J.P. MORGAN FUNDS
J.P. MORGAN INTERNATIONAL EQUITY FUND
J.P. MORGAN EMERGING MARKETS EQUITY FUND
J.P. MORGAN INTERNATIONAL OPPORTUNITIES FUND
J.P. MORGAN EUROPEAN EQUITY 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 (FOR THE INTERNATIONAL EQUITY
AND EMERGING MARKETS EQUITY FUNDS) AND NOVEMBER 30, 2000 (FOR THE INTERNATIONAL
OPPORTUNITIES AND EUROPEAN EQUITY FUNDS). THE PROSPECTUS AND THE FINANCIAL
STATEMENTS, INCLUDING THE INDEPENDENT ACCOUNTANTS' REPORTS THEREON, ARE
AVAILABLE, WITHOUT CHARGE UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION:
J.P. MORGAN FUNDS (800)221-7930.
Table of Contents
Page
General....................................................................1
Investment Objective and Policies..........................................1
Investment Restrictions....................................................21
Trustees and Advisory Board................................................22
Officers...................................................................25
Codes of Ethics............................................................26
Investment Advisor.........................................................26
Distributor................................................................30
Co-Administrator...........................................................29
Services Agent.............................................................30
Custodian and Transfer Agent...............................................31
Shareholder Servicing......................................................31
Financial Professionals....................................................32
Independent Accountants....................................................33
Expenses...................................................................33
Purchase of Shares.........................................................34
Redemption of Shares.......................................................35
Exchange of Shares.........................................................35
Dividends and Distributions................................................36
Net Asset Value............................................................36
Performance Data...........................................................37
Portfolio Transactions.....................................................39
Massachusetts Trust........................................................41
Description of Shares......................................................42
Special Information Concerning Investment Structure........................44
Taxes......................................................................45
Additional Information.....................................................50
Financial Statements.......................................................51
Appendix A - Description of Security Ratings..............................A-1
GENERAL
This Statement of Additional Information relates only to the J.P. Morgan
International Equity Fund, the J.P. Morgan Emerging Markets Equity Fund, the
J.P. Morgan International Opportunities Fund and the J.P. Morgan European Equity
Fund (collectively, the "Funds"). Each of the Funds is a separate series of
shares of beneficial interest of the 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, the J.P. Morgan International Equity 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, the Funds seek to achieve their investment objectives
by investing all of their investable assets in separate Master Portfolios (each,
a "Portfolio"), a corresponding diversified open-end management investment
company having the same investment objective as the corresponding Fund. Each
Fund invests in a Portfolio through a two-tier master-feeder investment fund
structure. See "Special Information Concerning Investment Structure."
Each Portfolio is advised by J.P. Morgan Investment Management Inc.
("JPMIM" or the "Advisor").
Investments in the Funds 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 the Funds 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 OBJECTIVE AND POLICIES
The following discussion supplements the information regarding the
investment objective of each Fund and the policies to be employed to achieve the
objective by each Portfolio as set forth in the applicable Prospectus. The
investment objectives of each Fund and the investment objectives of its
corresponding Portfolio are identical. Accordingly, references below to a
Portfolio also include the corresponding Fund; similarly, references to a Fund
also include the corresponding Portfolio unless the context requires otherwise.
The J.P. Morgan International Equity Fund (the "International Equity
Fund") is designed for investors with a long term investment horizon who want to
diversify their portfolios by investing in an actively managed portfolio of
non-U.S. securities that seeks to outperform the Morgan Stanley Capital
International ("MSCI") Europe, Australasia and Far East Index (the "EAFE
Index"). The International Equity Fund's investment objective is to provide high
total return from a portfolio of equity securities of foreign corporations. The
International Equity Fund attempts to achieve its investment objective by
investing all of its investable assets in The International Equity Portfolio
(the "International Equity Portfolio"), a diversified open-end management
investment company having the same investment objective as the International
Equity Fund.
The International Equity Portfolio seeks to achieve its investment
objective by investing primarily in the equity securities of foreign
corporations. Equity securities consist of common stocks and other securities
with equity characteristics such as preferred stocks, depository receipts,
warrants, rights, convertible securities, trust or limited partnership interests
and equity participations (collectively, "Equity Securities"). Under normal
circumstances, the International Equity Portfolio expects to invest at least 65%
of its total assets in such securities. The International Equity Portfolio does
not intend to invest in U.S. securities (other than money market instruments),
except temporarily, when extraordinary circumstances prevailing at the same time
in a significant number of developed foreign countries render investments in
such countries inadvisable.
Investment Process for the International Equity Portfolio
Country allocation: JPMIM's country allocation decision begins with a
forecast of equity risk premiums, which provide a valuation signal by measuring
the relative attractiveness of stocks. Using a proprietary approach, JPMIM
calculates this risk premium for each of the nations in the International Equity
Portfolio's universe, determines the extent of its deviation -- if any -- from
its historical norm, and then ranks countries according to the size of those
deviations. Countries with high (low) rankings are overweighted (underweighted)
in comparisons to the EAFE Index to reflect the above-average (below-average)
attractiveness of their stock markets. In determining weightings, JPMIM analyzes
a variety of qualitative factors as well, including the liquidity, earnings
momentum and interest rate climate of the market at hand. These qualitative
assessments can change the magnitude but not the direction of the country
allocations called for by the risk premium forecast. JPMIM places limits on the
total size of the International Equity Portfolio's country over- and
under-weightings relative to the EAFE Index.
Stock selection: JPMIM's more than 90 international equity analysts, each
an industry and country specialist with an average of nearly ten years of
experience, forecast normalized earnings and dividend payouts for roughly 1,200
non-U.S. companies -- taking a long-term perspective rather than the short time
frame common to consensus estimates. These forecasts are converted into
comparable expected returns by a dividend discount model, and then companies are
ranked from most to least attractive by industry and country. A diversified
portfolio is constructed using disciplined buy and sell rules. The portfolio
manager's objective is to concentrate the purchases in the stocks deemed most
undervalued, and to keep sector weightings close to those of the EAFE Index, the
International Equity Portfolio's benchmark. Once a stock falls into the bottom
half of the rankings, it generally becomes a candidate for sale. Where
available, warrants and convertibles may be purchased instead of common stock if
they are deemed a more attractive means of investing in an undervalued company.
2
Currency management: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
the International Equity Portfolio's return. JPMIM's currency decisions are
supported by a proprietary tactical model which forecasts currency movements
based on an analysis of four fundamental factors -- trade balance trends,
purchasing power parity, real short-term interest differentials and real bond
yields -- plus a technical factor designed to improve the timing of
transactions. Combining the output of this model with a subjective assessment of
economic, political and market factors, JPMIM's currency specialists recommend
currency strategies that are implemented in conjunction with the International
Equity Portfolio's investment strategy.
The J.P. Morgan Emerging Markets Equity Fund (the "Emerging Markets Equity
Fund") is designed for investors with a long term investment horizon who want
exposure to the rapidly growing emerging markets. The Emerging Markets Equity
Fund's investment objective is to achieve a high total return from a portfolio
of equity securities of companies in emerging markets. The Fund attempts to
achieve its investment objective by investing all of its investable assets in
The Emerging Markets Equity Portfolio (the "Emerging Markets Equity Portfolio"),
a diversified open-end management investment company having the same investment
objective as the Emerging Markets Equity Fund.
The Emerging Markets Equity Portfolio seeks to achieve its investment
objective by investing primarily in Equity Securities of emerging markets
issuers. Under normal circumstances, the Emerging Markets Equity Portfolio
expects to invest at least 65% of its total assets in such securities. The fund
may also invest up to 20% in debt securities of emerging markets issuers. The
Emerging Markets Equity Portfolio does not intend to invest in U.S. securities
(other than money market instruments), except temporarily, when extraordinary
circumstances prevailing at the same time in a significant number of emerging
markets countries render investments in such countries inadvisable.
Investment Process for the Emerging Markets Equity Portfolio
Country allocation: JPMIM's country allocation decision begins with a
forecast of the expected return of each market in the Emerging Markets Equity
Portfolio's universe. These expected returns are calculated using a proprietary
valuation method that is forward looking in nature rather than based on
historical data. JPMIM then evaluates these expected returns from two different
perspectives: first, it identifies those countries that have high real expected
returns relative to their own history and other nations in their universe.
