicago, IL 60604 Senior Manager, KPMG Peat
Marwick; Vice President, The
Brinson Funds, since 1997;
Assistant Treasurer, The
Brinson Funds from 1995-1997;
Assistant Secretary, The
Brinson Funds 1993-1995.
Debra L. Nichols 31 Secretary Partner, Brinson Partners, Inc.
209 South LaSalle Street since January 1995; Associate
Chicago, IL 60604 since 1991; prior thereto,
private investor; Secretary, the
Brinson Funds, since 1997;
Assistant Secretary, The Brinson
Funds from 1992-1997.
Carolyn M. Burke 30 Treasurer Partner, Brinson Partners, Inc.
209 South LaSalle Street since 1997; prior thereto,
Chicago, IL 60604 Associate, Brinson Partners from
1995-1997; Financial Analyst,
Van Kampen American Capital
Investment Advisory Corp. 1992-
1995; Senior Accountant, KPMG
Peat Marwick 1989-1992;
Treasurer, The Brinson Funds,
since 1997; Assistant Secretary,
The Brinson Funds from 1995-
1997.
Megan M. Doherty 29 Assistant Partner, Brinson Partners, Inc.
209 South LaSalle Street Secretary since 1997, prior thereto,
Chicago, IL 60604 Associate, Brinson Partners
from 1993-1997; prior thereto,
Adminis-trator, Harris
Associates, L.P.
</TABLE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Aggregate Pension or
Compensation Retirement Total
From Trust for Benefits Compensation
Fiscal Year Accrued From Trust and
ended As Part of Fund Complex
December 31, Fund Paid to
Name and Position Held 1996 Expenses Trustees \1\
- --------------------------- --------------- ------------ ---------------
<S> <C> <C> <C>
Walter E. Auch, Trustee $13,200 N/A $13,200
Frank K. Reilly, Trustee $13,200 N/A $25,200
Edward M. Roob, Trustee $13,200 N/A $25,200
</TABLE>
B-15
<PAGE>
/1/ This amount represents the aggregate amount of compensation
paid to the Trustees for: (a) service on the Board of Trustees for the Trust's
current fiscal year; and (b) service on the Board of Directors/Trustees of two
other investment companies managed by Brinson Partners, Inc. for the calendar
year ending December 31, 1996.
The amount of the Trust's shares owned by the Trust's Trustees and
officers is less than 1% of the Trust's issued and outstanding shares. No
officer or Trustee of the Trust who is also an officer or employee of the
Advisor receives any compensation from the Funds for services to the Funds. The
Trust pays each Trustee who is not affiliated with Brinson Partners a fee of
$6,000 per year, plus $300 per Fund per meeting and reimburses each Trustee and
officer for out-of-pocket expenses in connection with travel to and from and
attendance at Board meetings.
Each of the Trustees sits on the Trust's Audit Committee, which has
the responsibility, among other things, to (i) recommend the selection of the
Funds' independent auditors; (ii) review and approve the scope of the
independent auditors' audit activity; (iii) review the financial statements
which are the subject of the independent auditors' certification; and (iv)
review with such independent auditors the adequacy of the Funds' basic
accounting system and the effectiveness of the Funds' internal accounting
controls. There is no separate Nominating or Investment Committee. Items
pertaining to these Committees are submitted to the full Board of Trustees.
Item 15. Control Persons and Principal Holders of Securities.
As of July 29, 1997, the officers and Trustees, individually and as a
group, owned beneficially less than 1% of each of the Brinson Global Securities
Fund, the Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity
Fund, the Brinson U.S. Intermediate Capitalization Equity Fund, the Brinson
Post-Venture Fund, the Brinson EXDEX(R) Fund, the Brinson Non-U.S. Equity Fund,
the Brinson Emerging Markets Equity Fund, the Brinson Bond Plus Fund, the
Brinson U.S. Bond Fund, the Brinson U.S. Short/Intermediate Fixed Income Bond
Fund, the Brinson Short-Term Fund, the Brinson High Yield Fund and the Brinson
Emerging Markets Debt Fund.
As of July 29, 1997, the following persons owned of record
or beneficially more than 5% of the outstanding voting shares of each of the
Funds listed below (the Funds not listed below had not commenced operations as
of such date).
BRINSON GLOBAL SECURITIES FUND
<TABLE>
<CAPTION>
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
<S> <C>
* Brinson Trust Company Collective 61.56%
Investment Trust for Pension &
Profit Sharing Trust's - Global Securities Fund
Chicago, IL
Ameritech Pension Trust 14.88%
North Quincy, MA
JP Morgan Securities Inc. 6.68%
New York, NY
Washington State University 5.99%
Pullman, WA
</TABLE>
B-16
<PAGE>
BRINSON SHORT-TERM FUND
<TABLE>
<CAPTION>
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
<S> <C>
* Ameritech Pension Trust 99.92%
North Quincy, MA
BRINSON POST-VENTURE FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
Brinson Trust Company Collective 60.66%
Investment Trust for Pension &
Profit Sharing Trust's - US Equity Fund
Chicago, IL
Brinson Trust Company Collective 22.16%
Investment Trust for Pension &
Profit Sharing Trust's - Post-Venture Fund
Chicago, IL
Brinson Trust Company Collective 7.86%
Investment Trust for Pension & Profit
Sharing Trust's - MAP Fund
Chicago, IL
Bankers Trust Company 7.17%
Custodian for Brinson Global Securities Fund
Chicago, IL
BRINSON HIGH YIELD FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
* Bankers Trust Company 30.00%
Custodian for Brinson Global Securities Fund
Chicago, IL
* Brinson Trust Company Collective 26.35%
Investment Trust for Pension &
Profit Sharing Trust's - U.S. High Yield Fund
Chicago, IL
Brinson Trust Company Collective Investment Trust 23.54%
For Pension & Profit Sharing Trust's -MAP Fund
Chicago, IL
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
<S> <C>
The Brinson Funds 9.74%
Custodian for Global Fund
Chicago, IL
Brinson Trust Company Collective Investment Trust 5.004%
for Pension & Profit Sharing Trust's - U.S.
Balanced Fund Chicago, IL
BRINSON EMERGING MARKETS EQUITY FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
Bankers Trust Company 15.69%
Custodian for Brinson Global Securities Fund
Chicago, IL
U.S. West Pension Trust Brinson Partners 12.27%
International Equity Account
Englewood, CO
The Northern Trust Company 10.72%
Chicago, IL
Brinson Trust Company Collective 10.39%
Investment Trust for Pension & Profit Sharing
Trust's - MAP Fund
Chicago, IL
Brinson Trust Company Collective 9.35%
Investment Trust for Pension &
Profit Sharing Trust's - Brinson Emerging
Markets Equity Fund
Chicago, IL
First Chicago Corp. Pension Trust 6.36%
Chicago, IL
Tidecove & Company 6.32%
North Quincy, MA
</TABLE>
B-18
<PAGE>
<TABLE>
<CAPTION>
BRINSON EMERGING MARKETS DEBT FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
<S> <C>
Bankers Trust Company 24.35%
Custodian for Brinson Global Securities Fund
Chicago, IL
First Chicago Corp. Pension Trust 18.54%
Chicago, IL
Brinson Trust Company Collective 16.54%
Investment Trust for Pension &
Profit Sharing Trust's - MAP Fund
Chicago, IL
The Brinson Funds 8.81%
Custodian for Brinson Global Fund
Chicago, IL
San Francisco City and County 8.45%
Employees Retirement System
San Francisco, CA
Brinson Trust Company Collective 6.57%
Investment Trust For Pension &
Profit Sharing Trust's - Brinson Emerging
Markets Bond Fund
Chicago, IL
Andrew W. Mellon Foundation 6.42%
New York, NY
</TABLE>
* Person deemed to control the Fund under the provisions of the Investment
Company Act. Note that a controlling person possesses the ability to control
the outcome of matters submitted for shareholder vote of the Fund.
As of July 29, 1997, the following persons owned of record or beneficially
more than 5% of the outstanding voting shares of the Trust:
<TABLE>
<CAPTION>
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
<S> <C>
** Brinson Trust Company Collective Investment 38.24%
Trust for Pension & Profit Sharing Trusts'-
Global Securities Fund Chicago, IL
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
<S> <C>
Ameritech Pension Trust 9.8%
North Quincy, MA
Brinson Trust Company Collective Investment 6%
U.S. Equity Fund
Chicago, IL
</TABLE>
** Person deemed to control the Trust under the provisions of the Investment
Company Act. Note that a controlling person possesses the ability to control
the outcome of matters submitted for shareholder vote of the Trust.
Item 16. Investment Advisory and Other Services.
Investment Advisor
Brinson Partners, Inc. manages the assets of the Trust pursuant to an
Investment Advisory Agreement with the Trust (the "Advisory Agreement"). Brinson
Partners is an investment management firm managing as of March 31, 1997 over
$124.5 billion, primarily for institutional pension and profit sharing funds
with offices located in Basel, Frankfurt, Geneva, Chicago, London, Melbourne,
New York, Paris, Singapore, Sydney, Tokyo and Zurich. Brinson Partners and its
predecessor, First Chicago Investment Advisors, have managed investment
portfolios since 1974. Brinson Partners also serves as the investment advisor or
sub-advisor to seven other investment companies.
Brinson Partners is a wholly-owned subsidiary of Swiss Bank Corporation
("Swiss Bank") which purchased the stock of the Advisor's parent in April 1995.
Swiss Bank, with headquarters in Basel, Switzerland, is an internationally
diversified organization with operations in many areas of the financial services
industry.
Under the Advisory Agreement, the Advisor is responsible for the management
of the investment and reinvestment of the assets of each Fund, subject to the
control of the Trust's officers and Board of Trustees. The Advisor receives no
fees from the Funds or the Trust for providing investment advisory services and
the Advisor is responsible for paying the Advisor's own expenses.
The Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the Investment Company Act) and that it may be
terminated by the Trust (by the Board of Trustees or vote of a majority of the
outstanding voting shares of the Trust) or the Advisor upon 60 days' written
notice, without payment of any penalty. The Advisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
conformity with the Investment Company Act.
Administrative, Accounting, Transfer Agency and Custodian Services
The Trust, on behalf of each Fund, has entered into a Multiple Services
Agreement (the "Services Agreement") with Morgan Stanley Trust Company, One
Pierrepont Plaza, Brooklyn, New York 11201 ("MSTC" or "Administrator"), pursuant
to which MSTC is required to provide general administrative, accounting,
portfolio valuation, transfer agency and custodian services to each Fund,
including the coordination and monitoring of any third party service providers.
