<PAGE>
Marked to Indicate Changes
Filed with Exhibits on July 31, 1998
File No. 811-9036
----------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 12
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 312-220-7100
---------
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
July 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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, 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 active management
process is intended, by the Advisor, to produce superior performance relative
to the Benchmark.
A-2
<PAGE>
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.
A-3
<PAGE>
GLOBAL SECURITIES MARKETS INDEX
NORMAL ASSET ALLOCATION MIX
<TABLE>
<CAPTION>
Normal Asset Class
Allocation Strategy
Mix Ranges
---------- -----------
<S> <C> <C>
Asset Class
- -----------
U.S. Equity 40% 10-80%
Non-U.S. Equities 22% 5-40%
Emerging Market Equities 3% 0-8%
Dollar Bonds 21% 5-70%
High Yield Bonds 3% 0-10%
Non-U.S. Bonds 9% 2-25%
Emerging Market Debt 2% 0-8%
Cash and Cash Equivalents 0% 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
A-4
<PAGE>
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.
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
A-5
<PAGE>
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.
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.
Under the terms of a second exemptive order issued by the Commission,
the Fund may invest cash (i) held for temporary defensive purposes; (ii) not
invest pending investment in securities; (iii) that is set aside to cover an
obligation or commitment of the Fund to purchase securities or other assets at a
later date; (iv) to be invested on a strategic management basis (i-iv is herein
referred to as "Uninvested Cash"); and (v) collateral that it receives from the
borrowers of its portfolio securities in connection with the Fund's securities
lending program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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
A-6
<PAGE>
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 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).
A-7
<PAGE>
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 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.
A-8
<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 segregate in accordance with Commission positions 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 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
A-9
<PAGE>
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
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 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
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.
A-10
<PAGE>
LOAN PARTICIPATIONS AND ASSIGNMENTS
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 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
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.
A-11
<PAGE>
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 (the "Board") 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 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
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.
A-12
<PAGE>
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. 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 other 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
A-13
<PAGE>
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.
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
A-14
<PAGE>
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.
In light of the risks described above, the Board 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
A-15
<PAGE>
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 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 segregate liquid
assets in accordance with Commission positions 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 segregate 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 in accordance with Commission positions.
A-16
<PAGE>
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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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 segregate cash, U.S. government securities or
other liquid assets in accordance with Commission positions 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 segregate cash, U.S. government securities or other liquid
assets in accordance
A-17
<PAGE>
with Commission positions 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. 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 segregate assets in
accordance with Commission positions 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.
A-18
<PAGE>
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.
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 a swap contract, the Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will
be able to meet its obligations pursuant to a 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 a 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, the creditworthiness of swap counterparties in order to minimize
the risk of swaps.
A-19
<PAGE>
The Advisor and the Trust do not believe that the Fund's obligations
under 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 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 segregated in accordance with Commission positions. 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 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 Sundays and 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 three 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.
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. 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
A-20
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, Il 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with many operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
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
A-21
<PAGE>
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 this 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.
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 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
A-22
<PAGE>
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 and semi-annual reports which are distributed to existing Investors),
brokerage 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
A-23
<PAGE>
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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a control
person 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 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
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 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, or with
respect to additional matters relating to the Trust, as required under the
Investment Company Act. Pursuant to the Declaration of Trust, Investor
A-24
<PAGE>
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 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 312-220-7100.
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.
A-25
<PAGE>
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. 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. 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
A-26
<PAGE>
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.
A-27
<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.
NOTE: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category
A-28
<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.
A-29
<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, 1997. 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.
For Periods Ending 12/31/97
<TABLE>
<CAPTION>
Annualized
-------------------------------------------
1 year 2 years 3 years 5 years 10 years Inception
------ ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Brinson Global 11.75% 13.38% 17.45% 12.48% 13.36% 15.16%
Securities Fund
Global Securities 14.30% 13.48% 17.33% 13.39% 12.48% 14.45%
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."
A-30
<PAGE>
OFFEREE NO. ____
BRINSON RELATIONSHIP FUNDS
BRINSON U.S. EQUITY FUND
PART A
July 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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
A-2
<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.
A-3
<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.
Under the terms of a second exemptive order issued by the Commission,
the Fund may invest cash (i) held for temporary defensive purposes; (ii) not
invested pending investment in securities; (iii) that is set aside to cover an
obligation or commitment of the Fund to purchase securities or other assets at a
later date; (iv) to be invested on a strategic management basis (i-iv is herein
referred to as "Uninvested Cash"); and (v) collateral that it receives from the
borrowers of its portfolio securities in connection with the Fund's securities
lending program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment Company which has retained the Advisor to manage its investments.
The Trustees of the Trust also serve as Trustees of the Brinson Supplementary
Trust. The Supplementary Trust Series will invest in U.S. dollar denominated
money market instruments having a dollar-weighted average maturity of 90 days or
less. The Fund's investment of Uninvested Cash in shares of the Supplementary
Trust Series will not exceed 25% of the Fund's total assets.
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.
A-4
<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 segregate in accordance with Commission positions 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.
A-5
<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. One
example of illiquid securities is securities purchased under Rule 144A under
the Securities Act ("Rule 144A Securities"). While maintaining oversight, the
Board of Trustees (the "Board") 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 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
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
A-6
<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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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
A-7
<PAGE>
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 segregate cash, U.S. government securities or
other liquid assets in accordance with Commission positions 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 segregate 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 in accordance with Commission positions.
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. 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.
A-8
<PAGE>
In addition, when the Fund engages in futures transactions, to the
extent required by the Commission, the Fund will segregate in accordance with
Commission positions assets 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 Sundays and 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 three 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
A-9
<PAGE>
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.
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. 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 Internal Revenue Code of 1986, as amended (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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
A-10
<PAGE>
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 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
A-11
<PAGE>
(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
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 and semi-annual reports which are distributed to existing Investors),
brokerage 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.
A-12
<PAGE>
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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, the Town of West Hartford Pension Plan, West Hartford,
Connecticut and Mary Hitchcock Memorial Endowment Account, Lebanon, New
Hampshire, were control persons of the Fund and Brinson Trust Company Collective
Investment Trust for Pension and Profit Sharing Trusts - Global Securities Fund,
Chicago, Illinois, was a control person of 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 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
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
A-13
<PAGE>
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 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, 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.
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 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 312-220-7100.
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
A-14
<PAGE>
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. 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. 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.
A-15
<PAGE>
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.
A-16
<PAGE>
OFFEREE NO.___
BRINSON RELATIONSHIP FUNDS
BRINSON U.S. LARGE CAPITALIZATION EQUITY FUND
PART A
July 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalizatin Value 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 U.S. Cash Management Prime 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.
A-1
<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 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 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
A-2
<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 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.
A-3
<PAGE>
Under the terms of an exemptive order issued by the United States
Securities and Exchange Commission (the "Commission"), the Fund may invest cash
(i) held for temporary defensive purposes; (ii) not invested pending investment
in securities; (iii) that is set aside to cover an obligation or commitment of
the Fund to purchase securities or other assets at a later date; (iv) to be
invested on a strategic management basis (i-iv is herein referred to as
"Uninvested Cash"); and (v) collateral that it receives from the borrowers of
its portfolio securities in connection with the Fund's securities lending
program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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 segregate in accordance with the Commission positions,
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
A-4
<PAGE>
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 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. One
example of illiquid securities is securities purchased under Rule 144A under
the Securities Act ("Rule 144A Securities") and over-the-counter options
described below. While maintaining oversight, the Board of Trustees (the
"Board") 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 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 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.
A-5
<PAGE>
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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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.
A-6
<PAGE>
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 segregate cash, U.S. government securities or
other liquid assets in accordance with Commission positions 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 segregate cash, U.S. government securities or other liquid
assets in accordance with Commission positions 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. 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 segregate assets in accordance
with Commission positions 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.
A-7
<PAGE>
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 Sundays and 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 three 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.
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. 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).
A-8
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
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
A-9
<PAGE>
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 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
A-10
<PAGE>
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 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 and semi-annual reports which are distributed to existing Investors),
brokerage 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
A-11
<PAGE>
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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a control
person of 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 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
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 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, 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-12
<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 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 312-220-7100.
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-13
<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. 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. 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.
A-14
<PAGE>
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-15
<PAGE>
OFFEREE NO. _______
BRINSON RELATIONSHIP FUNDS
BRINSON U.S. INTERMEDIATE CAPITALIZATION EQUITY FUND
PART A
July 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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 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 investment
company that invests in a broader range of securities, because changes in the
financial condition
A-2
<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 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.
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.
A-3
<PAGE>
Under the terms of an exemptive order issued by the United States
Securities and Exchange Commission (the "Commission"), the Fund may invest cash
(i) held for temporary defensive purposes; (ii) not invested pending investment
in securities; (iii) that is set aside to cover an obligation or commitment of
the Fund to purchase securities or other assets at a later date; (iv) to be
invested on a strategic management basis (i-iv is herein referred to as
"Uninvested Cash"); and (v) collateral that it receives from the borrowers of
its portfolio securities in connection with the Fund's securities lending
program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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 segregate in accordance with the Commission positions
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
A-4
<PAGE>
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 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. One
example of illiquid securities is securities purchased under Rule 144A under
the Securities Act ("Rule 144A Securities"). While maintaining oversight, the
Board of Trustees (the "Board") 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 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
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.
A-5
<PAGE>
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 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.
A-6
<PAGE>
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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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 segregate cash, U.S. government securities or
other liquid assets in accordance with Commission positions 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 segregate cash, U.S. government securities or other liquid
assets in accordance with Commission positions 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
A-7
<PAGE>
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. 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 segregate in accordance with
Commission positions assets 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
A-8
<PAGE>
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 Sundays and 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 three 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.
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. 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 Internal Revenue Code of 1986, as amended (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
A-9
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an in investment management firm managing, as of March 31, 1998,
approximately U.S. $158 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 Advisers, 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 is a subsidiary of
Swiss Bank Corporation, one of the three largest banks in Switzerland. The SBC
Brinson division of Swiss Bank Corporation, of which Brinson Partners is a part,
has offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
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.
A-10
<PAGE>
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 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
A-11
<PAGE>
limited to, legal expenses, audit fees, printing costs (e.g., cost of printing
annual reports and semi-annual reports which are distributed to existing
Investors), brokerage 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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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
A-12
<PAGE>
issuance of which the Board 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 15, 1998, Brinson Trust Company Collective Investment Trust for
Pension and Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois,
was a control person of 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 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
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 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, 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 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
A-13
<PAGE>
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 312-220-7100.
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. 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
A-14
<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. 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.
A-15
<PAGE>
OFFEREE NO. _____
BRINSON RELATIONSHIP FUNDS
BRINSON POST-VENTURE FUND
PART A
JULY 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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 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.
A-2
<PAGE>
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 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
A-3
<PAGE>
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.
Under the terms of an exemptive order issued by the United States
Securities and Exchange Commission (the "Commission"), the Fund may invest cash
(i) held for temporary defensive purposes; (ii) not invested pending investment
in securities; (iii) that is set aside to cover an obligation or commitment of
the Fund to purchase securities or other assets at a later date; (iv) to be
invested on a strategic management basis (i-iv is herein referred to as
"Uninvested Cash"); and (v) collateral that it receives from the borrowers of
its portfolio securities in connection with the Fund's securities lending
program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments.
The Trustees of the Trust also serve as Trustees of the Brinson Supplementary
Trust. The Supplementary Trust Series will invest in U.S. dollar denominated
money market instruments having a dollar-weighted average maturity of 90 days or
less. The Fund's investment of Uninvested Cash in shares of the Supplementary
Trust Series will not exceed 25% of the Fund's total assets.
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 segregate in accordance with Commission positions 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.
A-4
<PAGE>
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 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 (the "Board") 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 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
A-5
<PAGE>
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 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
other 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.
A-6
<PAGE>
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 segregates
cash, U.S. government
A-7
<PAGE>
securities or other liquid assets in accordance with Commission positions 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. 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 segregate assets in
accordance with Commission positions 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
A-8
<PAGE>
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.
If there is a default by the counterparty to a swap contract, the Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will
be able to meet its obligations pursuant to a swap contract or that, in the
event of default,
A-9
<PAGE>
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 a 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, the
creditworthiness of swap counterparties in order to minimize the risk of
swaps.
The Advisor and the Trust do not believe that the Fund's obligations
under 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 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 segregated in accordance with Commission positions.
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, the creditworthiness
of 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 Sundays and 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 three 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.
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
A-10
<PAGE>
Board. 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 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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
Brinson Partners also serves as the investment advisor to nine other
investment
A-11
<PAGE>
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.
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 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
A-12
<PAGE>
(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 and semi-annual reports which are distributed to existing Investors),
brokerage 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
A-13
<PAGE>
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 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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for
Pension and Profit Sharing Trusts - U.S. Equity Fund, Chicago, Illinois was a
control person of the Fund and Brinson Trust Company Collective Investment
Trust for Pension and Profit Sharing Trusts - Global Securities Fund, Chicago,
Illinois, was a control person of 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 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
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
A-14
<PAGE>
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 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, 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 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 312-220-7100.
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,
A-15
<PAGE>
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. 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. 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
A-16
<PAGE>
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.
A-17
<PAGE>
APPENDIX A
Set forth below is the performance of the Brinson Trust Company Collective
Investment Trust's Post-Venture Fund ("BTC Post-Venture Fund") for periods ended
April 28, 1995 linked with the Brinson Relationship Funds' Post-Venture Fund
("Brinson Post-Venture Fund") for periods ending December 31, 1997. The Brinson
Post-Venture Fund assumed the assets of the BTC Post-Venture 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 been verified or
audited. The BTC Post-Venture 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 Post-Venture Fund.