Second, it identifies those countries that it expects will provide high returns
relative to their currency risk. Countries that rank highly on one or both of
these scores are overweighted relative to the Emerging Markets Equity
Portfolio's benchmark, the MSCI Emerging Markets Free Index, while those that
rank poorly are underweighted.
Stock selection: JPMIM's 25 emerging markets equity analysts, each an
industry specialist, monitor a universe of approximately 325 companies in these
countries, developing forecasts of earnings and cash flows for the most
attractive among them. Companies are ranked from most to least attractive based
on this research, and then a diversified portfolio is constructed using
disciplined buy and sell rules. The portfolio manager's objective is to
concentrate the Emerging Markets Equity Portfolio's holdings in the stocks
deemed most undervalued, and to keep sector weightings relatively close to those
of the index. Stocks are generally held until they fall into the bottom half of
JPMIM's rankings.
3
J.P. Morgan International Opportunities Fund (the "International
Opportunities Fund") is designed for long-term investors who want to invest in
an actively managed portfolio of common stocks and other equity securities of
non-U.S. companies, including companies located in emerging markets. The
International Opportunities Fund's investment objective is to provide high total
return from a portfolio of equity securities of foreign companies in developed
and, to a lesser extent, developing markets. The International Opportunities
Fund attempts to achieve its investment objective by investing all of its
investable assets in The International Opportunities Portfolio (the
"International Opportunities Portfolio"), a diversified open-end management
investment company having the same investment objective as the International
Opportunities Fund.
The International Opportunities Portfolio seeks to achieve its investment
objective by investing primarily in Equity Securities of non-U.S. issuers in
developed and developing countries. Under normal circumstances, the
International Opportunities Portfolio expects to invest at least 65% of its
total assets in such securities. The International Opportunities Portfolio does
not intend to invest in U.S. securities (other than money market instruments),
except temporarily, when extraordinary circumstances prevailing at the same time
in a significant number of foreign countries render investments in such
countries inadvisable.
Investment Process for the International Opportunities Portfolio
Stock selection: JPMIM's approximately 90 international equity analysts
and 23 emerging markets equity analysts, each an industry and country
specialist, forecast normalized earnings, dividend payouts and cash flows for
roughly 1,200 non-U.S. companies, taking a long-term perspective rather than the
short time frame common to consensus estimates. These forecasts are converted
into comparable expected returns by a dividend discount model, and then
companies are ranked from most to least attractive by industry. A diversified
portfolio is constructed using disciplined buy and sell rules. The portfolio
manager's objective is to concentrate the International Opportunities
Portfolio's purchases in the stocks deemed most undervalued. Stocks generally
become a candidate for sale when they fall into the bottom half of JPMIM's
rankings. Where available, warrants and convertibles may be purchased instead of
common stock if they are deemed a more attractive means of investing in an
undervalued company.
Currency management: JPMIM actively manages the currency exposure of the
International Opportunities Portfolio's investments in developed countries, in
conjunction with country and stock allocation, with the goal of protecting and
possibly enhancing the International Opportunities Portfolio's return. JPMIM's
currency decisions are supported by a proprietary tactical model which forecasts
currency movements based on an analysis of four fundamental factors -- trade
balance trends, purchasing power parity, real short-term interest differentials
and real bond yields -- plus a technical factor designed to improve the timing
of transactions. Combining the output of this model with a subjective assessment
of economic, political and market factors, JPMIM's currency specialists
recommend currency strategies that are implemented in conjunction with the
International Opportunities Portfolio's investment strategy.
Country allocation (developed countries): The International Opportunities
Portfolio's country weightings primarily result from its stock selection
decisions and may vary significantly from the MSCI All Country World Index Free
(ex-U.S.), the International Opportunities Portfolio's benchmark.
4
The J.P. Morgan European Equity Fund (the "European Equity Fund") is
designed for investors who want an actively managed portfolio of European Equity
Securities that seeks to outperform the MSCI Europe Index which is comprised of
more than 600 companies in 14 European countries. The European Equity Fund's
investment objective is to provide high total return from a portfolio of
European company stocks. The European Equity Fund attempts to achieve its
investment objective by investing all of its investable assets in The European
Equity Portfolio (the "European Equity Portfolio"), a diversified open-end
management investment company having the same investment objective as the
European Equity Fund.
The European Equity Portfolio seeks to achieve its investment objective by
investing primarily in Equity Securities of European companies. Under normal
circumstances, the European Equity Portfolio expects to invest at least 65% of
its total assets in Equity Securities. The European Equity Portfolio does not
intend to invest in U.S. securities (other than money market instruments),
except temporarily, when extraordinary circumstances prevailing at the same time
in a significant number of European countries render investments in such
countries inadvisable.
Investment Process for the European Equity Portfolio
Stock selection: Various models are used to quantify JPMIM's fundamental
stock research, producing a ranking of companies in each industry group
according to their relative value. The European Equity Portfolio's management
team then buys and sells stocks, using the research and valuation rankings as
well as its assessment of other factors including: catalysts that could trigger
a change in a stock's price, potential reward compared to potential risk and
temporary mispricings caused by market overreactions.
Country allocation: The European Equity Portfolio's country weightings
primarily result from its stock selection decisions and may vary significantly
from the MSCI Europe Index, the European Equity Portfolio's benchmark. In
addition, JPMIM makes active allocations to certain countries. For example,
currently country weightings in continental Europe result from individual stock
selection decisions. With regards to the United Kingdom, the Advisor makes an
active country allocation decision. The Advisor, based on changing market
conditions and experienced judgment, may from time to time adjust the extent to
which country weighting is based on stock selection and active country
allocation.
Equity Investments
The Portfolios invest primarily in Equity Securities. The Equity
Securities in which the Portfolios invest include those listed on any domestic
or foreign securities exchange or traded in the over-the-counter (OTC) market as
well as certain restricted or unlisted securities.
Equity Securities. The Equity Securities in which the Portfolios may
invest may or may not pay dividends and may or may not carry voting rights.
Common stock occupies the most junior position in a company's capital structure.
The convertible securities in which the Portfolios 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.
5
The terms of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
Common Stock Warrants
The Portfolios may invest in common stock warrants that entitle the holder
to buy common stock from the issuer of the warrant at a specific price (the
strike price) for a specific period of time. The market price of warrants may be
substantially lower than the current market price of the underlying common
stock, yet warrants are subject to similar price fluctuations. As a result,
warrants may be more volatile investments than the underlying common stock.
Warrants generally do not entitle the holder to dividends or voting rights
with respect to the underlying common stock and do not represent any rights in
the assets of the issuer company. A warrant will expire worthless if it is not
exercised on or prior to the expiration date.
Foreign Investments
The Portfolios make substantial investments in foreign countries.
Investors should realize that the value of the Portfolios' 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 administrations 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 Portfolios' 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 investments made by the Portfolios must be made in
compliance with U.S. and foreign currency restrictions and tax laws restricting
the amounts and types of foreign investments.
Generally, investment in securities of foreign issuers 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 Portfolio by domestic companies.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, a Portfolio'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
6
for securities of U.S. issuers, may affect portfolio liquidity. In buying and
selling securities on foreign exchanges, purchasers normally pay fixed
commissions that are generally higher than the negotiated commissions charged in
the United States. 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.
Foreign investments may be made directly in securities of foreign issuers
or in the form of American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other similar
securities of foreign issuers. ADRs are securities, typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer and deposited with
the depositary. ADRs include American Depositary Shares and New York Shares.
EDRs are receipts issued by a European financial institution. GDRs, which are
sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all costs of
the unsponsored facility. The depositary of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited security or to pass through to the holders of the
receipts voting rights with respect to the deposited securities.
Since investments in foreign securities may involve foreign currencies,
the value of a Portfolio'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. The Portfolios may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
the settlement of foreign securities transactions or to manage the Portfolios'
currency exposure related to foreign investments.
The Portfolios 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 the Portfolios investments in those countries and the
availability to a Portfolio 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 the Portfolios investments in such countries illiquid and more volatile
than investments in more developed countries, and a Portfolio 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
7
difficult as a result to assess the value or prospects of an investment in such
issuers.