B-20
<PAGE>
Custody Services. MSTC provides custodian services for the securities,
cash and other assets of each Fund. The custody fee schedule is based primarily
on the net amount of assets held during the period for which payment is being
made.
As authorized under the Services Agreement, MSTC has entered into a Mutual
Funds Service Agreement (the "CGFSC Agreement") with Chase Global Funds Services
Company ("CGFSC"), a corporate affiliate of The Chase Manhattan Bank, under
which CGFSC provides administrative, accounting, portfolio valuation, and
transfer agency services to each Fund. CGFSC's business address is 73 Tremont
Street, Boston, Massachusetts 02108-3913. Subject to the supervision of the
Board of Trustees of the Trust, MSTC supervises and monitors such services
provided by CGFSC.
Pursuant to the CGFSC Agreement, CGFSC provides:
(1) administrative services, including providing the necessary office
space, equipment and personnel to perform administrative and clerical
services; preparing, filing and distributing proxy materials, periodic
reports to Investors, registration statements and other documents; and
responding to Investor inquiries;
(2) accounting and portfolio valuation services, including the daily
calculation of each Fund's net asset value and the preparation of
certain financial statements; and
(3) transfer agency services, including the maintenance of each Investor's
account records, responding to Investors' inquiries concerning
accounts, processing purchases and redemptions of each Fund's shares,
acting as dividend and distribution disbursing agent and performing
other service functions.
For its administrative, accounting, portfolio valuation, transfer agency
and custodian services, MSTC receives the following as compensation from the
Trust on an annual basis: 0.0025% of the average weekly U.S. net assets of the
Trust; 0.0525% of the average weekly non-U.S. net assets of the Trust; 0.3250%
of the average weekly emerging markets net equity assets of the Trust; and
0.019% of the average weekly emerging markets debt net assets of the Trust. MSTC
receives an additional fee of 0.075% of the average weekly net assets of the
Trust for administrative duties, the latter subject to the expense limitation
applicable to the Trust. No fee (asset based or otherwise) is charged on any
investments made by any Fund into any other fund sponsored or managed by the
Advisor and assets of a Fund that are invested in another investment company or
series thereof sponsored or managed by the Advisor will not be counted in
determining the 0.075% administrative duties fee or the applicability of the
expense limitation on such fee. The foregoing fees include all out-of-pocket
expenses or transaction charges incurred by MSTC and any third party service
provider in providing such services. Pursuant to the CGFSC Agreement, MSTC pays
CGFSC for the services CGFSC provides to MSTC in fulfilling its obligations
under the Services Agreement.
Until May 9, 1997, FPS Services, Inc. served as administrator of the
following Funds and provided the administration, fund accounting and portfolio
valuation and transfer agency services described above. Aggregate fees paid to
FPS Services, Inc. as Administrator were as follows: with respect to the Brinson
Global Securities Fund for the period April 28, 1995 (commencement of
operations) through December 31, 1996, $749,786.96; with respect to the Brinson
High Yield Fund for the period April 28, 1995 (commencement of operations)
through December 31, 1996, $191,952.69; with respect to the Brinson Post-Venture
Fund for the period April 28, 1995 (commencement of operations) through December
31, 1996, $255,736.26; with respect to the Brinson Emerging Markets Equity Fund
for the period June 30, 1995 (commencement of operations) through December 31,
1996, $191,461.79;
B-21
<PAGE>
with respect to the Brinson Emerging Markets Debt Fund for the period June 30,
1995 (commencement of operations) through December 31, 1996, $208,870.95; and
with respect to the Brinson Short-Term Fund for the period June 28, 1996
(commencement of operations) through December 31, 1996, $50,988.71.
Other Services
The Administrator also serves as the Funds' transfer agent (in such
capacity, the "Transfer Agent"), accounting/pricing agent, and dividend and
distribution disbursing agent pursuant to the Services Agreement. Until May 9,
1997, Bankers Trust Company, One Bankers Trust Plaza, New York, New York 10006-
1107, was the custodian for the securities, cash and other assets of the Funds
that had commenced operations prior to such date pursuant to a Custodian
Agreement with the Trust. Effective May 10, 1997, the Administrator became the
custodian of the Trust pursuant to the Services Agreement. See "Management of
the Fund(s) - The Custodian" in the Parts A. Ernst & Young LLP, Sears Tower, 233
South Wacker Drive, Chicago, Illinois 60606-6301, is the independent accounting
and auditing firm which services the Trust.
Code of Ethics
The Trust has adopted a Code of Ethics which establishes standards by which
certain access persons of the Trust, which include officers of the Advisor and
officers and Trustees of the Trust, must abide relating to personal securities
trading activities.
Under the Code of Ethics, access persons are prohibited from engaging in
certain conduct, including, but not limited to: (1) investing in companies in
which the Funds invest unless the securities have a broad public market and are
registered on a national securities exchange or are traded in the over-the-
counter markets; (2) making or maintaining an investment in any corporation or
business with which the Funds have business relationships if the investment
might create, or give the appearance of creating, a conflict of interest; (3)
participating in an initial public offering; (4) entering into a securities
transaction when the access person knows or should know that such activity will
anticipate, parallel or counter any securities transaction of a Fund; (5)
entering into any securities transaction, without prior approval, in connection
with any security which has been designated as restricted; (6) entering into a
net short position with respect to any security held by a Fund; (7) entering
into any derivative transaction when a direct transaction in the underlying
security would be a violation of the Code of Ethics; and (8) engaging in self-
dealing or other transactions benefiting the access person at the expense of the
Trust or the Investors.
In addition, access persons may not buy or sell a prohibited security.
Access persons are required to file quarterly reports of security investment
transactions. Trustees who are not "interested trustees" of the Trust, as
defined in the Investment Company Act, need only report a transaction in a
security if such Trustee, at the time of the transaction, knew or should have
known, in the ordinary course of fulfilling his or her official duties as a
Trustee, that, during the 15-day period immediately preceding or after the date
of the transaction by the Trustee, such security was purchased or sold by a
Fund, or was being considered for purchase or sale by a Fund.
Item 17. Brokerage Allocation and Other Practices.
The Advisor is responsible for decisions to buy and sell securities for
each Fund and for the placement of portfolio business with broker-dealers and
the negotiation of commissions, if any, paid on such transactions. Fixed income
securities in which the Funds invest are traded in the over-the-counter
B-22
<PAGE>
market. These securities are generally traded on a net basis with dealers acting
as principal for their own accounts without a stated commission, although the
bid/ask spread quoted on securities includes an implicit profit to the dealers.
In over-the-counter transactions, orders are placed directly with a principal
market-maker unless a better price and execution can be obtained by using a
broker. Brokerage commissions are paid on transactions in listed securities,
futures contracts and options thereon. The Advisor is responsible for effecting
portfolio transactions and will do so in a manner deemed fair and reasonable to
the Funds. Under the Advisory Agreement, the Advisor is authorized to utilize
the trading desk of its foreign subsidiaries to direct foreign securities
transactions, but monitors the selection by such subsidiaries of brokers and
dealers used to execute transactions for a Fund.
The primary consideration in all portfolio transactions will be prompt
execution of orders in an efficient manner at the most favorable price. In
selecting and monitoring broker-dealers and negotiating commissions, the Advisor
considers the broker-dealer's reliability, the quality of its execution services
on a continuing basis and its financial condition. When more than one broker-
dealer is believed to meet these criteria, preference may be given to brokers
who provide research or statistical material or other services to the Funds or
to the Advisor. Such services include advice, both directly and in writing, as
to the value of the securities; the advisability of investing in, purchasing or
selling securities; and the availability of securities, or purchasers or sellers
of securities; as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy or the performance
of accounts. This allows the Advisor to supplement its own investment research
activities and obtain the views and information of others prior to making
investment decisions. The Advisor is of the opinion that, because this material
must be analyzed and reviewed by its staff, its receipt and use does not tend to
reduce expenses but may benefit the Funds by supplementing the Advisor's
research. See the "Management of the Fund - Brokerage Allocation" section in
the Parts A.
The aggregate amount of brokerage commissions paid by the Funds that have
commenced operations during the period April 28, 1995 through December 31, 1995,
(the "1995 Funds") was approximately $893,391. The Brinson Short-Term Fund,
which commenced operations on June 28, 1996, had not incurred any brokerage
commissions as of December 31, 1996. The aggregate amount of brokerage
commissions paid by the 1995 Funds during the fiscal year ended December 31,
1996 was approximately $3,081,399.13.
Brinson Partners directs portfolio transactions for other investment
companies and advisory accounts. Research services furnished by broker-dealers
through whom the Funds direct their securities transactions may be used by
Brinson Partners in servicing all of its accounts; not all such services may be
used in connection with the Funds. In the opinion of Brinson Partners, it is
not possible to measure separately the benefits from research services to each
of such accounts (including the Funds). Brinson Partners will attempt to
equitably allocate portfolio transactions among the Funds and others whenever
concurrent decisions are made to purchase or sell securities by the Funds and
other accounts. In making such allocations between the Funds and others, the
main factors to be considered are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending
investments to the Funds and others. In some cases, this procedure could have an
adverse effect on the Funds. In the opinion of Brinson Partners, however, the
results of such procedures will, on the whole, be in the best interest of each
of its clients.
Portfolio Turnover
The Funds are free to dispose of their portfolio securities at any time,
subject to complying with the Code and the Investment Company Act, when changes
in circumstances or conditions make such
B-23
<PAGE>
turnover desirable in light of each Fund's investment objective. The Funds will
not attempt to achieve or be limited to a predetermined rate of portfolio
turnover, such a turnover always being incidental to transactions undertaken
with a view to achieving that Fund's investment objective.
While it is the policy of the Funds generally not to engage in trading for
short-term gains, the Funds will effect portfolio transactions without regard to
the holding period if, in the judgment of the Advisor, such transactions are
advisable in light of a change in circumstances of a particular company, within
a particular industry or country, or in general market, economic or political
conditions. The rate of portfolio turnover for a Fund shall be calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
particular fiscal year by (b) the monthly average of the value of the portfolio
securities owned by that Fund during the particular fiscal year. Such monthly
average shall be calculated by totaling the values of the portfolio securities
as of the beginning and end of the first month of the particular fiscal year and
as of the end of each of the succeeding eleven months and dividing the sum by
13. Although the portfolio turnover rates for each Fund may vary greatly from
year to year, the Funds expect that under normal circumstances, the portfolio
turnover rate will not exceed 250% with respect to the Brinson Global Securities
Fund, the Brinson Global Equity Fund, the Brinson U.S. Equity Fund, the Brinson
U.S. Intermediate Capitalization Equity Fund, the Brinson EXDEX(R) Fund, the
Brinson U.S. Bond Fund, the Brinson Bond Plus Fund and the Brinson U.S.