For Periods Ending 12/31/97
<TABLE>
<CAPTION>
Annualized
---------------------------------
Since
1 year 2 Years 3 Years 5 Years Inception
------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Brinson Post-Venture Fund 31.55% 29.34% 30.21% 20.09% 21.32%
Wilshire Small Stock Index /(1)/ 22.82% 20.62% 23.84% 16.65% 11.60%
Inception date is 12/31/86
</TABLE>
/(1)/ The Wilshire Small Stock Index is calculated gross of fees.
The Wilshire Small Stock Index is the benchmark for both the BTC Post-Venture
Fund and the Brinson Post-Venture Fund. For the further description of the
benchmark, please review the section titled "Investment Process".
A-18
<PAGE>
OFFEREE NO.______
BRINSON RELATIONSHIP FUNDS
BRINSON EXDEX(R) FUND
PART A
JULY 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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
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.
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
A-2
<PAGE>
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.
Under the terms of an exemptive order issued by the United States
Securities and Exchange Commission (the "Commission"), the Fund may invest cash
(i) held for temporary defensive purposes; (ii) not invested pending investment
in securities; (iii) that is set aside to cover an obligation or commitment of
the Fund to purchase securities or other assets at a later date; (iv) to be
invested on a strategic management basis (i-iv is herein referred to as
"Uninvested Cash"); and (v) collateral that it receives from the borrowers of
its portfolio securities in connection with the Fund's securities lending
program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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
A-3
<PAGE>
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 segregate in accordance with the Commission positions
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") and over-the-counter options described
below. While maintaining oversight, the Board of Trustees (the "Board") 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 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
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
A-4
<PAGE>
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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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 segregate cash, U.S. government securities or
other liquid assets in accordance with Commission positions 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 segregate cash, U.S. government securities or other liquid
assets in accordance with Commission positions 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.
A-5
<PAGE>
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. 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 segregate assets in
accordance with Commission positions 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 Sundays and holidays) or such longer period as the
Commission may prescribe by rules and regulations, reduce the amount of its
borrowings to such an extent
A-6
<PAGE>
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 three 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.
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. 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."
A-7
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
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.
A-8
<PAGE>
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 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 and semi-annual reports which are distributed to existing Investors),
brokerage commissions, fees and expenses of the Administrator and the expenses
of obtaining quotations of
A-9
<PAGE>
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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 may, from time to time, authorize, shall have no preemptive
rights. The shares are not transferable except to the Trust.
A-10
<PAGE>
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 15, 1998, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a control
person of 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 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
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 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, 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 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.
A-11
<PAGE>
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 312-220-7100.
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. 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. For a detailed description, see Item 19 in Part B.
A-12
<PAGE>
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.
A-13
<PAGE>
OFFEREE NO. ____
BRINSON RELATIONSHIP FUNDS
BRINSON NON-U.S. EQUITY FUND
PART A
July 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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 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 Investment Company Act), the
Fund may be subject to greater investment and credit risk than an
A-2
<PAGE>
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.
A-3
<PAGE>
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.
Under the terms of a second exemptive order issued by the Commission,
the Fund may invest cash (i) held for temporary defensive purposes; (ii) not
invested pending investment in securities; (iii) that is set aside to cover an
obligation or commitment of the Fund to purchase securities or other assets at a
later date; (iv) to be invested on a strategic management basis (i-iv is herein
referred to as "Uninvested Cash"); and (v) collateral that it receives from the
borrowers of its portfolio securities in connection with the Fund's securities
lending program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as trustees of the Brinson Supplementary Trust.
The Trust Series will invest in U.S. dollar denominated money market instruments
having a dollar-weighted average maturity of 90 days or less. The Fund's
investment of Uninvested Cash in shares of the Supplementary Trust Series will
not exceed 25% of the Fund's total 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
A-4
<PAGE>
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 (the "Board") 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 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
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.
A-5
<PAGE>
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 other 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
A-6
<PAGE>
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 segregate in accordance with Commission positions 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.
A-7
<PAGE>
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
segregate liquid assets in accordance with Commission positions 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 segregate in accordance with Commission positions 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
A-8
<PAGE>
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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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 segregate cash, U.S. government securities or
other liquid assets in accordance with Commission positions 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 segregate cash, U.S. government securities or other liquid
assets in accordance with Commission positions 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
A-9
<PAGE>
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. 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 segregate assets in
accordance with Commission positions 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.
A-10
<PAGE>
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 a swap contract, the Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will
be able to meet its obligations pursuant to a 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 a 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, the creditworthiness of swap counterparties in order to minimize
the risk of swaps.
The Advisor and the Trust do not believe that the Fund's obligations
under 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 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 segregated in accordance with Commission positions. 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
A-11
<PAGE>
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 Sundays and 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 three 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.
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. 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
A-12
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago,IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
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.
A-13
<PAGE>
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 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 and semi-annual
A-14
<PAGE>
reports which are distributed to existing Investors), brokerage 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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
A-15
<PAGE>
Income Fund, the Brinson Short-Term Fund, the Brinson U.S. Cash Management Prime
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 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 15, 1998, the Board of Regents of the University of Wisconsin, Madison,
Wisconsin and Mac & Co., Pittsburgh, Pennsylvania were control persons of the
Fund and Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a control
person of 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 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
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 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, 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 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
A-16
<PAGE>
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 312-220-7100.
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
A-17
<PAGE>
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. 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. 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
A-18
<PAGE>
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-19
<PAGE>
OFFEREE NO. ___
BRINSON RELATIONSHIP FUNDS
BRINSON EMERGING MARKETS EQUITY FUND
BRINSON EMERGING MARKETS DEBT FUND
PART A
JULY 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Intermediate Capitalization Fund, the Brinson U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<PAGE>
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 Equity Benchmark is
constructed to minimize country specific risk while providing regional exposure
similar to the Morgan Stanley Capital International Emerging Markets (Free)
Index ("MSCI-EMF"), a market capitalization index.
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. Those
A-2
<PAGE>
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
bear all the costs of such facilities and the depository of an unsponsored
facility frequently is under no
A-3
<PAGE>
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.
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.
A-4
<PAGE>
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.
Under the terms of an exemptive order issued by the United States
Securities and Exchange Commission (the "Commission"), the Fund may invest cash
(i) held for temporary defensive purposes; (ii) not invested pending investment
in securities; (iii) that is set aside to cover an obligation or commitment of
the Fund to purchase securities or other assets at a later date; (iv) to be
invested on a strategic management basis (i-iv is herein referred to as
"Uninvested Cash"); and (v) collateral that it receives from the borrowers of
its portfolio securities in connection with the Fund's securities lending
program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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 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
A-5
<PAGE>
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 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.
A-6
<PAGE>
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 segregate in accordance with the Commission positions
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.
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
A-7
<PAGE>
("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 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.
A-8
<PAGE>
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 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.
A-9
<PAGE>
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
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.
A-10
<PAGE>
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 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 (the "Board") 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 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 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, 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.
A-11
<PAGE>
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 other 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 exposures relative to the normal currency allocation and
will consider return and risk of currency exposures relative to the respective
Benchmark.
A-12
<PAGE>
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.
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
A-13
<PAGE>
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 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.
A-14
<PAGE>
In light of the risks described above, the Board 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 segregate liquid assets in
accordance with Commission positions 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.
When the Funds enter into forward contracts for non-hedging purposes,
they will segregate cash, U.S. government securities
A-15
<PAGE>
or other liquid assets equal in value to their obligations with respect to
their forward contracts for non-hedging purposes in accordance with Commission
positions.
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 segregate
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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 segregate cash, U.S. government securities or
other liquid assets in accordance with Commission positions with a value
sufficient to meet their obligations under the call option, or own an
A-16
<PAGE>
offsetting call option. With respect to put options on foreign currency
written by the Funds, the Funds will segregate cash, U.S. government
securities or other liquid assets in accordance with Commission positions 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. 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 segregate assets in
accordance with Commission positions 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 transactions is
A-17
<PAGE>
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 a swap contract, a Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will
be able to meet its obligations pursuant to a 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 a swap contract. However, the amount
at risk is only the net unrealized gain, if any, on the swap, not the
A-18
<PAGE>
entire notional amount. The Advisor will closely monitor, subject to the
oversight of the Board, the creditworthiness of swap counterparties in order
to minimize the risk of swaps.
The Advisor and the Trust do not believe that the Funds' obligations
under 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 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 segregated in accordance with Commission positions.
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 Sundays and 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 three 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.
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. 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).
A-19
<PAGE>
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 150%. 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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, of the three largest banks in Switzerland. The SBC Brinson division
of Swiss Bank Corporation, of which Brinson Partners is a part, has offices in
Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris, Singapore, Sydney,
Tokyo and Zurich, in addition to Brinson Partners' principal office at 209 South
LaSalle Street, Chicago, Il 60604-1295. Swiss Bank Corporation, headquartered in
Basel, Switzerland, is an internationally diversified organization with
operations in many aspects of the financial services industry. Swiss Bank
Corporation and Union Bank of Switzerland, during mid-1998, received regulatory
approval for a merger, which will be effective on June 29, 1998. The merger will
not result in a change of control or assignment and, therefore, will not result
in a termination of the Advisory Agreement. The resulting entity will be named
UBS AG. After the merger, Brinson Partners will continue its role as investment
advisor to the Trust as part of the Brinson Partners division of UBS AG.
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
A-20
<PAGE>
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 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 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
A-21
<PAGE>
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 and semi-annual reports which are distributed to existing Investors),
brokerage 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.
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.
A-22
<PAGE>
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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond Fund, the Brinson U.S. Equity
Fund, the Brinson U.S. Large Capitalization Equity Fund, the Brinson U.S.
Intermediate Capitalization Fund, the Brinson U.S. Large Capitalization Value
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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for
Pension and Profit Sharing Trusts, Custodian for Brinson Global Securities
Fund, Chicago, Illinois, was a control person of the Brinson Emerging Markets
Equity Fund and Brinson Trust Company Collective Investment Trust for Pension
and Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a
control person of 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 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
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
A-23
<PAGE>
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 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, 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 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 312-220-7100.
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 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
A-24
<PAGE>
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 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. 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
A-25
<PAGE>
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. 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 holidays) or trading on the NYSE is restricted, or, to
the extent otherwise permitted by the Investment Company Act, if an emergency
exists.
A-26
<PAGE>
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.
A-27
<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.
NOTE: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
A-28
<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.
A-29
<PAGE>
OFFEREE NO. ___
BRINSON RELATIONSHIP FUNDS
BRINSON BOND PLUS FUND
PART A
July 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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 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
A-2
<PAGE>
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
Normal Asset Allocation Mix
<TABLE>
<CAPTION>
Normal Asset Class
Allocation Strategy
Mix Ranges
--- ------
<S> <C> <C>
Asset Class
U.S. Investment Grade Bond 80.0% 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.
A-3
<PAGE>
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 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.
A-4
<PAGE>
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.
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
A-5
<PAGE>
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.
Under the terms of a second exemptive order issued by the Commission,
the Fund may invest cash (i) held for temporary defensive purposes; (ii) not
invested pending investment in securities; (iii) that is set aside to cover an
obligation or commitment of the Fund to purchase securities or other assets at a
later date; (iv) to be invested on a strategic management basis (i-iv is herein
referred to as "Uninvested Cash"); and (v) collateral that it receives from the
borrowers of its portfolio securities in connection with the Fund's securities
lending program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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
A-6
<PAGE>
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 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
A-7
<PAGE>
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 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 segregate in accordance with Commission positions 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
A-8
<PAGE>
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, 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
A-9
<PAGE>
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 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
A-10
<PAGE>
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 (the "Board") 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 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
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.
A-11
<PAGE>
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 other 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
A-12
<PAGE>
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 Russian
A-13
<PAGE>
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 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 segregate liquid
assets in accordance with Commission positions 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.
A-14
<PAGE>
When the Fund enters into forward contracts for non-hedging purposes,
it will segregate 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 in accordance with Commission positions.
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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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 segregate
A-15
<PAGE>
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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 segregate cash, U.S.
government securities or other liquid assets in accordance with Commission
positions 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. 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 segregate assets in
accordance with Commission positions 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
A-16
<PAGE>
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.
If there is a default by the counterparty to a swap contract, the Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will
be able to meet its obligations pursuant to a 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 a 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, the creditworthiness of swap counterparties in order to minimize
the risk of swaps.
The Advisor and the Trust do not believe that the Fund's obligations
under 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 swap contract will be
accrued on a daily basis and an amount of cash,
A-17
<PAGE>
U.S. government securities or other liquid assets having an aggregate market
value at least equal to the accrued excess will be segregated in accordance
with Commission positions.
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 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 Sundays and 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 three 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.
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. 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.
A-18
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, Il 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. Union Bank of Switzerland is also one of the three largest banks
in Switzerland and is an internationally diversified financial services
organization. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of Brinson Partners' investment
advisory agreement with the Trust (the "Advisory Agreement"). The resulting
entity will be named UBS AG. After the merger, Brinson Partners will continue
its role as investment advisor to the Trust as part of the Brinson Partners
division of UBS AG.
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 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.
A-19
<PAGE>
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 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
A-20
<PAGE>
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 and semi-annual reports which are distributed to existing Investors),
brokerage 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.
A-21
<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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a control
person of 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 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
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 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, 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
A-22
<PAGE>
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 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 312-220-7100.
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
A-23
<PAGE>
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. 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. 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
A-24
<PAGE>
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-25
<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.
NOTE: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
A-26
<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.