Foreign Currency Exchange Transactions. Because the Portfolios buy and
sell securities and receive interest and dividends in currencies other than the
U.S. dollar, the Portfolios may enter from time to time into foreign currency
exchange transactions. The Portfolios either enter into these transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or use forward contracts to purchase or sell foreign
currencies. The cost of a Portfolio'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 a
Portfolio 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 contracts. 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 Portfolio's securities or
in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
The Portfolios may enter into forward foreign currency exchange contracts
in connection with settlements of securities transactions and other anticipated
payments or receipts. In addition, from time to time, the Advisor may reduce a
Portfolio's foreign currency exposure by entering into forward foreign currency
exchange contracts to sell a foreign currency in exchange for the U.S. dollar.
The Portfolios may also enter into forward foreign currency exchange contracts
to adjust their currency exposure relative to their benchmarks. Forward foreign
currency exchange contracts may involve the purchase or sale of a foreign
currency in exchange for U.S. dollars or may involve two foreign currencies.
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 Portfolio to assume the
risk of fluctuations in the value of the currency purchased vis a vis 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 and Corporate Debt Obligations. The Emerging Markets Equity Fund
may invest in sovereign debt obligations. Investment in sovereign debt
obligations involves special risks not present in corporate debt obligations.
The issuer of the sovereign debt or the governmental authorities that control
the repayment of the debt may be unable or unwilling to repay principal or
interest when due, and the Fund may have limited recourse in the event of a
default. During periods of economic uncertainty, the market prices of
8
sovereign debt, and the Fund's net asset value, may be more volatile than prices
of U.S. debt obligations. In the past, certain emerging markets have encountered
difficulties in servicing their debt obligations, withheld payments of principal
and interest and declared moratoria on the payment of principal and interest on
their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearages on their debt. The failure of a
sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
Corporate debt obligations, including obligations of industrial, utility,
banking and other financial issuers, are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations and may
also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general
market liquidity.
Brady Bonds. The Emerging Markets Equity Fund may invest in Brady bonds.
Brady bonds are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructurings. Brady bonds have been issued since
1989 and do not have a long payment history. In light of the history of defaults
of countries issuing Brady bonds on their commercial bank loans, investments in
Brady bonds may be viewed as speculative. Brady bonds may be fully or partially
collateralized or uncollateralized, are issued in various currencies (but
primarily the dollar) and are actively traded in over-the-counter ("OTC")
secondary markets. Incomplete collateralization of interest or principal payment
obligations results in increased credit risk. Dollar-denominated collateralized
Brady bonds, which may be either fixed-rate or floating-rate bonds, are
generally collateralized by U.S. Treasury zero coupon bonds having the same
maturity as the Brady bonds.
Obligations of Supranational Entities. The Emerging Markets Equity 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.
9
Investment in Lower Rated Obligations.
While generally providing higher coupons or interest rates than
investments in higher quality securities, lower quality debt securities involve
greater risk of loss of principal and income, including the possibility of
default or bankruptcy of the issuers of such securities, and have greater price
volatility, especially during periods of economic uncertainty or change. These
lower quality debt obligations tend to be affected by economic changes and
short-term corporate and industry developments to a greater extent than higher
quality securities, which react primarily to Fund invests in such lower quality
securities, the achievement of its investment objective may be more dependent on
the Advisor's credit analysis.
Lower quality debt obligations are affected by the market's perception of
their credit quality, especially during time of adverse publicity, and the
outlook for economic growth. Economic downturns or an increase in interest rates
may cause a higher incidence of default by the issuers of these securities,
especially issuers that are highly leveraged. The market for these lower quality
fixed income securities is generally less liquid than the market for investment
grade fixed income securities. It may be more difficult to sell these lower
rated securities to meet redemption requests, to respond to changes in the
market, or to value accurately the Fund's portfolio holdings for purposes of
determining the Fund's net asset value.
Money Market Instruments
Although the Portfolios intend under normal circumstances and to the
extent practicable, to be fully invested in Equity Securities, each Portfolio
may invest in money market instruments to the extent consistent with its
investment objective and policies. The Portfolios may make money market
investments pending other investment or settlement, for liquidity or in adverse
market conditions. A description of the various types of money market
instruments that may be purchased by the Portfolios appears below.
Also see "Quality and Diversification Requirements."
U.S. Treasury Securities. Each of the Portfolios 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 Portfolios 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 Portfolio must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitments. Securities in which each
Portfolio may invest that are not backed by the full faith and credit of the
United States include, but are not limited to: (i) obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation, the Federal Home
Loan Bank 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
10
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 Portfolios, 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 Portfolios 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 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 Portfolios 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 Portfolios may also invest in 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 Portfolios 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 Portfolio's quality restrictions. See
"Quality and Diversification Requirements." Although there is no secondary
market for master demand obligations, such obligations are considered by the
Portfolios to be liquid because they are payable upon demand. The Portfolios 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 Portfolios may enter into repurchase
agreements with brokers, dealers or banks that meet the Advisor's credit
guidelines. In a repurchase agreement, a Portfolio buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. The resale price normally is in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for the
period of time the Portfolio is invested in the agreement
11
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
Portfolio to the seller. The period of these repurchase agreements will usually
be short, from overnight to one week, and at no time will the Portfolios 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
Portfolios 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 Portfolios in each agreement plus accrued
interest, and the Portfolios 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 Portfolio might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by a Portfolio may be delayed or
limited.
Each of the Portfolios may make investments in other debt securities with
remaining effective maturities of not more than thirteen months, including
without limitation corporate and foreign bonds, asset-backed securities and
other obligations described in this Statement of Additional Information.
Corporate Bonds and Other Debt Securities. Each of the Portfolios 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."
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 Portfolio may invest are subject to the
Portfolio's overall credit requirements. However, asset-backed securities, in
general, are subject to certain risks. Most of these risks are related to
limited interests in applicable collateral. For example, credit card debt
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
12
Additional Investments
When-Issued and Delayed Delivery Securities. Each of the Portfolios may
purchase securities on a when-issued or delayed delivery basis. For example,
delivery of and payment for these securities can take place a month or more
after the date of the purchase commitment. The purchase price and the interest
rate payable, if any, on the securities are fixed on the purchase commitment
date or at the time the settlement date is fixed. The value of such securities
is subject to market fluctuation and for money market instruments and other
fixed income securities no interest accrues to a Portfolio until settlement
takes place. At the time a Portfolio makes the commitment to purchase securities
on a when-issued or delayed delivery basis, it will record the transaction,
reflect the value each day of such securities in determining its net asset value
and 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 Portfolio will maintain
with the Custodian a segregated account with liquid assets, consisting of cash,
U.S. Government securities or other appropriate securities, in an amount at
least equal to such commitments. On delivery dates for such transactions, each
Portfolio will meet its obligations from maturities or sales of the securities
held in the segregated account and/or from cash flow. If a Portfolio chooses to
dispose of the right to acquire a when-issued security prior to its acquisition,
it could, as with the disposition of any other portfolio obligation, incur a
gain or loss due to market fluctuation. Also, a Portfolio may be disadvantaged
if the other party to the transaction defaults.
Investment Company Securities. Securities of other investment companies
may be acquired by each of the Funds and their corresponding Portfolio to the
extent permitted under the 1940 Act or any order pursuant thereto. These limits
currently require that, as determined immediately after a purchase is made, (i)
not more than 5% of the value of 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 Portfolio
an exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets forth 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, shareholder servicing and administrative
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
13
date and price reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act a reverse repurchase agreement is also
considered as the borrowing of money by the 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 and securities lending are limited in the aggregate and
many not exceed 33-1/3% of a Fund's total assets.