Short/Intermediate Fixed Income Fund, and 100% with respect to all other Funds.
High portfolio turnover rates will increase aggregate brokerage commission
expenses which must be borne directly by a Fund and ultimately by that Fund's
Investors and the incidence of short-term capital gains (which are taxable to
Investors as ordinary income).
Item 18. Capital Stock and Other Securities
The Trust currently offers fifteen series of shares of beneficial interest.
Each share represents an equal proportionate interest in the assets and
liabilities of the applicable Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees of the Trust. Under
Delaware law, the Trust does not normally hold annual or special meetings of
Investors. See "Capital Stock and Other Securities" in each Fund's Part A.
Item 19. Purchase, Redemption and Pricing of Securities Being Offered
Purchases
Beneficial interests in the Funds are issued solely in private placement
transactions that do not involve a "public offering" within the meaning of
Section 4(2) of the Securities Act. Investments in a Fund may only be made by
common or commingled trust funds, investment companies, registered broker-
dealers, investment banks, commercial banks, corporations, group trusts or
similar organizations or entities that are "accredited investors" within the
meaning of Regulation D under the Securities Act. See "Purchase of Securities
Being Offered" in each Fund's Part A.
B-24
<PAGE>
Net Asset Value. The net asset value per share is calculated separately for
each Fund. The net asset value per share of a Fund is computed by dividing the
value of the assets of the Fund, less its liabilities, by the number of shares
of the Fund outstanding.
Presented below is the computation of the net asset value/offering price
per shares as of December 31, 1996 for each Fund that had commenced operations
as of December 31, 1996, using the following formula; Total Assets - Total
Liabilities / Outstanding Shares = Net Asset Value/Offering Price.
Brinson Global Securities Fund
$1,816,020,113 - $57,510,647/130,464,603 shares = $13.4788 (NAV/offering price)
Brinson Short-Term Fund
$22,961,165 - $1,253,798/2,106,298 shares = $10.3059 (NAV/offering price)
Brinson Post-Venture Fund
$300,040,782 - $1,062,534/19,604,032 shares = $15.2509 (NAV/offering price)
Brinson High Yield Fund
$168,123,182 - $3,073,141/13,399,664 shares = $12.3175 (NAV/offering price)
Brinson Emerging Markets Equity Fund
$186,773,915 - $7,435,740/17,606,002 shares = $10.1862 (NAV/offering price)
Brinson Emerging Markets Debt Fund
$222,745,556 - $174,988/13,184,226 shares = $16.8816 (NAV/offering price)
Investors in the Brinson Emerging Markets Equity Fund and the Brinson
Emerging Markets Debt Fund are subject to a transaction charge equal to 1.50%
and 0.50%, respectively, of the Fund's offering price on Fund share purchases.
Fund securities are valued and net asset value per share is determined for
all Funds with the exception of the Brinson High Yield Fund as of the close of
regular trading on the New York Stock Exchange ("NYSE"), which generally is 4:00
p.m. (Eastern time), on each day the NYSE is open for trading. Fund securities
are valued and net asset value per share is determined for the Brinson High
Yield Fund as of one hour prior to the close of the NYSE, which currently is 3
p.m. (Eastern time), on each day the NYSE is open for trading. The NYSE is open
for trading on every day except Saturdays, Sundays and the following holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday,
Memorial Day (day observed), Independence Day, Labor Day, Thanksgiving and
Christmas and on the preceding Friday or subsequent Monday when any of these
holidays falls on a Saturday or Sunday, respectively.
Fund securities listed on a national or foreign securities exchange and
over-the-counter securities carried as NASDAQ National Market system issues are
valued on the basis of the last sale prior to the time net asset value is
determined on the date the valuation is made. Other portfolio securities which
are traded in the over-the-counter market are valued at the last available bid
price prior to the time net asset value is determined. Valuations of fixed
income and equity securities may be obtained from a pricing service when such
prices are believed to reflect the fair value of such securities. Use of a
pricing service has been approved by the Board of Trustees. Securities traded
on securities exchanges are valued at the last sale price or, if there has been
no sale that day, at the last reported bid price, using prices as of the close
of trading on their respective exchanges. Price information on listed
securities is generally taken
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from the closing price on the exchange where the security is primarily traded.
Futures contracts and options thereon are valued at their daily quoted
settlement price. Forward foreign currency contracts are valued daily at forward
exchange rates and an unrealized gain or loss is recorded; the Fund realizes a
gain or loss upon settlement of the contracts. Each Fund's obligations under a
swap agreement will be accrued daily (offset by any amounts owing to the Fund)
and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by the Fund's maintenance of a segregated account consisting of cash,
U.S. government securities or high grade liquid assets. For valuation purposes,
foreign securities initially expressed in foreign currency values will be
converted into U.S. dollar values using WM/Reuters closing spot rates as of 4:00
p.m. London time. Securities with a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market value. Redeemable securities
issued by open-end investment companies are valued using their respective net
asset values for purchase orders placed at the close of the NYSE. Securities
(including over-the-counter options) for which market quotations are not readily
available and other assets are valued at their fair value as determined in good
faith by or under the direction of the Board of Trustees.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the NYSE and values
of foreign futures and options and foreign securities will be determined as of
the earlier closing of such exchanges and securities markets. Events affecting
the values of such foreign securities may occasionally occur, however, between
the earlier closings of such exchanges and securities markets and the closing of
the NYSE which will not be reflected in the computation of the net asset value
of a Fund. If an event materially affecting the value of such foreign
securities occurs during such period, then such securities will be valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees.
Where a foreign securities market remains open at the time that the Funds
value their portfolio securities, or closing prices of securities from that
market may not be retrieved because of local times differences or other
difficulties in obtaining such prices at that time, last sale prices in such
market at a point in time most practicable to timely valuation of the Funds may
be used.
Redemptions
Under normal circumstances Investors may redeem their shares at any time
without a fee. The redemption price will be based upon the net asset value per
share next determined after receipt of the redemption request. The redemption
price may be more or less than the Investor's cost, depending upon the net asset
value per share at the time of redemption.
Payment for shares tendered for redemption is regularly made by check or
wire within seven days after tender in proper form, except that the Trust
reserves the right to suspend the right of redemption, or to postpone the date
of payment upon redemption beyond seven days in certain circumstances, as
disclosed in the Funds' Parts A. The Trust has also reserved the right, subject
to certain restrictions, to redeem its shares "in kind" rather than in cash. See
"Redemption of Shares or Repurchase" in the Funds' Parts A.
Item 20. Tax Status.
General
The following discussion summarizes certain anticipated material U.S.
federal income tax consequences of investing in the Funds. The discussion is
based on the Code, existing and proposed Treasury Regulations thereunder,
Internal Revenue Service ("IRS") positions and court decisions in
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effect as of the date of this Part B. All the authorities are subject to change
by legislative or administrative action, possibly with retroactive effect. The
summary does not address all tax considerations that may be relevant to
prospective Investors or to certain types of Investors subject to special
treatment under the U.S. federal income tax laws. The discussion does not
constitute legal or tax advice. Furthermore, the tax consequences of investing
in the Funds may vary depending on the particular Investor's status.
ACCORDINGLY, EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO
THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF INVESTING IN THE
FUNDS.
Classification of the Funds
The Trust has received rulings from the IRS that each Fund will be treated
as a separate partnership for federal income tax purposes rather than as an
association taxable as a corporation. The Funds will not be "regulated
investment companies" for federal income tax purposes.
Classification of Funds as "Publicly Traded Partnerships"
The Trust has received rulings from the IRS that the Funds will not be
treated as "publicly traded partnerships" because the Funds will satisfy the
private placement safe harbor set forth in an IRS Notice 88-75, regarding
publicly traded partnerships. Subsequent to the receipt of such rulings from
the IRS, the Department of Treasury promulgated final regulations (the "Final
Regulations") under Section 7704 of the Code, pertaining to publicly traded
partnerships. In general, the Final Regulations limit the availability of the
private placement safe harbor to those partnerships which do not have more than
100 partners at any time during the taxable year, subject to certain anti-
avoidance rules. Under a transitional rule, the Final Regulations generally are
effective for taxable years beginning after December 31, 2005, if a partnership
was actively engaged in an activity before December 4, 1995. During such
transition period, an eligible partnership may continue to rely on the
provisions of IRS Notice 88-75. The Brinson Global Securities Fund, the Brinson
Post-Venture Fund, the Brinson High Yield Fund, the Brinson Emerging Markets
Equity Fund and the Brinson Emerging Markets Debt Fund presently qualify for
this transitional rule.
Taxation of Partnership Operations Generally
The Funds will not be subject to U.S. federal income tax. Instead, each
Investor in a Fund will be required to report separately on its own income tax
return its distributive share of items of such Fund's income, gains, losses,
deductions and credits. Each Investor will be required to report its
distributive share of such tax items regardless of whether it has received or
will receive corresponding distributions of cash or property from a Fund. In
general, cash distributions by the Funds to Investors will represent a non-
taxable return of capital up to the amount of such Investor's adjusted tax
basis.
Partnership Allocations
For federal income tax purposes, an Investor's distributive share of each
item of a Fund's income, gain, loss, deduction and credit will be determined by
the Trust's Amended and Restated Agreement and Declaration of Trust (the "Trust
Agreement") so long as the allocation has "substantial economic effect" within
the meaning of Code Section 704 and the regulations thereunder. In general, the
Trust Agreement provides that each Investor's capital account will be increased
by all contributions made by the Investor and will be reduced by all
distributions made to the Investor. In addition, an Investor's capital account
will be increased by the Investor's allocable share of the Fund's income and
gains and decreased by the Investor's allocable share of the Fund's losses. For
book purposes, capital accounts will be adjusted daily
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as if the Funds' assets had been sold at fair market value. An Investor's
allocable share of income, gain and loss for tax purposes generally will be
based on such Investor's capital account for book purposes but adjustments will
be made to account for differences in the book value of assets and the adjusted
tax basis of those assets. The Trust Agreement also provides that the
allocations specified therein will be interpreted and applied in a manner
consistent with regulations under Code Section 704 and that no allocation will
be made unless such allocation will be respected for tax purposes pursuant to
those regulations. The Trust has received rulings from the IRS that this
allocation method has economic effect.