A-27
<PAGE>
OFFEREE NO. ___
BRINSON RELATIONSHIP FUNDS
BRINSON U.S. BOND FUND
PART A
July 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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.
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 U.S. dollar denominated fixed income securities, which
may also provide the potential for capital appreciation. The Fund may also
invest in U.S. dollar denominated fixed income securities of foreign issuers.
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 Part B concerning borrowing,
the issuance of senior securities and concentration are "fundamental," which
A-2
<PAGE>
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 maturity date but
which can be called for repayment by the lender or the borrower at a
predetermined
A-3
<PAGE>
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.
Under the terms of a second exemptive order issued by the Commission,
the Fund may invest cash (i) held for temporary defensive purposes; (ii) not
invested pending investment in securities; (iii) that is set aside to cover an
obligation or commitment of the Fund to purchase securities or other assets at a
later date; (iv) to be invested on a strategic management basis (i-iv is herein
referred to as "Uninvested Cash"); and (v) collateral that it receives from the
borrowers of its portfolio securities in connection with the Fund's securities
lending program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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 held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The
A-4
<PAGE>
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.
A-5
<PAGE>
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 segregate in accordance with Commission positions 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.
A-6
<PAGE>
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 (the "Board") 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 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
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
A-7
<PAGE>
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 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 other 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 segregate set aside liquid assets in accordance with Commission positions, 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 tract"). 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 in accordance with Commission positions.
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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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 segregate cash, U.S. government securities or
other liquid assets in accordance with Commission positions 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 segregate cash, U.S. government securities or other liquid
assets in accordance
A-8
<PAGE>
with Commission positions 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. 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 segregate assets in
accordance with Commission positions 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.
A-9
<PAGE>
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.
If there is a default by the counterparty to a swap contract, the Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will
be able to meet its obligations pursuant to a swap contract or that, in the
event of a 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 a 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,
the creditworthiness of swap counterparties in order to minimize the risk of
swaps.
The Advisor and the Trust do not believe that the Fund's obligations
under 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 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 segregated in accordance with Commission positions.
A-10
<PAGE>
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, 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 Sundays and 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 three 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.
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. 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.
A-11
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, Il 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
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.
A-12
<PAGE>
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 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
A-13
<PAGE>
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 and semi-annual reports which are distributed to existing Investors),
brokerage 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.
A-14
<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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a control
person of 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 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
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 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, 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
A-15
<PAGE>
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 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 312-220-7100.
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
A-16
<PAGE>
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. 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. 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.
A-17
<PAGE>
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-18
<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.
NOTE: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category
A-19
<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.
A-20
<PAGE>
OFFEREE NO. ________
BRINSON RELATIONSHIP FUNDS
BRINSON U.S. SHORT/INTERMEDIATE FIXED INCOME FUND
PART A
JULY 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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. 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. A description of
various bond ratings appears in Appendix A, p.1-2. 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
A-2
<PAGE>
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.
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.
Under the terms of an exemptive order issued by the United States
Securities and Exchange Commission (the "Commission"), the Fund may invest cash
(i) held for temporary defensive purposes; (ii) not invested pending investment
in securities; (iii) that is set aside to cover an obligation or commitment of
the Fund to purchase securities or other assets at a later date; (iv) to be
invested on a strategic management basis (i-iv is herein referred to as
"Uninvested Cash"); and (v) collateral that it receives from the borrowers of
its portfolio securities in connection with the Fund's securities lending
program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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.
A-3
<PAGE>
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
A-4
<PAGE>
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.
A-5
<PAGE>
The Fund will segregate in accordance with Commission positions 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 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 (the "Board") 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 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
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.
A-6
<PAGE>
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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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.
A-7
<PAGE>
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 segregate cash, U.S. government securities or
other liquid assets in accordance with Commission positions 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 segregate cash, U.S. government securities or other liquid
assets in accordance with Commission positions 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. 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 segregate assets in
accordance with Commission positions 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.
A-8
<PAGE>
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.
If there is a default by the counterparty to a swap contract, the Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract
A-9
<PAGE>
counterparty will be able to meet its obligations pursuant to a swap contract
or that, in the event of a 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 a 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, the creditworthiness of swap
counterparties in order to minimize the risk of swaps.
The Advisor and the Trust do not believe that the Fund's obligations
under 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 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 segregated in accordance with Commission positions.
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, 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 Sundays and 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 three 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.
Creditworthiness of the borrowing broker-dealer or institution will be
monitored on an
A-10
<PAGE>
ongoing basis by the Advisor and any lending agent pursuant to procedures
reviewed and adopted by the Board. 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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
A-11
<PAGE>
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 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.
A-12
<PAGE>
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 and semi-annual reports which are distributed to existing Investors),
brokerage 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
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
A-13
<PAGE>
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.
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 to issue an unlimited number
of shares of beneficial interest with no par value. The Board 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 seventeen series: the
Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for
Pension and Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois,
was a control person of 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 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
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 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, or with
respect to additional matters relating to the
A-14
<PAGE>
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 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 312-220-7100.
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
A-15
<PAGE>
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. 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. 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
A-16
<PAGE>
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.
A-17
<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.
NOTE: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
A-18
<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.
A-19
<PAGE>
OFFEREE NO. _____
BRINSON RELATIONSHIP FUNDS
BRINSON U.S. CASH MANAGEMENT PRIME FUND
PART A
JULY 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime Fund, the Brinson High Yield Fund, and the
Brinson Emerging Markets Debt Fund. This Prospectus pertains only to the Brinson
U.S. Cash Management Prime 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. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
A-1
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The Fund's investment objective is to maximize current income
consistent with preservation of capital. The Fund seeks to achieve this
objective by investing in a portfolio of U.S. dollar denominated money market
instruments maturing in 397 days or less. Under normal market conditions, the
Fund will invest at least 65% of its total assets in money market instruments
having a dollar-weighted average maturity of 90 days or less. It is
anticipated that the Fund will maintain a constant net asset value of $1.00,
although there can be no assurance that the Fund will be able to do so.
INVESTMENT PROCESS
In accordance with procedures adopted by the Trust's Board of Trustees
(the "Board") pursuant to Rule 2a-7 (the "Rule") under the Investment Company
Act, the Fund limits its investments to those U.S. dollar denominated
securities that the Board determines present minimal credit risks and that
are, as required by the Rule, rated in one of the two highest short-term
rating categories as determined by nationally recognized statistical rating
organizations ("NRSROs"), or that are unrated and of comparable quality, with
remaining maturities of 397 calendar days or less ("Eligible Securities").
The Fund maintains a dollar-weighted average maturity of the securities in its
portfolio of 90 days or less. The Fund will not invest more than 5% of its
total assets in the securities of a single issuer, other than U.S. government
securities, rated in the highest rating category by the requisite NRSROs, and
the Fund will not invest (a) the greater of 1% of the Fund's total assets or
$1 million in Eligible Securities issued by a single issuer rated in the
second highest rating category and (b) more than 5% of its total assets in
Eligible Securities of all issuers rated in the second highest rating
category.
Because the Fund limits its investments to Eligible Securities, the
Fund's portfolio, and thus the Fund's shareholders, will generally earn lower
yields than if the Fund purchased securities with lower ratings and
correspondingly greater risks.
The Fund is a diversified portfolio that measures its performance
against the one month London Interbank Bid Rate ("LIBID" or the "Benchmark").
Brinson Partners, Inc., the Fund's investment advisor ("Brinson Partners" or
the "Advisor"), will attempt to enhance the long-term return 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.
As a way of seeking to achieve its investment objective, the Fund may
invest all of its investable assets in the Brinson U.S. Cash Management Prime
Fund series (the "Series") of the Brinson Supplementary Trust (the
"Supplementary Trust"). The Supplementary Trust is an unregistered investment
company. The Series has the same investment objective as the Fund, and, like
the Fund, is operated in accordance with the Rule. The Series' investment
policies are substantially similar to the Fund's investment policies.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. government securities, which consist of
marketable fixed, floating and variable rate securities issued or guaranteed
by the U.S. government, its agencies, or by various
A-2
<PAGE>
instrumentalities which have been established or sponsored by the U.S.
government ("U.S. government securities"). Certain of these obligations,
including U.S. Treasury bills, notes and bonds and securities of the
Government National Mortgage Association (popularly called "GNMAs" or "Ginnie
Maes") and the Federal Housing Administration, are issued or guaranteed by the
U.S. government and supported by the full faith and credit of the U.S.
government. Other U.S. government securities are issued or guaranteed by
federal agencies or U.S. government-sponsored enterprises and are not direct
obligations of the U.S. government, but involve sponsorship or guarantees by
government agencies or enterprises. These obligations include securities that
are supported by the right of the issuer to borrow from the U.S. Treasury,
such as obligations of Federal Home Loan Banks, and securities that are
supported by the credit of the instrumentality, such as Fannie Mae ("FNMA,"
formerly known as the Federal National Mortgage Association) bonds. In this
connection, the Fund may use any portion of its assets invested in U.S.
government securities to concurrently enter into repurchase agreements with
respect to such securities.
BANK OBLIGATIONS
The Fund may also invest in bank obligations or instruments secured by
bank obligations. Such instruments consist of fixed, floating or variable
rate certificates of deposit, letters of credit, time deposits, and bankers'
acceptances issued by banks and savings institutions with assets of at least
one billion dollars. Bank obligations may be obligations of U.S. banks,
foreign branches of U.S. banks (referred to as "Eurodollar Investments"), U.S.
branches of foreign banks (referred to as "Yankee Dollar Investments"), and
foreign branches of foreign banks ("Foreign Bank Investments"). When
investing in a bank obligation issued by a branch, the parent bank must have
assets of at least five billion dollars.
The Fund may invest only up to 25% of its assets in obligations of
foreign branches of U.S. banks or foreign banks. Investments in obligations
of U.S. branches of foreign banks which are considered domestic banks may only
be made if such branches have a federal or state charter to do business in the
United States and are subject to U.S. regulatory authorities.
Time deposits are non-negotiable deposits maintained in a foreign
branch of a U.S. banking institution for a specified period of time at a
stated interest rate. The Fund may invest not more than 10% of its net assets
in time deposits with maturities in excess of seven calendar days.
COMMERCIAL PAPER
The Fund may invest in commercial paper of domestic or foreign issuers
which is considered by the Fund to present minimal credit risks and which is
rated within the two highest rating categories by NRSROs or, if unrated, has
been determined by Brinson Partners to be of comparable quality to instruments
that are Eligible Securities pursuant to procedures adopted by the Board.
CORPORATE OBLIGATIONS
The corporate obligations which the Fund may purchase are fixed,
floating or variable rate bonds, debentures or notes which are considered by
the Fund to present minimal credit risks and which are rated within the two
highest rating categories by NRSROs, or if unrated, have been determined by
Brinson Partners to be of comparable quality to instruments which are Eligible
Securities pursuant to procedures adopted by the Board. Such corporate
obligations must mature in 397 calendar days or less. Generally, the higher an
instrument is rated, the greater its safety and the lower its yield.
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
A-3
<PAGE>
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 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).
A-4
<PAGE>
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 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.
GUARANTEED INVESTMENT CONTRACTS
A "guaranteed investment contract" (also known as a "guaranteed
interest contract," "guaranteed income contract," "guaranteed insurance
contract," or "guaranteed return contract") ("GIC") is a deferred annuity
contract issued by an insurance company under which (a) the contract holder
places funds on deposit with the insurer, and (b) the insurer promises to
repay the contract holder's deposit(s) plus interest at a guaranteed rate
according to a schedule specified in the contract. The terms and conditions
of GICs can vary in a variety of ways, including, by way of example, the
length of the guarantee period, the period during which the contract holder
may make deposits which will be subject to the same guarantee, the extent to
which withdrawals are permitted during the guarantee period, and the timing of
the insurer's repayment obligation. To the extent that the Fund cannot
dispose of a GIC in the ordinary course of business within seven days at
approximately the value at which the Fund has valued the GIC, it will treat
the GIC as illiquid and subject to its overall limit on illiquid investments
of 10% of the Fund's total net assets.
A-5
<PAGE>
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 10%
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 segregate in accordance with United States Securities and
Exchange Commission (the "Commission") positions 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. One
example of illiquid securities is securities purchased under Rule 144A under
the Securities Act ("Rule 144A Securities"). While maintaining oversight, the
Board of Trustees (the "Board") has delegated to the Advisor the day-to-day
function of determining whether Rule 144A Securities are liquid for purposes
of the Fund's 10% limitation on investments in illiquid assets. The Board 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 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 10% 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.
A-6
<PAGE>
OTHER INVESTMENT TECHNIQUES
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 Sundays and 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 three 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.
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. 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).
INVESTING IN THE SERIES
The Fund may invest all of its investable assets in the Series, which has
an investment objective that is identical to the Fund's investment objective.
The Series, like the Fund, is operated in accordance with Rule 2a-7. The
investment objective and policies of the Series may be changed without the
approval of the Series' shareholders (which may include the Fund). In the event
that the Series determines to change its investment objective, the Fund will
redeem its investment in the Series prior to any such change. In that case, the
Fund would either seek to invest its assets in another investment company
(which, like the Series, may be an unregistered company) with the same
investment objective as the Fund's, which might not be possible, or retain an
investment adviser to manage the Fund's assets in accordance with its investment
objective, possibly at increased cost.
