J.P. MORGAN FUNDS
J.P. MORGAN SHORT TERM BOND FUND
J.P. MORGAN BOND FUND
J.P. MORGAN GLOBAL STRATEGIC INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 2001
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 1, 2001 FOR THE FUNDS LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO
TIME. ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY
REFERENCE THE FINANCIAL STATEMENTS INCLUDED IN THE SHAREHOLDER REPORTS RELATING
TO THE FUNDS LISTED ABOVE DATED OCTOBER 31, 2000. THE PROSPECTUS AND THESE
FINANCIAL STATEMENTS, INCLUDING THE INDEPENDENT ACCOUNTANTS' REPORT ON THE
ANNUAL FINANCIAL STATEMENTS, ARE AVAILABLE, WITHOUT CHARGE UPON REQUEST FROM
FUNDS DISTRIBUTOR, INC., ATTENTION: J.P. MORGAN FUNDS (800)221-7930.
Table of Contents
Page
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GENERAL......................................................................1
INVESTMENT OBJECTIVES AND POLICIES...........................................1
INVESTMENT RESTRICTIONS.....................................................30
TRUSTEES, MEMBERS OF THE ADVISORY BOARD AND OFFICERS........................32
CODES OF ETHICS.............................................................36
INVESTMENT ADVISOR..........................................................37
DISTRIBUTOR.................................................................38
CO-ADMINISTRATOR............................................................39
SERVICES AGENT..............................................................40
CUSTODIAN AND TRANSFER AGENT................................................41
SHAREHOLDER SERVICING.......................................................41
FINANCIAL PROFESSIONALS.....................................................42
INDEPENDENT ACCOUNTANTS.....................................................43
EXPENSES....................................................................43
PURCHASE OF SHARES..........................................................44
REDEMPTION OF SHARES........................................................44
EXCHANGE OF SHARES..........................................................45
DIVIDENDS AND DISTRIBUTIONS.................................................46
NET ASSET VALUE.............................................................46
PERFORMANCE DATA............................................................47
PORTFOLIO TRANSACTIONS......................................................49
MASSACHUSETTS TRUST.........................................................51
DESCRIPTION OF SHARES.......................................................51
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE.........................53
TAXES.......................................................................54
ADDITIONAL INFORMATION......................................................58
FINANCIAL STATEMENTS........................................................59
APPENDIX A.................................................................A-1
GENERAL
This Statement of Additional Information relates only to J.P. Morgan Short
Term Bond Fund, J.P. Morgan Bond Fund and J.P. Morgan Global Strategic Income
Fund (collectively, the "Funds"). Each of the Funds is a series of shares of
beneficial interest of J.P. Morgan Funds, an open-end management investment
company formed as a Massachusetts business trust (the "Trust"). In addition to
the Funds, the Trust consists of other series representing separate investment
funds (each a "J.P. Morgan Fund"). The other J.P. Morgan Funds are covered by
separate Statements of Additional Information.
This Statement of Additional Information describes the financial history,
investment objectives and policies, management and operation of each of the
Funds in order to enable investors to select the Fund or Funds which best suit
their needs. The J.P. Morgan Funds operate through a two-tier master-feeder
investment fund structure. Formerly, J.P. Morgan Bond Fund operated as a
free-standing mutual fund and not through the master-feeder structure. Where
indicated in this Statement of Additional Information, historical information
for this Fund includes information for its predecessor entity.
This Statement of Additional Information provides additional information
with respect to the Funds and should be read in conjunction with the relevant
Fund's current Prospectus (the "Prospectus"). Capitalized terms not otherwise
defined herein have the meanings accorded to them in the Prospectus. The Funds'
executive offices are located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund seeks to achieve its investment objective by
investing all of its investable assets in a corresponding Master Portfolio (the
"Portfolio"), a corresponding open-end management investment company having the
same investment objective as the Fund. Each Fund invests in a Portfolio through
a two-tier master-feeder investment fund structure. See "Special Information
Concerning Investment Structure." Accordingly, references below to the Fund also
include the Portfolio; similarly, references to the Portfolio also include the
Fund unless the context requires otherwise.
Each Portfolio is advised by J.P. Morgan Investment Management Inc.
("JPMIM" or the "Advisor").
Investments in a Fund are not deposits or obligations of, or guaranteed or
endorsed by, Morgan Guaranty Trust Company of New York ("Morgan"), an affiliate
of the Advisor, or any other bank. Shares of a Fund are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other governmental agency. An investment in a Fund is subject to risk that may
cause the value of the investment to fluctuate, and when the investment is
redeemed, the value may be higher or lower than the amount originally invested
by the investor.
INVESTMENT OBJECTIVES AND POLICIES
J.P. Morgan Short Term Bond Fund (the "Short Term Bond Fund") is designed
for investors who place a strong emphasis on conservation of capital but who
also want a return greater than that of a money market fund or other very low
risk investment vehicles. The Short Term Bond Fund is appropriate for investors
who do not require the stable net asset value typical of a money market fund but
who want less price fluctuation than is typical of a longer-term bond fund. The
Short Term Bond Fund's investment objective is to provide high total return,
consistent with low volatility of principal. The Short Term Bond Fund seeks to
achieve this high total return to the extent
consistent with modest risk of capital and the maintenance of liquidity. The
Short Term Bond Fund attempts to achieve its investment objective by investing
all of its investable assets in The Short Term Bond Portfolio (the "Portfolio"),
a diversified open-end management investment company having the same investment
objective as the Short Term Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in the corporate and government debt obligations and related
securities of domestic and foreign issuers described in this Statement of
Additional Information.
J.P. Morgan Bond Fund (the "Bond Fund") is designed to be an economical
and convenient means of making substantial investments in a broad range of
corporate and government debt obligations and related investments of domestic
and foreign issuers, subject to certain quality and other restrictions. See
"Quality and Diversification Requirements." The Bond Fund's investment objective
is to provide a high total return consistent with moderate risk of capital and
maintenance of liquidity. Although the net asset value of the Bond Fund will
fluctuate, the Bond Fund attempts to conserve the value of its investments to
the extent consistent with its objective. The Bond Fund attempts to achieve its
objective by investing all of its investable assets in The U.S. Fixed Income
Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the Bond Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in high grade and investment grade corporate and government debt
obligations and related securities of domestic and foreign issuers described in
the Prospectus and this Statement of Additional Information.
J.P. Morgan Global Strategic Income Fund (the "Global Strategic Income
Fund") is designed for the aggressive investor seeking to diversify an
investment portfolio by investing in fixed-income securities of foreign and
domestic issuers. The Global Strategic Income Fund's investment objective is
high total return from a portfolio of fixed-income securities of foreign and
domestic issuers. The Global Strategic Income Fund seeks to achieve its
objective by investing all of its investable assets in the Global Strategic
Income Portfolio (the "Portfolio"), a diversified open-end management investment
company having the same investment objective as the Global Strategic Income
Fund.
The Portfolio attempts to achieve its investment objective by investing
primarily in mortgage-backed securities and direct mortgage obligations; below
investment grade debt obligations of U.S. and non-U.S. issuers; investment grade
U.S. dollar-denominated debt obligations of U.S. and non-U.S. issuers;
investment grade non-dollar denominated debt obligations of non-U.S. issuers;
and obligations of emerging market issuers.
The following discussion supplements the information regarding the
investment objective of each of the Funds and the policies to be employed to
achieve this objective by their corresponding Portfolios as set forth above and
in the Prospectus. The investment objective of each Fund and its corresponding
Portfolio is identical. Accordingly, references below to a Fund also include the
Fund's corresponding Portfolio; similarly, references to a Portfolio also
include the corresponding Fund that invests in the Portfolio unless the context
requires otherwise.
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Fixed Income Investments
Each Fund may invest in a broad range of debt securities of domestic and
foreign corporate and government issuers. The corporate securities in which the
Funds may invest include debt securities of various types and maturities, e.g.,
debentures, notes, mortgage securities, equipment trust certificates and other
collateralized securities and zero coupon securities. Collateralized securities
are backed by a pool of assets such as loans or receivables which generate cash
flow to cover the payments due on the securities. Collateralized securities are
subject to certain risks, including a decline in the value of the collateral
backing the security, failure of the collateral to generate the anticipated cash
flow or in certain cases more rapid prepayment because of events affecting the
collateral, such as accelerated prepayment of mortgages or other loans backing
these securities or destruction of equipment subject to equipment trust
certificates. In the event of any such prepayment a Fund will be required to
reinvest the proceeds of prepayments at interest rates prevailing at the time of
reinvestment, which may be lower. In addition, the value of zero coupon
securities which do not pay interest is more volatile than that of interest
bearing debt securities with the same maturity.
Corporate Bonds and Other Debt Securities
Each Fund may invest in bonds and other debt securities of domestic and
foreign issuers to the extent consistent with its investment objective and
policies. A description of these investments appears below. See "Quality and
Diversification Requirements." For information on short-term investments in
these securities, see "Money Market Instruments."
Mortgage-Backed Securities. Each Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists of
mortgage loans evidenced by promissory notes secured by first mortgages or first
deeds of trust or other similar security instruments creating a first lien on
owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value.
Government Guaranteed Mortgage-Backed Securities. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support
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to these federal agencies, authorities, instrumentalities and government
sponsored enterprises in the future.
There are several types of guaranteed mortgage-backed securities currently
available, including guaranteed mortgage pass-through certificates and multiple
class securities, which include guaranteed real estate mortgage investment
conduit certificates ("REMIC Certificates"), other collateralized mortgage
obligations ("CMOs") and stripped mortgage-backed securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class mortgage-backed securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Funds do not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae and Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets underlying
the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or
REMIC Certificates to be retired substantially earlier than their final
scheduled distribution dates. Generally, interest is paid or accrues on all
classes of CMOs or REMIC Certificates on a monthly basis.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multiclass mortgage securities, issued or guaranteed by
the U.S. Government, its agencies or instrumentalities or by private issuers.
Although the market for such securities is increasingly liquid, privately issued
SMBS may not be readily marketable and will be considered illiquid for purposes
of the Funds' limitation on investments in illiquid securities. The Advisor may
determine that SMBS which are U.S. Government securities are liquid for purposes
of each Fund's limitation on investments in illiquid securities in accordance
with procedures adopted by the Board of Trustees. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in
4
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other mortgage-backed securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
Mortgages (directly held). Each Fund may invest directly in mortgages.
Mortgages are debt instruments secured by real property. Unlike mortgage-backed
securities, which generally represent an interest in a pool of mortgages, direct
investments in mortgages involve prepayment and credit risks of an individual
issuer and real property. Consequently, these investments require different
investment and credit analysis by the Advisor.
The directly placed mortgages in which the Funds invest may include
residential mortgages, multifamily mortgages, mortgages on cooperative apartment
buildings, commercial mortgages, and sale-leasebacks. These investments are
backed by assets such as office buildings, shopping centers, retail stores,
warehouses, apartment buildings and single-family dwellings. In the event that
the Fund forecloses on any non-performing mortgage, and acquires a direct
interest in the real property, the Fund will be subject to the risks generally
associated with the ownership of real property. There may be fluctuations in the
market value of the foreclosed property and its occupancy rates, rent schedules
and operating expenses. There may also be adverse changes in local, regional or
general economic conditions, deterioration of the real estate market and the
financial circumstances of tenants and sellers, unfavorable changes in zoning,
building environmental and other laws, increased real property taxes, rising
interest rates, reduced availability and increased cost of mortgage borrowings,
the need for unanticipated renovations, unexpected increases in the cost of
energy, environmental factors, acts of God and other factors which are beyond
the control of the Fund or the Advisor. Hazardous or toxic substances may be
present on, at or under the mortgaged property and adversely affect the value of
the property. In addition, the owners of property containing such substances may
be held responsible, under various laws, for containing, monitoring, removing or
cleaning up such substances. The presence of such substances may also provide a
basis for other claims by third parties. Costs of clean-up or of liabilities to
third parties may exceed the value of the property. In addition, these risks may
be uninsurable. In light of these and similar risks, it may be impossible to
dispose profitably of properties in foreclosure.
Zero Coupon, Pay-in-Kind and Deferred Payment Securities. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Fund accrues income with respect to zero coupon and
pay-in-kind securities prior to the receipt of cash payments. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. While interest payments are not
made on such securities, holders of such securities are deemed to have received
"phantom income." Because a Fund will distribute "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the applicable Fund
will have fewer assets with which to purchase income producing securities. Zero
coupon, pay-in-kind and deferred payment
5
securities may be subject to greater fluctuation in value and lesser liquidity
in the event of adverse market conditions than comparably rated securities
paying cash interest at regular interest payment periods.
Asset-Backed Securities. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which a Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
Corporate Fixed Income Securities. Each Fund may invest in publicly and
privately issued debt obligations of U.S. and non-U.S. corporations, including
obligations of industrial, utility, banking and other financial issuers. These
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligation and may also be subject to price
volatility due to such factors as market interest rates, market perception of
the creditworthiness of the issuer and general market liquidity.
Money Market Instruments
Each Fund may invest in money market instruments to the extent consistent
with its investment objective and policies. Under normal circumstances, the
Funds will purchase these securities to invest temporary cash balances or to
maintain liquidity to meet withdrawals. However, the Funds may also invest in
money market instruments as a temporary defensive measure taken during, or in
anticipation of, adverse market conditions. A description of the various types
of money market instruments that may be purchased by the Funds appears below.
Also see "Quality and Diversification Requirements."
U.S. Treasury Securities. Each of the Funds may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
Additional U.S. Government Obligations. Each of the Funds may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, each Fund must look principally to the
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federal agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitments. Securities in which
each Fund may invest that are not backed by the full faith and credit of the
United States include, but are not limited to: (i) obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation, the Federal Home
Loan Banks and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations; (ii) securities issued by the
Federal National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
Foreign Government Obligations. Each of the Funds, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."
Bank Obligations. Each of the Funds may invest in negotiable certificates
of deposit, time deposits and bankers' acceptances of (i) banks, savings and
loan associations and savings banks which have more than $2 billion in total
assets (the "Asset Limitation") and are organized under the laws of the United
States or any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees). The Asset Limitation is not applicable to the Global Strategic
Income Fund. See "Foreign Investments." The Funds will not invest in obligations
for which the Advisor, or any of its affiliated persons, is the ultimate obligor
or accepting bank. Each of the Funds may also invest in obligations of
international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade between
nations (e.g., the European Investment Bank, the Inter-American Development
Bank, or the World Bank).
Commercial Paper. Each of the Funds may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee.
The monies loaned to the borrower come from accounts managed by Morgan or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. Morgan has the right to increase or
decrease the amount provided to the borrower under an obligation. The borrower
has the right to pay without penalty all or any part of the principal amount
then outstanding on an obligation together with interest to the date of payment.
Since these obligations typically provide that the interest rate is tied to the
Federal Reserve commercial paper composite rate, the rate on master demand
obligations is subject to change. Repayment of a master demand obligation to
participating accounts depends on the ability of the borrower to pay the accrued
interest and principal of the obligation on demand which is continuously
monitored by Morgan. Since master demand obligations typically are not rated by
credit rating agencies, the Funds may invest in such unrated obligations only if
at the time of an investment the obligation is determined by the Advisor to have
a credit quality which satisfies the Fund's quality restrictions. See "Quality
and Diversification Requirements." Although there is no secondary market for
master demand obligations, such obligations are
7
considered by the Funds to be liquid because they are payable upon demand. The
Funds do not have any specific percentage limitation on investments in master
demand obligations. It is possible that the issuer of a master demand obligation
could be a client of Morgan to whom Morgan, in its capacity as a commercial
bank, has made a loan.