Gains and Losses from Commodities, Options, Securities and Other Capital
Transactions.
General
The Funds intend to invest in a variety of investments as described herein.
In general, such investments will give rise to dividend or interest income
(treated as ordinary income) during the period such investments are held and to
capital gain or losses on disposition. However, special rules apply to certain
of the proposed types of investments. Certain of those rules are briefly
described below. For a complete description of the special rules which may
apply to each type of investment, Investors are advised to consult their own tax
advisors.
Section 1256 Contracts
The Code provides specific rules for "Section 1256 Contracts," a class of
property interests that includes futures and certain option contracts traded on
a qualified board or exchange and foreign currency contracts. A foreign
currency contract is defined in the Code as a contract "(i) which requires
delivery of, or the settlement of which depends on the value of, a foreign
currency which is a currency in which positions are also traded through
regulated futures contracts, (ii) which is traded in the interbank market, and
(iii) which is entered into at arm's length at a price determined by reference
to the price in the interbank market."
Section 1256 Contracts are subject to a "mark-to-market" system of taxation
which requires that all Section 1256 Contracts held by the Funds on the last
business day of its taxable year be treated as having been sold for their fair
market value on that day. Unrealized gains and losses in these open positions
must be recognized in the year in which the deemed sale occurs. Gains and
losses from Section 1256 Contracts (subject to the discussion below with respect
to foreign currency contracts which are Section 1256 Contracts), whether
realized through termination of the position or under the mark-to-market rule,
generally are treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss (the "60/40 rule"), regardless of the actual holding period
of the position. The character of an Investor's distributive share of Fund
profits or losses from Section 1256 Contracts will, therefore, be 60% long-term
capital gain or loss and 40% short-term capital gain or loss. Each Investor's
distributive share of such gain or loss will be combined with other items of
capital gain or loss for the taxable year in computing the federal income tax
liability of the Investor. However, as more fully described below under "Tax
Treatment of Capital Gains and Losses," Investors will be limited in their
ability to carry back losses from Section 1256 Contracts. The above-described
rules will apply with respect to a Section 1256 Contract which is a foreign
currency contract only if the position is a capital asset (which is not part of
a straddle) for which a Fund has made an election under Code Section 988 at the
time the position is entered into to treat the gain or loss in accordance with
the above-described rules. Given the investment policies of the Funds, there
can be no assurance that such an election can be made. In the case of a Section
1256 Contract which is a foreign currency contract for which this election is
not made, the mark-to-market rules described above apply to determine when gain
or loss is recognized but the gain or loss
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will be ordinary income or loss for federal income tax purposes, and each
Investor's distributive share thereof will be ordinary income or loss to such
Investor.
Non-Section 1256 Positions
Gain or loss with respect to positions that are not Section 1256 Contracts
("Non-Section 1256 Positions") and are not positions of a mixed straddle are
includible for tax purposes only when realized. Such gains and losses are not
subject to the 60/40 rule, but will be characterized as long- or short-term
capital gain or loss in accordance with general holding period and other
applicable rules, subject to the following discussion. The above-described
rules will apply with respect to gain or loss on a Non-Section 1256 Position in
foreign currency only if the position is a forward contract, futures contract or
option which is a capital asset (and not part of a straddle) for which a Fund
has made an election under Code Section 988 at the time the position is entered
into to treat the gain or loss thereon as capital gain or loss. In the case of
such Non-Section 1256 Positions for which such Section 988 election is not made,
any gain or loss will be ordinary income or loss for federal income tax
purposes.
Treatment of Straddles
The tax consequences described above apply to single Section 1256 Contracts
and single Non-Section 1256 Positions. Those consequences may, however, be
limited or modified if the positions are positions of a straddle. The term
"straddle" is defined as offsetting positions in personal property. Two or more
positions are offsetting if the taxpayer's risk of loss from holding one
position in personal property is substantially diminished by reason of holding
one or more other positions in personal property. It is anticipated that the
Funds may hold offsetting positions in the course of their trading activity.
Straddles consisting solely of Section 1256 Contracts are subject to the
mark-to-market and 60/40 rules discussed above, and are not subject to the
straddle provisions of Code Section 1092 (discussed below). In the event a Fund
takes delivery under or exercises any position of a straddle consisting solely
of Section 1256 Contracts, then each position of the straddle will be treated as
terminated on the day on which such Fund takes delivery or exercises its
position.
Code Section 1092 and the temporary regulations promulgated thereunder (the
"Temporary Regulations") limit the deductibility of losses incurred on positions
of a straddle in which all of the positions are Non-Section 1256 Positions.
Those rules provide that a loss may be deducted only to the extent it exceeds
unrecognized gains at year end in: (a) offsetting positions; (b) successor
positions; and (c) offsetting positions to successor positions. A successor
position is a position that was entered within 30 days before or after the loss
position was disposed of and which offsets a second position which was
offsetting to the loss position. This rule prevents the taxpayer from
recognizing losses in one year while deferring recognition of corresponding
gains until a subsequent year. The disallowed losses may be recognized in a
subsequent year to the extent the loss exceeds the unrecognized gain at the
subsequent year end in the offsetting positions, successor positions, or
offsetting positions to the successor position. Further, the Temporary
Regulations apply a modified wash sale rule which requires deferral of loss if,
during the 61-day period surrounding disposition of the loss position, the
taxpayer acquires, or enters into a contract to acquire, stock or securities
that are substantially identical to those sold at a loss.
A mixed straddle is a straddle, one but not all of the positions of which
is a Section 1256 Contract. Under Code Section 1256 and the Temporary
Regulations, a Fund may elect to treat its mixed straddles under the mixed
straddle account rules.
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Foreign Currency Transactions
Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain forward contracts, from
futures contracts that are not regulated futures contracts, and from unlisted
options will be treated as ordinary income or loss. As discussed above, in
certain circumstances where transactions are not undertaken as part of a
straddle, a Fund may elect capital gain or loss treatment for such transactions.
Alternatively, a Fund may elect ordinary income or loss treatment for
transactions in regulated futures contracts and listed options on foreign
currency that would otherwise produce capital gain or loss. In general, gains
or losses from a foreign currency transaction subject to Code Section 988 will
increase or decrease the amount of a Fund's ordinary income, rather than
increase or decrease the amount of such Fund's net capital gain income. Income
or loss attributable to notional principal contracts relating to a foreign
currency (e.g., currency swaps) is also ordinary income or loss under Code
Section 988. Also, gains or losses attributable to fluctuations in exchange
rates that occur between the time a Fund accrues interest or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such interest or receivables or pays such
expenses or liabilities may be treated as ordinary income or loss, as will gains
and losses attributable to fluctuations in exchange rates between the date a
foreign currency denominated debt instrument is purchased and the date that debt
instrument is disposed of or retired.
Section 1258 Conversion Transactions
Under Code Section 1258, a taxpayer shall not be entitled to capital gain
treatment for gain on the disposition or termination of any positions held as a
part of a "conversion transaction" which would otherwise qualify for capital
gains treatment. In general, a conversion transaction is one in which: (1)
substantially all of the taxpayer's expected return is attributable to the time
value of the taxpayer's net investment in the transaction; and (2) which
involves the taxpayer taking two or more offsetting positions with respect to
property (but only if such property was acquired and such offsetting positions
were entered into on a substantially contemporaneous basis) or entering into
certain straddle positions. If applicable, Code Section 1258 would
recharacterize a portion of the taxpayer's gain as ordinary income to the extent
of interest which would have accrued on the taxpayer's net investment in the
conversion transaction for the period ending on the date of such disposition at
a rate equal to 120% of the relevant applicable federal rate. Code Section
1258(c)(2)(D) gives the Treasury Department broad authority to promulgate
regulations to define the concept of conversion transactions.
Although the Funds do not believe that their trading strategies will result
in the Funds engaging in conversion transactions, it is possible that the
Treasury Department could draft regulations which provide that some of the
Funds' trades will be treated as conversion transactions. Such regulations
could have a retroactive effect.
Organization and Offering Expenses
The Funds are not entitled to deduct their organization and offering
expenses except to the extent amortization of certain organization expenditures
is permitted.
Calculation of Investor's "Adjusted Basis" and "At Risk Basis"
Each Investor's adjusted basis in his share in a Fund will equal his
purchase price thereof, increased by the amount of his share of items of income
and gain of the Fund and reduced, but not below
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zero, by: (a) the amount of his share of Fund deductions and losses; (b)
expenditures which are neither properly deductible nor properly chargeable to
his capital account; and (c) the amount of any distributions received by such
Investor.
An Investor who is an individual, trust, estate or a specific type of
closely-held corporation will be allowed to deduct his share of Fund losses only
to the extent of his "at risk" basis for his Fund interest. Generally, an
Investor will be considered "at risk" for an activity with respect to the amount
of money and the adjusted basis of property contributed to that activity and
amounts borrowed for use in an activity, to the extent that the Investor is
personally liable for the repayment of such borrowed amounts or has pledged
property, other than property used in such activity, as security for such
borrowed amounts.
Current Distributions by the Funds; Redemptions
Current Distributions. A current cash distribution by a Fund with respect
to shares held by an Investor will result in gain to the distributee Investor
only to the extent that the amount of cash distributed exceeds the Investor's
adjusted basis in its Fund shares owned. A current distribution will reduce the
distributee Investor's adjusted basis in his Fund shares, but not below zero.
Gain recognized as a result of such distributions will be considered as gain
from the sale or exchange of such Investor's shares in the Fund. Loss will not
be recognized by an Investor as a result of a current distribution by the Fund.
Liquidation of an Investor's Entire Interest in a Fund. Generally, a
distribution or series of distributions by a Fund to an Investor that results in
termination of its entire interest in such Fund will result in gain to the
distributee Investor only to the extent that cash, if any, distributed exceeds
the Investor's adjusted basis in its Fund shares. When only cash and unrealized
receivables are distributed, loss will be recognized to the extent that the
Investor's adjusted basis in its Fund shares exceeds the amount of cash
distributed and the basis to the Investor of any unrealized receivables
distributed. Any gain or loss recognized as a result of such distributions will
be considered as gain or loss from the sale or exchange of the distributee
Investor's Fund shares. Such gain or loss generally will be capital gain or
loss except to the extent the Funds distribute short-term obligations or "market
discount" obligations on which the Funds have not recognized income.