The Series is a portfolio of the Supplementary Trust, which is managed by a
Board of Trustees that is identical to the Board that manages the business and
affairs of the Trust. The Series is advised by Brinson Partners. Brinson
Partners does not receive any management fee for providing management services
to the Series. Administrative services are provided to the Series by the same
entities that provide such services to the Trust. The Supplementary Trust is an
unregistered investment company that operates in accordance with the conditions
contained in an exemptive order issued by the Commission to the Trust, the
Supplementary Trust, the Advisor, and certain other applicants.
Other institutional investors, including other mutual funds or portfolios,
may invest in the Series, and the expenses of such other funds or portfolios,
and, correspondingly, their returns, may differ from those of the Fund. The
shares of the Series are offered to institutional investors for the purpose of
increasing the funds available for investment, to reduce expenses as a
percentage of total assets and to achieve other economies that might be
available at higher asset levels. Investment in the Series by other
institutional investors offers potential benefits to the Series, and through its
investment in the Series, to the Fund also. However, such economics and expense
reductions might not be achieved, and additional investment opportunities, such
as increased diversification, might not be available if other institutional
investors do not invest in the Series. Also, if an institutional investor were
to redeem its investment in the Series, the remaining investors in the Series
could experience higher pro rata operating expenses, thereby producing lower
returns, and the Series' security holdings may become less diverse, resulting in
increased risk.
A withdrawal by an institutional investor of its investment in the Series could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution) to the Fund. Should such a distribution occur, the Fund could
incur brokerage fees or other transaction costs in converting such securities to
cash in order to pay redemptions. In addition, a distribution in kind to the
Fund could result in a less diversified portfolio of investments and could
adversely affect the Fund. Furthermore, the Fund's investment in the Series
results in certain operational and other complexities. However, the Advisor
believes that the benefits to be gained by investors outweigh the additional
complexities and that the risks attendant to such investment are not inherently
different from the risks of direct investment in securities of the type in which
the Fund invests.
Whenever the Fund, as an investor in the Series, is asked to vote on a
shareholder proposal relating to the Series, the Trust will seek voting
instructions from Investors with regard to voting on the proposal. The Board of
the Trust will then vote the Fund's shares in the Series in accordance with the
voting instructions received from Investors. The Board will vote those Fund
shares for which it receives no voting instructions either in accordance with
its best judgment or in the same proportion as the vote of all other holders of
the Series' shares.
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.
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 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.
A-7
<PAGE>
Brinson Partners has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
THE ADVISOR
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.
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 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
A-8
<PAGE>
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 and semi-annual reports which are distributed to existing Investors),
brokerage 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
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
A-9
<PAGE>
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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series of shares: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Partners, Inc. was a control person of the Brinson
U.S. Cash Management Prime Fund and Brinson Trust Company Collective
Investment Trust for Pension and Profit Sharing Trusts-Global Securities Fund,
Chicago, Illinois, was a control person of 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 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
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
A-10
<PAGE>
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 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, 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.
DISTRIBUTIONS AND ALLOCATIONS. The Fund currently intends to allocate
income, gains and losses daily and to make distributions monthly to Investors.
Distributions will be automatically reinvested in additional Fund shares at
net asset value, unless the Investor has notified CGFSC, as transfer agent for
the Fund, in writing, of the Investor's election to receive the distributions
in cash. Distribution options may be changed at any time by requesting such a
change in writing. Any check in payment of distributions which cannot be
delivered by the Post Office or which remains uncashed for a period of more
than one year may be reinvested in the Investor's account at the then current
net asset value and the distribution option may be changed from cash to
reinvest.
FEDERAL TAXES. The Fund intends to 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. 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 312-220-7100.
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.
A-11
<PAGE>
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.
Purchase orders for shares of the Fund which are received by the
transfer agent in proper form two hours prior to the close of regular trading
hours (currently 2:00 p.m. Eastern Time) on the New York Stock Exchange (the
"NYSE") on any day that the Fund's net asset value per share is calculated,
are priced according to the net asset value determined on that day. Purchase
orders for shares of the Fund received after two hours prior to the close of
the NYSE on a particular day are priced as of the time the net asset value per
share is next determined.
NET ASSET VALUE. The net asset value is computed as of the close of
regular trading on the NYSE (generally 4:00 p.m. Eastern time) on days when
the NYSE is open. The Fund values its portfolio instruments at amortized cost
in accordance with Rule 2a-7 (the "Rule") under the Investment Company Act,
which means that portfolio instruments are valued at their acquisition cost
(as adjusted for amortization of premium or accretion of discount) rather than
at current market value. Calculations are made to compare the value of the
Fund's investments valued at amortized cost with market-based values.
Market-based valuations are obtained by using actual quotations provided by
market makers, estimates of market value, or values obtained from yield data
relating to classes of money market instruments published by reputable sources
at the mean between the bid and asked prices for the instruments. If a
deviation of 1/2 of 1% or more were to occur between the Fund's net asset
value per share calculated by reference to market-based values and the Fund's
$1.00 per share net asset value, or if there were any other deviation that the
Board believed would result in a material dilution to Investors or purchasers,
the Board would promptly consider what action, if any, should be initiated. In
order to value its investments at amortized cost, the Fund purchases only
securities with a maturity of 397 calendar days or less and maintains a
dollar-weighted average portfolio maturity of 90 days or less. In addition,
the Fund limits portfolio investments to securities that meet the quality and
diversification requirements of the Rule, as described earlier in this
Prospectus.
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
A-12
<PAGE>
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.
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-13
<PAGE>
APPENDIX A
CORPORATE DEBT RATINGS
MOODY'S INVESTORS SERVICE, INC. DESCRIBES CLASSIFICATIONS OF CORPORATE BONDS
THAT MAY BE PURCHASED BY THE FUND AS FOLLOWS:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
These bonds are considered First Tier Securities. 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. These bonds are considered Second Tier Securities. 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.
STANDARD & POOR'S RATINGS GROUP DESCRIBES CLASSIFICATIONS OF CORPORATE BONDS
THAT MAY BE PURCHASED BY THE FUND 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. These bonds are considered First Tier Securities.
AA -- Bonds rated AA also qualify as high-quality debt obligations.
These bonds are considered Second Tier Securities. 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.
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.
A-14
<PAGE>
OFFEREE NO. ____
BRINSON RELATIONSHIP FUNDS
BRINSON HIGH YIELD FUND
PART A
July 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime 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.
A-1
<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 performance relative to the Benchmark. When
unusual market conditions warrant, the Fund can make substantial temporary
defensive investments in cash equivalents.
A-2
<PAGE>
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
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
A-3
<PAGE>
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, 1997. 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>
Cash 4.50%
BB 8.51
Split BB 6.15
B 49.41
Split B 17.39
CCC 9.09
D 0.03
Not Rated 4.93
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 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
A-4
<PAGE>
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 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.
A-5
<PAGE>
Under the terms of an exemptive order issued by the United States
Securities and Exchange Commission (the "Commission"), the Fund may invest cash
(i) held for temporary defensive purposes; (ii) not invested pending investment
in securities; (iii) that is set aside to cover an obligation or commitment of
the Fund to purchase securities or other assets at a later date; (iv) to be
invested on a strategic management basis (i-iv is herein referred to as
"Uninvested Cash"); and (v) collateral that it receives from the borrowers of
its portfolio securities in connection with the Fund's securities lending
program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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 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.
A-6
<PAGE>
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.
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
A-7
<PAGE>
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 segregate in accordance with Commission positions 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 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
A-8
<PAGE>
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 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 (the "Board") 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 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 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.
A-9
<PAGE>
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. 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. 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 other 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
A-10
<PAGE>
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 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 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.
As a result of the foregoing, a governmental issuer may default on its
obligations. If such a default occurs, the 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 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 Fund expects to invest have in the past experienced substantial
difficulties in servicing their external debt obligations, which
A-11
<PAGE>
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, high 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.
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 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 segregates
cash, U.S. government securities or other liquid assets in accordance with
Commission positions 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
A-12
<PAGE>
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. 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 segregate assets in
accordance with Commission positions 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
A-13
<PAGE>
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.
If there is a default by the counterparty to a swap contract, the Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will
be able to meet its obligations pursuant to a 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 a 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, the creditworthiness of swap counterparties in order to minimize
the risk of swaps.
The Advisor and the Trust do not believe that the Fund's obligations
under 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 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 segregated in accordance with Commission positions.
A-14
<PAGE>
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, 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 Sundays and 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 three 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. 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. 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
A-15
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, Il 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
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 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.
A-16
<PAGE>
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 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.
A-17
<PAGE>
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 and semi-annual reports which are distributed to existing Investors),
brokerage 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 affiliated with the Advisor or the Fund in accordance with
procedures adopted by the Board.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson U.S. Large Capitalization Value 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,
A-18
<PAGE>
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 U.S.
Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for
Pension and Profit Sharing Trusts - U.S. High Yield Fund, Chicago, Illinois,
was a control person of the Fund and Brinson Trust Company Collective
Investment Trust for Pension and Profit Sharing Trusts - Global Securities
Fund, Chicago, Illinois, was a control person of 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 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
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 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, 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 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.
A-19
<PAGE>
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 312-220-7100.
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 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
A-20
<PAGE>
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. 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. 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 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.
A-21
<PAGE>
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-22
<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.
NOTE: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
A-23
<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.
A-24
<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, 1997. The
Brinson High Yield Fund assumed the assets of the BTC High Yield 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 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.
<TABLE>
<CAPTION>
For Periods Ending 12/31/97
Annualized
------------------------------------
Since
1 year 2 years 3 years 5 years Inception
------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Brinson High Yield Fund 13.37% 14.05% 14.09% 12.41% 11.49%
High Yield Bond Index 12.63% 12.52% 14.12% 11.84% 11.59%
</TABLE>
Inception date is 12/31/86
(1) The High Yield Bond Index is calculated gross of fees.
The High Yield Band 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".
A-25
<PAGE>
OFFEREE NO. _____
BRINSON RELATIONSHIP FUNDS
BRINSON SHORT-TERM FUND
PART A
JULY 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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
U.S. Cash Management Prime 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.
A-1
<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 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.
A-2
<PAGE>
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.
A-3
<PAGE>
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.
A-4
<PAGE>
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
A-5
<PAGE>
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 segregate in accordance with the United States
Securities and Exchange Commission (the "Commission") positions, 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.
A-6
<PAGE>
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 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.
A-7
<PAGE>
The Trust has received an Exemptive Order from 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.
Under the terms of another exemptive order issued by the Commission,
the Fund may invest cash (i) held for temporary defensive purposes; (ii) not
invested pending investment in securities; (iii) that is set aside to cover an
obligation or commitment of the Fund to purchase securities or other assets at a
later date; (iv) to be invested on a strategic management basis (i-iv is herein
referred to as "Uninvested Cash"); and (v) collateral that it receives from the
borrowers of its portfolio securities in connection with the Fund's securities
lending program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments.
The Trustees of the Trust also serve as Trustees of the Brinson Supplementary
Trust. The Supplementary Trust Series will invest in U.S. dollar denominated
money market instruments having a dollar-weighted average maturity of 90 days or
less. The Fund's investment of Uninvested Cash in shares of the Supplementary
Trust Series will not exceed 25% of the Fund's total assets.
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 (the "Board") 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 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 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
A-8
<PAGE>
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
A-9
<PAGE>
A-10
<PAGE>
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
A-11
<PAGE>
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. 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 segregate assets in accordance
with Commission positions 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 Futures
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, futures and similar strategies may lower the Fund's return.
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 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
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
A-12
<PAGE>
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.
If there is a default by the counterparty to a swap contract, the Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will
be able to meet its obligations pursuant to a swap contract or that, in the
event of a 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 a 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, the creditworthiness of swap counterparties in order to minimize the risk
of swaps.
The Advisor and the Trust do not believe that the Fund's obligations
under 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 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
segregated in accordance with Commission positions.
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, 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 Sundays and 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.
A-13
<PAGE>
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
three 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. 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. 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 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."
A-14
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement. The
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
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.
A-15
<PAGE>
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.
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 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
A-16
<PAGE>
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 and semi-
annual reports which are distributed to existing Investors), brokerage
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 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.
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
A-17
<PAGE>
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.
A-18
<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 to issue an unlimited number
of shares of beneficial interest with no par value. The Board 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 seventeen series of shares: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a control
person of 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 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 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 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, 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
A-19
<PAGE>
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.
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 the Trust.
Federal Taxes. The Fund intends to 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 312-220-7100.
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
A-20
<PAGE>
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. 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. 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
A-21
<PAGE>
trading hours (generally 4:00 p.m. Eastern time) on the NYSE on any day that the
NYSE is open for regular trading.
A-22
<PAGE>
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-23
<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.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
- ----
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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 U.S. LARGE CAPITALIZATION VALUE EQUITY FUND
PART A
JULY 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond 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 U.S. Large
Capitalization Value 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 U.S. Cash Management Prime Fund, the Brinson High Yield Fund and the
Brinson Emerging Markets Debt Fund. This Prospectus pertains only to the Brinson
U.S. Large Capitalization Value 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.
A-1
<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 value oriented 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
Russell 1000 Value Index (the "Russell 1000 Value" or "Benchmark"). The
Benchmark is a broad cap-weighted index which includes primarily U.S. common
stocks. Securities in the Benchmark tend to exhibit higher price-to-book and
price earnings ratios, higher dividend yields and lower forecasted growth values
than securities in a growth universe. 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
A-2
<PAGE>
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 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'
A-3
<PAGE>
notice if there is no secondary market available for these obligations, and in
other securities that are not readily marketable.