Repurchase Agreements. Each of the Funds may enter into repurchase
agreements with brokers, dealers or banks that meet the Advisor's credit
guidelines. In a repurchase agreement, a Fund buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. The resale price normally is in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for the
period of time the Fund is invested in the agreement and is not related to the
coupon rate on the underlying security. A repurchase agreement may also be
viewed as a fully collateralized loan of money by a Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Funds invest in repurchase agreements for more
than thirteen months. The securities which are subject to repurchase agreements,
however, may have maturity dates in excess of thirteen months from the effective
date of the repurchase agreement. The Funds will always receive securities as
collateral whose market value is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the Funds in
each agreement plus accrued interest, and the Funds will make payment for such
securities only upon physical delivery or upon evidence of book entry transfer
to the account of the custodian. If the seller defaults, a Fund might incur a
loss if the value of the collateral securing the repurchase agreement declines
and might incur disposition costs in connection with liquidating the collateral.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the security, realization upon disposal of the collateral by a Fund may be
delayed or limited.
Each of the Funds may make investments in other debt securities, including
without limitation corporate bonds and other obligations described in this
Statement of Additional Information.
Tax Exempt Obligations
In certain circumstances the Bond and Short Term Bond Funds may invest in
tax exempt obligations to the extent consistent with each Fund's investment
objective and policies. A description of the various types of tax exempt
obligations which may be purchased by the Funds appears below. See "Quality and
Diversification Requirements."
Municipal Bonds. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
8
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
Municipal Notes. The Funds may also invest in municipal notes of various
types, including notes issued in anticipation of receipt of taxes, the proceeds
of the sale of bonds, other revenues or grant proceeds, as well as municipal
commercial paper and municipal demand obligations such as variable rate demand
notes and master demand obligations.
Municipal notes are short-term obligations with a maturity at the time of
issuance ranging from six months to five years. The principal types of municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term unsecured
negotiable promissory notes that are sold to meet seasonal working capital or
interim construction financing needs of a municipality or agency. While these
obligations are intended to be paid from general revenues or refinanced with
long-term debt, they frequently are backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Funds may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of each Fund to receive the par value of the
obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, excluded from gross income for federal
income tax purposes. Although there is no secondary market for master demand
obligations, such obligations are considered by the Funds to be liquid because
they are payable upon demand. The Funds have no specific percentage limitations
on investments in master demand obligations.
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Premium Securities. During a period of declining interest rates, many
municipal securities in which the Fund invests likely will bear coupon rates
higher than current market rates, regardless of whether the securities were
initially purchased at a premium. In general, such securities have market values
greater than the principal amounts payable on maturity, which would be reflected
in the net asset value of the Fund's shares. The values of such "premium"
securities tend to approach the principal amount as they near maturity.
Puts. The Funds may purchase without limit, municipal bonds or notes
together with the right to resell the bonds or notes to the seller at an agreed
price or yield within a specified period prior to the maturity date of the bonds
or notes. Such a right to resell is commonly known as a "put." The aggregate
price for bonds or notes with puts may be higher than the price for bonds or
notes without puts. Consistent with the Fund's investment objective and subject
to the supervision of the Trustees, the purpose of this practice is to permit
the Fund to be fully invested in tax exempt securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions, and to purchase at a later date securities other
than those subject to the put. The principal risk of puts is that the writer of
the put may default on its obligation to repurchase. The Advisor will monitor
each writer's ability to meet its obligations under puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in order to take
advantage of alternative investment opportunities or in the event the Advisor
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration date
and in selecting which puts to exercise, the Advisor considers the amount of
cash available to the Fund, the expiration dates of the available puts, any
future commitments for securities purchases, alternative investment
opportunities, the desirability of retaining the underlying securities in the
Fund's portfolio and the yield, quality and maturity dates of the underlying
securities.
The Fund values any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Fund were to invest in municipal bonds and notes with maturities of 60 days or
more that are subject to puts separate from the underlying securities, the puts
and the underlying securities would be valued at fair value as determined in
accordance with procedures established by the Board of Trustees. The Board of
Trustees would, in connection with the determination of the value of a put,
consider, among other factors, the creditworthiness of the writer of the put,
the duration of the put, the dates on which or the periods during which the put
may be exercised and the applicable rules and regulations of the SEC. Prior to
investing in such securities, the Fund, if deemed necessary based upon the
advice of counsel, will apply to the SEC for an exemptive order, which may not
be granted, relating to the amortized valuation of such securities.
Since the value of the put is partly dependent on the ability of the put
writer to meet its obligation to repurchase, the Fund's policy is to enter into
put transactions only with municipal securities dealers who are approved by the
Advisor. Each dealer will be approved on its own merits, and it is the
10
Fund's general policy to enter into put transactions only with those dealers
which are determined to present minimal credit risks. In connection with such
determination, the Advisor reviews regularly the list of approved dealers,
taking into consideration, among other things, the ratings, if available, of
their equity and debt securities, their reputation in the municipal securities
markets, their net worth, their efficiency in consummating transactions and any
collateral arrangements, such as letters of credit, securing the puts written by
them. Commercial bank dealers normally will be members of the Federal Reserve
System, and other dealers will be members of the National Association of
Securities Dealers, Inc. or members of a national securities exchange. Other put
writers will have outstanding debt rated Aa or better by Moody's Investors
Service, Inc. ("Moody's") or AA or better by Standard & Poor's Ratings Group
("Standard & Poor's"), or will be of comparable quality in the Advisor's opinion
or such put writers' obligations will be collateralized and of comparable
quality in the Advisor's opinion. The Trustees have directed the Advisor not to
enter into put transactions with any dealer which in the judgment of the Advisor
become more than a minimal credit risk. In the event that a dealer should
default on its obligation to repurchase an underlying security, the Fund is
unable to predict whether all or any portion of any loss sustained could
subsequently be recovered from such dealer.
Entering into a put with respect to a tax exempt security may be treated,
depending upon the terms of the put, as a taxable sale of the tax exempt
security by the Fund with the result that, while the put is outstanding, the
Fund will no longer be treated as the owner of the security and the interest
income derived with respect to the security will be treated as taxable income to
the Fund.
Foreign Investments
The Global Strategic Income Fund makes substantial investments in foreign
countries. The Bond and Short Term Bond Funds may invest in certain foreign
securities. The Short Term Bond and Bond Funds may invest up to 20% of total
assets in fixed income securities of foreign issuers denominated in foreign
currencies. Neither the Bond or Short Term Bond Funds expect to invest more than
25% of their respective total assets at the time of purchase in securities of
foreign issuers. In the case of the Bond and Short Term Bond Funds, any foreign
commercial paper must not be subject to foreign withholding tax at the time of
purchase.
Foreign investments may be made directly in securities of foreign issuers
or in the form of American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or in other similar
securities of foreign issuers. ADRs are securities, typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer and deposited with
the depositary. ADRs include American Depositary Shares and New York Shares.
EDRs are receipts issued by a European financial institution. GDRs, which are
sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security. An
unsponsored depositary may
11
not provide the same shareholder information that a sponsored depositary is
required to provide under its contractual arrangements with the issuer of the
underlying foreign security. Generally, ADRs, in registered form, are designed
for use in the U.S. securities markets, and EDRs, in bearer form, are designed
for use in European securities markets.
Holders of an unsponsored depositary receipt generally bear all costs of
the unsponsored facility. The depositary of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
Investment in securities of foreign issuers and in obligations of foreign
branches of domestic banks involves somewhat different investment risks from
those affecting securities of U.S. domestic issuers. There may be limited
publicly available information with respect to foreign issuers, and foreign
issuers are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to domestic companies.
Dividends and interest paid by foreign issuers may be subject to withholding and
other foreign taxes which may decrease the net return on foreign investments as
compared to dividends and interest paid to a Fund by domestic companies.
Investors should realize that the value of a Fund's investments in foreign
securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administration or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investment made by a Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
In addition, while the volume of transactions effected on foreign
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, a Fund's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. companies. Moreover, the settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. In addition, there is generally
less government supervision and regulation of securities exchanges, brokers and
issuers located in foreign countries than in the United States.
Since investments in foreign securities may involve foreign currencies,
the value of the Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. Each Fund may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
12
the settlement of foreign securities transactions or to manage the Fund's
currency exposure. See "Foreign Currency Exchange Transactions" below.
Foreign Currency Exchange Transactions. Because each Fund may buy and sell
securities and receive interest in currencies other than the U.S. dollar, a Fund
may enter from time to time into foreign currency exchange transactions. The
Fund either enters into these transactions on a spot (i.e. cash) basis at the
spot rate prevailing in the foreign currency exchange market or uses forward
contracts to purchase or sell foreign currencies. The cost of the Fund's spot
currency exchange transactions is generally the difference between the bid and
offer spot rate of the currency being purchased or sold.
A forward foreign currency exchange contract is an obligation by the Fund
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. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These contracts are
derivative instruments, as their value derives from the spot exchange rates of
the currencies underlying the contract. These contracts are entered into in the
interbank market directly between currency traders (usually large commercial
banks) and their customers. A forward foreign currency exchange contract
generally has no deposit requirement and is traded at a net price without
commission. Neither spot transactions nor forward foreign currency exchange
contracts eliminate fluctuations in the prices of the Fund's securities or in
foreign exchange rates, or prevent loss if the prices of these securities should
decline.
A Fund may enter into foreign currency exchange transactions in an attempt
to protect against changes in foreign currency exchange rates between the trade
and settlement dates of specific securities transactions or anticipated
securities transactions. A Fund may also enter into forward contracts to hedge
against a change in foreign currency exchange rates that would cause a decline
in the value of existing investments denominated or principally traded in a
foreign currency. To do this, the Fund would enter into a forward contract to
sell the foreign currency in which the investment is denominated or principally
traded in exchange for U.S. dollars or in exchange for another foreign currency.
A Fund will only enter into forward contracts to sell a foreign currency for
another foreign currency if the Advisor expects the foreign currency purchased
to appreciate against the U.S. dollar.
Although these transactions are intended to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they limit
any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause the Fund to assume the risk of
fluctuations in the value of the currency purchased against the hedged currency
and the U.S. dollar. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of such securities between the date
the forward contract is entered into and the date it matures. The projection of
currency market movements is extremely difficult, and the successful execution
of a hedging strategy is highly uncertain.
Sovereign Fixed Income Securities. Each of the Funds may invest in fixed
income securities issued or guaranteed by a foreign sovereign government
13
or its agencies, authorities or political subdivisions. Investment in sovereign
fixed income securities involves special risks not present in corporate fixed
income securities. The issuer of the sovereign debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal or interest when due, and a Fund may have limited recourse in
the event of a default. During periods of economic uncertainty, the market
prices of sovereign debt, and a Fund's net asset value, may be more volatile
than prices of U.S. debt obligations. In the past, certain foreign countries
have encountered difficulties in servicing their debt obligations, withheld
payments of principal and interest and declared moratoria on the payment of
principal and interest on their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward international lenders and local political
constraints. Sovereign debtors may also be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities to reduce
principal and interest arrearages on their debt. The failure of a sovereign
debtor to implement economic reforms, achieve specified levels of economic
performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
Brady Bonds. Each 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. Brady bonds have been issued since 1989 and do not have a
long payment history. In light of the history of defaults of countries issuing
Brady bonds on their commercial bank loans, investments in Brady bonds may be
viewed as speculative. Brady bonds may be fully or partially collateralized or
uncollateralized, are issued in various currencies (but primarily the dollar)
and are actively traded in over-the-counter secondary markets. Incomplete
collateralization of interest or principal payment obligations results in
increased credit risk. Dollar-denominated collateralized Brady bonds, which may
be fixed-rate bonds or floating-rate bonds, are generally collateralized by U.S.
Treasury zero coupon bonds having the same maturity as the Brady bonds.
Obligations of Supranational Entities. Each Fund may invest in obligations
of supranational entities designated or supported by governmental entities to
promote economic reconstruction or development and of international banking
institutions and related government agencies. Examples include the International
Bank for Reconstruction and Development (the "World Bank"), the European Coal
and Steel Community, the Asian Development Bank and the Inter-American
Development Bank. Each supranational entity's lending activities are limited to
a percentage of its total capital (including "callable capital" contributed by
its governmental members at the entity's call), reserves and net income. There
is no assurance that participating governments will be able or willing to honor
their commitments to make capital contributions to a supranational entity.
14
Investing in Emerging Markets
The Global Strategic Income Fund, and to a lesser extent the Bond and
Short Term Bond Funds, may also invest in countries with emerging economies or
securities markets. Political and economic structures in many of such countries
may be undergoing significant evolution and rapid development, and such
countries may lack the social, political and economic stability characteristic
of more developed countries. Certain of such countries may have in the past
failed to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of a Fund's investments in those countries and the
availability to a Fund of additional investments in those countries. The small
size and inexperience of the securities markets in certain of such countries and
the limited volume of trading in securities in those countries may make a Fund's
investments in such countries illiquid and more volatile than investments in
more developed countries, and a Fund may be required to establish special
custodial or other arrangements before making certain investments in those
countries. There may be little financial or accounting information available
with respect to issuers located in certain of such countries, and it may be
difficult as a result to assess the value or prospects of an investment in such
issuers.
Transaction costs in emerging markets may be higher than in the United
States and other developed securities markets. As legal systems in emerging
markets develop, foreign investors may be adversely affected by new or amended
laws and regulations or may not be able to obtain swift and equitable
enforcement of existing law.
The Global Strategic Income Fund may make investments denominated in
emerging markets currencies. Some countries in emerging markets also may have
managed currencies, which are not free floating against the U.S. dollar. In
addition, emerging markets are subject to the risk of restrictions upon the free
conversion of their currencies into other currencies. Any devaluations relative
to the U.S. dollar in the currencies in which the Fund's securities are quoted
would reduce the Fund's net asset value.
Restrictions on Investment and Repatriation. Certain emerging markets
limit, or require governmental approval prior to, investments by foreign
persons. Repatriation of investment income and capital from certain emerging
markets is subject to certain governmental consents. Even where there is no
outright restriction on repatriation of capital, the mechanics of repatriation
may affect the operation of the Fund.
Additional Investments
Convertible Securities. Each of the Funds may invest in convertible
securities of domestic and, subject to the Fund's investment restrictions,
foreign issuers. The convertible securities in which a Fund may invest include
any debt securities or preferred stock which may be converted into common stock
or which carry the right to purchase common stock. Convertible securities
entitle the holder to exchange the securities for a specified number of shares
of common stock, usually of the same company, at specified prices within a
certain period of time.
When-Issued and Delayed Delivery Securities. Each of the Funds may
purchase securities on a when-issued or delayed delivery basis. For example,
15
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and for money market instruments and other
fixed income securities no interest accrues to a Fund until settlement takes
place. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, each Fund will
maintain with the custodian a segregated account with liquid assets, consisting
of cash, U.S. Government securities or other appropriate securities, in an
amount at least equal to such commitments. On delivery dates for such
transactions, each Fund will meet its obligations from maturities or sales of
the securities held in the segregated account and/or from cash flow. If a Fund
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. Also, a Fund may be
disadvantaged if the other party to the transaction defaults. It is the current
policy of the Bond and Short Term Bond Funds not to enter into when-issued
commitments exceeding in the aggregate 15% of the market value of the Fund's
total assets, less liabilities other than the obligations created by when-issued
commitments.
Structured Securities. The Global Strategic Income Fund may invest in
structured securities, including currency linked securities. The interest rate
or, in some cases, the principal payable at the maturity of a structured
security may change positively or inversely in relation to one or more interest
rates, financial indices, currency rates or other financial indicators
(reference prices). A structured security may be leveraged to the extent that
the magnitude of any change in the interest rate or principal payable on a
structured security is a multiple of the change in the reference price. Thus,
structured securities may decline in value due to adverse market changes in
currency exchange rates and other reference prices.
Risks Associated with Derivative Securities and Contracts. The risks
associated with a Fund's transactions in derivative securities and contracts may
include some or all of the following: market risk, leverage and volatility risk,
correlation risk, credit risk, and liquidity and valuation risk.
Market Risk. Investments in structured securities are subject to the
market risks described above. Entering into a derivative contract involves a
risk that the applicable market will move against the Fund's position and that
the Fund will incur a loss. For derivative contracts other than purchased
options, this loss may substantially exceed the amount of the initial investment
made or the premium received by the Fund.