Tax Treatment of Capital Gains and Losses
Amounts realized from the sale or exchange of assets of a Fund will
generally be treated as amounts realized from the sale or exchange of capital
assets. A net capital loss allocated to an Investor may be used to offset other
capital gains. Present law taxes both long-term and short-term capital gains of
corporations at the rates applicable to ordinary income. However, for Investors
other than corporations, net long-term capital gains (i.e., the excess of net
long-term capital gain over net short-term capital loss) are taxed at a maximum
marginal rate of 28%, while short-term capital gains are taxed at a maximum
marginal rate of 39.6%. For a taxpayer other than a corporation, such net
capital loss also may be used to offset ordinary income up to $3,000 per year.
In general, for taxpayers other than corporations, the unused portion of such
loss may be carried forward indefinitely, but not carried back. However, a
taxpayer, other than a corporation, may elect to carry back for three years net
losses resulting from Section 1256 Contracts, but only to the extent of
previously reported gain attributable to Section 1256 Contracts. In the case of
a corporate taxpayer, such capital loss may be offset only against capital
gains, but generally may be carried back three years or forward five years.
Furthermore, the amount that may be carried back is limited to an amount which
does not cause or increase a net operating loss in a carryback year.
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Limitation on Deduction of Investment Interest
The deduction by noncorporate taxpayers of interest on funds borrowed to
acquire or carry investment assets is limited to net investment income. Net
investment income is the excess of investment income over the expenses directly
incurred in earning such income. The amount disallowed may be carried forward
to subsequent tax years within certain limits. This limitation, if applicable,
is computed separately by each Investor and not by the Funds.
Limitation on Deductibility of Section 212 Expenses
Under Code Section 212, expenses incurred by an individual in the
production of income are deductible only to the extent they exceed 2% of the
individual's adjusted gross income. Under regulations promulgated by the
Treasury Department, the determination of whether Fund expenses are subject to
Code Section 212 is made at the entity level. The Funds intend to report fees
and expenses incurred in their trading activities as ordinary and necessary
business expenses allowable under Code Section 162. On audit, the IRS might
assert that the Funds' expenses are allowable under Code Section 212, and
therefore subject to the 2% floor.
Passive Activity Income or Loss
Under IRS regulations, the trading activity of the Funds will not
constitute a passive activity. Accordingly, neither the income nor the loss of
the Funds will be subject to the passive activity rules.
Tax Elections
The Code provides for optional adjustments to the basis of Fund property
upon distribution of Fund property to an Investor (Code Section 734) and
transfers of shares (including by reason of death) (Code Section 743), provided
that a Fund election has been made pursuant to Code Section 754. The general
effect of such an election is that transferees of shares are treated, for
purposes of computing gain or loss, as though they had acquired a direct
interest in the Fund assets. Any such election, once made, is irrevocable
without the consent of the IRS. As a result of the complexities and added
expense of the tax accounting required to implement such an election, the Funds
do not presently intend to make such an election.
Tax Returns; Audits
The Funds will report their operations for tax purposes on the accrual
method for each year, and each will file annually a partnership information
income tax return and will distribute annually to their respective Investors a
form (Treasury Form K-1) showing its distributive share of such Fund's items of
income, gain, loss, deduction or credit. The Advisor will arrange for the
preparation and filing of all necessary tax returns for the Funds and will
furnish necessary instructions and information to the Investors for their
individual Federal income tax returns.
The Code generally provides that upon audit of a partnership return, the
tax treatment of any "partnership item" (including among other things, items of
partnership income, gain, loss, deduction, and credit) will be determined at the
partnership level in one uniform proceeding rather than in separate proceedings
with the partners. The period for assessment with respect to Fund items
generally will not expire before three years from the date of filing the Fund
return or, if later, the last date prescribed for filing such return determined
without regard to extension. Under some circumstances, the provisions of
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the Code extend the period for assessment and, in addition, the period may be
extended with respect to any Investor by agreement with such Investor or, for
all Investors, by agreement with the designated "Tax Matters Partner." One
Investor of each Fund will be appointed the Tax Matters Partner with respect to
that Fund within the meaning of Code Section 6231(a)(7).
Additionally, Investors must report Fund items on their tax returns in a
manner consistent with the treatment of such items on the Fund information
return, or notify the IRS of any inconsistency. Failure to report the
inconsistency will allow the IRS to assess automatically and collect any
deficiency resulting from an adjustment to conform the treatment of the item to
that presented on the Fund tax return and could result in the imposition of
certain penalties.
Tax-Exempt Investors
Under Code Section 511, a tax is imposed on the "unrelated business taxable
income" ("UBTI") of organizations otherwise exempt from tax under Code section
501(a). Code Section 512 defines the term UBTI as the gross income derived by
any organization from any unrelated trade or business (as defined in Code
Section 513) less applicable deductions. Income from certain types of
investments made by the Funds which is allocated to tax-exempt Investors may be
treated as UBTI subject to the tax imposed by Code section 511. In addition, if
and to the extent that a Fund borrows in connection with the acquisition of any
property, income from such debt financed property will be subject to the tax on
UBTI. Income from securities trading transactions generally will not give rise
to UBTI. While it is anticipated that the Advisor generally will attempt to make
investments in a manner which does not give rise to the tax imposed on UBTI, the
Advisor may make investments in assets the income from which gives rise to UBTI
or may borrow in connection with the acquisition of property if the Advisor
believes that the returns on such investments justify incurring or the risk of
incurring UBTI. The Funds anticipate that they will distribute annually to each
such tax-exempt Investor after the end of the Funds' fiscal year, the
information necessary for that Investor to determine the portion of its
distributive share of each item of income, gain and deduction that is to be
taken into account in the determination of unrelated business taxable income.
Foreign Income Taxes
The Funds may pay or accrue foreign income taxes in connection with
trading. Such amounts will be deemed to be received by Investors and paid to
the foreign government. An Investor may (subject to certain limitations) elect
each taxable year to treat its share of these foreign income taxes as a credit
against its U.S. income tax liability or to deduct such amount from its U.S.
taxable income. However, an Investor's ability to obtain a credit for such
taxes depends on the particular circumstances applicable to that Investor and it
is possible that an Investor may get little or no foreign tax credit benefit
with respect to its share of foreign taxes paid or accrued by the Funds. In
those cases in which an Investor can fully utilize foreign tax credits for a
particular year, such tax credits would increase the effective return on its
investment in the Funds as compared with the effective return if the Investor
deducted such taxes in determining its U.S. taxable income. In most instances,
credits will be included in the foreign "basket" of an Investor for foreign tax
credit purposes.
Foreign Investors
A nonresident alien or foreign entity (a "Foreign Person") is generally
subject to U.S. federal income tax on all income that is effectively connected
with the conduct of a U.S. trade or business. A Foreign Person who is a partner
in a partnership is generally considered to be engaged in a U.S. trade or
business if the partnership is so engaged. Whether a particular Fund is
considered to be engaged in a
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U.S. trade or business is a factual determination, based upon whether, among
other things, the Fund is engaged in frequent and substantial trading to catch
short term market swings, as opposed to invested for long-term capital
appreciation. To the extent relevant, this determination will be made on an
annual basis by each Fund. Accordingly, a Foreign Person that invests in a Fund
(a "Foreign Investor") may be treated as engaged in a U.S. trade or business
and, if so, will be obligated to file a U.S. income tax return with respect to
its share of the Fund's income that is effectively connected with the conduct of
a trade or business of the Fund in the United States. Any such trade or business
income will be taxed at the graduated rates that apply to income earned by U.S.
persons. In addition, foreign corporations may be subject to the "branch profits
tax" on its "effectively connected earnings and profits" arising out of an
investment in the Funds.
The Funds will be required to withhold a tax at the highest applicable rate
(currently 39.6% in the case of an individual and 35% in the case of a
corporation) from the Foreign Person's distributive share of any income/gain or
loss that is effectively connected with that U.S. trade or business. Any tax
withheld will constitute a credit against the Foreign Investor's U.S. federal
income tax liability and will be refundable to the extent that it exceeds such
liability. Foreign Persons are also generally subject to a 30% withholding tax
(unless reduced by an applicable treaty) on certain investment income that is
not effectively connected with the conduct of a U.S. trade or business.
State and Local Taxation
An Investor's distributive share of a Fund's taxable income or loss
generally will have to be taken into account in determining the Investor's state
and local income tax liability in a jurisdiction in which such Investor is a
resident. In addition, a state or other taxing jurisdiction in which an
Investor is not a resident but in which the Investor may be deemed to be engaged
in business may impose a tax on that Investor with respect to its share of Fund
income derived from that state or other taxing jurisdiction.
The Funds themselves may also be subject to state and/or local tax on some
or all of their net income, depending on the nature and extent of a Fund's
activities in the particular state or locality. Any such tax imposed on the
Funds will be an expense paid out of the Funds' income and allocated among the
Investors in accordance with the Trust Agreement.
Prospective Investors should consult their own tax advisors concerning the
state and local tax consequences of investing in a Fund.
THE FOREGOING ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL INCOME
TAX PLANNING. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE EFFECTS OF THIS INVESTMENT ON THEIR OWN TAX SITUATIONS.
Item 21. Underwriters.
Not applicable.
Item 22. Calculation of Performance Data.
Total Return
Current yield and total return quotations used by the Funds are based on
standardized methods of computing performance mandated by Commission Rules and
Form N-1A under the Investment Company
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Act. As the following formula indicates, the average annual total return is
determined by multiplying a hypothetical initial purchase order of $1,000 by the
average annual compound rate of return (including capital
appreciation/depreciation and dividends and distributions paid and reinvested)
for the stated period less any fees charged to all shareholder accounts and
annualizing the result. The calculation assumes that all dividends and
distributions are reinvested at the net asset value on the reinvestment dates
during the period. The quotation assumes the account was completely redeemed at
the end of each period and deduction of all applicable charges and fees.
According to the Commission formula:
P(1+T)/n/=ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at
the end of the 1, 5 or 10 year periods (or fractional
portion thereof).
Based upon the foregoing calculations, the average annual total return for: (I)
the Brinson Global Securities Fund for the period April 28, 1995 (commencement
of operations) through December 31, 1996, was 19.45% and for the fiscal year
ended December 31, 1996 was 15.03%; (ii) the Brinson Post-Venture Fund for the
period April 28,1995 (commencement of operations) through December 31, 1996 was
28.57% and for the fiscal year ended December 31, 1996 was 27.16%; (iii) the
Brinson High Yield Fund for the period April 28, 1995 (commencement of
operations) through December 31, 1996 was 13.21% and for the fiscal year ended
December 31, 1996 was 14.73%; (iv) the Brinson Emerging Markets Equity Fund for
the period June 30, 1995 (commencement of operations) through, December 31, 1996
was 1.23% and for the fiscal year ended December 31, 1996 was 9.34%; (v) the
Brinson Emerging Markets Debt Fund for the period June 30, 1995 (commencement of
operations) through December 31, 1996 was 41.55% and for the fiscal year ended
December 31, 1996 was 45.03%; and (vi) the Brinson Short-Term Fund for the
period June 28, 1996 (commencement of operations) through December 31, 1996 was
6.09%.