Under the terms of an exemptive order issued by the Commission, the
Fund may invest cash (i) held for temporary defensive purposes; (ii) not
invested pending investment in securities; (iii) that is set aside to cover an
obligation or commitment of the Fund to purchase securities or other assets at a
later date; (iv) to be invested on a strategic management basis (i-iv is herein
referred to as "Uninvested Cash"); and (v) collateral that it receives from the
borrowers of its portfolio securities in connection with the Fund's securities
lending program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments. The
Trustees of the Trust also serve as Trustees of the Brinson Supplementary Trust.
The Supplementary Trust Series will invest in U.S. dollar denominated money
market instruments having a dollar-weighted average maturity of 90 days or less.
The Fund's investment of Uninvested Cash in shares of the Supplementary Trust
Series will not exceed 25% of the Fund's total assets.
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 segregate in accordance with the United States
Securities and Exchange Commission (the "Commission") positions 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
A-4
<PAGE>
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.
A-5
<PAGE>
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.
The Trust has received an exemptive order (the "Exemptive Order") from
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. One example
of illiquid securities is securities purchased under Rule 144A under the
Securities Act ("Rule 144A Securities") and over-the-counter options described
below. While maintaining oversight, the Board of Trustees (the "Board") 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 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)
A-6
<PAGE>
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 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.
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 segregates cash, U.S. government
securities or other liquid assets in accordance with Commission positions 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
A-7
<PAGE>
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 segregate cash, U.S. government securities or other liquid
assets in accordance with Commission positions 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
segregate cash, U.S. government securities or other liquid assets in accordance
with Commission positions 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. 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.
A-8
<PAGE>
In addition, when the Fund engages in futures transactions, to the
extent required by the Commission, the Fund will segregate assets in accordance
with Commission positions 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 Sundays and 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.
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 three
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
A-9
<PAGE>
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. 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. 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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, N.A. Brinson Partners and its
A-10
<PAGE>
predecessor entities have managed domestic and international investment assets
since 1974 and global investment assets since 1982. Brinson Partners is a
subsidiary of Swiss Bank Corporation, one of the three largest banks in
Switzerland. The SBC Brinson division of Swiss Bank Corporation, of which
Brinson Partners is a part, has offices in Basel, Frankfurt, Geneva, London,
Melbourne, New York, Paris, Singapore, Sydney, Tokyo and Zurich, in addition to
Brinson Partners' principal office at 209 South LaSalle Street, Chicago, IL
60604-1295. Swiss Bank Corporation, headquartered in Basel, Switzerland, is an
internationally diversified organization with operations in many aspects of the
financial services industry. Swiss Bank Corporation and Union Bank of
Switzerland, during mid-1998, received regulatory approval for a merger, which
will be effective on June 29, 1998. The merger will not result in a change of
control or assignment and, therefore, will not result in a termination of the
Advisory Agreement. The resulting entity will be named UBS AG. After the merger,
Brinson Partners will continue its role as investment advisor to the Trust as
part of the Brinson Partners division of UBS AG.
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.
A-11
<PAGE>
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 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 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
A-12
<PAGE>
not limited to, legal expenses, audit fees, printing costs (e.g., cost of
printing annual reports and semi-annual reports which are distributed to
existing Investors), brokerage 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.
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 to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime Fund, the Brinson High Yield Fund and the Brinson
Emerging Markets Debt Fund.
A-13
<PAGE>
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 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 15, 1998, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a control
person of 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 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 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 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, 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 the Trust.
Federal Taxes. The Fund intends to 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
A-14
<PAGE>
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 312-220-7100.
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
A-15
<PAGE>
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. 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. 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
A-16
<PAGE>
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-17
<PAGE>
OFFEREE NO. ___
BRINSON RELATIONSHIP FUNDS
Brinson Global Bond Fund
PART A
July 31, 1998
[LOGO]
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 seventeen series of
shares: the Brinson Global Securities Fund, the Brinson Global Bond Fund, the
Brinson U.S. Equity Fund, the Brinson U.S. Large Capitalization Equity Fund, the
Brinson U.S. Large Capitalization Value Equity Fund, the Brinson U.S.
Intermediate Capitalization Equity Fund, the Brinson U.S. Large Capitalization
Value 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
U.S. Cash Management Prime Fund, the Brinson High Yield Fund and the Brinson
Emerging Markets Debt Fund. This Prospectus pertains only to the Brinson Global
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.
A-1
<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 bonds
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 fixed income and money markets and active security
selection within each market. Asset allocation decisions are undertaken
relative to the Salomon World Government 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 Fund's investment advisor is Brinson Partners, Inc. ("Brinson
Partners" or the "Advisor"). 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.
As a general matter, the Advisor will purchase for the Fund securities
contained in the Benchmark. The Benchmark is a market capitalization weighted
index which measures the broad global fixed income markets invested in debt
issues of U.S. and non-U.S. governments, governmental utilities and
supranationals. 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
A-2
<PAGE>
relative attractiveness across asset classes, the actual Fund weights will be
equal to the Benchmark weights. Although it may invest anywhere in the world, it
is expected that the Fund's assets will be primarily invested in fixed income
markets listed in the Benchmark. From time to time, the Advisor may substitute
securities in an equivalent index when it believes that such securities in the
index more accurately reflect the global fixed income securities markets. 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 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.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
A-3
<PAGE>
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 the
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 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 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 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. 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
A-4
<PAGE>
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 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 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
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 debt securities as described above. Pursuant to the Exemptive Order, any
investment by the Fund in 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.
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'
A-5
<PAGE>
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, in lieu of investing directly in the
cash and cash equivalents described above, the Fund may invest a portion of its
assets in another series of the Trust. Any investment by the Fund in such
other series 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.
Under the terms of a second exemptive order issued by the Commission,
the Fund may invest cash (i) held for temporary defensive purposes; (ii) not
invested pending investment in securities; (iii) that is set aside to cover an
obligation or commitment of the Fund to purchase securities or other assets at a
later date; (iv) to be invested on a strategic management basis (i-iv is herein
referred to as "Uninvested Cash"); and (v) collateral that it receives from the
borrowers of its portfolio securities in connection with the Fund's securities
lending program, in a series of shares of Brinson Supplementary Trust (the
"Supplementary Trust Series"). Brinson Supplementary Trust is a private
investment company which has retained the Advisor to manage its investments.
The Trustees of the Trust also serve as Trustees of the Brinson Supplementary
Trust. The Supplementary Trust Series will invest in U.S. dollar denominated
money market instruments having a dollar-weighted average maturity of 90 days or
less. The Fund's investment of Uninvested Cash in shares of the Supplementary
Trust Series will not exceed 25% of the Fund's total assets.
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
A-6
<PAGE>
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 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
A-7
<PAGE>
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 segregate in accordance with Commission positions 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
A-8
<PAGE>
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. In no event may the
Fund invest in securities rated lower than BBB- by S&P or Baa3 by Moody's. 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 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
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 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
A-9
<PAGE>
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 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 only if the Lender interpositioned between the Fund and the
A-10
<PAGE>
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
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
A-11
<PAGE>
cost, 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 (the "Board") 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 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 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.
Foreign Securities and Currency Considerations
A-12
<PAGE>
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 other 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
A-13
<PAGE>
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.
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.
A-14
<PAGE>
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 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 segregate liquid
assets in accordance with Commission positions 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.
A-15
<PAGE>
When the Fund enters into forward contracts for non-hedging purposes,
it will segregate 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 in accordance with Commission positions.
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 segregates cash, U.S. government
securities or other liquid assets in accordance with Commission positions 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 segregate cash, U.S. government
A-16
<PAGE>
securities or other liquid assets in accordance with Commission positions 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 segregate cash, U.S. government securities or other
liquid assets in accordance with Commission positions 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. 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 segregate assets in accordance
with Commission positions 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
A-17
<PAGE>
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.
If there is a default by the counterparty to a swap contract, the Fund
will be limited to contractual remedies pursuant to the agreements related to
the transaction. There is no assurance that a swap contract counterparty will be
able to meet its obligations pursuant to a 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 a 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,
the creditworthiness of swap counterparties in order to minimize the risk of
swaps.
A-18
<PAGE>
The Advisor and the Trust do not believe that the Fund's obligations
under 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 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
segregated in accordance with Commission positions. 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
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 Sundays and 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.
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 three
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. 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. 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
A-19
<PAGE>
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 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 has been appointed by the Trust as its Investment
Advisor and furnishes investment advisory and asset management services to the
Trust with respect to its portfolios. Brinson Partners, a Delaware corporation,
is an investment management firm managing, as of March 31, 1998, approximately
U.S. $158 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 Advisers, 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 is a subsidiary of Swiss Bank
Corporation, one of the three largest banks in Switzerland. The SBC Brinson
division of Swiss Bank Corporation, of which Brinson Partners is a part, has
offices in Basel, Frankfurt, Geneva, London, Melbourne, New York, Paris,
Singapore, Sydney, Tokyo and Zurich, in addition to Brinson Partners' principal
office at 209 South LaSalle Street, Chicago, IL 60604-1295. Swiss Bank
Corporation, headquartered in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Swiss Bank Corporation and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The merger will not result in a change of control or assignment
and, therefore, will not result in a termination of the Advisory Agreement.
The
A-20
<PAGE>
resulting entity will be named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the Brinson
Partners division of UBS AG.
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,
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 the Trust, MSTC supervises and monitors such services provided by
CGFSC.
A-21
<PAGE>
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 and semi-
annual reports which are distributed to existing Investors), brokerage
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.
A-22
<PAGE>
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.
Capital Stock and Other Securities
A-23
<PAGE>
The Trust was organized as a Delaware business trust on August 16,
1994. The Declaration of Trust permits the Board to issue an unlimited number of
shares of beneficial interest with no par value. The Board 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 seventeen series: the Brinson
Global Securities Fund, the Brinson Global Bond 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 U.S. Large Capitalization
Value 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
U.S. Cash Management Prime 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 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 15, 1998, Brinson Trust Company Collective Investment Trust for Pension and
Profit Sharing Trusts - Global Securities Fund, Chicago, Illinois, was a control
person 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 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 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 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, 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
A-24
<PAGE>
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 the Trust.
Federal Taxes. The Fund intends to 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 312-220-7100.
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, 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
A-25
<PAGE>
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. 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. 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
A-26
<PAGE>
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-27
<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>
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
- ----
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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>
BRINSON RELATIONSHIP FUNDS
PART B
STATEMENT OF ADDITIONAL INFORMATION
JULY 31, 1998
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 seventeen 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 (with the exception of
the Brinson U.S. Cash Management Prime Fund, which is diversified) as defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act"). The seventeen current Funds are: the Brinson Global Securities Fund, the
Brinson Global Bond 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 U.S. Large Capitalization Value 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 U.S. Cash Management Prime 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 July 31,
1998.
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 July 31, 1998. 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 312-220-7100.
All terms used in this Part B and not otherwise defined herein have
the meanings assigned to them in the Parts A.
ITEM 11. TABLE OF CONTENTS.
Item 12. General Information and History B-2
Item 13. Investment Objective and Policies B-2
Item 14. Management of the Trust B-12
Item 15. Control Persons and Principal Holders of Securities B-15
Item 16. Investment Advisory and Other Services B-20
Item 17. Brokerage Allocation and Other Practices B-23
Item 18. Capital Stock and Other Securities B-25
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered B-25
Item 20. Tax Status B-28
Item 21. Underwriters B-36
Item 22. Calculation of Performance Data B-36
Item 23. Financial Statements B-38
Appendix A - Investment Practices B-39
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 the Parts A, certain Funds 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 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.
B-2
<PAGE>
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
Certain Funds 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 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.
B-3
<PAGE>
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.
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
Certain Funds 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 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
B-4
<PAGE>
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 Fannie Mae ("FNMA",
formerly known as the Federal National Mortgage Association), 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"). Certain Funds 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
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. Certain Funds
B-5
<PAGE>
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
Certain Funds 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 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
Certain Funds
B-6
<PAGE>
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
segregate in accordance with the Commission positions 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
Certain Funds may, 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, 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 (or that would exceed 10% of the value of the net
assets of the Brinson U.S. Cash Management Prime 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
B-7
<PAGE>
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, cash, U.S.
government securities or other liquid assets will be segregated in accordance
with Commission positions 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
Certain Funds 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. 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
B-8
<PAGE>
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 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
B-9
<PAGE>
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"). 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.
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 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 (and no more than 10% of the Brinson U.S. Cash Management Prime
Fund's net assets), excluding Restricted Securities eligible for resale
pursuant to Rule 144A that have been determined to be liquid by the Board.
OTHER INVESTMENT VEHICLES AVAILABLE TO THE FUNDS
The Board 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
B-10
<PAGE>
of percentage limitations with respect to portfolio lending transactions and
borrowing, are not fundamental and may be changed by the Board without the
approval of the Investors.
INVESTMENT PRACTICES AVAILABLE TO THE FUNDS
Certain 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, 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.
INVESTMENT RESTRICTIONS OF THE FUNDS
Each Fund is subject to the investment restrictions set forth below
adopted by the Board, 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;
B-11
<PAGE>
(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. Except for Brinson U.S.
Large Capitalization Value Equity Fund, Brinson Global Bond Fund
and Brinson Short-Term Fund, 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;
(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 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-12
<PAGE>
Position(s)
Held with Principal Occupation(s)
Name & Address Age Registrant During Past 5 Years
- -------------- --- ----------- -----------------------
Walter E. Auch 77 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 1994; Present
Director of the following
companies: Thomsen Asset
Management 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 62 Trustee Professor, University of
College of Business and Notre Dame since 1982;
Administration Chairman Trustee, The Brinson Funds
University of Notre Dame since 1992; Trustee,
Notre Dame, IN 46556-0399 Brinson Trust Company
1992-1993; Director,
Discover 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 63 Trustee Retired; prior thereto,
841 Woodbine Lane Senior Vice President,
Northbrook, IL 60062 Daiwa 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 54 President Managing Partner and
209 South LaSalle Street Director, Brinson Partners,
Chicago, IL 60604 Inc. since 1991; prior
thereto Executive
Vice-President of
Washington Mutual Savings
Bank; President and
Trustee, The Brinson Funds
since 1992; Treasurer and
Principal Accounting
Officer, The Brinson Funds
from 1995-1997; President
and Trustee, Brinson Trust
Company since 1991.