Leverage and Volatility Risk. Derivative instruments may sometimes
increase or leverage a Fund's exposure to a particular market risk. Leverage
enhances the price volatility of derivative instruments held by a Fund. If a
Fund enters into futures contracts, writes options or engages in certain foreign
currency exchange transactions, it is required to maintain a segregated account
consisting of cash or liquid assets, hold offsetting portfolio securities or
cover written options which may partially offset the leverage inherent in these
transactions. Segregation of a large percentage of
16
assets could impede portfolio management or an investor's ability to meet
redemption requests.
Correlation Risk. A Fund's success in using derivative contracts to hedge
portfolio assets depends on the degree of price correlation between the
derivative contract and the hedged asset. Imperfect correlation may be caused by
several factors, including temporary price disparities among the trading markets
for the derivative contract, the assets underlying the derivative contract and
the Fund's assets.
Credit Risk. Derivative securities and over-the-counter derivative
contracts involve a risk that the issuer or counterparty will fail to perform
its contractual obligations.
Liquidity and Valuation Risk. Some derivative securities are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, a commodity exchange may suspend or
limit trading in an exchange-traded derivative contract, which may make the
contract temporarily illiquid and difficult to price. A Fund's ability to
terminate over-the-counter derivative contracts may depend on the cooperation of
the counterparties to such contracts. For thinly traded derivative securities
and contracts, the only source of price quotations may be the selling dealer or
counterparty.
Investment Company Securities. Securities of other investment companies
may be acquired by each of the Funds and their corresponding Portfolios to the
extent permitted under the 1940 Act. These limits require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of a
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group, and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by a Fund, provided however, that a Fund may invest all of
its investable assets in an open-end investment company that has the same
investment objective as the Fund (its corresponding Portfolio). As a shareholder
of another investment company, a Fund or Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory and
other expenses that a Fund or Portfolio bears directly in connection with its
own operations.
The Securities and Exchange Commission ("SEC") has granted the Portfolios
an exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets the following conditions: (1) the Portfolio
may invest in one or more of the permitted money market funds up to an aggregate
limit of 25% of its assets; and (2) the Advisor will waive and/or reimburse its
advisory fee from the Portfolio in an amount sufficient to offset any doubling
up of investment advisory, administrative and shareholder servicing fees.
Reverse Repurchase Agreements. Each of the Funds may enter into reverse
repurchase agreements. In a reverse repurchase agreement, a Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act a reverse repurchase agreement is
17
also considered as the borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for a Fund to be magnified. The
Funds will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, except for liquidity purposes, a Fund will enter into a
reverse repurchase agreement only when the expected return from the investment
of the proceeds is greater than the expense of the transaction. A Fund will not
invest the proceeds of a reverse repurchase agreement for a period which exceeds
the duration of the reverse repurchase agreement. Each Fund will establish and
maintain with the custodian a separate account with a segregated portfolio of
securities in an amount at least equal to its purchase obligations under its
reverse repurchase agreements. All forms of borrowing (including reverse
repurchase agreements, mortgage dollar rolls and securities lending) are limited
in the aggregate and may not exceed 33-1/3% of the Funds' total assets.
Mortgage Dollar Roll Transactions. The Funds may engage in mortgage dollar
roll transactions with respect to mortgage securities issued by the Government
National Mortgage Association, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. In a mortgage dollar roll transaction,
the Fund sells a mortgage backed security and simultaneously agrees to
repurchase a similar security on a specified future date at an agreed upon
price. During the roll period, the Fund will not be entitled to receive any
interest or principal paid on the securities sold. The Fund is compensated for
the lost interest on the securities sold by the difference between the sales
price and the lower price for the future repurchase as well as by the interest
earned on the reinvestment of the sales proceeds. The Fund may also be
compensated by receipt of a commitment fee. When the Fund enters into a mortgage
dollar roll transaction, liquid assets in an amount sufficient to pay for the
future repurchase are segregated with the custodian. Mortgage dollar roll
transactions are considered reverse repurchase agreements for purposes of the
Fund's investment restrictions. All forms of borrowing (including reverse
repurchase agreements, mortgage dollar rolls and securities lending) are limited
in the aggregate and may not exceed 33-1/3% of the Funds' total assets.
Loans of Portfolio Securities. Each of the Funds may lend its securities
if such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Fund at least equal at all times to 100% of the
market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Fund any income accruing
thereon. Loans will be subject to termination by a Fund in the normal settlement
time, generally three business days after notice, or by the borrower on one
day's notice. Borrowed securities must be returned when the loan is terminated.
Any gain or loss in the market price of the borrowed securities which occurs
during the term of the loan inures to a Fund and its respective investors. The
Funds may pay reasonable finders' and custodial fees in connection with a loan.
In addition, a Fund will consider all facts and circumstances including the
creditworthiness of the borrowing financial institution, and no Fund will make
any loans in excess of one year. The Funds will not lend their securities to any
officer, Trustee, Member of Advisory Board, Director, employee or other
affiliate of the Funds, the Advisor or the Distributor, unless otherwise
permitted by applicable law. All forms of borrowing (including reverse
repurchase agreements, mortgage dollar rolls and securities lending) are limited
in the aggregate and may not exceed 33-1/3% of the Funds' total assets.
Illiquid Investments; Privately Placed and Other Unregistered Securities.
No Fund may acquire any illiquid securities if, as a result
18
thereof, more than 15% of its net assets would be in illiquid investments.
Subject to this non-fundamental policy limitation, each Fund may acquire
investments that are illiquid or have limited liquidity, such as private
placements or investments that are not registered under the Securities Act of
1933, as amended (the "1933 Act"), and cannot be offered for public sale in the
United States without first being registered under the 1933 Act. An illiquid
investment is any investment that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which it is valued by a
Fund. The price a Fund pays for illiquid securities or receives upon resale may
be lower than the price paid or received for similar securities with a more
liquid market. Accordingly the valuation of these securities will reflect any
limitations on their liquidity.
Each Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.
As to illiquid investments, a Fund is subject to a risk that should the
Fund decide to sell them when a ready buyer is not available at a price the Fund
deems representative of their value, the value of the Fund's net assets could be
adversely affected. Where an illiquid security must be registered under the 1933
Act, before it may be sold, a Fund may be obligated to pay all or part of the
registration expenses, and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
Quality and Diversification Requirements
Each Fund intends to meet the diversification requirements of the 1940
Act. Current 1940 Act diversification requirements require that with respect to
75% of the assets of the Fund: (1) the Fund may not invest more than 5% of its
total assets in the securities of any one issuer, except obligations of the U.S.
Government, its agencies and instrumentalities, and (2) the Fund may not own
more than 10% of the outstanding voting securities of any one issuer. As for the
other 25% of the Fund's assets not subject to the limitation described above,
there is no limitation on investment of these assets under the 1940 Act, so that
all of such assets may be invested in securities of any one issuer. Investments
not subject to the limitations described above could involve an increased risk
to a Fund should an issuer, or a state or its related entities, be unable to
make interest or principal payments or should the market value of such
securities decline.
Each Fund will comply with the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company. See "Taxes".
Short Term Bond and Bond Funds. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, such subdivision is regarded
as the sole issuer. Similarly, in the case of an industrial development revenue
bond or pollution control revenue bond, if the bond is backed only by the assets
and revenues of the nongovernmental user, the nongovernmental user is regarded
as the sole issuer. If in either case the
19
creating government or another entity guarantees an obligation, the guaranty is
regarded as a separate security and treated as an issue of such guarantor. Since
securities issued or guaranteed by states or municipalities are not voting
securities, there is no limitation on the percentage of a single issuer's
securities which the Fund may own so long as it does not invest more than 5% of
its total assets that are subject to the diversification limitation in the
securities of such issuer, except obligations issued or guaranteed by the U.S.
Government. Consequently, the Fund may invest in a greater percentage of the
outstanding securities of a single issuer than would an investment company which
invests in voting securities. See "Investment Restrictions.
The Bond and Short Term Bond Funds invest in a diversified portfolio of
securities that are considered "high grade," "investment grade" and "below
investment grade" as described in Appendix A. In addition, at the time the Fund
invests in any commercial paper, bank obligation, repurchase agreement, or any
other money market instruments, the investment must have received a short term
rating of investment grade or better (currently Prime-3 or better by Moody's or
A-3 or better by Standard & Poor's) or the investment must have been issued by
an issuer that received a short term investment grade rating or better with
respect to a class of investments or any investment within that class that is
comparable in priority and security with the investment being purchased by the
Fund. If no such ratings exists, the investment must be of comparable investment
quality in the Advisor's opinion, but will not be eligible for purchase if the
issuer or its parent has long term outstanding debt rated below BBB.
The Global Strategic Income Fund. The higher total return sought by the
Global Strategic Income Fund is generally obtainable from high yield high risk
securities in the lower rating categories of the established rating services.
These securities are rated below Baa by Moody's or below BBB by Standard &
Poor's. The Global Strategic Income Fund may invest in securities rated as low
as B by Moody's or Standard & Poor's, which may indicate that the obligations
are speculative to a high degree. Lower rated securities are generally referred
to as junk bonds. See the Appendix attached to this Statement of Additional
Information for a description of the characteristics of the various ratings
categories. The Global Strategic Income Fund is not obligated to dispose of
securities whose issuers subsequently are in default or which are downgraded
below the minimum ratings noted above. The credit ratings of Moody's and
Standard & Poor's (the "Rating Agencies"), such as those ratings described in
this Statement of Additional Information, may not be changed by the Rating
Agencies in a timely fashion to reflect subsequent economic events. The credit
ratings of securities do not evaluate market risk. The Global Strategic Income
Fund may also invest in unrated securities which, in the opinion of the Advisor,
offer comparable yields and risks to the rated securities in which the Fund may
invest.
Debt securities that are rated in the lower rating categories, or which
are unrated, involve greater volatility of price and risk of loss of principal
and income, including the possibility of default or bankruptcy of the issuer of
such securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. Although the
Advisor seeks to minimize these risks through diversification, investment
analysis and attention to current developments in interest rates and economic
conditions, there can be no assurance that the Advisor will be
20
successful in limiting the Global Strategic Income Fund's exposure to the risks
associated with lower rated securities. Because the Global Strategic Income Fund
invests in securities in the lower rated categories, the achievement of the
Fund's investment objective is more dependent on the Advisor's ability than
would be the case if the Fund were investing in securities in the higher rated
categories.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to determine accurately the Portfolio's net
asset value.
Reduced volume and liquidity in the high yield bond market or the reduced
availability of market quotations may make it more difficult to dispose of the
Global Strategic Income Fund's investments in high yield securities and to value
accurately these assets. The reduced availability of reliable, objective data
may increase the Global Strategic Income Fund's reliance on management's
judgment in valuing high yield bonds. In addition, the Global Strategic Income
Fund's investments in high yield securities may be susceptible to adverse
publicity and investor perceptions whether or not justified by fundamental
factors.
Below Investment Grade Debt. Certain lower rated securities purchased by
each Fund, such as those rated Ba or B by Moody's or BB or B by Standard &
Poor's (commonly known as junk bonds), may be subject to certain risks with
respect to the issuing entity's ability to make scheduled payments of principal
and interest and to greater market fluctuations. While generally providing
greater income than investments in higher quality securities, lower quality
fixed income securities involve greater risk of loss of principal and income,
including the possibility of default or bankruptcy of the issuers of such
securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Fund invests in such lower quality securities, the achievement of its
investment objective may be more dependent on the Advisor's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to value accurately the Fund's portfolio
securities for purposes of determining the Fund's net asset value. See Appendix
A for more detailed information on these ratings.
21
In determining suitability of investment in a particular unrated security,
the Advisor takes into consideration asset and debt service coverage, the
purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers. Options and Futures Transactions
The Funds may purchase and sell (a) exchange traded and over-the-counter
(OTC) put and call options on fixed income securities, indexes of fixed income
securities and futures contracts on fixed income securities and indexes of fixed
income securities and (b) futures contracts on fixed income securities and
indexes of fixed income securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.
Each of the Funds may use futures contracts and options for hedging and
risk management purposes. The Funds may not use futures contracts and options
for speculation.
Each of the Funds may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge a Fund's investments against price fluctuations. Other strategies,
including buying futures contracts and buying calls, tend to increase market
exposure. Options and futures contracts may be combined with each other or with
forward contracts in order to adjust the risk and return characteristics of a
Fund's overall strategy in a manner deemed appropriate to the Advisor and
consistent with the Fund's objective and policies. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase a Fund's return. While the use of these instruments by a
Fund may reduce certain risks associated with owning its portfolio securities,
these techniques themselves entail certain other risks. If the Advisor applies a
strategy at an inappropriate time or judges market conditions or trends
incorrectly, options and futures strategies may lower a Fund's return. Certain
strategies limit the Fund's possibilities to realize gains as well as its
exposure to losses. A Fund could also experience losses if the prices of its
options and futures positions were poorly correlated with its other investments,
or if it could not close out its positions because of an illiquid secondary
market. In addition, the Fund will incur transaction costs, including trading
commissions and option premiums, in connection with its futures and options
transactions and these transactions could significantly increase the Fund's
turnover rate.
A Fund may purchase put and call options on securities, indexes of
securities and futures contracts, or purchase and sell futures contracts, only
if such options are written by other persons and if (i) the aggregate premiums
paid on all such options which are held at any time do not exceed 20% of the
Fund's net assets, and (ii) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the Fund's total
assets. In addition, a Fund will not purchase or sell (write) futures contracts,
options on futures contracts or commodity options for risk management purposes
if, as a result, the aggregate initial margin and options premiums required to
establish these positions exceed 5% of the net asset value of a Fund.
22
Options
Purchasing Put and Call Options. By purchasing a put option, a Fund
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. A Fund may
terminate its position in a put option it has purchased by allowing it to expire
or by exercising the option. A Fund may also close out a put option position by
entering into an offsetting transaction, if a liquid market exits. If the option
is allowed to expire, the Fund will lose the entire premium it paid. If a Fund
exercises a put option on a security, it will sell the instrument underlying the
option at the strike price. If a Fund exercises an option on an index,
settlement is in cash and does not involve the actual sale of securities. If an
option is American style, it may be exercised on any day up to its expiration
date. A European style option may be exercised only on its expiration date.
The buyer of a typical put option can expect to realize a gain if the
underlying instrument falls substantially. However, if the price of the
instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
Selling (Writing) Put and Call Options. When a Fund writes a put option,
it takes the opposite side of the transaction from the option's purchaser. In
return for the receipt of the premium, the Fund assumes the obligation to pay
the strike price for the instrument underlying the option if the party to the
option chooses to exercise it. The Fund may seek to terminate its position in a
put option it writes before exercise by purchasing an offsetting option in the
market at its current price. If the market is not liquid for a put option the
Fund has written, however, it must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes, and must
continue to post margin as discussed below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
23
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
Options on Indexes. Each of the Funds may purchase and sell put and call
options on any securities index based on securities in which the Fund may
invest. Options on securities indexes are similar to options on securities,
except that the exercise of securities index options is settled by cash payment
and does not involve the actual purchase or sale of securities. In addition,
these options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security. A Fund, in purchasing or selling index options, is subject to
the risk that the value of its portfolio securities may not change as much as an
index because the Fund's investments generally will not match the composition of
an index.
For a number of reasons, a liquid market may not exist and thus a Fund may
not be able to close out an option position that it has previously entered into.
When a Fund purchases an OTC option, it will be relying on its counterparty to
perform its obligations, and the Fund may incur additional losses if the
counterparty is unable to perform.
Exchange Traded and OTC Options. All options purchased or sold by the Fund
will be traded on a securities exchange or will be purchased or sold by
securities dealers (OTC options) that meet creditworthiness standards approved
by the Advisor. While exchange-traded options are obligations of the Options
Clearing Corporation, in the case of OTC options, the Fund relies on the dealer
from which it purchased the option to perform if the option is exercised. Thus,
when the Fund purchases an OTC option, it relies on the dealer from which it
purchased the option to make or take delivery of the underlying securities.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as loss of the expected benefit of the transaction.