Yield
- -----
As indicated below, current yield is determined by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders during the
30-day (or one-month) base periods. According to the Commission formula:
Yield = 2[(a-b + 1)/6/-1]
---
cd
where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
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The yield of the Funds may be calculated by dividing the net investment income
per share earned by the particular Fund during a 30-day (or one-month) period by
the net asset value per share on the last day of the period and annualizing the
result on a semiannual basis. A Fund's net investment income per share earned
during the period is based on the average daily number of shares outstanding
during the period entitled to receive dividends and includes dividends and
interest earned during the period minus expenses accrued for the period, net of
reimbursements.
Item 23. Financial Statements.
The Financial Statements and the Report of Independent Accountants thereon
contained in the Funds' Annual Report dated December 31, 1996 are incorporated
herein by reference.
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<PAGE>
APPENDIX A
INVESTMENT PRACTICES
Set forth below is a discussion of various hedging and fixed income
strategies that may be pursued by the Advisor on behalf of some or all of the
Funds. The discussion herein is general in nature and describes hedging and
fixed income strategies of the Funds in both U.S. and non-U.S. markets; certain
of the Funds limit their investments to the United States and the discussion
below should therefore be read in conjunction with the applicable Parts A. The
Funds will not be obligated to pursue any of these investment strategies and
make no representation as to the availability of these techniques at this time
or at any time in the future.
The Funds may buy and sell put and call options traded on U.S. or foreign
exchanges or over-the-counter and may attempt to manage the overall risk of the
portfolio investments through hedging strategies. The Funds may engage in
certain options strategies involving securities, stock and fixed income indexes,
futures and currencies and may enter into forward currency contracts in order to
attempt to enhance income or to hedge the Funds' investments. The Funds also
may use futures contracts, and forward currency contracts, and use options and
futures contracts for hedging purposes or in other circumstances permitted by
the Commodity Futures Trading Commission ("CFTC"). The foregoing instruments
are sometimes referred to collectively as "Hedging Instruments" and certain
special characteristics of and risks associated with using Hedging Instruments
are discussed below. Hedging Instruments may also be used in an attempt to
manage the Funds' average duration, foreign currency exposure and other risks of
investment which can affect fluctuations in the Funds' net asset values.
In addition to the investment limitations of the Funds described herein,
use of these instruments may be subject to applicable regulations of the
Commission, the several options and futures exchanges upon which options and
futures contracts are traded, and other regulatory authorities. In addition to
the products, strategies and risks described herein, the Advisor may become
aware of additional opportunities in connection with options, futures contracts,
forward currency contracts and other hedging techniques. The Advisor may
utilize these opportunities to the extent that they are consistent with the
Funds' investment objectives and permitted by the Funds' investment limitations
and applicable regulatory authorities.
Cover for Options and Futures Strategies. The Funds generally will not use
leverage in their options and futures strategies. In the case of a transaction
entered into as a hedge, the Funds will hold securities, currencies or other
options or futures positions whose values are expected to offset ("cover")
obligations under the transaction. A Fund will not enter into an option or a
futures strategy that exposes the Fund to an obligation to another party unless
it owns (1) an offsetting ("covered") position in securities, currencies or
other options or futures contracts or (2) cash, U.S. government securities or
other liquid assets with a value sufficient at all times to cover its potential
obligations. The Funds will comply with guidelines established by the
Commission with respect to coverage of option and futures strategies by mutual
funds and, if such guidelines so require, will set aside cash, U.S. government
securities or other liquid assets in a segregated account with their custodian
in the amount prescribed. Securities, currencies or other options or futures
positions used for cover and securities held in a segregated account cannot be
sold or closed out while the option or futures strategy is outstanding, unless
they are replaced with similar assets. As a result, there is a possibility that
the use of cover or segregation involving a large percentage of the Funds'
assets could impede fund management or the Funds' ability to meet current
obligations.
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<PAGE>
Option Income and Hedging Strategies. The Funds may purchase and write
(sell) options traded on a U.S. or, where applicable, foreign exchange or over-
the-counter.
The Funds may purchase call options on securities that the Advisor intends
to include in the Funds' portfolio in order to fix the cost of a future
purchase. Call options also may be purchased as a means of enhancing returns
by, for example, participating in an anticipated price increase of a security on
a more limited risk basis than would be possible if the security itself were
purchased. In the event of a decline in the price of the underlying security,
use of this strategy would serve to limit the Funds' potential loss to the
option premium paid; conversely, if the market price of the underlying security
increases above the exercise price and a Fund either sells or exercises the
option, any profit eventually realized will be reduced by the premium paid.
The Funds may purchase put options on securities in order to attempt to
hedge against a decline in the market value of securities held in their
portfolios or to enhance return. A put option would enable the Funds to sell
the underlying security at a predetermined exercise price; thus the potential
for loss to the Funds below the exercise price would be limited to the option
premium paid. If the market price of the underlying security were higher than
the exercise price of the put option, any profit the Funds realize on the sale
of the security would be reduced by the premium paid for the put option less any
amount for which the put option may be sold.
The Funds may write covered call options on securities in which they may
invest for hedging purposes or to increase income in the form of premiums
received from the purchasers of the options. Because it can be expected that a
call option will be exercised if the market value of the underlying security
increases to a level greater than the exercise price, the Funds will generally
write covered call options on securities when the Advisor believes that the
premium received by the Funds, plus anticipated appreciation in the market price
of the underlying security up to the exercise price of the option, will be
greater than the total appreciation in the price of the security. The strategy
may also be used to provide limited protection against a decrease in the market
price of the security in an amount equal to the premium received for writing the
call option less any transactional costs. Thus, in the event that the market
price of the underlying security held by the Funds declines, the amount of such
decline will be offset wholly or in part by the amount of the premium received
by the Funds. If, however, there is an increase in the market price of the
underlying security and the option is exercised, the Funds would be obligated to
sell the security at less than its market value. The Funds would give up the
ability to sell the portfolio securities used to cover the call option while the
call option is outstanding. In the case of over-the-counter options written by
the Funds, such securities would also be considered illiquid. Similarly, assets
used to "cover" over-the-counter options written by the Funds will be treated as
illiquid unless the over-the-counter options are sold to qualified dealers who
agree that a Fund may repurchase any over-the-counter options it writes for a
maximum price to be calculated by a formula set forth in the option agreement.
The "cover" for an over-the-counter option written subject to this procedure
would be considered illiquid only to the extent that the maximum repurchase
price under the formula exceeds the intrinsic value of the option. In addition,
the Funds could lose the ability to participate in an increase in the value of
such securities above the exercise price of the call option because such an
increase would likely be offset by an increase in the cost of closing out the
call option (or could be negated if the buyer chose to exercise the call option
at an exercise price below the securities' current market value).
The Funds may write put options. A put option gives the purchaser of the
option the right to sell, and the writer (seller) the obligation to buy, the
underlying security at the exercise price during the option period. So long as
the obligation of the writer continues, the writer may be assigned an exercise
notice by the purchaser of options requiring the writer to make payment of the
exercise price against delivery of the underlying security or take delivery. The
operation of put options in other respects,
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<PAGE>
including their related risks and rewards, is substantially identical to that of
call options. If the put option is not exercised, the Funds will realize income
in the amount of the premium received. This technique could be used to enhance
current return during periods when the Advisor expects that the price of the
security will not fluctuate greatly. The risk in such a transaction would be
that the market price of the underlying security would decline below the
exercise price less the premium received, in which case the Funds would expect
to suffer a loss.
The Funds may purchase put and call options and write put and covered call
options on indices in much the same manner as the options discussed above,
except that index options may serve as a hedge against overall fluctuations in
the securities markets (or a market sector) rather than anticipated increases or
decreases in the value of a particular security. An index assigns a value to
the securities included in the index and fluctuates with changes in such values.
An option on an index gives the holder the right, upon exercise, to receive an
amount of cash if the closing level of the index upon which the option is based
is greater than (in the case of a call) or lesser than (in the case of a put)
the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple (the "multiplier"). The
indices on which options are traded include both U.S. and non-U.S. markets. The
effectiveness of hedging techniques using index options will depend on the
extent to which price movements in the index selected correlate with price
movements of the securities in which the Funds invest.
The Funds may purchase and write covered straddles on securities or
indexes. A long straddle is a combination of a call and a put option purchased
on the same security. The Funds would enter into a long straddle when the
Advisor believes that it is likely that the price of the underlying security
will be more volatile during the term of the options than the option pricing
implies. A short straddle is a combination of a call and a put written on the
same security. The Funds would enter into a short straddle when the Advisor
believes that it is unlikely the price of the underlying security will be as
volatile during the term of the options as the option pricing implies.
The writing of a call option on a futures contract constitutes a partial
hedge against the declining price of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at the
expiration of the option is below the exercise price, the Funds will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the value of a Fund's investment portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against the increasing price of the security or foreign currency
which is deliverable upon exercise of the futures contract. If the futures price
at the expiration of the option is higher than the exercise price, the Funds
will retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Funds intend to
purchase.
Options on a stock index future give the holder the right to receive cash.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the futures contract. If an option is exercised on the last trading day
prior to the expiration date of the option, the settlement will be made entirely
in cash equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date. If a put or call
option which a Fund has written is exercised,
B-39
<PAGE>
the Fund may incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its options positions, a
Fund's losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. For example, a
Fund will purchase a put option on a futures contract to hedge the Fund's
investment portfolio against the risk of rising interest rates.
Furthermore, with respect to options on futures contracts, a Fund may seek
to close out an option position by writing or buying an offsetting position
covering the same securities or contracts and have the same exercise price and
expiration date. The ability to establish and close out positions on options
will be subject to the maintenance of a liquid secondary market, which cannot be
assured.
Special Characteristics and Risks of Options Trading. A Fund may
effectively terminate its right or obligation under an option by entering into a
closing transaction. If a Fund wishes to terminate its obligation to purchase
or sell securities under a put or call option it has written, the Fund may
purchase a put or call option of the same series (i.e., an option identical in
its terms to the option previously written); this is known as a closing purchase
transaction. Conversely, in order to terminate its right to purchase or sell
specified securities or currencies under a call or put option it has purchased,
a Fund may write an option of the same series as the option held; this is known
as a closing sale transaction. Closing transactions essentially permit the
Funds to realize profits or limit losses on options positions prior to the
exercise or expiration of the option. Whether a profit or loss is realized from
a closing transaction depends on the price movement of the underlying security
or currency and the market value of the option.