Loans of Portfolio Securities. Each of the Portfolios may lend its
securities if such loans are secured continuously by cash or equivalent
collateral or by a letter of credit in favor of the Portfolio at least equal at
all times to 100% of the market value of the securities loaned, plus accrued
interest. While such securities are on loan, the borrower will pay the Portfolio
any income accruing thereon. Loans will be subject to termination by the
Portfolio in the normal settlement time, generally three business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to a
Portfolio and its respective investors. The Portfolios may pay reasonable
finders' and custodial fees in connection with a loan. In addition, a Portfolio
will consider all facts and circumstances before entering into such an
agreement, including the creditworthiness of the borrowing financial
institution, and no Portfolio will make any loans in excess of one year. The
Portfolios will not lend their securities to any officer, Trustee, Director,
Member of the Advisory Board, employee or other affiliate of the Portfolios, the
Advisor or the Distributor, unless otherwise permitted by applicable law. All
forms of borrowing (including reverse repurchase agreements and securities
lending are limited in the aggregate and many not exceed 33-1/3% of a Fund's
total assets.
Privately Placed and Certain Unregistered Securities. A Portfolio may not
acquire any illiquid securities if, as a result thereof, more than 15% of the
Portfolio's net assets would be in illiquid investments. Subject to this
non-fundamental policy limitation, the Portfolios may acquire investments that
are illiquid or have limited liquidity, such as private placements or
investments that are not registered under 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 Portfolio. The price a Portfolio pays for illiquid securities
or receives upon resale may be lower than the price paid or received for similar
securities with a more liquid market. Accordingly the valuation of these
securities will reflect any limitations on their liquidity.
The Portfolios 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.
14
As to illiquid investments, a Portfolio is subject to a risk that should
the Portfolio decide to sell them when a ready buyer is not available at a price
the Portfolio deems representative of their value, the value of the Portfolio's
net assets could be adversely affected. Where an illiquid security must be
registered under the 1933 Act, before it may be sold, a Portfolio may be
obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a holding under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a Portfolio might obtain a less favorable price than prevailed when it decided
to sell.
Quality and Diversification Requirements
Each of the Portfolios 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 Portfolio: (1) the Portfolio 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 Portfolio may not own more than 10% of the outstanding voting securities of
any one issuer. As for the other 25% of the Portfolio'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 the Portfolio 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.
The Portfolios will also 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."
The Portfolios may invest in convertible debt securities, for which there
are no specific quality requirements. In addition, at the time a Portfolio
invests in any commercial paper, bank obligation or repurchase agreement, the
issuer must have outstanding debt rated A or higher by Moody's or Standard &
Poor's, the issuer's parent corporation, if any, must have outstanding
commercial paper rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no
such ratings are available, the investment must be of comparable quality in the
Advisor's opinion. At the time a Portfolio invests in any other short-term debt
securities, they must be rated A or higher by Moody's or Standard & Poor's, or
if unrated, the investment must be of comparable quality in the Advisor's
opinion.
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
Exchange Traded and OTC Options. All options purchased or sold by the
Portfolios will be traded on a securities exchange or will be purchased or sold
by securities dealers (OTC options) that meet creditworthiness standards
approved by the Trustees. While exchange-traded options are obligations of the
Options Clearing Corporation, in the case of OTC options, a Portfolio relies on
the dealer from which it purchased the option to perform if the
15
option is exercised. Thus, when a Portfolio purchases an OTC option, it relies
on the dealer from which it purchased the option to make or take delivery of the
underlying securities. Failure by the dealer to do so would result in the loss
of the premium paid by the Portfolio as well as loss of the expected benefit of
the transaction.
Provided that a Portfolio has arrangements with certain qualified dealers
who agree that the Portfolio may repurchase any option it writes for a maximum
price to be calculated by a predetermined formula, a Portfolio may treat the
underlying securities used to cover written OTC options as liquid. In these
cases, the OTC option itself would only be considered illiquid to the extent
that the maximum repurchase price under the formula exceeds the intrinsic value
of the option.
Futures Contracts and Options on Futures Contracts. The Portfolios may
purchase or sell (write) futures contracts and may purchase and sell (write) put
and call options, including put and call options on futures contracts. Futures
contracts obligate the buyer to take and the seller to make delivery at a future
date of a specified quantity of a financial instrument or an amount of cash
based on the value of a securities index. Currently, futures contracts are
available on various types of fixed income securities, including but not limited
to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and
on indexes of fixed income securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid by
the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by a Portfolio are paid by the Portfolio into a segregated
account, in the name of the Futures Commission Merchant, as required by the 1940
Act and the SEC's interpretations thereunder.
Combined Positions. The Portfolios 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, a Portfolio may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
16
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
Portfolio's current or anticipated investments exactly. A Portfolio may invest
in options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will not
track the performance of the Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments match the
Portfolio's investments well. Options and futures contracts prices are affected
by such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Portfolio may purchase or sell options
and futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in a Portfolio's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
Liquidity of Options and Futures Contracts. There is no assurance 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
Portfolio to enter into new positions or close out existing positions. If the
market for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions, and
could potentially require a Portfolio to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, the
Portfolio's access to other assets held to cover its options or futures
positions could also be impaired. (See "Exchange Traded and OTC Options" above
for a discussion of the liquidity of options not traded on an exchange.)
Position Limits. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, a Portfolio or the Advisor may be
required to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid exceeding
such limits.
Asset Coverage for Futures Contracts and Options Positions. Although the
Portfolios will not be commodity pools, certain derivatives subject the
Portfolios to the rules of the Commodity Futures Trading Commission which limit
the extent to which the Portfolio can invest in such derivatives. Each Portfolio
may invest in futures contracts and options with respect thereto for hedging
purposes without limit. However, the Portfolio may not invest in such contracts
and options for other purposes if the sum of the amount of initial margin
deposits and premiums paid for unexpired options with respect to such
17
contracts, other than for bona fide hedging purposes, exceeds 5% of the
liquidation value of the Portfolio's assets, after taking into account
unrealized profits and unrealized losses on such contracts and options;
provided, however, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the 5%
limitation.
In addition, the Portfolios will comply with guidelines established by the
SEC with respect to coverage of options and futures contracts by mutual funds,
and if the guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures contract or option is
outstanding, unless they are replaced with other suitable assets. As a result,
there is a possibility that segregation of a large percentage of the Portfolio's
assets could impede portfolio management or the Portfolio's ability to meet
redemption requests or other current obligations.
Swaps and Related Swap Products
Each of the Portfolios 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").
Each Portfolio 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 Portfolio anticipates purchasing at a later date, or to gain
exposure to certain markets in the most economical way possible. A Portfolio
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.
18
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
Portfolio 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 Portfolio, payments by the
parties will be exchanged on a "net basis", and a Portfolio will receive or pay,
as the case may be, only the net amount of the two payments.
The amount of a Portfolio's potential gain or loss on any swap transaction
is not subject to any fixed limit. Nor is there any fixed limit on a Portfolio's
potential loss if it sells a cap or collar. If the Portfolio buys a cap, floor
or collar, however, the Portfolio's potential loss is limited to the amount of
the fee that it has paid. 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.
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 Portfolio will be less favorable than if these techniques had not been
used. These instruments are typically not traded on exchanges. Accordingly,
there is a risk that the other party to certain of these instruments will not
perform its obligations to a Portfolio or that a Portfolio 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 Portfolio.
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 Portfolio will maintain cash or liquid assets in a segregated account
with its custodian in an amount sufficient at all times to cover its current
obligations under its swap transactions, caps, floors and collars. If a
Portfolio enters into a swap agreement on a net basis, it will segregate assets
with a daily value at least equal to the excess, if any, of a Portfolio's
accrued obligations under the swap agreement over the accrued amount a Fund is
entitled to receive under the agreement. If a Portfolio enters into a swap
agreement on other than a net basis, or sells a cap, floor or collar, it will
segregate assets with a daily value at least equal to the full amount of a
Portfolio's accrued obligations under the agreement.
Each Portfolio 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 Portfolio 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
19
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 Portfolio'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 Portfolio will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and a Portfolio's basis in the contract.
The federal income tax treatment with respect to swap transactions, caps,
floors, and collars may impose limitations on the extent to which a Portfolio
may engage in such transactions.
Risk Management
The Portfolios may employ non-hedging risk management techniques. Examples
of risk management strategies include synthetically altering a portfolio's
exposure to the equity markets of particular countries by purchasing futures
contracts on the stock indices of those countries to increase exposure to their
equity markets. 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 International Equity Portfolio (International Equity Fund) For the fiscal
years ended October 31, 1998, 1999 and 2000: 74%, 70% and 80%, respectively.