Provided that the Fund has arrangements with certain qualified dealers who
agree that the Fund may repurchase any option it writes for a maximum price to
be calculated by a predetermined formula, the Fund may treat the underlying
securities used to cover written OTC options as liquid. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Futures Contracts
The Funds may purchase and sell futures contracts. When a Fund purchases a
futures contract, it agrees to purchase a specified quantity of an underlying
instrument at a specified future date or to make a cash payment based on the
value of a securities index. When a Fund sells a futures
24
contract, it agrees to sell a specified quantity of the underlying instrument at
a specified future date or to receive a cash payment based on the value of a
securities index. The price at which the purchase and sale will take place is
fixed when the Fund enters into the contract. Futures can be held until their
delivery dates or the position can be (and normally is) closed out before then.
There is no assurance, however, that a liquid market will exist when the Fund
wishes to close out a particular position.
When a Fund purchases a futures contract, the value of the futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Fund's exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying instrument
directly. When a Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the value of the
underlying instrument. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the underlying
instrument had been sold.
The purchaser or seller of a futures contract is not required to deliver
or pay for the underlying instrument unless the contract is held until the
delivery date. However, when a Fund buys or sells a futures contract it will be
required to deposit "initial margin" with its custodian in a segregated account
in the name of its futures broker, known as a futures commission merchant (FCM).
Initial margin deposits are typically equal to a small percentage of the
contract's value. If the value of either party's position declines, that party
will be required to make additional "variation margin" payments equal to the
change in value on a daily basis. The party that has a gain may be entitled to
receive all or a portion of this amount. A Fund may be obligated to make
payments of variation margin at a time when it is disadvantageous to do so.
Furthermore, it may not always be possible for a Fund to close out its futures
positions. Until it closes out a futures position, the Fund will be obligated to
continue to pay variation margin. Initial and variation margin payments do not
constitute purchasing on margin for purposes of a Fund's investment
restrictions. In the event of the bankruptcy of an FCM that holds margin on
behalf of a Fund, the Fund may be entitled to return of margin owed to it only
in proportion to the amount received by the FCM's other customers, potentially
resulting in losses to the Fund.
Each Fund will segregate liquid assets in connection with its use of
options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Options on Futures Contracts. The Funds may purchase and sell put and call
options, including put and call options on futures contracts. Futures contracts
obligate the buyer to take and the seller to make delivery at a future date of a
specified quantity of a financial instrument or an amount of cash based on the
value of a securities index. Currently, futures contracts are available on
various types of fixed income securities, including but not limited to U.S.
Treasury bonds, notes and bills, Eurodollar certificates of deposit and on
indexes of fixed income securities.
25
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid by
the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by a Fund are paid by the Fund into a segregated account, in the
name of the FCM, as required by the 1940 Act and the SEC's interpretations
thereunder.
Combined Positions. Each Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Correlation of Price Changes. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a Fund's
current or anticipated investments exactly. A Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures contracts prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures contracts prices are affected by
such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Fund may purchase or sell futures with a
greater or lesser value than the securities it wishes to hedge or intends to
purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all
cases. If price changes in a Fund's options or futures positions are poorly
correlated with its other investments, the
26
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
Liquidity of Options and Futures Contracts. There is no assurance that a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for a Fund
to enter into new positions or close out existing positions. If the market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and could potentially
require a Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions could also be impaired.
(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)
Position Limits. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, a Fund or the Advisor may be required to
reduce the size of its futures and options positions or may not be able to trade
a certain futures or options contract in order to avoid exceeding such limits.
Asset Coverage for Futures Contracts and Options Positions. Although the
Funds will not be commodity pools, certain derivatives subject a Fund to the
rules of the Commodity Futures Trading Commission which limit the extent to
which each Fund can invest in such derivatives. The Funds may invest in futures
contracts and options with respect thereto for hedging purposes without limit.
However, a Fund may not invest in such contracts and options for other purposes
if the sum of the amount of initial margin deposits and premiums paid for
unexpired options with respect to such contracts, other than for bona fide
hedging purposes, exceeds 5% of the liquidation value of a Fund's assets, after
taking into account unrealized profits and unrealized losses on such contracts
and options; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.
In addition, the Funds will comply with guidelines established by the SEC
with respect to coverage of options and futures contracts by mutual funds, and
if the guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures contract or option is
outstanding, unless they are replaced with other suitable assets. As a result,
there is a possibility that segregation of a large percentage of a Fund's assets
could impede portfolio management or a Fund's ability to meet redemption
requests or other current obligations.
Swaps and Related Swap Products. Each of the Funds may engage in swap
transactions, including, but not limited to, interest rate, currency, securities
index, basket, specific security and commodity swaps, interest rate caps, floors
and collars and options on interest rate swaps (collectively defined as "swap
transactions").
27
Each Fund may enter into swap transactions for any legal purpose
consistent with its investment objective and policies, such as for the purpose
of attempting to obtain or preserve a particular return or spread at a lower
cost than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities a Fund anticipates purchasing at a later date, or to gain exposure to
certain markets in the most economical way possible. A Fund will not sell
interest rate caps, floors or collars if it does not own securities with coupons
which provide the interest that a Fund may be required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional counterparties for periods ranging from a few weeks to several
years. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of return) that would be earned or realized on
specified notional investments or instruments. The gross returns to be exchanged
or "swapped" between the parties are calculated by reference to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency or
commodity, or in a "basket" of securities representing a particular index. The
purchaser of an interest rate cap or floor, upon payment of a fee, has the right
to receive payments (and the seller of the cap is obligated to make payments) to
the extent a specified interest rate exceeds (in the case of a cap) or is less
than (in the case of a floor) a specified level over a specified period of time
or at specified dates. The purchaser of an interest rate collar, upon payment of
a fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a pre-specified notional
amount with pre-specified terms with the seller of the option as the
counterparty.
The "notional amount" of a swap transaction is the agreed upon basis for
calculating the payments that the parties have agreed to exchange. For example,
one swap counterparty may agree to pay a floating rate of interest (e.g., 3
month LIBOR) calculated based on a $10 million notional amount on a quarterly
basis in exchange for receipt of payments calculated based on the same notional
amount and a fixed rate of interest on a semi-annual basis. In the event a Fund
is obligated to make payments more frequently than it receives payments from the
other party, it will incur incremental credit exposure to that swap
counterparty. This risk may be mitigated somewhat by the use of swap agreements
which call for a net payment to be made by the party with the larger payment
obligation when the obligations of the parties fall due on the same date. Under
most swap agreements entered into by a Fund, payments by the parties will be
exchanged on a "net basis", and a Fund will receive or pay, as the case may be,
only the net amount of the two payments.
The amount of a Fund's potential gain or loss on any swap transaction is
not subject to any fixed limit. Nor is there any fixed limit on a Fund's
potential loss if it sells a cap or collar. If the Fund buys a cap, floor or
collar, however, the Fund's potential loss is limited to the amount of the fee
that it has paid. When measured against the initial amount of cash required to
initiate the transaction, which is typically zero in the case of most
conventional swap transactions, swaps, caps, floors and collars tend to be more
volatile than many other types of instruments.
28
The use of swap transactions, caps, floors and collars involves investment
techniques and risks which are different from those associated with portfolio
security transactions. If the Advisor is incorrect in its forecasts of market
values, interest rates, and other applicable factors, the investment performance
of a Fund will be less favorable than if these techniques had not been used.
These instruments are typically not traded on exchanges. Accordingly, there is a
risk that the other party to certain of these instruments will not perform its
obligations to a Fund or that a Fund may be unable to enter into offsetting
positions to terminate its exposure or liquidate its position under certain of
these instruments when it wishes to do so. Such occurrences could result in
losses to a Fund.
The Advisor will, however, consider such risks and will enter into swap
and other derivatives transactions only when it believes that the risks are not
unreasonable.
Each Fund will maintain cash or liquid assets in a segregated account with
its custodian in an amount sufficient at all times to cover its current
obligations under its swap transactions, caps, floors and collars. If a Fund
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of a Fund's accrued
obligations under the swap agreement over the accrued amount a Fund is entitled
to receive under the agreement. If a Fund enters into a swap agreement on other
than a net basis, or sells a cap, floor or collar, it will segregate assets with
a daily value at least equal to the full amount of a Fund's accrued obligations
under the agreement.
Each Fund will not enter into any swap transaction, cap, floor, or collar,
unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, a Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in which
many types of swap transactions are traded have grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the markets for certain types of swaps (e.g., interest rate swaps) have become
relatively liquid. The markets for some types of caps, floors and collars are
less liquid.
The liquidity of swap transactions, caps, floors and collars will be as
set forth in guidelines established by the Advisor and approved by the Trustees
which are based on various factors, including (1) the availability of dealer
quotations and the estimated transaction volume for the instrument, (2) the
number of dealers and end users for the instrument in the marketplace, (3) the
level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and
(5) the nature of the marketplace for trades (including the ability to assign or
offset a Fund's rights and obligations relating to the instrument). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.
During the term of a swap, cap, floor or collar, changes in the value of
the instrument are recognized as unrealized gains or losses by marking to market
to reflect the market value of the instrument. When the instrument is
terminated, a Fund will record a realized gain or loss equal to the difference,
if any, between the proceeds from (or cost of) the closing transaction and a
Fund's basis in the contract.
29
The federal income tax treatment with respect to swap transactions, caps,
floors, and collars may impose limitations on the extent to which a Fund may
engage in such transactions.
Risk Management
Each Fund may employ non-hedging risk management techniques. Examples of
risk management strategies include synthetically altering the duration of a
portfolio or the mix of securities in a portfolio. For example, if the Advisor
wishes to extend maturities in a fixed income portfolio in order to take
advantage of an anticipated decline in interest rates, but does not wish to
purchase the underlying long term securities, it might cause the Fund to
purchase futures contracts on long term debt securities. Similarly, if the
Advisor wishes to decrease fixed income securities or purchase equities, it
could cause the Fund to sell futures contracts on debt securities and purchase
futures contracts on a stock index. Such non-hedging risk management techniques
are not speculative, but because they involve leverage include, as do all
leveraged transactions, the possibility of losses as well as gains that are
greater than if these techniques involved the purchase and sale of the
securities themselves rather than their synthetic derivatives.
Portfolio Turnover
The table below sets forth the portfolio turnover rates for the Portfolios
corresponding to the Funds. A rate of 100% indicates that the equivalent of all
of the Portfolio's assets have been sold and reinvested in a year. High
portfolio turnover may result in the realization of substantial net capital
gains or losses. To the extent net short term capital gains are realized, any
distributions resulting from such gains are considered ordinary income for
federal income tax purposes. See "Taxes" below.
The Short Term Bond Portfolio (Short Term Bond Fund) -- For the fiscal years
ended October 31, 1998, 1999 and 2000: 381%, 398% and 271%, respectively.
The U.S. Fixed Income Portfolio (Bond Fund) -- For the fiscal year ended October
31, 19971998, 1999 and 2000: 115%, 465% and 531%, respectively.
The Global Strategic Income Portfolio (Global Strategic Income Fund) For the
fiscal years ended October 31, 1998, 1999, and 2000: 368%, 318% and 266%.
The variation in the U.S. Fixed Income Portfolio's turnover rate over the
last two fiscal years is primarily due to the Portfolio's investments in
mortgages and futures.
INVESTMENT RESTRICTIONS
The investment restrictions of each Fund and its corresponding Portfolio
are identical, unless otherwise specified. Accordingly, references below to a
Fund also include the Fund's corresponding Portfolio unless the context requires
otherwise; similarly, references to a Portfolio also include its corresponding
Fund unless the context requires otherwise.
The investment restrictions below have been adopted by each Fund and by
each corresponding Portfolio. Except where otherwise noted, these investment
restrictions are "fundamental" policies which, under the 1940 Act, may not be
changed without the vote of a majority of the outstanding voting securities of
30
the Fund or Portfolio, as the case may be. A "majority of the outstanding voting
securities" is defined in the 1940 Act as the lesser of (a) 67% or more of the
voting securities present at a meeting if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy, or (b) more
than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions below apply at the time of the purchase of
securities. Whenever a Fund is requested to vote on a change in the fundamental
investment restrictions of its corresponding Portfolio, the Trust will hold a
meeting of Fund shareholders and will cast its votes as instructed by the Fund's
shareholders.
Each Fund and its corresponding Portfolios:
1. May not make any investment inconsistent with the Fund's classification as a
diversified investment company under the Investment Company Act of 1940.
2. May not purchase any security which would cause the Fund to concentrate its
investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;
3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. May not underwrite securities of other issuers, except to the extent that the
Fund, in disposing of portfolio securities, may be deemed an underwriter within
the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may (a) invest in securities or other instruments
directly or indirectly secured by real estate, (b) invest in securities or other
instruments issued by issuers that invest in real estate and (c) make direct
investments in mortgages;
7. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodities contracts; but this shall not
prevent the Fund from purchasing, selling and entering into financial futures
contracts (including futures contracts on indices of securities, interest rates
and currencies), options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants,
swaps, forward contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities; and
8. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.
Non-Fundamental Investment Restrictions. The investment restrictions
described below are not fundamental policies of the Funds and their
corresponding Portfolios and may be changed by their Trustees. These
non-fundamental investment policies require that the Funds and their
corresponding Portfolios:
(i) May not acquire any illiquid securities, such as repurchase agreements with
more than seven days to maturity or fixed time deposits with a duration of over
seven calendar days, if as a result thereof, more than 15% of the
31
market value of the Fund's net assets would be in investments which are
illiquid;
(ii) May not purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued or delayed delivery
securities, or to short sales that are covered in accordance with SEC rules; and
(iii) May not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of the fundamental investment restriction regarding industry
concentration, JPMIM may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With The Securities and Exchange Commission or other sources. In the absence of
such classification or if JPMIM determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, JPMIM
may classify an issuer accordingly. For instance, personal credit finance
companies and business credit finance companies are deemed to be separate
industries and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents.
TRUSTEES, MEMBERS OF THE ADVISORY BOARD AND OFFICERS
Trustees
The names of the Trustees of the Trust, who are also the Trustees of each
of the Portfolios and the other Master Portfolio as defined below, their
principal occupations during the past five years and dates of birth are set
forth below. Their mailing address is c/o Pierpont Group, Inc. 461 Fifth Avenue,
New York, New York 10017.
FREDERICK S. ADDY--Trustee; Retired; Prior to April 1994, Executive Vice
President and Chief Financial Officer, Amoco Corporation. His date of birth is
January 1, 1932.
WILLIAM G. BURNS--Trustee; Retired, Former Vice Chairman and Chief
Financial Officer, NYNEX. His date of birth is November 2, 1932.
ARTHUR C. ESCHENLAUER--Trustee; Retired; Former Senior Vice President,
Morgan Guaranty Trust Company of New York. His date of birth is May 23, 1934.
MATTHEW HEALEY*--Trustee, Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc., since prior to 1996.
- ----------
* Mr. Healey is an "interested person" (as defined in the 1940 Act) of the
Trust.
32
MICHAEL P. MALLARDI--Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His date of
birth is March 17, 1934.
A majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust, each of the
Portfolios and J.P. Morgan Institutional Funds, up to and including creating a
separate board of trustees.
Each Trustee is currently paid an annual fee of $75,000 for serving as
Trustee of the Trust, each of the Master Portfolios (as defined below), J.P.
Morgan Institutional Funds and J.P. Morgan Series Trust and is reimbursed for
expenses incurred in connection with service as a Trustee. The Trustees may hold
various other directorships unrelated to these funds.
Trustee compensation expenses paid by the Trust for the calendar year
ended December 31, 2000 are set forth below.
- -------------------------------------------------------------------------------
TOTAL TRUSTEE
COMPENSATION ACCRUED
AGGREGATE BY THE MASTER
TRUSTEE PORTFOLIOS(1), J.P.