In considering the use of options to enhance income or to hedge the Funds'
investments, particular note should be taken of the following:
(1) The value of an option position will reflect, among other things, the
current market price of the underlying security, or index, the time remaining
until expiration, the relationship of the exercise price, the term structure of
interest rates, estimated price volatility of the underlying security, or index
and general market conditions. For this reason, the successful use of options
as a hedging strategy depends upon the Advisor's ability to forecast the
direction of price fluctuations in the underlying securities or, in the case of
index options, fluctuations in the market sector represented by the selected
index.
(2) Options normally have expiration dates of up to 90 days. The exercise
price of the options may be below, equal to or above the current market value of
the underlying securities, index or currencies. Purchased options that expire
unexercised have no value. Unless an option purchased by the Funds is exercised
or unless a closing transaction is effected with respect to that position, the
Funds will realize a loss in the amount of the premium paid and any transaction
costs.
(3) A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Although the
Funds intend to purchase or write only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market will exist for any particular option at any specific time. Closing
transactions may be effected with respect to options traded in the over-the-
counter markets (currently the primary markets for options on debt securities)
only by negotiating directly with the other party to the option contract, or in
a secondary market for the option if such a market exists. Although the Funds
will enter into over-the-
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<PAGE>
counter options only with dealers that are expected to be capable of entering
into closing transactions with the Funds, there can be no assurance that the
Funds will be able to liquidate an over-the-counter option at a favorable price
at any time prior to expiration. In the event of insolvency of the counter-
party, the Funds may be unable to liquidate an over-the-counter option.
Accordingly, it may not be possible to effect closing transactions with respect
to certain options, with the result that the Funds would have to exercise those
options which they have purchased in order to realize any profit. With respect
to options written by the Funds, the inability to enter into a closing
transaction may result in material losses to the Funds. For example, because
the Funds must maintain a covered position with respect to any call option they
write on a security, index, currency or future, the Funds may not sell the
underlying security or currency (or invest any cash, government securities or
short-term debt securities used to cover an index option) during the period they
are obligated under the option. This requirement may impair the Funds' ability
to sell the security or make an investment at a time when such a sale or
investment might be advantageous.
(4) Index options are typically settled in cash. If a Fund writes a call
option on an index, the Fund will not know in advance the difference, if any,
between the closing value of the index on the exercise date and the exercise
price of the call option itself and thus will not know the amount of cash
payable upon settlement. In addition, a holder of an index option who exercises
it before the closing index value for that day is available runs the risk that
the level of the underlying index may subsequently change.
(5) Index prices may be distorted if trading of a substantial number of
securities included in the index is interrupted causing the trading of options
on that index to be halted. If a trading halt occurred, a Fund would not be
able to close out options which it had purchased and the Fund may incur losses
if the underlying index moved adversely before trading resumed. If a trading
halt occurred and restrictions prohibiting the exercise of options were imposed
through the close of trading on the last day before expiration, exercises on
that day would be settled on the basis of a closing index value that may not
reflect current price information for securities representing a substantial
portion of the value of the index.
(6) If a Fund holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that the
level of the underlying index may change before closing. If such a change
causes the exercised option to fall "out-of-the-money," the Fund will be
required to pay the difference between the closing index value and the exercise
price of the option (times the applicable multiplier) to the assigned writer.
Although a Fund may be able to minimize this risk by withholding exercise
instructions until just before the daily cutoff time or by selling rather than
exercising the option when the index level is close to the exercise price, it
may not be possible to eliminate this risk entirely because the cutoff times for
index options may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.
(7) The Funds' activities in the options markets may result in higher fund
turnover rates and additional brokerage costs; however, the Funds may also save
on commissions by using options as a hedge rather than buying or selling
individual securities in anticipation or as a result of market movements.
Investment Limitations On Options Transactions. The ability of the Funds
to engage in options transactions is subject to certain limitations. A Fund may
purchase call options to the extent that premiums paid by the Fund do not
aggregate more than 20% of such Fund's total assets. A Fund will write call
options only on a covered basis, which means that such Fund will own the
underlying security subject to a call option at all times during the option
period. The Funds may only purchase put options to
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<PAGE>
the extent that the premiums on all outstanding put options do not exceed 20% of
each Fund's total assets. With regard to the writing of put options, the Funds
will limit the aggregate value of the obligations underlying such put options to
40% of each Fund's total net assets. Each of the Funds will invest in over-the-
counter options only to the extent consistent with the 15% of the Fund's net
assets limit on investments in illiquid securities.
Forward Foreign Currency Contracts. The Funds may purchase or sell
currencies and/or engage in forward foreign currency transactions in order to
expedite settlement of portfolio transactions and to manage currency risk. A
forward foreign currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders, usually large commercial banks, and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades. The Funds will
account for these contracts by marking-to-market each day at current forward
values.
Although the contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate these contracts. In such event,
the Funds' ability to utilize forward foreign currency exchange contracts may be
restricted. The Funds will comply with guidelines established by the Commission
with respect to coverage of forward contracts entered into by mutual funds and,
if such guidelines so require, will set aside cash, U.S. government securities
or other liquid assets in a segregated account with their custodian in the
amount prescribed. Under normal circumstances, consideration of the prospect
for currency parities will be incorporated into the longer term investment
decisions made with regard to overall diversification strategies. The Advisor,
however, believes that it is important to have the flexibility to enter into
such forward contracts when it determines that the best interests of the Funds
will be served.
At the maturity of a forward contract, the Funds may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
At or before the maturity date of a forward contract requiring the Funds to
sell a currency, the Funds may either sell the portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
their contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Funds will obtain, on the same maturity date, the
same amount of the currency that they are obligated to deliver. Similarly, a
Fund may close out a forward contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. The Funds
would realize a gain or loss as a result of entering into such an offsetting
forward currency contract under either circumstance to the extent the exchange
rate or rates between the currencies involved moved between the execution dates
of the first contract and the offsetting contract.
The cost to the Funds of engaging in forward currency contracts will vary
with factors such as the currencies involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. The use of forward currency contracts will not eliminate fluctuations
in the prices of the
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<PAGE>
underlying securities a Fund owns or intends to acquire, but it will fix a rate
of exchange in advance. In addition, although forward currency contracts limit
the risk of loss due to a decline in the value of the hedged currencies, at the
same time they limit any potential gain that might result should the value of
the currencies increase.
Futures Contracts The Funds may enter into contracts for the purchase or
sale for future delivery of securities, including index contracts or foreign
currencies. While futures contracts provide for the delivery of securities,
deliveries usually do not occur. Futures contracts are generally terminated by
entering into offsetting transactions.
The Funds may enter into such futures contracts to protect against the
adverse affects of fluctuations in security prices, interest rates or foreign
exchange rates without actually buying or selling the securities or foreign
currency. For example, if interest rates are expected to increase, a Fund might
enter into futures contracts for the sale of debt securities. Such a sale would
have much the same effect as selling an equivalent value of the debt securities
owned by the Funds. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the futures
contracts to the Funds would increase at approximately the same rate, thereby
keeping the net asset value of a Fund from declining as much as it otherwise
would have. Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of securities at higher prices. Since the fluctuations in the value
of futures contracts should be similar to those of debt securities, the Funds
could take advantage of the anticipated rise in value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Funds could then buy debt securities on
the cash market.
A stock index futures contract obligates the seller to deliver (and the
purchaser to take) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the last
trading day of the contract and the price at which the agreement was made. Open
futures contracts are valued on a daily basis and a Fund may be obligated to
provide or receive cash reflecting any decline or increase in the contract's
value. No physical delivery of the underlying stocks in the index is made in
the future.
To the extent that market prices move in an unexpected direction, the Funds
may not achieve the anticipated benefits of futures contracts or may realize a
loss. For example, if a Fund is hedged against the possibility of an increase
in interest rates which would adversely affect the price of securities held in
its portfolio and interest rates decrease instead, such Fund would lose part or
all of the benefit of the increased value which it has because it would have
offsetting losses in its futures position. In addition, in such situations, if
the Fund had insufficient cash, it may be required to sell securities from its
portfolio to meet daily variation margin requirements. Such sales of securities
may, but will not necessarily, be at increased prices which reflect the rising
market. A Fund may be required to sell securities at a time when it may be
disadvantageous to do so.
In addition, when a Fund engages in futures transactions, to the extent
required by the Commission, it will maintain with its custodian, assets in a
segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents, U.S. government securities
or other liquid assets from its portfolio in an amount equal to the difference
between the fluctuating market value of such futures contracts and the aggregate
value of the initial and variation margin maintained by the Fund with respect to
such futures contracts.
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Swaps (All Funds, with the exception of the Brinson U.S. Equity Fund, the
Brinson U.S. Large Capitalization Equity Fund, the Brinson U.S. Intermediate
Capitalization Equity Fund and the Brinson EXDEX(R) Fund). The Funds may engage
in interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars and other derivative instruments. The Funds expect to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of their portfolios, to protect against
currency fluctuations, as a technique for managing portfolio duration (i.e., the
price sensitivity to changes in interest rates) or to protect against any
increase in the price of securities the Funds anticipate purchasing at a later
date, or to gain exposure to certain markets.
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BRINSON RELATIONSHIP FUNDS
Form N-1A
Part C. Other Information
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Included in Part A:
None.
Included in Part B:
Brinson Relationship Funds:
(1) Notes to Financial Statements at December 31, 1996 (audited).*
(2) Report of Independent Auditors relating to the Financial Statements at
December 31, 1996 and for the year then ended.*
Brinson Global Securities Fund:
-------------------------------
(1) Schedule of Investments at December 31, 1996 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1996 (audited).*
(3) Statement of Operations for the period April 28, 1995 (commencement of
operations) to December 31, 1995 and the fiscal year ended December 31,
1996 (audited).*
(4) Statement of Changes in Net Assets for the period April 28, 1995
(commencement of operations) to December 31, 1995 and the fiscal year ended
December 31, 1996 (audited).*
(5) Financial Highlights (audited).*
Brinson Short-Term Fund:
------------------------
(1) Schedule of Investments at December 31, 1996 (audited).
(2) Statement of Assets and Liabilities at December 31, 1996 (audited).