B-13
<PAGE>
Position(s)
Held with Principal Occupation(s)
Name & Address Age Registrant During Past 5 Years
- -------------- --- ----------- -----------------------
Thomas J. Digenan 34 Vice Partner, Brinson Partners,
209 South LaSalle Street President Inc. since 1993; prior
Chicago, IL 60604 thereto 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 32 Vice Partner, Brinson Partners,
209 South LaSalle Street President Inc. since January 1995;
Chicago, IL 60604 Associate since 1991;
prior thereto, private
investor; Vice-President,
The Brinson Funds, since
1997; Secretary, The
Brinson Funds, 1997;
Assistant Secretary, The
Brinson Funds from
1992-1997.
Carolyn M. Burke 31 Secretary Partner, Brinson Partners,
209 South LaSalle Street and Inc. since 1997; prior
Chicago, IL 60604 Treasurer thereto, Associate,
Brinson Partners from
1995-1997; Financial
Analyst, Van Kampen
American Capital
Investment Advisory Corp.
1992-1995; Senior
Accountant, KPMG Peat
Marwick 1989-1992;
Secretary, The Brinson
Funds, since 1997;
Treasurer, The Brinson
Funds, since 1997;
Assistant Secretary, The
Brinson Funds from
1995-1997.
Catherine E. Macrae 41 Assistant Partner, Brinson Partners,
209 South LaSalle Street Secretary Inc. since January 1996;
Chicago, IL 60604 Assistant Secretary, The
Brinson Funds, since 1997;
Associate, Brinson
Partners, Inc. since 1992;
prior thereto, Economic
Analyst, Chicago
Mercantile Exchange.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Total
Compensation Retirement Compensation
From Trust for Benefits Accrued From Trust and
Fiscal Year ended As Part of Fund Fund Complex
Name and Position Held December 31, 1997(1) Expenses Paid to Trustees
- ---------------------- -------------------- ---------------- ----------------
<S> <C> <C> <C>
Walter E. Auch, Trustee $13,800 N/A $28,200
Frank K. Reilly, Trustee $13,800 N/A $40,950
Edward M. Roob, Trustee $13,800 N/A $40,950
</TABLE>
(1) This amount represents the aggregate amount of compensation paid to
the Trustees for: (a) service on the Board for the Trust's fiscal year ended
December 31, 1997; and (b) service on the Board
B-14
<PAGE>
of Directors/Trustees of two other investment companies managed by Brinson
Partners, Inc. for the calendar year ending December 31, 1997.
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.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of July 15, 1998, 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 High Yield Fund, the
Brinson Emerging Markets Debt Fund and the Brinson U.S. Cash Management Prime
Fund.
As of July 15, 1998, 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 either had not commenced
operations as of such date or there was no person who owned of record or
beneficially more that 5% of the Fund's outstanding voting shares.)
BRINSON GLOBAL SECURITIES FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
* Brinson Trust Company Collective 78.56%
Investment Trust for Pension &
Profit Sharing Trusts - Global Securities Fund
Chicago, IL
Washington State University 6.70%
Pullman, WA
B-15
<PAGE>
BRINSON U.S. EQUITY FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
Town of West Hartford 47.21%
Pension Plan
West Hartford, CT
* Mary Hitchcock Memorial Hospital 28.43%
Endowment Account
Lebanon, NH
Mount St. Mary's College 12.92%
Los Angeles, CA
Nebraska Methodist Health System, Inc. 6.94%
Omaha, NE
BRINSON POST-VENTURE FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
* Brinson Trust Company Collective 64.89%
Investment Trust for Pension &
Profit Sharing Trusts - US Equity Fund
Chicago, IL
Brinson Trust Company Collective 13.68%
Investment Trust for Pension &
Profit Sharing Trusts - Post-Venture Fund
Chicago, IL
Brinson Relationship Funds 6.75%
Pooled Funds Operations
Chicago, IL
Pension Fund of Swiss Bank Corp. 6.12%
Basel, Switzerland
B-16
<PAGE>
BRINSON HIGH YIELD FUND
Name & Address of Beneficial and Record Owners Percentage
* Brinson Trust Company Collective 37.80%
Investment Trust for Pension &
Profit Sharing Trusts - U.S. High Yield Fund
Chicago, IL
Brinson Relationship Funds 18.75%
Pooled Funds Operations
Chicago, IL
Brinson Trust Company Collective Investment Trust 13.32%
For Pension & Profit Sharing Trusts -MAP Fund
Chicago, IL
Brinson Relationship Funds 9.02%
Pooled Funds Operations
Chicago, IL
Employees' Retirement System 7.57%
Honolulu, HI
New Cora Limited 6.16%
c/o SBC Brinson Limited
London, England
BRINSON EMERGING MARKETS EQUITY FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
* Brinson Trust Company Collective 26.78%
Investment Trust for Pension &
Profit Sharing Trusts - Brinson Emerging
Markets Equity Fund
Chicago, IL
U.S. West Pension Trust, Brinson Partners 15.32%
International Equity Account
Englewood, CO
Brinson Relationship Funds 11.61%
Pooled Funds Operations
Chicago, IL
B-17
<PAGE>
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
Brinson Trust Company Collective 9.80%
Investment Trust for Pension & Profit Sharing
Trusts - MAP Fund
Chicago, IL
Brinson Relationship Funds 5.87%
Pooled Funds Operations
Chicago, IL
First Chicago Corp. Pension Trust 5.41%
FBO Employee Benefit Trust Admin.
Wheaton, IL
BRINSON EMERGING MARKETS DEBT FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
Brinson Relationship Funds 14.49%
Pooled Funds Operations
Chicago, IL
The Northern Trust Company Trustees 12.02%
FBO Gannett Company Inc.
Master Retirement Plan
Chicago, IL
First Chicago Corp. Pension Trust 11.40%
FBO Employee Benefit Trusts Admin.
Wheaton, IL
Brinson Trust Company Collective 11.00%
Investment Trust for Pension &
Profit Sharing Trusts - MAP Fund
Chicago, IL
Brinson Trust Company Collective 9.16%
Investment Trust For Pension &
Profit Sharing Trusts - Brinson Emerging
Markets Bond Fund
Chicago, IL
State of Wisconsin 8.04%
Investment Board
Madison, WI
Brinson Relationship Funds 7.75%
Pooled Funds Operations
Chicago, IL
New Cora Limited 5.15%
c/o SBC Brinson Limited
London, England
BRINSON U.S. CASH MANAGEMENT PRIME FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
BTC U.S. Cash Management Prime Fund 90.81%
Brinson Partners, Inc.
Chicago, IL
Medical Centre Insurance Company Ltd. 9.18%
Hamilton 5
U.S. LARGE CAPITALIZATION VALUE EQUITY FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
BTC U.S. Large Capitalization Value Equity Fund 99.99%
Chicago, IL
NON-U.S. EQUITY FUND
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
Board of Regents of the 55.86%
University of Wisconsin System
Madison, WI
Mac & Co 44.14%
Mutual Fund Operations
Pittsburgh, PA
* 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.
B-18
<PAGE>
As of July 15, 1998, the following persons owned of record or beneficially more
than 5% of the outstanding voting shares of the Trust:
Name & Address of Beneficial and Record Owners Percentage
- ---------------------------------------------- ----------
** Brinson Trust Company 30.64%
Collective Investment Trust
for Pension & Profit Sharing
Trusts - Global Securities Fund
Chicago, IL
Brinson Trust Company 8.43%
Collective Investment Trust
for Pension & Profit Sharing
Trusts - Brinson U.S. Equity Fund
Chicago, IL
Brinson Relationship Funds 7.83%
Pooled Funds Operations
Chicago, IL
BTC U.S. Cash Management 6.68%
Brinson Partners, Inc.
Chicago, IL
** 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,
1998 approximately $158 billion, primarily for institutional pension and profit
sharing funds with offices located in Basel, Chicago, Frankfurt, Geneva, Hong
Kong, 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 nine other investment companies.
B-19
<PAGE>
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. Swiss Bank and Union Bank of Switzerland, during
mid-1998, received regulatory approval for a merger, which will be effective on
June 29, 1998. The resulting entity will be named UBS AG. After the merger,
Brinson Partners will continue its role as investment advisor to the Trust as
part of the Brinson Partners division of UBS AG.
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. 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 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.
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 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.
B-20
<PAGE>
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.
From May 10, 1997 through December 31, 1997, aggregate fees paid to
MSTC for administration, accounting, portfolio valuation and transfer agency
services under the Services Agreement were as follows:
<TABLE>
<CAPTION>
FUND DOLLAR AMOUNT
<S> <C>
Brinson Global Securities Fund $123,927
Brinson High Yield Fund $ 0.00
Brinson Post-Venture Fund $ 0.00
Brinson Emerging Markets Equity Fund $160,098
Brinson Emerging Markets Debt Fund $109,050
Brinson U.S. Equity Fund $ 0.00
(commenced operations August 29, 1997)
</TABLE>
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; and 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.
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.
B-21
<PAGE>
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
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
B-22
<PAGE>
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 following table depicts brokerage commissions paid by the Funds.
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
FISCAL YEARS ENDED DECEMBER 31, 1997, 1996, 1995
Fund 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Brinson Global Securities Fund
(commenced operations April 28, 1995) $1,485,767 $1,151,367 $533,368
Brinson Post-Venture Fund
(commenced operations April 28, 1995) $ 752,226 $ 214,744 $178,185
Brinson Emerging Markets Equity Fund
(commenced operations April 28, 1995) $3,095,413 $ 828,127 $180,615
Brinson U.S. Equity Fund
(commenced operations August 29, 1997) $ 33,074 N/A N/A
TOTAL $5,366,480 $2,194,238 $892,168
================================
</TABLE>
The aggregate dollar amount of brokerage commissions paid by Brinson
Global Securities Fund during the fiscal year ended December 31, 1997, to SBC
Warburg Dillon Read, Inc. ("Dillon Read") was $2,250.00. For the 1997 fiscal
year, the percentage of such Fund's aggregate brokerage commissions paid to
Dillon Read was 0.15%, and the percentage of the Fund's aggregate dollar
amount of transactions involving the payment of commissions effected through
Dillon Read was 0.15%. Dillon Read and Brinson Partners are both wholly-owned
subsidiaries of Swiss Bank.
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.
B-23
<PAGE>
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 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 Bond 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 U.S. Large Capitalization Value 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 seventeen 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.
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, 1997 for each Fund that had commenced
operations as of December 31, 1997, using the following formula: Total Assets
- - Total Liabilities / Outstanding Shares = Net Asset Value/Offering Price.
B-24
<PAGE>
Brinson Global Securities Fund
$1,737,124,381 - $432,592,072/86,647,824 shares = $15.0556 (NAV/offering price)
Brinson Post-Venture Fund
$409,173,905 - $3,821,858/20,203,483 shares = $20.0635 (NAV/offering price)
Brinson High Yield Fund
$166,759,047 - $10,238,521/11,208,425 shares = $13.9645 (NAV/offering price)
Brinson Emerging Markets Equity Fund
$470,130,015 - $18,256,677/49,312,343 shares = ($9.1635) ($9.3030)
(NAV)(offering price)
Brinson Emerging Markets Debt Fund
$446,047,874 - $17,962,827/21,163,254 shares = ($20.2278) ($20.3294)
(NAV)(offering price)
Brinson U.S. Equity Fund
$74,050,912 - $420,124/7,143,967 shares = $10.3067 (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 and the
Brinson U.S. Cash Management Prime 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 generally is 3 p.m. (Eastern
time), on each day the NYSE is open for trading, and for the Brinson U.S. Cash
Management Prime Fund as of two hours prior to the close of the NYSE, which
generally is 2:00 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
B-25
<PAGE>
such prices are believed to reflect the fair value of such securities. Use of
a pricing service has been approved by the Board. 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 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 segregation of cash, U.S.
government securities or high grade liquid assets in accordance with
Commission positions. 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.
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.
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.
The Brinson U.S. Cash Management Prime Fund utilizes the amortized
cost valuation method of valuing portfolio instruments. Under the amortized
cost method, assets are valued by constantly amortizing over the remaining
life of an instrument the difference between the principal amount due at
maturity and the cost of the instrument to the Fund. The Advisor will
determine at least weekly the extent of any deviation of the net asset value,
as determined on the basis of the amortized cost method, from net asset value
as it would be determined on the basis of available market quotations. If any
deviation occurs which may result in material dilution or other unfair results
to Investors, the Board will take such actions as it deems appropriate to
eliminate or reduce, to the extent reasonably practicable, such dilution or
unfair results. These actions may include redeeming shares in kind, selling
portfolio instruments prior to their maturity to realize capital gains or
losses, adjusting or withholding distributions, utilizing available market
quotations to determine net asset value per share or adjusting the number of
shares through a capital contribution.
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.