COMPENSATION MORGAN INSTITUTIONAL
PAID BY THE FUNDS, J.P. MORGAN
TRUST DURING SERIES TRUST AND THE
NAME OF TRUSTEE 2000 TRUST DURING 2000(2)
- --------------- ------------ --------------------
Frederick S. Addy, Trustee $11,238 $75,000
William G. Burns, Trustee $11,238 $75,000
Arthur C. Eschenlauer, Trustee $11,238 $75,000
Matthew Healey, Trustee (3)
Chairman and Chief Executive
Officer $11,238 $75,000
Michael P. Mallardi, Trustee $11,238 $75,000
- -------------------------------------------------------------------------------
(1) Includes the Portfolios and 16 other portfolios (collectively the
"Master Portfolios") for which JPMIM acts as investment advisor.
(2) No investment company within the fund complex has a pension or
retirement plan. Currently there are 22 investment companies (composed of
19 investment companies comprising the Master Portfolios, J.P. Morgan
Institutional Funds, the Trust and J.P. Morgan Series Trust) in the fund
complex.
(3) During 2000, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $200,000 ,
contributed 25,500 to a defined contribution plan on his behalf and paid $
18,400 in insurance premiums for his benefit.
The Trustees decide upon general policies and are responsible for
overseeing the Trust's and Portfolio's business affairs. Each of the Portfolios
and the Trust has entered into a Fund Services Agreement with Pierpont Group,
Inc. to assist the Trustees in exercising their overall supervisory
responsibilities over the affairs of the Portfolios and the Trust.
33
Pierpont Group, Inc. was organized in July 1989 to provide services for the J.P.
Morgan Family of Funds (formerly "The Pierpont Family of Funds"), and the
Trustees are the equal and sole shareholders of Pierpont Group, Inc. The Trust
and the Portfolios have agreed to pay Pierpont Group, Inc. a fee that is equal
to the Trust's and Portfolio's allocated share of Pierpont Group, Inc.'s
reasonable costs in performing these services to the Trust, the Portfolios and
contain other registered investment companies subject to similar agreements with
Pierpont Group, Inc. These costs are periodically reviewed by the Trustees. The
principal offices of Pierpont Group, Inc. are located at 461 Fifth Avenue, New
York, New York 10017.
The aggregate fees paid to Pierpont Group, Inc. by each Fund and its
corresponding Portfolio during the indicated fiscal years are set forth below:
Short Term Bond Fund -- For the fiscal years ended October 31, 2000, 1998, 1999
and 2000: $689, $736 and $595, respectively.
The Short Term Bond Portfolio -- For the fiscal years ended October 31, 1998,
1999 and 2000: $3,458, $6,343 and $6,453, respectively.
Bond Fund -- For the fiscal years ended October 31, 1998, 1999 and 2000: $5,901,
$4,299 and $3,586, respectively.
The U.S. Fixed Income Portfolio -- For the fiscal years ended October 31, 2000,
1998, 1999 and 2000: $35,661, $30,562, and $24,445, respectively.
Global Strategic Income Fund -- For the period November 5, 1997 (commencement of
operations) through October 31, 1998: $2,473. For the fiscal years ended October
31, 1999 and 2000: $2,579 and $113, respectively.
Global Strategic Income Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000: $57,247, $61,940 and $2,674, respectively.
Members of the Advisory Board
The Trustees determined as of January 26, 2000 to establish an advisory
board and appoint four members ("Members of the Advisory Board") thereto. Each
member serves at the pleasure of the Trustees. The advisory board is distinct
from the Trustees and provides advice to the Trustees as to investment,
management and operations of the Trust; but has no power to vote upon any matter
put to a vote of the Trustees. The advisory board and the members thereof also
serve each of the Trusts and the Master Portfolios. The creation of the Advisory
Board and the appointment of the members thereof was designed (i) so that the
Board of Trustees will continuously consist of persons able to assume the duties
of Trustees and be fully familiar with the business and affairs of each of the
Trusts and the Master Portfolios, in anticipation of the current Trustees
reaching the mandatory retirement age of seventy and (ii) with the intention
that the Members of the Advisory Board held be proposed for election as Trustees
at a shareholder meeting to be held prior to the retirement. Each member of the
Advisory Board is paid an annual fee of $75,000 for serving in this capacity for
the Trust, each of the Master Portfolios, the J.P. Morgan Funds and the J.P.
Morgan Series Trust and is reimbursed for expenses incurred in connection for
such service. The members of the Advisory Board may hold various other
directorships unrelated to these funds. The mailing address of the Members of
the Advisory Board is c/o Pierpont Group, Inc., 461 Fifth Avenue, New York, New
York 10017. Their names,
34
principal occupations during the past five years and dates of birth are set
forth below:
Ann Maynard Gray - Former President, Diversified Publishing Group and Vice
President, Capital Cities/ABC, Inc. Her date of birth is August 22, 1945.
John R. Laird -- Retired; Former Chief Executive Officer, Shearson Lehman
Brothers and The Boston Company. His date of birth is June 21, 1942.
Gerard P. Lynch** -- Retired; Former Managing Director, Morgan Stanley
Group and President and Chief Operating Officer, Morgan Stanley Services, Inc.
His date of birth is October 5, 1936.
James J. Schonbachler -- Retired; Prior to September, 1998, Managing
Director, Bankers Trust Company and Chief Executive Officer and Director,
Bankers Trust A.G., Zurich and BT Brokerage Corp. His date of birth is January
26, 1943.
Officers
The Trust's and Portfolios' executive officers (listed below), other than
the Chief Executive officer and the officers who are employees of the Advisor,
are provided and compensated by Funds Distributor, Inc. ("FDI"), a wholly owned
indirect subsidiary of Boston Institutional Group, Inc. The officers conduct and
supervise the business operations of the Trust and the Portfolios. The Trust and
the Portfolios have no employees.
The officers of the Trust and the Portfolios, their principal occupations
during the past five years and dates of birth are set forth below. Unless
otherwise specified, each officer holds the same position with the Trust and
each Portfolio. The business address of each of the officers unless otherwise
noted is Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group, since
prior to 1996. His address is c/o Pierpont Group, Inc., 461 Fifth Avenue, New
York, New York 10017. His date of birth is August 23, 1937.
MARGARET W. CHAMBERS; Vice President and Secretary. Executive Vice
President and General Counsel of FDI since April of 1998. From August 1996 to
March 1998, Ms. Chambers was Vice President and Assistant General Counsel for
Loomis, Sayles & Company, L.P. From January 1986 to July 1996, she was an
associate with the law firm of Ropes & Gray. Her date of birth is October 12,
1959.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer and Director of FDI, and an officer of certain
investment companies advised or administered by FDI since prior to 1996. Her
date of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Vice President,
New Business Development of FDI and an officer of certain investment companies
distributed or administered by FDI. Prior to 1999, Mr.
- ----------
** Mr. Lynch may be deemed an "interested person" (as defined in the 1940 Act)
of the Advisor due to his son's affiliation with an affiliate.
35
Conroy was a Manager of Treasury Services and Administration of FDI. His date of
birth is March 31, 1969.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. His date of birth is December 24, 1964.
KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President of FDI. Manager of Treasury Services Administration and an officer of
certain investment companies advised or administered by Montgomery Asset
Management, L.P. and Dresdner RCM Global Investors, Inc., and their respective
affiliates. Her date of birth is July 5, 1972.
MARY A. NELSON; Vice President and Assistant Treasurer. Senior Vice
President and Director of Financial Services at FDI, since August 1994, and an
officer of certain investment companies distributed or administered by FDI. Her
date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer; Vice President, Morgan Guaranty Trust
Company of New York. Ms. Pace serves in the Funds Administration group as a
Manager for the Budgeting and Expense Processing Group. Her address is 60 Wall
Street, New York, New York 10260. Her date of birth is March 13, 1966.
GEORGE A. RIO; President and Treasurer; Executive Vice President and
Client Service Director of FDI since April 1998. From June 1995 to March 1998,
Mr. Rio was Senior Vice President and Senior Key Account Manager for Putnam
Mutual Funds. His date of birth is January 2, 1955.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. Ms. Rotundo serves as Manager of the Funds
Infrastructure group and is responsible for the management of special projects.
Prior to January 2000, she served as Manager of the Tax Group in the Funds
Administration group and was responsible for U.S. mutual fund tax matters. Her
address is 60 Wall Street, New York, New York 10260. Her date of birth is
September 26, 1965.
ELBA VASQUEZ; Vice President and Assistant Secretary. Vice President of
FDI since February 1999. Ms. Vasquez served as National Sales Associate for FDI
from May 1996. Prior to that she served in various mutual fund sales and
marketing positions for U.S. Trust Company of New York. Her date of birth is
December 14, 1961.
As of the date of this Statement of Additional Information, the officers,
Trustees and Members of the Advisory Board as a group owned less than 1% of the
shares of each Fund.
CODES OF ETHICS
The Trust, FDI and the Advisor have adopted codes of ethics pursuant to
Rule 17j-1 under the 1940 Act. Each of these codes permits personnel subject
36
oto such code to invest in securities, including securities that may be
purchased or held by the Fund. Such purchases, however, are subject to
preclearance and other procedures reasonably necessary to prevent access persons
(as defined therein) from engaging in any unlawful conduct set forth in Rule
17j-1.
INVESTMENT ADVISOR
The Funds have retained JPMIM as Investment Advisor to provide investment
advice and portfolio management services to Portfolios, pursuant to an
Investment Advisory Agreement dated as of October 1,1998. Subject to the
supervision of Portfolios' Trustees, the Advisor makes the Portfolios'
day-to-day investment decisions, arranges for the execution of portfolio
transactions and generally manages the Portfolios' investments.
The Investment Advisory Agreement provides that it will continue in effect
for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Distributor" below. The Investment Advisory Agreement will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Trustees, or by a vote of the holders of a majority of
the Fund's outstanding voting securities, on 60 days' written notice to the
Advisor and by the Advisor on 90 days' written notice to the Trust. See
"Additional Information."
The Advisor, a wholly owned subsidiary of J.P. Morgan Chase & Co. ("J.P.
Morgan Chase") and a corporation organized under the laws of the State of
Delaware, is a registered investment adviser under the Investment Advisers Act
of 1940, as amended. The Advisor is located at 522 Fifth Avenue, New York, New
York 10036.
J.P. Morgan Chase, a bank holding company organized under the laws of the
State of Delaware, was formed from the merger of J.P. Morgan & Co. Incorporated
with and into The Chase Manhattan Corporation. J.P. Morgan Chase, together with
its predecessors, has been in the banking and investment advisory business for
over 100 years and today, through JPMIM and its other subsidiaries, offers a
wide range of banking and investment management services to governmental,
institutional, corporate and individual clients.
The investment advisory services the Advisor provides to the Portfolios
are not exclusive under the terms of the Investment Advisory Agreement. The
Advisor is free to and does render similar investment advisory services to
others. The Advisor also manages employee benefit funds of corporations, labor
unions and state and local governments and the accounts of other institutional
investors, including investment companies. Certain of the assets of employee
benefit accounts under its management are invested in commingled pension trust
funds for which Morgan serves as trustee. The accounts, which are managed or
advised by the Advisor, have varying investment objectives and the Advisor
invests assets of such accounts in investments substantially similar to, or the
same as, those which are expected to constitute the principal investments of the
Portfolios. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Portfolios. See
"Portfolio Transactions."
Sector weightings are generally similar to a benchmark with the emphasis
on security selection as the method to achieve investment performance superior
to the benchmark. The benchmarks for the Portfolios in which the Funds invest
are currently: The Short Term Bond Portfolio-Merrill Lynch 1-3 Year Treasury
37
Index; The U.S. Fixed Income Portfolio--Salomon Brothers Broad Investment Grade
Bond Index; The Global Strategic Income Portfolio--The Lehman Brothers Aggregate
Bond Index.
The Portfolios are managed by employees of the Advisor who, in acting for
their customers, including the Funds, do not discuss their investment decisions
with any personnel of J.P. Morgan Chase or any personnel of other divisions of
the Advisor or with any of its affiliated persons, with the exception of certain
other investment management affiliates of J.P. Morgan Chase that execute
transactions on behalf of the Portfolios.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Advisory
Agreements, the Portfolio corresponding to each Fund has agreed to pay the
Advisor a fee, which is computed daily and may be paid monthly, equal to the
annual rates of each Portfolio's average daily net assets shown below.
Short Term Bond: 0.25%
U.S. Fixed Income: 0.30%
Global Strategic Income: 0.45%
The table below sets forth for each Fund listed the advisory fees paid by
its corresponding Portfolio to Morgan and JPMIM, as applicable, for the fiscal
period indicated.
The Short Term Bond Portfolio (Short Term Bond Fund) -- For the fiscal years
ended October 31, 1998, 1999 and 2000: $322,384, $807,631 and $1,018,928,
respectively.
The U.S. Fixed Income Portfolio (Bond Fund) -- For the fiscal years ended
October 31, 1998, 1999 and 2000: $3,583,060, $4,514,768 and $4,648,013,
respectively.
The Global Strategic Income Portfolio (Global Strategic Income Fund) -- For the
fiscal years ended October 31, 1998, 1999 and 2000: $887,960, $1,073,105, and
$757,567, respectively.
Morgan, an affiliate of the Advisor and a wholly owned subsidiary of J.P.
Morgan Chase, is a New York trust company that conducts a general banking and
trust business. Morgan is subject to regulation by the New York State Banking
Department and is a member of the Federal Reserve System. Through offices in New
York City and abroad, Morgan offers a wide range of services primarily to
governmental, institutional, corporate and high net worth individual customers
in the United States and throughout the world. Under separate agreements, Morgan
also provides certain financial, fund accounting and administrative services to
the Trust and the Fund and shareholder services for the Trust. Morgan is located
at 60 Wall Street, New York, New York 10260. See "Services Agent" and
"Shareholder Servicing" below.
DISTRIBUTOR
FDI serves as the Trust's exclusive Distributor and holds itself available
to receive purchase orders for each of the Fund's shares. In that capacity, FDI
has been granted the right, as agent of the Trust, to solicit and accept orders
for the purchase of each of the Fund's shares in accordance with the terms of
the Distribution Agreement between the Trust and FDI. Under
38
the terms of the Distribution Agreement between FDI and the Trust, FDI receives
no compensation in its capacity as the Trust's distributor.
The Distribution Agreement shall continue in effect with respect to each
of the Funds for a period of two years after execution only if it is approved at
least annually thereafter (i) by a vote of the holders of a majority of the
Fund's outstanding shares or by its Trustees and (ii) by a vote of a majority of
the Trustees of the Trust who are not "interested persons" (as defined by the
1940 Act) of the parties to the Distribution Agreement, cast in person at a
meeting called for the purpose of voting on such approval (see "Trustees and
Members of the Advisory Board" and "Officers"). The Distribution Agreement will
terminate automatically if assigned by either party thereto and is terminable at
any time without penalty by a vote of a majority of the Trustees of the Trust, a
vote of a majority of the Trustees who are not "interested persons" of the
Trust, or by a vote of the holders of a majority of the Fund's outstanding
shares as defined under "Additional Information," in any case without payment of
any penalty on 60 days' written notice to the other party. The principal offices
of FDI are located at 60 State Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under Co-Administration Agreements with the Trust and the Portfolios dated
August 1, 1996, FDI also serves as the Trust's and the Portfolios'
Co-Administrator. The Co-Administration Agreements may be renewed or amended by
the respective Trustees without a shareholder vote. The Co-Administration
Agreements are terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust or the Portfolios, as applicable, on not more than 60
days' written notice nor less than 30 days' written notice to the other party.
The Co-Administrator may subcontract for the performance of its obligations,
provided, however, that unless the Trust or the Portfolios, as applicable,
expressly agrees in writing, the Co-Administrator shall be fully responsible for
the acts and omissions of any subcontractor as it would for its own acts or
omissions. See "Services Agent" below.
FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Trust and the
Portfolios; (ii) provides officers for the Trust and the Portfolios; (iii)
prepares and files documents required for notification of state securities
administrators; (iv) reviews and files marketing and sales literature; (v) files
Portfolio regulatory documents and mails Portfolio communications to Trustees,
Members of the Advisory Board and investors; and (vi) maintains related books
and records.
For its services under the Co-Administration Agreements, each Fund and
Portfolio has agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of-pocket expenses. The amount
allocable to each Fund or Portfolio is based on the ratio of its net assets to
the aggregate net assets of the Trust, J.P. Morgan Funds, the Master Portfolios
and other investment companies subject to similar agreements with FDI.
The table below sets forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to FDI for the fiscal periods indicated.
Short Term Bond Fund -- For the fiscal years ended October 31, 2000, 1998, 1999
and 2000: $513, $536 and $425, respectively.
39
The Short Term Bond Portfolio -- For the fiscal years ended October 31, 2000,
1998, 1999 and 2000: $2,401, $4,065 and $2,933, respectively.
Bond Fund -- For the fiscal years ended October 31, 1998, 1999 and 2000: $4,423,
$3,161 and $2,565, respectively.
The U.S. Fixed Income Portfolio -- For the fiscal year ended October 31, 1998,
1999 and 2000: $22,913, $19,016 and $11,454, respectively.
Global Strategic Income Fund -- For the period November 4, 1997 (commencement of
operations) through October 31, 2000: $183. For the fiscal year ended October
31, 1999 and 2000: $149 and $82, respectively.
The Global Strategic Income Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000: $2,695, $2,188 and $1,120, respectively.
SERVICES AGENT
The Trust, on behalf of each Fund, and each Fund's corresponding Portfolio
have entered into Administrative Services Agreements (the "Services Agreements")
with Morgan pursuant to which Morgan is responsible for certain administrative
and related services provided to each Fund and its corresponding Portfolio. The
Services Agreements may be terminated at any time, without penalty, by the
Trustees or Morgan, in each case on not more than 60 days' nor less than 30
days' written notice to the other party.
Under the Services Agreements, Morgan provides certain administrative and
related services to the Funds and the Portfolios, including services related to
tax compliance, preparation of financial statements, calculation of performance
data, oversight of service providers and certain regulatory and Board of Trustee
matters.
Under the Services Agreements, each of the Funds and its corresponding
Portfolio has agreed to pay Morgan fees equal to its allocable share of an
annual complex-wide charge. This charge is calculated daily based on the
aggregate net assets of the Master Portfolios and J.P. Morgan Series Trust in
accordance with the following annual schedule: 0.09% of the first $7 billion of
their aggregate average daily net assets and 0.04% of their aggregate average
daily net assets in excess of $7 billion, less the complex-wide fees payable to
FDI. The portion of this charge payable by each Fund and Portfolio is determined
by the proportionate share that their net assets bear to the total net assets of
the Trust, J.P. Morgan Institutional Funds, the Master Portfolios, the other
investors in the Master Portfolios for which Morgan provides similar services
and J.P. Morgan Series Trust.
The table below sets forth for each Fund listed and its corresponding
Portfolio the fees paid to Morgan as Services Agent. See the Prospectus and
"Expenses" below for applicable expense limitations.
Short Term Bond Fund -- For the fiscal years ended October 31, 2000, 1998, 1999
and 2000: $6,767, $9,317 and $9,171, respectively.
The Short Term Bond Portfolio -- For the fiscal years ended October 31, 1998,
1999 and 2000: $37,243, $83,666 and $99,162, respectively.
40
Bond Fund -- For the fiscal years ended October 31, 1998, 1999 and 2000:
$57,899, $54,771 and $55,257, respectively.
The U.S. Fixed Income Portfolio -- For the fiscal years ended October 31, 1998,
1999 and 2000: $348,110, $390,355 and $377,452, respectively.
Global Strategic Income Fund -- For the period November 4, 1997 (commencement of
operations) through October 31, 1998: $2,473. For the fiscal year ended October
31, 1999 and 2000: $2,579 and $1,752, respectively.
The Global Strategic Income Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000, respectively: $57,247, $61,940 and $41,043, respectively.
CUSTODIAN AND TRANSFER AGENT
The Bank of New York ("BONY"), One Wall Street, New York, New York 10286,
serves as the Trust's and each of the Portfolio's custodian and fund accounting
agent. Pursuant to the Custodian Contracts, BONY is responsible for holding
portfolio securities and cash and maintaining the books of account and records
of portfolio transactions. In the case of foreign assets held outside the United
States, the custodian employs various subcustodians in accordance with the
regulations of the SEC.
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110, serves as each Fund's transfer and dividend
disbursing agent. As transfer agent and dividend disbursing agent, State Street
is responsible for maintaining account records detailing the ownership of Fund
shares and for crediting income, capital gains and other changes in share
ownership to shareholder accounts.
SHAREHOLDER SERVICING
The Trust on behalf of each of the Funds has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for its customers and for other Fund investors who are customers
of a Financial Professional. Under this agreement, Morgan is responsible for
performing shareholder account administrative and servicing functions, which
includes but is not limited to, answering inquiries regarding account status and
history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to a Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Funds' transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; and providing other related services.
Effective August 1, 1998, under the Shareholder Servicing Agreement, each
Fund has agreed to pay Morgan for these services a fee at the annual rate of
0.25% (expressed as a percentage of the average daily net asset value of Fund
shares owned by or for shareholders).
41
The table below sets forth for each Fund listed the shareholder servicing
fees paid by each Fund to Morgan for the fiscal periods indicated. See the
Prospectus and "Expenses" below for applicable expense limitations.
Short Term Bond Fund -- For the fiscal years ended October 31, 1998, 1999 and
2000: $50,132, $89,853 and $88,715, respectively.
Bond Fund -- For the fiscal years ended October 31, 2000, 1998, 1999 and 2000:
$425,071, $527,506 and $566,990, respectively.
Global Strategic Income Fund -- For the period November 4, 1997 (commencement of
operations) through October 31, 1998: $21,368. For the fiscal years ended
October 31, 1999 and 2000: $24,786 and $17,945, respectively.
If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreements, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Funds or the Portfolios might occur and a shareholder might no
longer be able to avail himself or herself of any services then being provided
to shareholders by Morgan.
Each Fund may be sold to or through financial intermediaries who are
customers of J.P. Morgan ("financial professionals"), including financial
institutions and broker-dealers, that may be paid fees by J.P. Morgan or its
affiliates for services provided to their clients that invest in the Fund. See
"Financial Professionals" below. Organizations that provide record keeping or
other services to certain employee benefit or retirement plans that include the
Fund as an investment alternative may also be paid a fee.
FINANCIAL PROFESSIONALS
The services provided by financial professionals may include establishing
and maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for bank wires, performing shareholder subaccounting,
answering client inquiries regarding the Trust, assisting clients in changing
dividend options, account designations and addresses, providing periodic
statements showing the client's account balance and integrating these statements
with those of other transactions and balances in the client's other accounts
serviced by the financial professional, transmitting proxy statements, periodic
reports, updated prospectuses and other communications to shareholders and, with
respect to meetings of shareholders, collecting, tabulating and forwarding
executed proxies and obtaining such other information and performing such other
services as J.P. Morgan or the financial professional's clients may reasonably
request and agree upon with the financial professional.
Although there is no sales charge levied directly by the Fund, financial
professionals may establish their own terms and conditions for providing their
services and may charge investors a transaction-based or other fee for their
services. Such charges may vary among financial professionals but in all cases
will be retained by the financial professional and not be remitted to the Fund
or J.P. Morgan.
Each Fund has authorized one or more brokers to accept purchase and
redemption orders on its behalf. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf. A
Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee,
42
accepts the order. These orders will be priced at the Fund's net asset value
next calculated after they are so accepted.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust and the Portfolios are
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036. PricewaterhouseCoopers LLP conducts an annual audit of the financial
statements of each of the Funds and the Portfolios, assists in the preparation
and/or review of each of the Fund's and the Portfolio's federal and state income
tax returns and consults with the Funds and the Portfolios as to matters of
accounting and federal and state income taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., JPMIM, Morgan and
FDI under various agreements discussed under "Trustees and Members of the
Advisory Board," "Officers," "Investment Advisor," "Co-Administrator,"
"Distributor," "Services Agent" and "Shareholder Servicing" above, the Funds and
the Portfolios are responsible for usual and customary expenses associated with
their respective operations. Such expenses include organization expenses, legal
fees, accounting and audit expenses, insurance costs, the compensation and
expenses of the Trustees and Members of the Advisory Board, registration fees
under federal securities laws, and extraordinary expenses applicable to the
Funds or the Portfolios. For the Funds, such expenses also include transfer,
registrar and dividend disbursing costs, the expenses of printing and mailing
reports, notices and proxy statements to Fund shareholders, and filing fees
under state securities laws. For the Portfolios, such expenses also include
applicable registration fees under foreign securities laws, custodian fees and
brokerage expenses.
J.P. Morgan has agreed that it will reimburse the Funds noted below until
February 28, 2002, as described in the Prospectus, to the extent necessary to
maintain the Fund's total operating expenses (which excludes interest, taxes and
extraordinary expenses of the Fund and the Portfolio) at the following annual
rates of the Fund's average daily net assets. These limits do not cover
extraordinary expenses.
Short Term Bond Fund: 0.60%
Global Strategic Income Fund: 1.00%
The table below sets forth for each Fund listed the fees and other
expenses J.P. Morgan reimbursed under the expense reimbursement arrangements
described above or pursuant to prior expense reimbursement arrangements for the
fiscal periods indicated.
Short Term Bond Fund -- For the fiscal years ended October 31, 2000, 1998, 1999
and 2000: $111,407, $83,986 and $74,303, respectively.
The Short Term Bond Portfolio -- For the fiscal years ended October 31, 2000,
1998, 1999 and 2000: $166,257,$171,744 and $45,204, respectively.
Bond Fund -- For the fiscal years ended October 31, 1998, 1999 and 2000: N/A,
N/A and N/A, respectively.
The U.S. Fixed Portfolio -- For the fiscal years ended October 31, 1998, 1999
and 2000: N/A, N/A and N/A, respectively.
43
Global Strategic Income Fund -- For the period November 4, 1997 (commencement of
operations) through October 31, 1998: $76,157. For the fiscal years ended
October 31, 1999 and 2000: $52,071, and $107,790, respectively.
The Global Strategic Income Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000: N/A, $14,518 and $3,645, respectively.
PURCHASE OF SHARES
Additional Minimum Balance Information. If your account balance falls
below the minimum for 30 days as a result of selling shares (and not because of
performance), the Fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the Fund reserves the right to close out your account and
send the proceeds to the address of record.
Method of Purchase. Investors may open Fund accounts and purchase shares
as described in the Prospectus. References in the Prospectus and this Statement
of Additional Information to customers of Morgan or a Financial Professional
include customers of their affiliates and references to transactions by
customers with Morgan or a Financial Professional include transactions with
their affiliates. Only Fund investors who are using the services of a financial
institution acting as shareholder servicing agent pursuant to an agreement with
the Trust on behalf of a Fund may make transactions in shares of a Fund.
Each Fund may, at its own option, accept securities in payment for shares.
The securities delivered in such a transaction are valued by the method
described in "Net Asset Value" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of the Advisor, appropriate
investments for the Fund's corresponding Portfolio. In addition, securities
accepted in payment for shares must: (i) meet the investment objective and
policies of the acquiring Fund's corresponding Portfolio; (ii) be acquired by
the applicable Fund for investment and not for resale (other than for resale to
the Fund's corresponding Portfolio); and (iii) be liquid securities which are
not restricted as to transfer either by law or liquidity of market. Each Fund
reserves the right to accept or reject at its own option any and all securities
offered in payment for its shares.
Prospective investors may purchase shares with the assistance of a
Financial Professional, and the Financial Professional may charge the investor a
fee for this service and other services it provides to its customers.
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus.
If the Trust on behalf of a Fund and its corresponding Portfolio determine
that it would be detrimental to the best interest of the remaining shareholders
of a Fund to make payment wholly or partly in cash, payment of the redemption
price may be made in whole or in part by a distribution in kind of securities
from the Fund, in lieu of cash, in conformity with the applicable rule of the
SEC. If shares are redeemed in kind, the redeeming shareholder might incur
transaction costs in converting the assets into cash. The method of valuing
portfolio securities is described under "Net Asset Value," and such valuation
will be made as of the same time the redemption price is determined. The Trust,
on behalf of all of the Funds and their
44
corresponding Portfolios (except the Global Strategic Income Portfolio), have
elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which the
Funds and the corresponding Portfolios are obligated to redeem shares solely in
cash up to the lesser of $250,000 or one percent of the net asset value of the
Fund during any 90 day period for any one shareholder. The Trust will redeem
Fund shares in kind only if it has received a redemption in kind from the
corresponding Portfolio and therefore shareholders of the Fund that receive
redemptions in kind will receive securities of the Portfolio. The Portfolios
have advised the Trust that the Portfolios will not redeem in kind except in
circumstances in which a Fund is permitted to redeem in kind. The Trust is in
the process of seeking exemptive relief from the SEC with respect to redemptions
in kind by the Fund. If the requested relief is granted, the Fund would then be
permitted to pay redemptions to greater than 5% shareholders in securities,
rather than in cash, to the extent permitted by the SEC and applicable law. The
method of valuing portfolio securities is described under "Net Asset Value," and
such valuation will be made as of the same time the redemption price is
determined.
Further Redemption Information. Investors should be aware that redemptions
from the Fund may not be processed if a redemption request is not submitted in
proper form. To be in proper form, the Fund must have received the shareholder's
taxpayer identification number and address. In addition, if a shareholder sends
a check for the purchase of fund shares and shares are purchased before the
check has cleared, the transmittal of redemption proceeds from the shares will
occur upon clearance of the check which may take up to 15 days. The Trust, on
behalf of the Fund, and the Portfolio, reserves the right to suspend the right
of redemption and to postpone the date of payment upon redemption as follows:
(i) for up to seven days, (ii) during periods when the New York Stock Exchange
is closed for other than weekends and holidays or when trading on such Exchange
is restricted as determined by the SEC by rule or regulation, (iii) during
periods in which an emergency, as determined by the SEC, exists that causes
disposal by the Portfolio of, or evaluation of the net asset value of, its
portfolio securities to be unreasonable or impracticable, or (iv) for such other
periods as the SEC may permit. For information regarding redemption orders
placed through a financial professional, please see "Financial Professionals"
above.
EXCHANGE OF SHARES
An investor may exchange shares from the Fund into any other J.P. Morgan
Fund, J.P. Morgan Institutional Fund or J.P. Morgan Series Trust fund without
charge. An exchange may be made so long as after the exchange the investor has
shares, in each fund in which he or she remains an investor, with a value of at
least that fund's minimum investment amount. Shareholders should read the
prospectus of the fund into which they are exchanging and may only exchange
between fund accounts that are registered in the same name, address and taxpayer
identification number. Shares are exchanged on the basis of relative net asset
value per share. Exchanges are in effect redemptions from one fund and purchases
of another fund and the usual purchase and redemption procedures and
requirements are applicable to exchanges. The Funds generally intend to pay
redemption proceeds in cash, however, since they reserve the right at their sole
discretion to pay redemptions over $250,000 in-kind as a portfolio of
representative stocks rather than in cash, each Fund reserves the right to deny
an exchange request in excess of that amount. See "Redemption of Shares".
Shareholders subject to federal income tax who exchange shares in one fund for
shares in another fund may recognize capital gain or loss for federal income tax
purposes. Shares of the fund to be acquired are purchased for settlement when
the proceeds from redemption become available. In the case
45
of investors in certain states, state securities laws may restrict the
availability of the exchange privilege. The Fund reserves the right to
discontinue, alter or limit its exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays dividends and distributions as described under
"Dividends and Distributions" in the Prospectus.