(3) Statement of Operations for the period June 28, 1996 (commencement of
operations) to December 31, 1995 and the fiscal year ended December 31,
1996 (audited).
(4) Statement of Changes in Net Assets for the period June 28, 1996
(commencement of operations) to December 31, 1995 and the fiscal year ended
December 31,1996 (audited).
(5) Financial Highlights (audited).
<PAGE>
Brinson Post-Venture Fund:
--------------------------
(1) Schedule of Investments at December 31, 1996 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1996 (audited).*
(3) Statement of Operations for the period April 28, 1995 (commencement of
operations) to December 31, 1995 and the fiscal year ended December 31,
1996 (audited).*
(4) Statement of Changes in Net Assets for the period April 28, 1995
(commencement of operations) to December 31, 1995 and the fiscal year ended
December 31, 1996 (audited).*
(5) Financial Highlights (audited).*
Brinson High Yield Fund:
------------------------
(1) Schedule of Investments at December 31, 1996 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1996 (audited).*
(3) Statement of Operations for the period April 28, 1995 (commencement of
operations) to December 31, 1995 and the fiscal year ended December 31,
1996 (audited).*
(4) Statement of Changes in Net Assets for the period April 28, 1995
(commencement of operations) to December 31, 1995 and the fiscal year ended
December 31, 1996 (audited).*
(5) Financial Highlights (audited).*
Brinson Emerging Markets Equity Fund:
------------------------------------------------
(1) Schedule of Investments at December 31, 1996 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1996 (audited).*
(3) Statement of Operations for the period June 30, 1995 (commencement of
operations) to December 31, 1995 and the fiscal year ended December 31,
1996 (audited).*
(4) Statement of Changes in Net Assets for the period June 30, 1995
(commencement of operations) to December 31, 1995 and the fiscal year ended
December 31, 1996 (audited).*
(5) Financial Highlights (audited).*
Brinson Emerging Markets Debt Fund:
----------------------------------------------
(1) Schedule of Investments at December 31, 1996 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1996 (audited).*
(3) Statement of Operations for the period June 30, 1995 (commencement of
operations) to December 31, 1995 and the fiscal year ended December 31,
1996 (audited).*
(4) Statement of Changes in Net Assets for the period June 30, 1995
(commencement of operations) to December 31, 1995 and the fiscal year ended
December 31, 1996 (audited).*
* Incorporated by reference to the Trusts Financial Statements filed
electronically with the Annual Report dated December 31, 1996 and filed with the
Securities and Exchange Commission on February 28, 1997.
(b) Exhibits
-------------
Exhibit
Number Description
---- ---------
(1) (a) Certificate of Trust Amendment to certificate of Trust and
Agreement and Declaration of Trust of the Registrant/1/
(b) Certificate of Amendment of Agreement and Declaration of Trust
of the Registrant/2/
(2) By-Laws of the Registrant/3/
(3) None.
(4) None.
(5) Investment Advisory Agreement between the Registrant and Brinson
Partners, Inc. dated April 26, 1995/3/
(6) Not Applicable.
(7) Not Applicable.
(8) See (9)(a).
(9) Form of Multiple Services Agreement dated May 9, 1997 between the
Registrant and Morgan Stanley Trust Company ("MSTC")/3/
(10) Not Applicable.
<PAGE>
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) None.
(15) None.
(17) See Exhibit 27 below.
(18) None.
(16) None.
(27) Financial Data Schedule. /3/
- -------------------------------------------------
/1/ Incorporated by reference from the Registrant's Registration Statement
on Form N-1A filed with the Securities and Exchange Commission on
April 27, 1995.
/2/ Incorporated by reference from the Registrant's Registration Statement
on Form N-1A filed electronically with the Securities and Exchange
Commission on August 13, 1996.
/3/ Incorporated by reference from the Registrant's Registration Statement
on Form N-1A filed electronically with the Securities and Exchange
Commission on April 30, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant.
Registrant is controlled by Brinson Trust Company Collective
Investment Trust for Pension & Profit Sharing Trust's Global Securities Fund.
Chicago, IL by reason of its ownership of 38.24% of shares of the Trust.
Item 26. Number of Holders of Securities.
<TABLE>
<CAPTION>
Title of Class Number of Shareholders of Record
Shares of Beneficial Interest as of July 29, 1997
----------------------------- --------------------------------
<S> <C> <C>
Series 1: Brinson Global Securities Fund 12
Series 2: Brinson Global Equity Fund 0
Series 3: Brinson U.S. Equity Fund 0
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Series 4: Brinson U.S. Large Capitalization
Equity Fund 0
Series 5: Brinson U.S. Intermediate Capitalization
Equity Fund 0
Series 6: Brinson Post Venture Fund 5
Series 7: Brinson EXDEX(R) Fund 0
Series 8: Brinson Non-U.S. Equity Fund 0
Series 9: Brinson Emerging Markets Equity Fund 20
Series 10: Brinson Bond Plus Fund 0
Series 11: Brinson U.S. Bond Fund 0
Series 12: Brinson U.S. Short/Intermediate Fixed
Income Fund 0
Series 13: Brinson Short-Term Fund 2
Series 14: Brinson High Yield Fund 6
Series 15: Brinson Emerging Markets Debt Fund 14
</TABLE>
Item 27. Indemnification.
As permitted by Sections 17(h) and (i) of the Investment Company Act
of 1940, as amended (the "Investment Company Act"), indemnification provisions
for each of the Registrant's Trustees, officers, employees, agents and persons
who serve at the Trust's request as directors, officers or trustees of other
organizations in which the Trust has any interest as a shareholder, creditor or
otherwise are set forth in Article V, Section 5.2 of the Registrant's Agreement
and Declaration of Trust, as amended (included in Item 24(b)(1) above).
Pursuant to Article V, Section 5.1 of the Registrant's Agreement and
Declaration of Trust, as amended, the Trust shall indemnify each of its
Trustees, officers, employees, and agents against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as fines
and penalties, and as counsel fees) reasonably incurred by him, her or it in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he, she or it may be involved or
with which he, she or it may be threatened, while in office or thereafter, by
reason of his, her or its being or having been such a Trustee, officer, employee
or agent, except with respect to any matter as to which he, she or it shall have
been adjudicated to have acted in bad faith, or with willful misfeasance, gross
negligence or reckless disregard of his, her or its duties to the Registrant.
"Director and Officer" liability policies purchased by the Trust
insure the Trust's Trustees and officers, subject to the policies' coverage
limits, exclusions and deductibles, against loss resulting from claims by reason
of any act, error, omission, misstatement, misleading statement, neglect or
breach of duty.
Indemnification of the Registrant's Custodian and Administrator
against certain liabilities is provided for in the following documents:
(a) Section V of the Custodian Agreement (Item 24(b)(8) above).
<PAGE>
(b) Section 9(d) of the Multiple Services Agreement (Item 24(b)(9)(d)
above).
(c) Section III of the Multiple Services Agreement (Item 24(b)(9)(e)
above).
The Registrant hereby undertakes that it will apply the
indemnification provision of its Agreement and Declaration of Trust as amended,
in a manner consistent with Release 11,330 of the Securities and Exchange
Commission under the Investment Company Act, so long as the interpretation of
Sections 17(h) and 17(i) of the Investment Company Act remains in effect.
Item 28. Business and Other Connections of Advisor.
Brinson Partners, Inc. provides investment advisory services for a
variety of individuals and institutions and as of March 31, 1997 had
approximately $124.5 billion in assets under management. It presently acts as
investment advisor to nine other investment companies: The Brinson Funds,
Enterprise Accumulation Trust - International Growth Portfolio, Enterprise Group
of Funds, Inc.- International Growth Portfolio, Fort Dearborn Income Securities,
Inc., Managed Accounts Services Portfolio Trust - Pace Large Company Value
Equity Investments, The Hirtle Callaghan Trust - International Equity Portfolio,
John Hancock Variable Series Trust I - International Balanced Fund, AON Funds -
International Equity Fund and The Republic Funds - Republic Equity Fund. Brinson
Partners, Inc. is controlled by Swiss Bank Corporation. Swiss Bank Corporation
with headquarters in Basel, Switzerland, is an internationally diversified
organization with operations in many aspects of the financial services industry.
For information as to the business, profession, vocation or employment
of a substantial nature engaged in by Brinson Partners, Inc. or any of its
respective officers and directors during the past two years, reference is made
to Form ADV, filed with the Securities and Exchange Commission under the
Investment Advisors Act of 1940, as amended, by Brinson Partners, Inc.,
incorporated herein by reference (SEC File No. 801-34910).
Item 29. Principal Underwriter.
Not Applicable.
Item 30. Location of Accounts and Records.
All account, book and other documents required to be maintained by
Section 31(a) of the Investment Company Act and Rules 31a-1 to 31a-3 promulgated
thereunder will be maintained either at the offices of (i) the Registrant
(Brinson Relationship Funds, 209 South LaSalle Street, Chicago, IL 60604-1294);
(ii) the Advisor (Brinson Partners, Inc., 209 South LaSalle Street, Chicago, IL
60604-1294); (iii) the administrators--until May 9, 1997, FPS Services, Inc.,
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903. Effective
May 10, 1997, Morgan Stanley Trust Company, One Pierrepont Plaza, Brooklyn, NY
11201, or Chase Global Funds Services Company, 73 Tremont Street, Boston,
Massachusetts, 02108-3913; or (iv) the Custodian--until May 9, 1997, Bankers
Trust Company, One Bankers Trust Plaza, New York, NY 10006-1107; effective May
10, 1997, Morgan Stanley Trust Company, One Pierrepont Plaza, Brooklyn, NY
11201.
Item 31. Management Services.
The Registrant is not a party to any management-related service contract not
discussed in Part A or Part B of this Form.
Item 32. Undertakings.
The undersigned Registrant hereby undertakes to include a discussion of the
Trust's performance in the Trust's annual report to shareholders which will be
made available to shareholders upon request and without charge.
<PAGE>
The undersigned Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of a Trustee
or Trustees if it is requested to do so by the holders of at least 10% of its
outstanding shares, and to assist in communications with other shareholders as
required by Section 16(c) of the Investment Company Act, as though Section 16(c)
of the Investment Company Act were applicable to the Registrant.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Chicago, State of Illinois on the 14th day of August, 1997.
----
BRINSON RELATIONSHIP FUNDS
(Registrant)
By /s/ E. Thomas McFarlan*
-----------------------
E. Thomas McFarlan
President and Treasurer
/s/ Helen A. Robichaud
- ----------------------
Helen A. Robichaud
as Attorney-in-Fact and Agent
pursuant to Power of Attorney