B-26
<PAGE>
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 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
Each Fund is intended to be treated as a separate partnership for
federal income tax purposes rather than as an association taxable as a
corporation, and the Trust has received rulings from the IRS to that effect
for each Fund other than the Brinson U.S. Cash Management Prime Fund, Brinson
U.S. Large Capitalization Value Equity Fund, Brinson Global Bond Fund and
Brinson Short-Term Fund. 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 (except the
Brinson U.S. Cash Management Prime Fund, Brinson U.S. Large Capitalization Value
Equity Fund, Brinson Global Bond Fund and Brinson Short-Term Fund) 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 (the "Transition Funds")
presently qualify for this transitional rule. The Funds, other than the
Transition Funds, intend to qualify for treatment as other than "publicly traded
partnerships" under the private placement safe harbor under the Final
Regulations.
B-27
<PAGE>
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 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
B-28
<PAGE>
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 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 included 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
B-29
<PAGE>
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.
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
B-30
<PAGE>
that some of the Funds' trades will be treated as conversion transactions.
Such regulations could have a retroactive effect.
Under certain constructive sale transaction provisions, a Fund must
recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt
instruments. A Fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or forward
contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
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 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.
B-31
<PAGE>
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 capital gains from assets held for
more than one year but less than 18 months are taxed at a maximum rate of 28%
and net capital gains from assets held for more than 18 months are taxed as a
maximum rate of 20%. Short-term gains are taxed at a maximum marginal rate of
39.6%. For a taxpayer other than a corporation, a 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.
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.
B-32
<PAGE>
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 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
B-33
<PAGE>
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. If a Fund purchases shares in certain foreign investment entities
called "passive foreign investment companies" ("PFIC"), an Investor may be
subject to U.S. federal income tax and a related interest charge on a portion
of any "excess distribution" or gain from the disposition of such shares.
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 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.
B-34
<PAGE>
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 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, 1997, was 16.53%; and for
the fiscal year ended December 31, 1997 was 11.70%; (ii) the Brinson Post-
Venture Fund for the period April 28,1995 (commencement of operations) through
December 31, 1997 was 29.75%; and for the fiscal year ended December 31, 1997
was 31.56%; (iii) the Brinson High Yield Fund for the period April 28, 1995
(commencement of operations) through December 31, 1997 was 13.30%; and for the
fiscal year ended December 31, 1997 was 13.37%; (iv) the Brinson Emerging
Markets Equity Fund for the period June 30, 1995 (commencement of operations)
through December 31, 1997 was 3.42%; and for the fiscal year ended December
31, 1997 was -10.04%; (v) the Brinson Emerging Markets Debt Fund for the
period June 30, 1995 (commencement of operations) through December 31, 1997
was 32.45%; and for the fiscal year ended December 31, 1997 was 19.82%; and (vi)
the Brinson U.S. Equity Fund for the period August 29, 1997 (commencement of
operations) through December 31, 1997 was 3.07%.
B-35
<PAGE>
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.
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.
YIELD OF THE BRINSON U.S. CASH MANAGEMENT PRIME FUND
The yield of the Brinson U.S. Cash Management Prime Fund for a
seven-day period (the "base period") will be computed by determining the net
change in value (calculated as set forth below) of a hypothetical account
having a balance of one share at the beginning of the period, dividing the net
change in account value by the value of the account at the beginning of the
base period to obtain the base period return, and multiplying the base period
return by 365/7 with the resulting yield figure carried to the nearest
hundredth of one percent. Net changes in value of a hypothetical account will
include the value of additional shares purchased with dividends from the
original share and dividends declared on both the original share and any such
additional shares, but will not include realized gains or losses or unrealized
appreciation or depreciation on portfolio investments. Yield may also be
calculated on a compound basis (the "effective yield"), which assumes that net
income is reinvested in shares of the Brinson U.S. Cash Management Prime Fund
at the same rate as net income is earned for the base period.
The yield and effective yield of the Brinson U.S. Cash Management
Prime Fund will vary in response to fluctuations in interest rates and in the
expenses of the Fund. Actual yields will also depend on such variables as
investment quality, average maturity, the type of instruments the Brinson U.S.
Cash Management Prime Fund invests in and other factors. For comparative
purposes, the current and effective yields should be compared to current and
effective yields offered by competing financial instruments for the same base
period and calculated by the methods described above. Yields of other
investment vehicles may not be comparable because of the factors set forth
above, differences in the time periods computed, and differences in the
methods used in valuing portfolio instruments, computing net asset values and
calculating yields.
The Brinson U.S. Cash Management Prime Fund had not commenced
operations as of December 31, 1997.
B-36
<PAGE>
ITEM 23. FINANCIAL STATEMENTS.
The Financial Statements and the Report of Independent Auditors
thereon contained in the Funds' Annual Report dated December 31, 1997 are
incorporated herein by reference.
B-37
<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. Not all
Funds engage in some or all of the strategies discussed in this Appendix 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 segregate cash, U.S. government securities or other liquid assets in the
amount prescribed. Securities, currencies or other options or futures
positions used for cover and segregated securities 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.
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.
B-38
<PAGE>
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, 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
B-39
<PAGE>
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, 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.
B-40
<PAGE>
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-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
B-41
<PAGE>
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' (with the exception of the Brinson U.S. Cash
Management Prime Fund) 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 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
B-42
<PAGE>
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
segregate cash, U.S. government securities or other liquid assets 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 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
B-43
<PAGE>
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 segregate assets in accordance with
Commission positions 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.
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, the Brinson U.S. Large Capitalization Value Equity
Fund, the Brinson EXDEX(R) Fund and the Brinson U.S. Cash Management Prime
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.
B-44
<PAGE>
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, 1997 (audited).*
(2) Report of Independent Auditors relating to the Financial Statements at
December 31, 1997.*
Brinson Global Securities Fund:
-------------------------------
(1) Schedule of Investments at December 31, 1997 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1997
(audited).*
(3) Statement of Operations for the fiscal year ended December 31, 1997
(audited).*
(4) Statement of Changes in Net Assets for the fiscal years ended December
31, 1996 and December 31, 1997 (audited).*
(5) Financial Highlights (audited).*
<PAGE>
Brinson Post-Venture Fund:
--------------------------
(1) Schedule of Investments at December 31, 1997 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1997
(audited).*
(3) Statement of Operations for the fiscal year ended December 31, 1997
(audited).*
(4) Statement of Changes in Net Assets for the fiscal years ended December
31, 1996 and December 31, 1997 (audited).*
(5) Financial Highlights (audited).*
Brinson High Yield Fund:
------------------------
(1) Schedule of Investments December 31, 1997 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1997
(audited).*
(3) Statement of Operations for the fiscal year ended December 31, 1997
(audited).*
(4) Statement of Changes in Net Assets for the fiscal years ended December
31, 1996 and December 31, 1997 (audited).*
(5) Financial Highlights (audited).*
Brinson Emerging Markets Equity Fund:
------------------------------------------------
(1) Schedule of Investments at December 31, 1997 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1997
(audited).*
(3) Statement of Operations for the fiscal year ended December 31, 1997
(audited).*
(4) Statement of Changes in Net Assets for the fiscal years ended December
31, 1996 and December 31, 1997 (audited).*
(5) Financial Highlights (audited).*
Brinson Emerging Markets Debt Fund:
----------------------------------------------
(1) Schedule of Investments at December 31, 1997 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1997
(audited).*
(3) Statement of Operations for the fiscal year ended December 31, 1997
(audited).*
(4) Statement of Changes in Net Assets for the fiscal years ended December
31, 1996 and December 31, 1997 (audited).*
(5) Financial Highlights (audited).*
Brinson U.S. Equity Fund **
---------------------------
(1) Schedule of Investments at December 31, 1997 (audited).*
(2) Statement of Assets and Liabilities at December 31, 1997 (audited).*
(3) Statement of Operations at December 31, 1997 (audited).*
(4) Statement of Changes in Net Assets for the period ended December 31,
1997 (audited).*
(5) Financial Highlights (audited).*
** The Fund commenced operations August 29, 1997.
* Incorporated by reference to the Trust's Financial Statements contained
in the Trust's Annual Report to Shareholders dated December 31, 1997 as
filed electronically with the Securities and Exchange Commission on March
9, 1998.
(b) Exhibits
-------------
Exhibit
Number Description
---- ---------
(1) (a)(1) Amended and Restated Agreement and Declaration of Trust dated August
15, 1994, as amended on May 20, 1996./3/
(b)(1) Certificate of Trust dated August 15, 1994./3/
(b)(2) Certificate of Amendment to the Certificate of Trust dated April 21,
1995./3/
(2) By-Laws dated August 22, 1994./1/
(3) None
(4) None
(5) (a) Investment Advisory Agreement dated April 26, 1995 between the
Registrant and Brinson Partners, Inc. on behalf of the Brinson
Global Securities Fund, Brinson Short-Term Fund, Brinson Post-
Venture Fund, Brinson High Yield Fund, Brinson Emerging Markets
Equity Fund and Brinson Emerging Markets Debt Fund./1/
(b) Amendment No. 1 dated June 26, 1997 to Schedule A of the Investment
Advisory Agreement dated April 26, 1995 between the Registrant and
Brinson Partners, Inc. reflecting the addition of the Brinson U.S.
Equity Fund, Brinson U.S. Large Capitalization Equity Fund, Brinson
U.S. Intermediate Capitalization Equity Fund, Brinson EXDEX Fund,
Brinson Non-U.S. Equity Fund, Brinson Bond Plus Fund, Brinson U.S.
Bond Fund and Brinson U.S. Short/Intermediate Fixed Income Fund./3/
(c) Amendment No. 2 dated January 27, 1998 to Schedule A of the
Investment Advisory Agreement dated April 26, 1995 between the
Registrant and Brinson Partners, Inc. reflecting the addition of the
Brinson U.S. Cash Management Prime Fund./3/
(d) Amendment No. 3 dated June 1, 1998 to Schedule A of the Investment
Advisory Agreement dated April 26, 1995 between the Registrant and
Brinson Partners, Inc. reflecting the addition of the Brinson U.S.
Large Capitalization Value Equity Fund and the Brinson Global Bond
Fund and the elimination of the Brinson Short-term Fund and the
Brinson Global Equity Fund./3/
(e) Amendment No. 4 dated June 1, 1998 to Schedule A of the Investment
Advisory Agreement dated April 26, 1995 between the Registrant and
Brinson Partners, Inc. reflecting the addition of the Brinson Short-
Term Fund./3/
(6) Not applicable.
(7) Not applicable.
(8) Custody Services are provided under the Multiple Services Agreement
dated May 9, 1997 as amended through January 27, 1998. See 9(a)/3/
(9) (a) Multiple Services Agreement ("MSA") dated May 9, 1997 between the
Registrant and Morgan Stanley Trust Company ("MSTC") as amended
through January 27, 1998./3/
(a)(1) Form of Amendment dated June 1, 1998 to Schedule B1 to the MSA dated
May 9, 1997 between the Registrant and MSTC./3/
(a)(2) Form of Amendment dated June 1, 1998 to Schedule B1 to the MSA dated
May 9, 1997 between the Registrant and MSTC./3/
(a)(3) Form of Amendment dated June 1, 1998 to Schedule D to the MSA dated
May 9, 1997 between the Registrant and MSTC./3/
(a)(4) Form of Amendment dated June 1, 1998 to Schedule E to the MSA dated
May 9, 1997 between the Registrant and MSTC./3/
(a)(5) Form of Amendment dated June 1, 1998 to Schedule F to the MSA dated
May 9, 1997 between the Registrant and MSTC./3/
(10) Not applicable.
<PAGE>
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) None.
(15) None.
(16) None.
(17) See Exhibit 27 below.
(18) None.
(19) Power of Attorney. /2/
(27) Financial Data Schedules are filed electronically herewith.
- -------------------------------------------------
/1/ Incorporated herein by reference to Item 24(b)(9)(2) to Post-Effective
Amendment No. 6 to Registrant's Registration Statement on Form N-1A (File
No. 811-9036) as filed electronically with the Commission on April 30,
1997.
/2/ Incorporated herein by reference to Post Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A (File No. 811-9036) as
filed electronically with the Commission on April 30, 1998.
/3/ Incorporated herein by reference to Post Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A (File No. 8811-9036) as
filed electronically with the Commission on June 12, 1998.
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 30.64% 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 June 30, 1998
----------------------------- --------------------------------
<S> <C> <C>
Series 1: Brinson Global Securities Fund 15
Series 2: Brinson U.S. Equity Fund 6
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Series 3: Brinson U.S. Large Capitalization
Equity Fund 1
Series 4: Brinson U.S. Intermediate Capitalization
Equity Fund* 0
Series 5: Brinson Post Venture Fund 8
Series 6: Brinson EXDEX(R) Fund* 0
Series 7: Brinson Non-U.S. Equity Fund 4
Series 8: Brinson Emerging Markets Equity Fund 20
Series 9:: Brinson Bond Plus Fund* 0
Series 10: Brinson U.S. Bond Fund* 0
Series 11: Brinson U.S. Short/Intermediate Fixed
Income Fund* 0
Series 12: Brinson High Yield Fund 10
Series 13: Brinson Emerging Markets Debt Fund 21
Series 14: Brinson U.S. Cash Management Prime Fund 3
Series 15: Brinson U.S. Large Capitalization
Value Equity Fund 2
Series 16: Brinson Global Bond Fund* 0
Series 17: Brinson Short-Term Fund* 0
* Fund has not commenced operations
</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 (included in Item 24(b)(1) above).
Pursuant to Article V, Section 5.2 of the Registrant's Agreement and
Declaration of Trust, 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 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.
<PAGE>
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, 1998 had
approximately $158 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.