Dividends and capital gains distributions paid by a Fund are automatically
reinvested in additional shares of the Fund unless the shareholder has elected
to have them paid in cash. Dividends and distributions to be paid in cash are
credited to the shareholder's account at Morgan or at his financial professional
or, in the case of certain Morgan customers, are mailed by check in accordance
with the customer's instructions. Each Fund reserves the right to discontinue,
alter or limit the automatic reinvestment privilege at any time.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
NET ASSET VALUE
Each of the Funds computes its net asset value separately for each class
of shares outstanding once daily as of the close of trading on the New York
Stock Exchange (normally 4:00 p.m. eastern time) on each business day as
described in the prospectus. The net asset value will not be computed on the day
the following legal holidays are observed: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day. On days when U.S. trading markets
close early in observance of these holidays, the Fund will close for purchases
and redemptions at the same time. The Fund and the Portfolio may also close for
purchases and redemptions at such other times as may be determined by the Board
of Trustees to the extent permitted by applicable law. The days on which net
asset value is determined are the Funds' business days.
The net asset value of the Fund is equal to the value of the Fund's
investment in its corresponding Portfolio (which is equal to the Fund's pro rata
share of the total investment of the Fund and of any other investors in the
Portfolio less the Fund's pro rata share of the Portfolio's liabilities) less
the Fund's liabilities. The following is a discussion of the procedures used by
the Portfolio corresponding to the Fund in valuing its assets.
Portfolio securities are valued at the last sale price on the securities
exchange or national securities market on which such securities are primarily
traded. Unlisted securities are valued at the last average of the quoted bid and
asked prices in the OTC market. The value of each security for which readily
available market quotations exist is based on a decision as to the broadest and
most representative market for such security. For purposes of calculating net
asset value all assets and liabilities initially expressed in foreign currencies
will be converted into U.S. dollars at the prevailing average currency exchange
rate on the valuation date.
46
Fixed income securities with a maturity of 60 days or more, are generally
valued using bid quotations readily available from and supplied daily by pricing
services or brokers. If such prices are generally not readily available from the
Fund's pricing services or brokers, such securities are priced in accordance
with fair value procedures adopted by the Trustees. Such fair value procedures
include the use of pricing services, which use prices based upon yields or
prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Fixed
income securities with a remaining maturity of less than 60 days are valued by
the amortized cost method.
The value of all assets initially expressed in foreign currencies shall be
converted to U.S. dollars at prevailing rates as provided by an independent
pricing source as of 11:00 a.m. New York time.
Listed options on debt securities traded on U.S. option exchanges shall be
valued at their closing price on such exchanges. Futures on debt securities and
related options traded on commodities exchanges shall be valued at their closing
price as of the close of such commodities exchanges, which is currently
4:15p.m., New York time. Options and futures traded on foreign exchanges shall
be valued at the last sale or close price available prior to the calculation of
the Funds' net asset value. Non-listed OTC options and swaps shall be valued at
the closing price provided by a counterparty or third-party broker.
Trading in securities in most foreign markets is normally completed before
the close of trading in U.S. markets and may also take place on days on which
the U.S. markets are closed. If events materially affecting the value of
securities occur between the time when the market in which they are traded
closes and the time when the Portfolio's net asset value is calculated, such
securities will be valued at fair value in accordance with procedures
established by and under the general supervision of the Trustees.
PERFORMANCE DATA
From time to time, the Funds may quote performance in terms of yield,
actual distributions, total return or capital appreciation in reports, sales
literature and advertisements published by the Trust. Current performance
information for the Funds may be obtained by calling the number provided on the
cover page of this Statement of Additional Information. See also the Prospectus.
Comparative performance information may be used from time to time in
advertising the Funds' shares, including appropriate market indices including
the benchmarks indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
The Funds may advertise "total return" and non-standardized total return
data. The total return shows what an investment in a Fund would have earned over
a specified period of time (one, five or ten years or since commencement of
operations, if less) assuming that all distributions and dividends by the Fund
were reinvested on the reinvestment dates during the period and less all
recurring fees. This method of calculating total return is required by
regulations of the SEC. Total return data similarly calculated, unless otherwise
indicated, over other specified periods of time may also be used.
47
All performance figures are based on historical earnings and are not intended to
indicate future performance.
Yield Quotations. As required by regulations of the SEC, the annualized
yield for the Funds is computed by dividing each Fund's net investment income
per share earned during a 30-day period by the net asset value on the last day
of the period. The average daily number of shares outstanding during the period
that are eligible to receive dividends is used in determining the net investment
income per share. Income is computed by totaling the interest earned on all debt
obligations during the period and subtracting from that amount the total of all
recurring expenses incurred during the period. The 30-day yield is then
annualized on a bond-equivalent basis assuming semi-annual reinvestment and
compounding of net investment income.
Below is set forth historical yield information for the Funds for the
periods indicated:
Short Term Bond Fund (10/31/99): 30-day yield: 7.11%.
Bond Fund (10/31/99): 30-day yield: 6.24%.
Global Strategic Income Fund (10/31/99): 30-day yield: 6.70%.
Total Return Quotations. The Funds may advertise "total return" and
non-standardized total return data. The total return shows what an investment in
a Fund would have earned over a specified period of time (one, five or ten years
or since commencement of operations, if less) assuming that all distributions
and dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. This method of calculating total return is
required by regulations of the SEC. Total return data similarly calculated,
unless otherwise indicated, over other specified periods of time may also be
used. All performance figures are based on historical earnings and are not
intended to indicate future performance.
As required by regulations of the SEC, the average annual total return of
the Funds for a period is computed by assuming a hypothetical initial payment of
$1,000. It is then assumed that all of the dividends and distributions by the
Fund over the period are reinvested. It is then assumed that at the end of the
period, the entire amount is redeemed. The average annual total return is then
calculated by determining the annual rate required for the initial payment to
grow to the amount which would have been received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change over
a measuring period, may also be calculated.
Historical performance information for periods prior to the establishment
of the Bond Fund will be that of its predecessor free-standing fund and will be
presented in accordance with applicable SEC staff interpretations.
Historical performance information for periods prior to the establishment
of the Global Strategic Income Fund will be that of its corresponding
predecessor J.P. Morgan Institutional Fund and will be presented in accordance
with applicable SEC staff interpretations.
Below is set forth historical return information for the Funds or their
predecessors for the periods indicated:
48
Short Term Bond Fund (10/31/ 00): Average annual total return, 1 year: 5.19%;
average annual total return, 5 years: 5.36%; average annual total return, 10
years: N/A; average annual total return, commencement of operations (July 8,
1993) to period end: 5.11%; aggregate total return, 1 year: 5.19%; aggregate
total return, 5 years: 29.85%; aggregate total return, 10 years: N/A; aggregate
total return, commencement of operations (July 8, 1993) to period end: 43.28%.
Bond Fund (10/31/ 00): Average annual total return, 1 year: 6.61% ; average
annual total return, 5 years: 5.58%; average annual total return, 10 years:
7.13%; aggregate total return, 1 year: 6.61% ; aggregate total return, 5 years:
31.21%; aggregate total return, 10 years: 99.05%.
Global Strategic Income Fund (10/31/00): Average annual total return, 1 year
6.57%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations (March 17, 1997) to period end: 5.20%; aggregate
total return, 1 year: 6.57%; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (March 17, 1997) to period end: 18.65%.
General. A Fund's performance will vary from time to time depending upon
market conditions, the composition of its corresponding Portfolio, and its
operating expenses. Consequently, any given performance quotation should not be
considered representative of a Fund's performance for any specified period in
the future. In addition, because performance will fluctuate, it may not provide
a basis for comparing an investment in a Fund with certain bank deposits or
other investments that pay a fixed yield or return for a stated period of time.
From time to time, the Funds may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the Funds; (5) descriptions of investment strategies for one or more of the
Funds; (6) descriptions or comparisons of various savings and investment
products (including, but not limited to, qualified retirement plans and
individual stocks and bonds), which may or may not include the Funds; (7)
comparisons of investment products (including the Funds) with relevant markets
or industry indices or other appropriate benchmarks; (8) discussions of Fund
rankings or ratings by recognized rating organizations; and (9) discussions of
various statistical methods quantifying the Fund's volatility relative to its
benchmark or to past performance, including risk adjusted measures. The Funds
may also include calculations, such as hypothetical compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of any of the Funds.
PORTFOLIO TRANSACTIONS
The Advisor places orders for all Portfolios for all purchases and sales
of portfolio securities, enters into repurchase agreements, and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of all the Portfolios. See "Investment Objectives and Policies."
49
Fixed income and debt securities and municipal bonds and notes are
generally traded at a net price with dealers acting as principal for their own
accounts without a stated commission. The price of the security usually includes
profit to the dealers. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. On occasion,
certain securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Portfolio transactions for the Portfolios corresponding to the Funds will
be undertaken principally to accomplish a Portfolio's objective in relation to
expected movements in the general level of interest rates. The Portfolios
corresponding to the Funds may engage in short-term trading consistent with
their objectives. See "Investment Objectives and Policies -- Portfolio
Turnover."
In connection with portfolio transactions for the Portfolios, the Advisor
intends to seek best execution on a competitive basis for both purchases and
sales of securities.
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of a Portfolio's brokerage
transactions to affiliates of the Advisor. Under the 1940 Act, persons
affiliated with the Portfolio and persons who are affiliated with such persons
are prohibited from dealing with the Portfolio as principal in the purchase and
sale of securities unless a permissive order allowing such transactions is
obtained from the SEC. However, affiliated persons of the Portfolio may serve as
its broker in listed or over-the-counter transactions conducted on an agency
basis provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, the Portfolio may no purchase securities during the existence of
any underwriting syndicate for such securities of which Morgan or an affiliate
is a member or in a private placement in which Morgan or an affiliate serves as
placement agent except pursuant to procedures adopted by the Board of Trustees
of the Portfolio that either comply with rules adopted by the SEC or with
interpretations of the SEC's staff.
Investment decisions made by the Advisor are the product of many factors
in addition to basic suitability for the particular fund or other client in
question. Thus, a particular security may be bought or sold for certain clients
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the same security. The Portfolio may only
sell a security to other portfolios or accounts managed by the Advisor or its
affiliates in accordance with procedures adopted by the Trustees.
It also sometimes happens that two or more clients simultaneously purchase
or sell the same security. On those occasions when the Advisor deems the
purchase or sale of a security to be in the best interests of the Portfolio, as
well as other clients including other funds, the Advisor to the extent permitted
by applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for other clients in order to obtain best execution, including lower
brokerage commissions if appropriate. In such event, allocation of the
securities so purchased or sold as well as any expenses incurred in the
transaction will be made by the Advisor in the manner
50
it considers to be most equitable and consistent with the Advisor's fiduciary
obligations to the Portfolio. In some instances, this procedure might adversely
affect the Portfolio.
If a Portfolio that writes options effects a closing purchase transaction
with respect to an option written by it, normally such transaction will be
executed by the same broker-dealer who executed the sale of the option. The
writing of options by a Portfolio will be subject to limitations established by
each of the exchanges governing the maximum number of options in each class
which may be written by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more
brokers. The number of options which a Portfolio may write may be affected by
options written by the Advisor for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
MASSACHUSETTS TRUST
The Trust is a "Massachusetts business trust" of which each Fund is a
separate and distinct series. A copy of the Declaration of Trust for the Trust
is on file in the office of the Secretary of The Commonwealth of Massachusetts.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. However, the Trust's Declaration of Trust provides that the shareholders
will not be subject to any personal liability for the acts or obligations of any
Fund and that every written agreement, obligation, instrument or undertaking
made on behalf of any Fund will contain a provision to the effect that the
shareholders are not personally liable thereunder.
Effective October 10, 1996, the name of the Trust was changed from "The
Pierpont Funds" to "The JPM Pierpont Funds, and each Fund's name changed
accordingly. Effective January 1, 1998, the name of the Trust was changed from
"The JPM Pierpont Funds" to "J.P. Morgan Funds" and each Fund's name changed
accordingly.
The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, Member of the Advisory Board, officer, employee or
agent of a Fund is liable to a Fund or to a shareholder, and that no Trustee,
Member of the Advisory Board, officer, employee, or agent is liable to any third
persons in connection with the affairs of a Fund, except as such liability may
arise from his or its own bad faith, willful misfeasance, gross negligence or
reckless disregard of his or its duties to such third persons. It also provides
that all third persons shall look solely to Fund property for satisfaction of
claims arising in connection with the affairs of a Fund. With the exceptions
stated, the Trust's Declaration of Trust provides that a Trustee, Member of the
Advisory Board, officer, employee, or agent is entitled to be indemnified
against all liability in connection with the affairs of a Fund.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
DESCRIPTION OF SHARES
51
The Trust is an open-end management investment company organized as a
Massachusetts business trust in which each Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust."
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares ($0.001 par value) of one or more series and
classes within any series and to divide or combine the shares (of any series, if
applicable) without changing the proportionate beneficial interest of each
shareholder in a Fund (or in the assets of other series, if applicable). Each
share represents an equal proportional interest in a Fund with each other share.
Upon liquidation of a Fund, holders are entitled to share pro rata in the net
assets of a Fund available for distribution to such shareholders. See
"Massachusetts Trust." Shares of a Fund have no preemptive or conversion rights
and are fully paid and nonassessable. The rights of redemption and exchange are
described in the Prospectus and elsewhere in this Statement of Additional
Information.
The shareholders of the Trust are entitled to one vote for each dollar of
net asset value (or a proportionate fractional vote in respect of a fractional
dollar amount), on matters on which shares of the Fund shall be entitled to
vote. Subject to the 1940 Act, the Trustees have the power to alter the number
and the terms of office of the Trustees, to lengthen their own terms, or to make
their terms of unlimited duration subject to certain removal procedures, and
appoint their own successors, provided, however, that immediately after such
appointment the requisite majority of the Trustees have been elected by the
shareholders of the Trust. The voting rights of shareholders are not cumulative
so that holders of more than 50% of the shares voting can, if they choose, elect
all Trustees being selected while the shareholders of the remaining shares would
be unable to elect any Trustees. It is the intention of the Trust not to hold
meetings of shareholders annually. The Trustees may call meetings of
shareholders for action by shareholder vote as may be required by either the
1940 Act or the Trust's Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in writing
or vote of more than two-thirds of its outstanding shares, to remove a Trustee.
The Trustees will call a meeting of shareholders to vote on removal of a Trustee
upon the written request of the record holders of 10% of the Trust's shares. The
Trustees are also required, under certain circumstances, to assist shareholders
in communicating with other shareholders.
The Trustees have authorized the issuance and sale to the public of shares
of 18 series of the Trust. The Trustees have no current intention to create any
classes within the initial series or any subsequent series. The Trustees may,
however, authorize the issuance of shares of additional series and the creation
of classes of shares within any series with such preferences, privileges,
limitations and voting and dividend rights as the Trustees may determine. The
proceeds from the issuance of any additional series would be invested in
separate, independently managed portfolios with distinct investment objectives,
policies and restrictions, and share purchase, redemption and net asset
valuation procedures. Any additional classes would be used to distinguish among
the rights of different categories of shareholders, as might be required by
future regulations or other unforeseen circumstances. All consideration received
by the Trust for shares of any additional series or class, and all assets in
which such consideration is invested, would belong to that series or class,
subject only to the rights of creditors of the Trust and would be subject to the
liabilities related thereto. Shareholders of any additional series or class will
approve the adoption of any management contract or distribution plan relating to
such
52
series or class and of any changes in the investment policies related thereto,
to the extent required by the 1940 Act.
For information relating to mandatory redemption of Fund shares or their
redemption at the option of the Trust under certain circumstances, see the
Prospectus.
As of January 31, 2001, no one owned of record or was known by the fund to
own beneficially more than 5% of the outstanding shares of either Fund.
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund is an open-end management investment company
which seeks to achieve its investment objective by investing all of its
investable assets in a corresponding Master Portfolio, a separate registered
investment company with the same investment objective and policies as the Fund.