The Emerging Markets Equity Portfolio (Emerging Markets Equity Fund) For the
fiscal years ended October 31, 1998, 1999 and 2000: 44%, 87% and 65%,
respectively.
20
The International Opportunities Portfolio (International Equity Fund) For the
fiscal years ended November 30, 1998, 1999 and 2000: 143%, 80% and 86%,
respectively.
The European Equity Portfolio (European Equity Fund) For the period January 1,
1998 through November 30, 1998: 99%. For the fiscal years ended November 30,
1999 and 2000: 68% and 86%, respectively.
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 the Trust with
respect to 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 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 Portfolio:
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, and (b) invest in securities or
other instruments issued by issuers that invest in real estate;
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
21
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 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 fundamental investment restrictions 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 AND ADVISORY BOARD
Trustees
The mailing address of the Trustees of the Trust, who are also the
Trustees of each of the Portfolios and the other Master Portfolios, as defined
below, is c/o Pierpont Group, Inc., 461 Fifth Avenue, New York, New York 10017.
Their names, principal occupations during the past five years and dates of birth
are set forth below:
22
Frederick S. Addy -- Trustee; Retired; Former 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. ("Pierpont Group") since prior to 1993. His date
of birth is August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His 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 the 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 (adjusted as of
April 1, 1997) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), the J.P. Morgan Institutional Funds and J.P.
Morgan Series Trust and is reimbursed for expenses incurred in connection with
service as a Trustee. The Trustees may hold various other directorships
unrelated to these funds.
Trustee compensation expenses paid by the Trust for the calendar year
ended December 31, 2000 set forth below.
TOTAL TRUSTEE
AGGREGATE COMPENSATION ACCRUED BY
TRUSTEE THE MASTER PORTFOLIOS (1),
COMPENSATION J.P. MORGAN INSTITUTIONAL
PAID BY THE FUNDS, J.P. MORGAN SERIES
TRUST DURING TRUST AND THE TRUST
NAME OF TRUSTEE 2000 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 15 other portfolios (collectively, the "Master
Portfolios") for which JPMIM acts as investment advisor.
- ----------
* Mr. Healey is an "interested person" (as defined in the 1940 Act) of the
Trust.
23
** No investment company within the fund complex has a pension or retirement
plan. Currently there are 17 investment companies (14 investment companies
comprising the Master Portfolios, J.P. Morgan Institutional Funds, the Trust and
J.P. Morgan Series Trust) in the fund complex.
*** 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 to
assist the Trustees in exercising their overall supervisory responsibilities
over the affairs of the Portfolios and the Trust. 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 in an amount representing its
reasonable costs in performing these services. These costs are periodically
reviewed by the Trustees. The principal offices of Pierpont Group are located at
461 Fifth Avenue, New York, New York 10017.
The aggregate fees paid to Pierpont Group by each Fund and its
corresponding Portfolio during the indicated fiscal periods are set forth below:
International Equity Fund -- For the fiscal years ended October 31, 1998, 1999
and 2000: $3,379, $1,398 and $966, respectively.
International Equity Portfolio -- For the fiscal years ended October 31, 1998
1999 and 2000: $18,453, $9,765 and $8,841, respectively.
Emerging Markets Equity Fund -- For the fiscal years ended October 31, 1998 1999
and 2000: $1,387, $622 and $645, respectively.
Emerging Markets Equity Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000: $11,566, $3,334 and $2,806, respectively.
International Opportunities Fund -- For the fiscal years ended November 30,
1998, 1999 and 2000: $2,225, $1,073 and $1,282, respectively.
International Opportunities Portfolio -- For the fiscal years ended November 30,
1998 1999 and 2000: $13,264, $6,949 and $8,347, respectively.
European Equity Fund --For fiscal year ended December 31, 1997: $117. For the
period January 1, 1998 through November 30, 1998: $336. For the fiscal years
ended November 30, 1999 and 2000: $274 and $216, respectively.
European Equity Portfolio --For the fiscal year ended December 31, 1997:
$21,837.period January 1, 1998 through November 30, 1998: $738. For the fiscal
years ended November 30, 1999 and 2000: $498 and $384, respectively.
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
24
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 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. 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
Institutional 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, 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 Portfolio. 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 the
Portfolios. 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 1993. His address is Pine Tree Country Club Estates, 10286 Saint
Andrews Road, Boynton Beach, Florida 33436. His date of birth is August 23,
1937.
MARGARET W. CHAMBERS; Executive Vice President and General Counsel of FDI
since April, 1998. From August 1996 to March 1998, Ms. Chambers was Vice
President and Assistant General Counsel for Loomis, Sayles & Company, L.P. From
January 1986 to July 1996, she was an associate with the law firm of Ropes &
Gray. Her date of birth is October 12, 1959.
25
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI. 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 April 1997, Mr. Conroy was
Supervisor 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 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 and Premier Mutual, and an
officer of certain investment companies distributed or administered by FDI. Her
date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, Morgan Guaranty Trust
Company of New York. 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.
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. Her date of birth is December 14, 1961.
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 in the Funds Administration group
as Head of Infrastructure and is responsible for special projects. Prior to
January 2000, she served as the Manager of the Tax 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.
26
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 Funds, the Advisor and FDI have adopted codes of ethics pursuant to
Rule 17j-1 under the 1940 Act. Each of these codes permits personnel subject to
such code to invest in securities, including securities that may be purchased or
held by the Portfolios. Such purchases, however, are subject to preclearance and
other procedures reasonably necessary to prevent Access Persons from engaging in
any unlawful conduct set forth in Rule 17j-1.
INVESTMENT ADVISOR
The Funds have not retained the services of an investment advisor because
each Fund seeks to achieve its investment objective by investing all of its
investable assets in a corresponding Portfolio. Subject to the supervision of
the Portfolios' Trustees, the Advisor makes each Portfolio's day-to-day
investment decisions, arranges for the execution of portfolio transactions and
generally manages the Portfolio's investments. Prior to October 1, 1998, Morgan
was each Portfolio's investment advisor. JPMIM, a wholly owned subsidiary of
J.P. Morgan Chase & Co. Incorporated ("J.P. Morgan Chase"), is a registered
investment adviser under the Investment Advisers Act of 1940, as amended,
manages employee benefit funds of corporations, labor unions and state and local
governments and the accounts of other institutional investors, including
investment companies. Certain of the assets of employee benefit accounts under
its management are invested in commingled pension trust funds for which Morgan
serves as trustee.
J.P. Morgan Chase, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors. 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 has a long history of offering a wide
range of banking and investment services to customers throughout the United
States and the world. The firm, through its predecessor firms, has been in
business for over a century.
The investment advisory services the Advisor provides to the Portfolios
are not exclusive under the terms of the Advisory Agreements. The Advisor is
free to and does render similar investment advisory services to others. The
Advisor serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. The accounts which
are managed or advised by the Advisor have varying investment objectives and the
Advisor invests assets of such accounts in investments substantially similar to,
or the same as, those which are expected to constitute the principal investments
of the Portfolios. Such accounts are supervised by 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 benchmark for the Portfolios in which the Funds invest are
currently: The International Equity Portfolio -- EAFE; The Emerging Markets
Equity Portfolio -- MSCI Emerging Markets Free Index; The
27
International Opportunities Portfolio -- MSCI All Country World Index Free
(ex-U.S.); The European Equity Portfolio - MSCI Europe Index.
The Portfolios are managed by employees of the Advisor who, in acting for
their customers, including the Portfolios, 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 Fund.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
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.
International Equity: .60%
Emerging Markets Equity: 1.00%
International Opportunities: .60%
European Equity: .65%
The table below sets forth for each Fund listed the advisory fees paid by
its corresponding Portfolio to JPMIM, for the fiscal periods indicated. See the
Funds' financial statements, which are incorporated herein by reference.
International Equity Portfolio -- For the fiscal years ended October 31, 1998,
1999 and 2000: $3,581,301, $2,881,754 and $3,312,702, respectively.
Emerging Markets Equity Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000: $3,584,676, $1,648,556 and $1,771,982, respectively.