Effective on June 29, 1998, Swiss Bank Corporation and Union Bank of Switzerland
merged. The merger did not result in a change of control or assignment and,
therefore, did not result in a termination of the Advisory Agreement. The
resulting entity is named UBS AG. After the merger, Brinson Partners will
continue its role as investment advisor to the Trust as part of the UBS Brinson
Division of UBS AG.
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 Commission under the Investment Advisers 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 Registrant's Advisor (Brinson Partners, Inc., 209 South LaSalle Street,
Chicago, IL 60604-1294); (iii) effective May 10, 1997, the Registrant's
Administrator, Morgan Stanley Trust Company, ("MSTC") One Pierrepont Plaza,
Brooklyn, NY 11201,; (iv) the Registrant's Sub-Administrator, Chase Global Funds
Services Company, 73 Tremont Street, Boston, Massachusetts, 02108-3913; or (v)
the Registrant's Custodian,--MSTC, 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.
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.
<PAGE>
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 31st day of July 1998.
----
BRINSON RELATIONSHIP FUNDS
(Registrant)
By /s/ E. Thomas McFarlan*
-----------------------
E. Thomas McFarlan
President and Treasurer
/s/ Karl O. Hartmann
- -----------------------------
Karl O. Hartmann
as Attorney-in-Fact and Agent
pursuant to Power of Attorney
<PAGE>
BRINSON RELATIONSHIP FUNDS
Post Effective Amendment No.11
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ----------- -------------------
27 Financial Data Schedules
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000944684
<NAME> BRINSON RELATIONSHIP FUNDS
<SERIES>
<NUMBER> 1
<NAME> BRINSON EMERGING MARKETS DEBT FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 421,578,677
<INVESTMENTS-AT-VALUE> 438,385,406
<RECEIVABLES> 7,302,878
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 359,590
<TOTAL-ASSETS> 446,047,874
<PAYABLE-FOR-SECURITIES> 17,897,073
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 65,754
<TOTAL-LIABILITIES> 17,962,827
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 304,657,755
<SHARES-COMMON-STOCK> 21,163,254
<SHARES-COMMON-PRIOR> 13,184,226
<ACCUMULATED-NII-CURRENT> 50,082,652
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 56,073,125
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,271,515
<NET-ASSETS> 428,085,047
<DIVIDEND-INCOME> 51,597
<INTEREST-INCOME> 26,163,272
<OTHER-INCOME> 0
<EXPENSES-NET> (346,695)
<NET-INVESTMENT-INCOME> 25,868,174
<REALIZED-GAINS-CURRENT> 37,060,810
<APPREC-INCREASE-CURRENT> (12,971,139)
<NET-CHANGE-FROM-OPS> 49,957,845
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,490,582
<NUMBER-OF-SHARES-REDEEMED> (3,511,554)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 205,514,479
<ACCUMULATED-NII-PRIOR> 24,214,478
<ACCUMULATED-GAINS-PRIOR> 19,012,315
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 346,695
<AVERAGE-NET-ASSETS> 263,115,446
<PER-SHARE-NAV-BEGIN> 16.882
<PER-SHARE-NII> 1.776
<PER-SHARE-GAIN-APPREC> 1.57
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.228
<EXPENSE-RATIO> 0.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000944684
<NAME> BRINSON RELATIONSHIP FUNDS
<SERIES>
<NUMBER> 2
<NAME> BRINSON EMERGING MARKETS EQUITY FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 529,128,674
<INVESTMENTS-AT-VALUE> 460,172,615
<RECEIVABLES> 1,066,370
<ASSETS-OTHER> 259,380
<OTHER-ITEMS-ASSETS> 8,631,650
<TOTAL-ASSETS> 470,130,015
<PAYABLE-FOR-SECURITIES> 3,066,664
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,190,013
<TOTAL-LIABILITIES> 18,256,677
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 534,407,672
<SHARES-COMMON-STOCK> 49,312,343
<SHARES-COMMON-PRIOR> 17,606,002
<ACCUMULATED-NII-CURRENT> 13,362,870
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,866,490)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (84,030,714)
<NET-ASSETS> 451,873,338
<DIVIDEND-INCOME> 5,368,853
<INTEREST-INCOME> 3,947,095
<OTHER-INCOME> 0
<EXPENSES-NET> (950,104)
<NET-INVESTMENT-INCOME> 8,365,844
<REALIZED-GAINS-CURRENT> (9,483,262)
<APPREC-INCREASE-CURRENT> (85,779,669)
<NET-CHANGE-FROM-OPS> (86,897,087)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 32,314,985
<NUMBER-OF-SHARES-REDEEMED> (608,644)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 272,535,163
<ACCUMULATED-NII-PRIOR> 4,997,026
<ACCUMULATED-GAINS-PRIOR> (2,383,228)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 950,104
<AVERAGE-NET-ASSETS> 342,957,186
<PER-SHARE-NAV-BEGIN> 10.186
<PER-SHARE-NII> 0.256
<PER-SHARE-GAIN-APPREC> (1.278)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.164
<EXPENSE-RATIO> 0.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000944684
<NAME> BRINSON RELATIONSHIP FUNDS
<SERIES>
<NUMBER> 7
<NAME> BRINSON GLOBAL EQUITY FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> AUG-29-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 23,319,094
<INVESTMENTS-AT-VALUE> 23,410,188
<RECEIVABLES> 222,331
<ASSETS-OTHER> 10,100
<OTHER-ITEMS-ASSETS> 167,095
<TOTAL-ASSETS> 23,809,714
<PAYABLE-FOR-SECURITIES> 383,213
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,611
<TOTAL-LIABILITIES> 385,824
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,295,395
<SHARES-COMMON-STOCK> 2,329,539
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 138,842
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (174,866)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 164,519
<NET-ASSETS> 23,423,890
<DIVIDEND-INCOME> 134,349
<INTEREST-INCOME> 8,358
<OTHER-INCOME> 0
<EXPENSES-NET> (3,865)
<NET-INVESTMENT-INCOME> 138,842
<REALIZED-GAINS-CURRENT> (174,866)
<APPREC-INCREASE-CURRENT> 164,519
<NET-CHANGE-FROM-OPS> 128,495
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,329,538
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 23,423,890
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 10,300
<AVERAGE-NET-ASSETS> 23,530,419
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> (0.004)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.056
<EXPENSE-RATIO> 0.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000944684
<NAME> BRINSON RELATIONSHIP FUNDS
<SERIES>
<NUMBER> 3
<NAME> BRINSON GLOBAL SECURITIES FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,569,901,748
<INVESTMENTS-AT-VALUE> 1,662,898,173
<RECEIVABLES> 56,947,431
<ASSETS-OTHER> 104,212
<OTHER-ITEMS-ASSETS> 17,174,565
<TOTAL-ASSETS> 1,737,124,381
<PAYABLE-FOR-SECURITIES> 21,721,969
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 410,870,103
<TOTAL-LIABILITIES> 432,592,072
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 777,735,632
<SHARES-COMMON-STOCK> 86,647,824
<SHARES-COMMON-PRIOR> 130,464,603
<ACCUMULATED-NII-CURRENT> 151,083,373
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 288,280,201
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 87,432,474
<NET-ASSETS> 1,304,532,309
<DIVIDEND-INCOME> 15,952,439
<INTEREST-INCOME> 49,725,484
<OTHER-INCOME> 0
<EXPENSES-NET> (870,635)
<NET-INVESTMENT-INCOME> 64,807,288
<REALIZED-GAINS-CURRENT> 167,608,264
<APPREC-INCREASE-CURRENT> (37,368,433)
<NET-CHANGE-FROM-OPS> 195,047,119
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 24,152,140
<NUMBER-OF-SHARES-REDEEMED> (67,968,919)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (453,977,157)
<ACCUMULATED-NII-PRIOR> 86,276,085
<ACCUMULATED-GAINS-PRIOR> 120,672,565
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 870,635
<AVERAGE-NET-ASSETS> 1,740,921,931
<PER-SHARE-NAV-BEGIN> 13.479
<PER-SHARE-NII> 0.546
<PER-SHARE-GAIN-APPREC> 1.031
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.056
<EXPENSE-RATIO> 0.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000944684
<NAME> BRINSON RELATIONSHIP FUNDS
<SERIES>
<NUMBER> 4
<NAME> BRINSON HIGH YIELD FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 156,238,615
<INVESTMENTS-AT-VALUE> 155,661,358
<RECEIVABLES> 11,091,287
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 6,402
<TOTAL-ASSETS> 166,759,047
<PAYABLE-FOR-SECURITIES> 201,705
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,036,816
<TOTAL-LIABILITIES> 10,238,521
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 113,085,855
<SHARES-COMMON-STOCK> 11,208,425
<SHARES-COMMON-PRIOR> 13,399,664
<ACCUMULATED-NII-CURRENT> 32,438,054
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,573,874
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (577,257)
<NET-ASSETS> 156,520,526
<DIVIDEND-INCOME> 1,088,647
<INTEREST-INCOME> 13,328,953
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 14,417,600
<REALIZED-GAINS-CURRENT> 10,125,145
<APPREC-INCREASE-CURRENT> (6,492,577)
<NET-CHANGE-FROM-OPS> 18,050,168
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,464,066
<NUMBER-OF-SHARES-REDEEMED> (4,655,305)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (8,529,515)
<ACCUMULATED-NII-PRIOR> 18,020,454
<ACCUMULATED-GAINS-PRIOR> 1,448,729
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 89,153
<AVERAGE-NET-ASSETS> 142,071,767
<PER-SHARE-NAV-BEGIN> 12.318
<PER-SHARE-NII> 1.33
<PER-SHARE-GAIN-APPREC> 0.317
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.965
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000944684
<NAME> BRINSON RELATIONSHIP FUNDS
<SERIES>
<NUMBER> 5
<NAME> BRINSON POST-VENTURE FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 323,511,447
<INVESTMENTS-AT-VALUE> 406,650,722
<RECEIVABLES> 2,436,273
<ASSETS-OTHER> 86,910
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 409,173,905
<PAYABLE-FOR-SECURITIES> 3,800,357
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,501
<TOTAL-LIABILITIES> 3,821,858
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 201,183,173
<SHARES-COMMON-STOCK> 20,203,483
<SHARES-COMMON-PRIOR> 19,604,032
<ACCUMULATED-NII-CURRENT> 14,577,807
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 106,459,037
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 83,132,030
<NET-ASSETS> 405,352,047
<DIVIDEND-INCOME> 4,863,543
<INTEREST-INCOME> 1,329,455
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 6,192,998
<REALIZED-GAINS-CURRENT> 50,571,206
<APPREC-INCREASE-CURRENT> 38,360,184
<NET-CHANGE-FROM-OPS> 95,124,388
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,434,473
<NUMBER-OF-SHARES-REDEEMED> (1,835,022)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 106,373,799
<ACCUMULATED-NII-PRIOR> 8,384,809
<ACCUMULATED-GAINS-PRIOR> 55,887,831
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 106,418
<AVERAGE-NET-ASSETS> 345,587,753
<PER-SHARE-NAV-BEGIN> 15.251
<PER-SHARE-NII> 0.294
<PER-SHARE-GAIN-APPREC> 4.519
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.064
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000944684
<NAME> BRINSON RELATIONSHIP FUNDS
<SERIES>
<NUMBER> 2
<NAME> BRINSON SHORT-TERM FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 66,790,931
<INVESTMENTS-AT-VALUE> 66,790,931
<RECEIVABLES> 21,316
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1,503
<TOTAL-ASSETS> 66,813,750
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 61,117,352
<TOTAL-LIABILITIES> 61,117,352
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,049,820
<SHARES-COMMON-STOCK> 521,838
<SHARES-COMMON-PRIOR> 2,106,298
<ACCUMULATED-NII-CURRENT> 3,648,319
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,741)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,696,398
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,113,519
<OTHER-INCOME> 0
<EXPENSES-NET> 26,441
<NET-INVESTMENT-INCOME> 3,087,078
<REALIZED-GAINS-CURRENT> (1,639)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 3,085,439
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,246,918
<NUMBER-OF-SHARES-REDEEMED> (17,831,378)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (16,010,969)
<ACCUMULATED-NII-PRIOR> 561,241
<ACCUMULATED-GAINS-PRIOR> (102)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 52,485
<AVERAGE-NET-ASSETS> 52,732,768
<PER-SHARE-NAV-BEGIN> 10.306
<PER-SHARE-NII> 0.764
<PER-SHARE-GAIN-APPREC> (0.154)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.916
<EXPENSE-RATIO> 0.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000944684
<NAME> BRINSON RELATIONSHIP FUNDS
<SERIES>
<NUMBER> 6
<NAME> BRINSON U.S. EQUITY FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> AUG-29-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 66,722,084
<INVESTMENTS-AT-VALUE> 66,967,962
<RECEIVABLES> 6,970,825
<ASSETS-OTHER> 6,365
<OTHER-ITEMS-ASSETS> 98,444
<TOTAL-ASSETS> 74,050,912
<PAYABLE-FOR-SECURITIES> 416,988
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,136
<TOTAL-LIABILITIES> 420,124
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 72,956,740
<SHARES-COMMON-STOCK> 7,143,967
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 356,005
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 69,403
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 248,640
<NET-ASSETS> 73,630,788
<DIVIDEND-INCOME> 320,832
<INTEREST-INCOME> 36,846
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 356,005
<REALIZED-GAINS-CURRENT> 69,403
<APPREC-INCREASE-CURRENT> 248,640
<NET-CHANGE-FROM-OPS> 674,048
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,143,966
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 73,630,788
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,989
<AVERAGE-NET-ASSETS> 54,171,318
<PER-SHARE-NAV-BEGIN> 10
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.257
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.307
<EXPENSE-RATIO> 0.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