Fund shareholders are entitled to one vote for each dollar of net asset value
(or a proportionate fractional vote in respect of a fractional dollar amount),
on matters on which shares of the Fund shall be entitled to vote.
In addition to selling a beneficial interest to a Fund, a Portfolio may
sell beneficial interests to other mutual funds or institutional investors. Such
investors will invest in the Portfolio on the same terms and conditions and will
bear a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio may sell shares of their own fund using a
different pricing structure than the Fund. Such different pricing structures may
result in differences in returns experienced by investors in other funds that
invest in the Portfolio. Such differences in returns are not uncommon and are
present in other mutual fund structures. Information concerning other holders of
interests in the Portfolio is available from Morgan at (800) 521-5411.
The Trust may withdraw the investment of a Fund from a Portfolio at any
time if the Board of Trustees of the Trust determines that it is in the best
interests of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same
investment objective and restrictions as the Fund or the retaining of an
investment adviser to manage the Fund's assets in accordance with the investment
policies with respect to the Portfolio described above and in each Fund's
prospectus.
Certain changes in a Portfolio's fundamental investment policies or
restrictions, or a failure by a Fund's shareholders to approve such change in
the Portfolio's investment restrictions, may require withdrawal of the Fund's
interest in the Portfolio. Any such withdrawal could result in a distribution in
kind of portfolio securities (as opposed to a cash distribution) from the
Portfolio which may or may not be readily marketable. The distribution in kind
may result in the Fund having a less diversified portfolio of investments or
adversely affect the Fund's liquidity, and the Fund could incur brokerage, tax
or other charges in converting the securities to cash. Notwithstanding the
above, there are other means for meeting shareholder redemption requests, such
as borrowing.
Smaller funds investing in a Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large
53
fund withdraws from the Portfolio, the remaining funds may subsequently
experience higher pro rata operating expenses, thereby producing lower returns.
Additionally, because a Portfolio would become smaller, it may become less
diversified, resulting in potentially increased portfolio risk (however, these
possibilities also exist for traditionally structured funds which have large or
institutional investors who may withdraw from a fund). Also, funds with a
greater pro rata ownership in the Portfolio could have effective voting control
of the operations of the Portfolio. Whenever the Fund is requested to vote on
matters pertaining to the Portfolio (other than a vote by the Fund to continue
the operation of the Portfolio upon the withdrawal of another investor in the
Portfolio), the Trust will hold a meeting of shareholders of the Fund and will
cast all of its votes proportionately as instructed by the Fund's shareholders.
The Trust will vote the shares held by Fund shareholders who do not give voting
instructions in the same proportion as the shares of Fund shareholders who do
give voting instructions. Shareholders of the Fund who do not vote will have no
affect on the outcome of such matters.
TAXES
The following discussion of tax consequences is based on U.S. federal tax
laws in effect on the date of this Statement of Additional Information. These
laws and regulations are subject to change by legislative or administrative
action, possibly on a retroactive basis.
Each Fund intends to qualify and remain qualified as a regulated
investment company under Subchapter M of the Code. As a regulated investment
company, a Fund must, among other things, (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock, securities or
foreign currency and other income (including but not limited to gains from
options, futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; and (b) diversify its
holdings so that, at the end of each fiscal quarter of its taxable year, (i) at
least 50% of the value of the Fund's total assets is represented by cash, cash
items, U.S. Government securities, investments in other regulated investment
companies, and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the Fund's total assets, and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or securities of other regulated investment
companies).
As a regulated investment company, a Fund (as opposed to its shareholders)
will not be subject to federal income taxes on the net investment income and
capital gains that it distributes to its shareholders, provided that at least
90% of its net investment income and realized net short-term capital gains in
excess of net long-term capital losses for the taxable year is distributed in
accordance with the Code's timing requirements.
Under the Code, a Fund will be subject to a 4% excise tax on a portion of
its undistributed taxable income and capital gains if it fails to meet certain
distribution requirements by the end of the calendar year. Each Fund intends to
make distributions in a timely manner and accordingly does not expect to be
subject to the excise tax.
54
For federal income tax purposes, dividends that are declared by a Fund in
October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends generally will be
taxable to a shareholder in the year declared rather than the year paid.
Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital
losses are generally taxable to shareholders of the Funds as ordinary income
whether such distributions are taken in cash or reinvested in additional shares.
Distributions to corporate shareholders of the Funds are not eligible for the
dividends received deduction. Each Fund generally pays a monthly dividend. If
dividend payments exceed income earned by the Fund, the over distribution would
be considered a return of capital rather than a dividend payment. The Funds
intends to pay dividends in such a manner so as to minimize the possibility of a
return of capital. Distributions of net long-term capital gain (i.e., net
long-term capital gains in excess of net short-term capital losses) are taxable
to shareholders of a Fund as long-term capital gain, regardless of whether such
distributions are taken in cash or reinvested in additional shares and
regardless of how long a shareholder has held shares in the Fund. In general,
long-term capital gain of an individual shareholder will be subject to a 20%
rate of tax.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where, if applicable, a put option is acquired
or a call option is written thereon or the straddle rules described below are
otherwise applicable. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by a Portfolio lapses or is
terminated through a closing transaction, such as a repurchase by the Portfolio
of the option from its holder, the Portfolio will realize a short-term capital
gain or loss, depending on whether the premium income is greater or less than
the amount paid by the Portfolio in the closing transaction. If securities are
purchased by a Portfolio pursuant to the exercise of a put option written by it,
the Portfolio will subtract the premium received from its cost basis in the
securities purchased.
Any distribution of net investment income or capital gains will have the
effect of reducing the net asset value of Fund shares held by a shareholder by
the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above. Investors should thus consider the consequences
of purchasing shares in the Fund shortly before the Fund declares a sizable
dividend distribution.
For federal income tax purposes, the Short Term Bond Fund had a capital
loss carryforward at October 31, 2000 of $1,207,181, of which $701,688 expires
in the year 2007 and $505,493 expires in the year 2008. The Bond Fund had a
capital loss carryforward at October 31, 2000 of $7,890,062, of which expires
$4,747,539 in the year 2007 and $3,142,523 expires in the year 2008. The Global
Strategic Income Fund had a capital loss carryforward at October 31, 2000 of
$899,325, of which $446,636 expires in the year 2006, $178,038 expires in the
year 2007 and $274,651 expires in the year 2008. To the extent that
55
this capital loss is used to offset future capital gains, it is probable that
gains so offset will not be distributed to shareholders.
Any gain or loss realized on the redemption or exchange of Fund shares by
a shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. Long-term capital gain of an
individual holder generally is subject to a maximum tax rate of 20%. However, if
a Fund shares are acquired by an individual after December 31, 2000 and held for
more than five years, the maximum long-term capital gain tax rate will be
reduced to 18%. Any loss realized by a shareholder upon the redemption or
exchange of shares in the Fund held for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain distributions
received by the shareholder with respect to such shares. In addition, no loss
will be allowed on the redemption or exchange of shares of the Fund, if within a
period beginning 30 days before the date of such redemption or exchange and
ending 30 days after such date, the shareholder acquires (such as through
dividend reinvestment) securities that are substantially identical to shares of
the Fund. Investors are urged to consult their tax advisors concerning the
limitations on the deductibility of capital losses.
Under the Code, gains or losses attributable to disposition of foreign
currency or to certain foreign currency contracts, or to fluctuations in
exchange rates between the time a Portfolio accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time a
Portfolio actually collects such income or pays such liabilities, are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of debt securities held by a Portfolio, if any, denominated in
foreign currency, to the extent attributable to fluctuations in exchange rates
between the acquisition and disposition dates are also treated as ordinary
income or loss.
Certain forward currency contracts, options and futures contracts entered
into by a Portfolio may create "straddles" for U.S. federal income tax purposes
and this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities.
Certain options, futures and foreign currency contracts held by a
Portfolio at the end of each taxable year will be required to be "marked to
market" for federal income tax purposes -- i.e., treated as having been sold at
market value. For certain options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss regardless of how long the Portfolio has held such options
or futures. However, gain or loss recognized on certain foreign currency
contracts will be treated as ordinary income or loss.
If a correct and certified taxpayer identification number is not on file,
each Fund is required, subject to certain exemptions, to withhold 31% of certain
payments made or distributions declared to non-corporate shareholders.
Foreign Shareholders. Dividends of net investment income and distributions
of realized net short-term gain in excess of net long-term loss to a shareholder
who, as to the United States, is a nonresident alien individual, fiduciary of a
foreign trust or estate, foreign corporation or foreign partnership (a "foreign
shareholder") will be subject to U.S.
56
withholding tax at the rate of 30% (or lower treaty rate) unless the dividends
are effectively connected with a U.S. trade or business of the shareholder, in
which case the dividends will be subject to tax on a net income basis at the
graduated rates applicable to U.S. individuals or domestic corporations.
Distributions treated as long-term capital gains to foreign shareholders
will not be subject to U.S. tax unless the distributions are effectively
connected with the shareholder's trade or business in the United States or, in
the case of a shareholder who is a nonresident alien individual, the shareholder
was present in the United States for more than 182 days during the taxable year
and certain other conditions are met.
In the case of a foreign shareholder who is a nonresident alien individual
or foreign entity and that is a beneficial owner Fund shares, a Fund may be
required to withhold U.S. federal income tax as "backup withholding" at the rate
of 31% from any distributions including distributions treated as long-term
capital gains and from the proceeds of redemptions, exchanges or other
dispositions of Fund shares unless such foreign shareholder provides an IRS Form
W-8BEN certifying that it is a non-U.S. person for U.S. federal income tax
purposes, or otherwise established an exemption. Transfers by gift of shares of
a Fund by a foreign shareholder who is a nonresident alien individual will not
be subject to U.S. federal gift tax, but the value of shares of the Fund held by
such a shareholder at his or her death will be includible in his or her gross
estate for U.S. federal estate tax purposes.
Foreign Taxes. It is expected that the Global Strategic Income Fund may be
subject to foreign withholding taxes or other foreign taxes with respect to
income (possibly including, in some cases, capital gains) received from sources
within foreign countries. So long as more than 50% in value of the total assets
of the Fund (including its share of the assets of the corresponding Portfolio)
at the close of any taxable year consists of stock or securities of foreign
corporations, the Fund may elect to treat any foreign income taxes deemed paid
by it as paid directly by its shareholders. The Fund will make such an election
only if it deems it to be in the best interest of its shareholders. The Fund
will notify its shareholders in writing each year if it makes the election and
of the amount of foreign income taxes, if any, to be treated as paid by the
shareholders and the amount of foreign taxes, if any, for which shareholders of
the Fund will not be eligible to claim a foreign tax credit because the holding
period requirements (described below) have not been satisfied. If the Fund makes
the election, each shareholder will be required to include in his income (in
addition to the dividends and distributions he receives) his proportionate share
of the amount of foreign income taxes deemed paid by the Fund and will be
entitled to claim either a credit (subject to the limitations discussed below)
or, if he itemizes deductions, a deduction for his share of the foreign income
taxes in computing federal income tax liability (no deduction will be permitted
in computing an individual's alternative minimum tax liability). Shareholders of
the Fund will not be eligible to claim a foreign tax credit with respect to
taxes paid by the Fund (notwithstanding that the Fund elects to treat the
foreign taxes deemed paid by it as paid directly by its shareholders) unless
certain holding period requirements are met. A shareholder who is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding tax
on the income resulting from the election described in this paragraph, but may
not be able to claim a credit or deduction against such U.S. tax for the foreign
taxes treated as having been paid by such shareholder. A tax-exempt shareholder
will not ordinarily benefit from this election. Shareholders who choose to
utilize a credit (rather than a deduction) for foreign taxes will be
57
subject to the limitation that the credit may not exceed the shareholder's U.S.
tax (determined without regard to the availability of the credit) attributable
to his or her total foreign source taxable income. For this purpose, the portion
of dividends and distributions paid by the Global Strategic Income Fund from its
foreign source net investment income will be treated as foreign source income.
The Fund's gains and losses from the sale of securities will generally be
treated as derived from U.S. sources, however, and certain foreign currency
gains and losses likewise will be treated as derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
"passive income," such as the portion of dividends received from the Fund which
qualifies as foreign source income. In addition, the foreign tax credit is
allowed to offset only 90% of the alternative minimum tax imposed on
corporations and individuals. Because of these limitations, if the election is
made, shareholders may nevertheless be unable to claim a credit for the full
amount of their proportionate shares of the foreign income taxes paid by the
Global Strategic Income Fund. Individual shareholders of the Fund with $300 or
less of creditable foreign taxes ($600 in the case of an individual shareholder
filing jointly) may elect to be exempt from the foreign tax credit limitation
rules described above (other than the 90% limitation applicable for purposes of
the alternative minimum tax), provided that all of such individual shareholder's
foreign source income is "qualified passive income" (which generally includes
interest, dividends, rents, royalties and certain other types of income) and
further provided that all of such foreign source income is shown on one or more
payee statements furnished to the shareholder. Shareholders making this election
will not be permitted to carry over any excess foreign taxes to or from a tax
year to which such an election applies.
State and Local Taxes. Each Fund may be subject to state or local taxes in
jurisdictions in which the Fund is deemed to be doing business. In addition, the
treatment of a Fund and its shareholders in those states which have income tax
laws might differ from treatment under the federal income tax laws. Shareholders
should consult their own tax advisors with respect to any state or local taxes.
Other Taxation. The Trust is organized as a Massachusetts business trust
and, under current law, neither the Trust nor any Fund is liable for any income
or franchise tax in The Commonwealth of Massachusetts, provided that each Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code. The Portfolios are organized as New York trusts. The Portfolios are not
subject to any federal income taxation or income or franchise tax in the State
of New York or The Commonwealth of Massachusetts. The investment by a Fund in
its corresponding Portfolio does not cause the Fund to be liable for any income
or franchise tax in the State of New York.
ADDITIONAL INFORMATION
Telephone calls to the Funds, J.P. Morgan or a Financial Professional as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's registration statement
filed with the SEC under the 1933 Act and the 1940 Act and the Portfolios'
registration statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The registration
statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
58
Statements contained in this Statement of Additional Information and the
Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Funds or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by any Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
FINANCIAL STATEMENTS
The following financial statements and the reports thereon of
PricewaterhouseCoopers LLP of each Fund are incorporated herein by reference to
their respective annual report filings made with the SEC pursuant to Section
30(b) of the 1940 Act and Rule 30b2-1 thereunder. Any of the following financial
reports are available without charge upon request by calling J.P. Morgan Funds
Services at (800) 521-5411. Each Fund's financial statements include the
financial statements of the corresponding Portfolio.
- -------------------------------------------------------------------------------
Date of Annual Report;
Date Filed;
Name of Fund and Accession Number
- -------------------------------------------------------------------------------
10/31/00
12/26/00;
J.P. Morgan Short Term Bond Fund 0000894089-00-000019
- -------------------------------------------------------------------------------
10/31/00;
12/28/00;
J.P. Morgan Bond Fund 000894089-00-0000024
- -------------------------------------------------------------------------------
10/31/00;
J.P. Morgan Global Strategic 12/28/00;
Income Fund 000894089-00-0000023
- -------------------------------------------------------------------------------
59
APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A - Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to
meet its financial commitment on the obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
A-1
Commercial Paper, including Tax Exempt
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designations 1, 2, and 3 to indicate the relative degree of
safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 - This designation indicates that the degree of safety regarding timely
payment is satisfactory.
A-3 - This designation indicates that the degree of safety regarding timely
payment is adequate.
Short-Term Tax-Exempt Notes
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest rating
assigned by Standard & Poor's and has a very strong or strong capacity to
pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory
capacity to pay principal and interest.
MOODY'S
Corporate and Municipal Bonds
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
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payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Commercial Paper, including Tax Exempt
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced
by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations.
The effect of industry characteristics and market compositions may
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be more pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection measurements and
may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
Short-Term Tax Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes
with this rating enjoy strong protection from established cash flows
of funds for their servicing or from established and broad-based
access to the market for refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
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