International Opportunities Portfolio -- For the fiscal years ended November 30,
1998, 1999 and 2000: $2,687,804, $2,133,208 and $3,268,904, respectively.
European Equity Portfolio -- For the period January 1, 1998 through November 30,
1998: $166,971. For the fiscal years ended November 30, 1999 and 2000: $163,353
and $158,680, respectively.
The Investment Advisory Agreements provide that they 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. Each of the Investment Advisory Agreements will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Portfolio's Trustees, or by a vote of the holders of a
majority of the Portfolio's outstanding voting securities, on 60 days' written
notice to the Advisor and by the Advisor on 90 days' written notice to the
Portfolio. See "Additional Information."
Under separate agreements, Morgan provides certain financial, fund
accounting and administrative services to the Trust and the Portfolios and
shareholder services for the Trust. See "Services Agent" and "Shareholder
Servicing" below.
28
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 the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Trust's distributor. FDI is a wholly owned indirect
subsidiary of Boston Institutional Group, Inc. FDI also serves as exclusive
placement agent for the Portfolio. FDI currently provides administration and
distribution services for a number of other investment companies.
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
Portfolio; (ii) provides officers for the Trust and the Portfolio; (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
29
the aggregate net assets of the Trust, the Master Portfolios and other
investment companies subject to similar agreements with FDI.
The table below sets forth for each Fund and its corresponding Portfolio
the administrative fees paid to FDI for the fiscal periods indicated.
International Equity Fund -- For the fiscal years ended October 31, 1998, 1999
and 2000: $2,482, $1,009 and $674, respectively.
International Equity Portfolio -- For the fiscal years ended October 31, 1998,
1999 and 2000: $11,630, $6,065 and $4,108, respectively.
Emerging Markets Equity Fund -- For the fiscal years ended October 31, 1998,
1999 and 2000: $997, $463 and $461, respectively.
Emerging Markets Equity Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000: $7,255, $2,073 and $1,321, respectively.
International Opportunities Fund -- For the fiscal years ended November 30,
1998, 1999 and 2000: $1,626, $810 and $912, respectively.
International Opportunities Portfolio -- For the fiscal years ended November 30,
1998, 1999 and 2000: $8,417, $4,338 and $3,736, respectively.
European Equity Fund -- For the period January 1, 1998 through November 30,
1998: $246. For the fiscal years ended November 30, 1999 and 2000: $201 and
$150, respectively.
European Equity Portfolio -- For the period January 1, 1998 through November 30,
1998: $468. For the fiscal years ended November 30, 1999 and 2000: $308 and
$172, 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 effective December 29, 1995, as amended August 1, 1996, 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 Fund and the Portfolio, including services related to
tax compliance, preparation of financial statements, calculation of performance
data, oversight of service providers and certain regulatory and Board of Trustee
matters.
Under the amended Services Agreements, the Funds and the Portfolios have
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
its net assets bear to the total net assets of the Trust, the Master Portfolios,
the other investors in the Master Portfolios
30
for which Morgan provides similar services and J.P. Morgan Series Trust. The
table below sets forth for each Fund and its corresponding Portfolio the fees
paid to Morgan, as Services Agent.
International Equity Fund -- For the fiscal years ended October 31, 1998, 1999
and 2000: $31,866, $17,391 and $14,478, respectively.
International Equity Portfolio -- For the fiscal years ended October 31, 1998,
1999 and 2000: $174,789, $124,528 and $134,468, respectively.
Emerging Markets Equity Fund -- For the fiscal years ended October 31, 1998,
1999 and 2000: $12,828, $8,070 and $9,933, respectively.
Emerging Markets Equity Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000: $106,124, $42,701 and $43,197, respectively.
International Opportunities Fund -- For the fiscal years ended November 30,
1998, 1999 and 2000: $21,655, $14,351 and $20,074, respectively.
International Opportunities Portfolio -- For the fiscal years ended November 30,
1998, 1999 and 2000: $129,873, $91,386 and $132,072, respectively.
European Equity Fund -- For the fiscal year ended December 31, 1997: $1,095. For
the period January 1, 1998 through November 30, 1998: $3,400. For the fiscal
year ended November 30, 1999 and 2000: $3,546 and $3,307, respectively.
European Equity Portfolio -- For the period January 1, 1998 through November 30,
1998: $7,380. For the fiscal years ended November 30, 1999 and 2000: $6,472 and
$5,929, 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.
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
include but are 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
31
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.
Under the Shareholder Servicing Agreement, each Fund has agreed to pay
Morgan for these services a fee at the following annual rate of 0.25% (expressed
as a percentage of the average daily net asset values of Fund shares owned by or
for shareholders for whom Morgan is acting as shareholder servicing agent).
Morgan acts as shareholder servicing agent for all shareholders.
The table below sets forth for each Fund listed the shareholder servicing
fees paid by each Fund to Morgan for the fiscal periods indicated.
International Equity Fund -- For the fiscal years ended October 31, 1998, 1999
and 2000: $271,861, $167,059 and $148,427, respectively.
Emerging Markets Equity Fund -- For the fiscal years ended October 31, 1998,
1999 and 2000: $109,292, $77,984 and $102,479, respectively.
International Opportunities Fund -- For the fiscal years ended November 30,
1998, 1999 and 2000: $186,424, $139,554 and $206,746, respectively.
European Equity Fund --For the period January 1, 1998 through November 30, 1998:
$29,634. For the fiscal years ended November 30, 1999 and 2000: $34,421 and
$34,048, respectively.
The Funds 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 Chase or
its affiliates for services provided to their clients that invest in the Funds.
See "Financial Professionals" below. Organizations that provide recordkeeping or
other services to certain employee benefit or retirement plans that include the
Funds 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 Morgan or the financial professional's clients may reasonably
request and agree upon with the financial professional.
32
Although there is no sales charge levied directly by a 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 Chase.
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 a 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, 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 Fund's and 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.
Morgan Guaranty Trust Company, an affiliate of J.P. Morgan Chase has
agreed that it will reimburse the Funds noted below until February 28, 2002 to
the extent necessary to maintain the Fund's total operating expenses (which
include expenses of the Fund and the Portfolio) at the following annual rates of
the Fund's average daily net assets.
European Equity Fund: 1.50%
Emerging Markets Equity Fund: 1.75%
These limits do not cover extraordinary expenses. These
reimbursement/waiver arrangements will continue through at least February 28,
2002.
The table below sets forth for each Fund listed the fees and other
expenses J.P. Morgan & Co. Incorporated or its affiliates reimbursed under the
expense reimbursement arrangements described above or pursuant to prior expense
reimbursement arrangements for the fiscal periods indicated.
33
Emerging Markets Equity Fund -- For the fiscal years ended October 31, 1998,
1999 and 2000: $28,944, $36,814 and $84,466, respectively.
Emerging Markets Equity Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000: N/A, N/A, and N/A, respectively
International Opportunities Fund -- For the fiscal years ended November 30,
1998, 1999 and 2000: $34,643, $31,228 and $127, respectively.
International Opportunities Portfolio -- For the fiscal years ended November 30,
1998, 1999 and 2000: $2,053, N/A, and N/A, respectively.
European Equity Fund --For the period January 1, 1998 through November 30, 1998:
$72,575. For the fiscal years ended November 30, 1999 and 2000: $122,165 and
$86,591, respectively.
European Equity Portfolio --For the period January 1, 1998 through November 30,
1998: $62,269. For the fiscal years ended November 30, 1999 and 2000: $147,071
and $124,861, 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), each 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 accounts with a Fund only through
the Distributor. All purchase transactions in Fund accounts are processed by
Morgan as shareholder servicing agent and the Fund is authorized to accept any
instructions relating to a Fund account from Morgan as shareholder servicing
agent for the customer. All purchase orders must be accepted by the Distributor.
Prospective investors who are not already customers of Morgan may apply to
become customers of Morgan for the sole purpose of Fund transactions. There are
no charges associated with becoming a Morgan customer for this purpose. Morgan
reserves the right to determine the customers that it will accept, and the Trust
reserves the right to determine the purchase orders that it will accept.
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
34
resale (other than for resale to the Fund's corresponding Portfolio); (iii) be
liquid securities which are not restricted as to transfer either by law or
liquidity of market; and (iv) if stock, have a value which is readily
ascertainable as evidenced by a listing on a stock exchange, OTC market or by
readily available market quotations from a dealer in such securities. 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 establish its own
minimums and charge the investor a fee for this service and other services it
provides to its customers. Morgan may pay fees to financial professionals for
services in connection with fund investments. See "Financial Professionals"
above.
REDEMPTION OF SHARES
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 Portfolio, 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 corresponding
Portfolios have elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Funds and their 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.
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 a Fund, and the Portfolios reserve 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
35
An investor may exchange shares from any Fund into shares of any other
J.P. Morgan Fund or J.P. Morgan Institutional 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. Each Fund generally intends to pay redemption proceeds in cash,
however, since it reserves the right at its sole discretion to pay redemptions
over $250,000 in-kind as a portfolio of representative securities rather than in
cash, the 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 of investors in certain states, state securities laws may restrict
the availability of the exchange privilege. The Trust reserves the right to
discontinue, alter or limit the 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. The Funds reserve 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 once daily on Monday
through Friday at the time 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. The Funds and
the Portfolios 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 each 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)
36
less the Fund's liabilities. The following is a discussion of the procedures
used by the Portfolios corresponding to each Fund in valuing their assets.
The value of investments listed on a domestic or foreign securities
exchange, including National Association of Securities Dealers Automated
Quotations ("NASDAQ") is based on the last sale prices on the exchange on which
the security is principally traded (the "primary exchange"). If there has been
no sale on the primary exchange on the valuation date, and the spread between
bid and asked quotations on the primary exchange is less than or equal to 10% of
the bid price for the security, the security shall be valued at the average of
the closing bid and asked quotations on the primary exchange, except under
certain circumstances, when the average of the closing bid and asked price is
less than the last sales price of the foreign local shares, the security shall
be valued at the last sales price of the local shares. Under all other
circumstances (e.g. there is no last sale on the primary exchange, there are no
bid and asked quotations on the primary exchange, or the spread between bid and
asked quotations is greater than 10% of the bid price), the value of the
security shall be the last sale price on the primary exchange up to ten days
prior to the valuation date unless, in the judgment of the portfolio manager,
material events or conditions since such last sale necessitate fair valuation of
the security. With respect to securities otherwise traded in the
over-the-counter market, the value shall be equal to the quoted bid price. The
value of each security for which readily available market quotations exist is
based on a decision as to the broadest and most representative market for such
security. For purposes of calculating net asset value all assets and liabilities
initially expressed in foreign currencies will be converted into U.S. dollars at
the prevailing currency exchange rate on the valuation date.
Options on stock indexes traded on national securities exchanges are
valued at the close of options trading on such exchanges which is currently 4:10
p.m. New York time. Stock index futures and related options, which are traded on
commodities exchanges, are valued at their last sales price as of the close of
such commodities exchanges which is currently 4:15 p.m., New York time. Options
and futures traded on foreign exchanges are valued at the last sale price
available prior to the calculation of the Fund's net asset value. Securities or
other assets for which market quotations are not readily available (including
certain restricted and illiquid securities) are valued at fair value in
accordance with procedures established by and under the general supervision and
responsibility of the Trustees. Such procedures include the use of independent
pricing services which use prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. Short-term investments which mature in
60 days or less are valued at amortized cost if their original maturity was 60
days or less, or by amortizing their value on the 61st day prior to maturity, if
their original maturity when acquired by the Portfolio was more than 60 days,
unless this is determined not to represent fair value by the Trustees.
Trading in securities on most foreign 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 Fund'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
37
From time to time, the Funds may quote performance in terms of actual
distributions, average annual and aggregate annual total returns or capital
appreciation in reports, sales literature and advertisements published by the
Trust. Shareholders may obtain current performance information by calling the
number provided on the cover page of this Statement of Additional Information.
Total Return Quotations. 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
annualized 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 European Equity Fund will be that of the J.P. Morgan Institutional
European Equity Fund (another investor in the same master portfolio) 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:
International Equity Fund: 10/31/00: Average annual total return, 1 year:
(5.49%)%; average annual total return, 5 years: 7.46%; average annual total
return, 10 years: 5.22%; aggregate total return, 1 year: (5.49%); aggregate
total return, 5 years: 43.27%; aggregate total return, 10 years: 69.83%.
Emerging Markets Equity Fund: 10/31/00: Average annual total return, 1 year:
(7.12)%; average annual total return, 5 years: (3.93)%; average annual total
return, commencement of operations** to period end: (3.49)%; aggregate total
return, 1 year: (7.12)%; aggregate total return, 5 years: (18.17)%; aggregate
total return, commencement of operations* to period end: (19.80)%.
International Opportunities Fund: 11/30/00: Average annual total return, 1 year:
(10.87)%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations ** to period end: 4.98%; aggregate total
return, 1 year: (10.87)%; aggregate total return, 5 years: N/A; aggregate total
return, commencement of operations ** to period end: 19.51%.
European Equity Fund: 11/30/00: Average annual total return, 1 year: (12.75)%;
average annual total return, 5 years: N/A; average annual total return,
commencement of operations **** to period end: 10.86%; aggregate total return, 1
year: (12.75)%; aggregate total return, 5 years: N/A; aggregate total return,
commencement of operations *** to period end: 62.34%.
- ----------
* Emerging Markets Equity Fund commenced operations on November 15, 1993.
** International Opportunities Fund commenced operations on February 26, 1997.
*** European Equity Fund commenced operations on May 13, 1996.
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
38
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.
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.
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 Portfolios. See "Investment Objectives and Policies."
Portfolio transactions for a Portfolio will be undertaken principally to
accomplish the Portfolio's objective in relation to expected movements in the
general level of interest rates. The Portfolios may engage in short-term trading
consistent with their objectives. See "Investment Objectives and Policies --
Portfolio Turnover".
In connection with portfolio transactions, the overriding objective is to
obtain the best execution of purchase and sales orders.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition; as well as the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
the Advisor decides that the broker chosen will provide the best execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of each Portfolio review regularly the
reasonableness of commissions and other transaction costs incurred by the
Portfolios in light of facts and circumstances deemed relevant from time to
time, and, in that connection, will
39
receive reports from the Advisor and published data concerning transaction costs
incurred by institutional investors generally. Research services provided by
brokers to which the Advisor has allocated brokerage business in the past
include economic statistics and forecasting services, industry and company
analyses, portfolio strategy services, quantitative data, and consulting
services from economists and political analysts. Research services furnished by
brokers are used for the benefit of all the Advisor's clients and not solely or
necessarily for the benefit of an individual Portfolio. The Advisor believes
that the value of research services received is not determinable and does not
significantly reduce its expenses. The Portfolios do not reduce their fee to the
Advisor by any amount that might be attributable to the value of such services.
The Portfolios or their predecessors corresponding to the International
Equity, Emerging Markets Equity, International Opportunities and European Equity
Funds paid the following brokerage commissions for the indicated fiscal periods:
International Equity Portfolio -- For the fiscal years ended October 31, 1998,
1999 and 2000: $1,920,469, $1,073,526 and $1,460,249, respectively.
Emerging Markets Equity Portfolio -- For the fiscal years ended October 31,
1998, 1999 and 2000: $1,089,000, $866,867 and $470,666, respectively.
International Opportunities Portfolio -- For the fiscal years ended November 30,
1998, 1999 and 2000: $2,294,676, $982,901 and $1,645,894, respectively.
European Equity Portfolio -- For the period January 1, 1998 through November 30,
1998: $104,556. For the fiscal years ended November 30, 1999 and 2000: $63,209
and $65,930, respectively.
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 not 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.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of a Portfolio as well as other customers
including other Portfolios, the Advisor to the extent permitted by applicable
laws and regulations, may, but is not obligated to, aggregate the securities to
be sold or purchased for a Portfolio with those to be sold or purchased for
other customers in order to obtain best execution, including lower brokerage
commissions if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction will be
made by the Advisor in the manner it considers to be most equitable and
40
consistent with its fiduciary obligations to a Portfolio. In some instances,
this procedure might adversely affect a 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 trust fund of the type commonly known as 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. The Declaration of Trust and the By-Laws
of the Trust are designed to make the Trust similar in most respects to a
Massachusetts business corporation. The principal distinction between the two
forms concerns shareholder liability described below.
Effective January 1, 1998, the name of the Trust was changed from "The JPM
Pierpont Funds" to "J.P. Morgan Funds". Effective January 1, 1998, the name of
the funds were changed from "The JPM Pierpont International Equity Fund" to the
"J.P. Morgan International Equity Fund", "The JPM Pierpont Emerging Markets
Equity Fund" to the "J.P. Morgan Emerging Markets Equity Fund", the "JPM
Pierpont International Opportunities Fund" to the "J.P. Morgan International
Opportunities Fund" and "The JPM Pierpont European Equity Fund" to the "J.P.
Morgan European Equity Fund."
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust which is not the case for a corporation. However, the Trust's Declaration
of Trust provides that the shareholders shall 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
shall contain a provision to the effect that the shareholders are not personally
liable thereunder.
No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Trust in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Funds.
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
41
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
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 non-assessable. 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 themselves 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. In
addition, whenever ten or more shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
1% of the Trust's outstanding shares, whichever is less,
42
shall apply to the Trustees in writing, stating that they wish to communicate
with other shareholders with a view to obtaining signatures to request a meeting
for the purpose of voting upon the question of removal of any Trustee or
Trustees and accompanied by a form of communication and request which they wish
to transmit, the Trustees shall within five business days after receipt of such
application either: (1) afford to such applicants access to a list of the names
and addresses of all shareholders as recorded on the books of the Trust; or (2)
inform such applicants as to the approximate number of shareholders of record,
and the approximate cost of mailing to them the proposed communication and form
of request. If the Trustees elect to follow the latter course, the Trustees,
upon the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall, with
reasonable promptness, mail such material to all shareholders of record at their
addresses as recorded on the books, unless within five business days after such
tender the Trustees shall mail to such applicants and file with the SEC,
together with a copy of the material to be mailed, a written statement signed by
at least a majority of the Trustees to the effect that in their opinion either
such material contains untrue statements of fact or omits to state facts
necessary to make the statements contained therein not misleading, or would be
in violation of applicable law, and specifying the basis of such opinion. After
opportunity for hearing upon the objections specified in the written statements
filed, the SEC may, and if demanded by the Trustees or by such applicants shall,
enter an order either sustaining one or more of such objections or refusing to
sustain any of them. If the SEC shall enter an order refusing to sustain any of
such objections, or if, after the entry of an order sustaining one or more of
such objections, the SEC shall find, after notice and opportunity for hearing,
that all objections so sustained have been met, and shall enter an order so
declaring, the Trustees shall mail copies of such material to all shareholders
with reasonable promptness after the entry of such order and the renewal of such
tender.
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 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
"Redemption of Shares".
SPECIAL INFORMATION CONCERNING INVESTMENT STRUCTURE
43
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.
Generally, when a Master Portfolio seeks a vote to change a fundamental
investment restriction, its feeder fund(s) will hold a shareholder meeting and
cast its vote proportionately, as instructed by its shareholders. 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 in accordance with the investment policies
described below with respect to the Portfolio.
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 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
44
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 effect on the outcome of such matters.
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 the Trust.
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.
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.
For federal income tax purposes, the following fund had capital loss
carryforwards for the periods indicated:
Emerging Markets Equity Fund: For the fiscal year ended October 31, 2000,
$22,123,291, of which $1,159,298 will expire in the year 2004, $15,741,713 will
expire in 2006, and $5,146,180 will expire in 2007, and $76,100 will expire in
2008.
45
To the extent that this capital loss is used to offset future capital
gains, it is probable that gains so offset will not be distributed to
shareholders.
Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gains 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.
If dividend payments exceed income earned by a Fund, the over distribution would
be considered a return of capital rather than a dividend payment. The Funds
intend 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 gain in excess of net short-term capital loss) 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 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 a Fund shortly before the Fund declares a sizable
dividend distribution.
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
Fund shares are acquired 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
46
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.
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 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.
The Funds invest in Equity Securities of foreign issuers. If a Portfolio
purchases shares in certain foreign corporations (referred to as passive foreign
investment companies ("PFICs") under the Code), the corresponding fund may be
subject to federal income tax on a portion of an "excess distribution" from such
foreign corporation, including any gain from the disposition of such shares,
even though a portion of such income may have to be distributed as a taxable
dividend by the Fund to its shareholders. In addition, certain interest charges
may be imposed on a Fund as a result of such distributions. Alternatively, a
Fund may in some cases be permitted to include each year in its income and
distribute to shareholders a pro rata portion of the foreign investment fund's
income, whether or not distributed to the Fund.
The Portfolios will be permitted to "mark to market" any marketable stock
held by a Portfolio in a PFIC. If a Portfolio made such an election, the
corresponding Fund would include in income each year an amount equal to its
share of the excess, if any, of the fair market value of the PFIC stock as of
the close of the taxable year over the adjusted basis of such stock. The Fund
would be allowed a deduction for its share of the excess, if any, of the
adjusted basis of the PFIC stock over its fair market value as of the close of
the taxable year, but only to the extent of any net mark-to-market gains with
respect to the stock included by the Fund for prior taxable years.
If a correct and certified taxpayer identification number is not on file,
the 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
47
foreign partnership (a "foreign shareholder") will be subject to U.S.
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, a Fund may be required to withhold U.S. federal income tax as
"backup withholding" at the rate of 31% from distributions treated as long-term
capital gains and from the proceeds of redemptions, exchanges or other
dispositions of Fund shares unless IRS Form W-8 (or any successor form) is
provided. 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 Funds 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 a 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. A Fund will make such an election only if it deems
it to be in the best interest of its shareholders. A 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 a 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.) Effective for dividends paid
after September 5, 1997, shareholders of a 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 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 a Fund from
its foreign source net investment income
48
will be treated as foreign source income. A 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 a Fund. Effective for taxable years of a
shareholder beginning after December 31, 1997, 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
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares or the Portfolio's outstanding voting
securities present at a meeting, if the holders of more than 50% of the Fund's
outstanding shares or the Portfolio's outstanding voting securities are present
or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares
or the Portfolio's outstanding voting securities, whichever is less.
Telephone calls to the Funds, J.P. Morgan Chase 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
49
been omitted. The registration statements including the exhibits filed therewith
may be examined at the office of the SEC in Washington D.C.
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.
50
FINANCIAL STATEMENTS
The following financial statements and the reports thereon of
PricewaterhouseCoopers LLP of the International Equity, Emerging Markets Equity,
International Opportunities and European Equity Funds 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
JP Morgan Funds Services at (800) 521-5411. Each Fund's financial statements
include the financial statements of the Fund's corresponding Portfolio.
- --------------------------------------------------------------------------------
Date of Annual Report; Date Annual
Name of Fund Report Filed; and Accession Number
- -------------------------------------------------------------------------------
J.P. Morgan International Equity Fund 10/31/00; 12/27/00; 0000894089-00-000021
- --------------------------------------------------------------------------------
J.P. Morgan Emerging Markets Equity 10/31/00; 12/27/00; 0000894089-00-000022
Fund
- --------------------------------------------------------------------------------
J.P. Morgan International 11/30/00; 2/2/01; 0000894089-01-000008
Opportunities Fund
- --------------------------------------------------------------------------------
J.P. Morgan European Equity Fund 11/30/00; 2/2/01; 0000894089-01-00009
- --------------------------------------------------------------------------------
51
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.
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-1
Short-Term Tax-Exempt Notes
SP-1 -- The short-term tax-exempt note rating of SP-1 is the highest rating
assigned by Standard & Poor's and has a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics are given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a satisfactory capacity
to pay principal and interest.
MOODY'S
Corporate and Municipal Bonds
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
A-2
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Commercial Paper, including Tax Exempt
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- - Leading market positions in well established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - Well established access to a range of financial markets and assured sources
of alternate liquidity.
Short-Term Tax Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes with this
rating enjoy strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of protection not
as large as MIG-1.
A-3