The information in this statement of additional information is not complete
and may be changed. This statement of additional information and the
accompanying prospectus are not an offer to sell these securities and we are not
soliciting an offer to buy these securities in any jurisdiction where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 9, 2001
J.P. MORGAN INSTITUTIONAL FUNDS
J.P. MORGAN SERIES TRUST
JP MORGAN FLEMING INTERNATIONAL EQUITY FUND
JPMORGAN FLEMING EMERGING MARKETS EQUITY FUND
JP MORGAN FLEMING INTERNATIONAL OPPORTUNITIES FUND
JPMORGAN SHORT TERM BOND FUND
JP MORGAN BOND FUND
JPMORGAN GLOBAL STRATEGIC INCOME FUND
JP MORGAN DIVERSIFIED FUND
JPMORGAN DISCIPLINED EQUITY FUND
JP MORGAN U.S. EQUITY FUND
JPMORGAN U.S. SMALL COMPANY FUND
JP MORGAN CALIFORNIA BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
AUGUST , 2001
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED AUGUST , 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 APRIL 30, 2000 (FOR THE CALIFORNIA BOND FUND),
JUNE 30, 2000 (FOR THE INSTITUTIONAL DIVERSIFIED FUND), OCTOBER 31, 2000 (FOR
THE INTERNATIONAL EQUITY, EMERGING MARKETS EQUITY, INSTITUTIONAL SHORT TERM
BOND, INSTITUTIONAL BOND AND INSTITUTIONAL GLOBAL STRATEGIC INCOME FUNDS) AND
NOVEMBER 30, 2000 (FOR THE INTERNATIONAL OPPORTUNITIES, EUROPEAN EQUITY,
INSTITUTIONAL DISCIPLINED EQUITY, INSTITUTIONAL U.S. EQUITY AND INSTITUTIONAL
U.S. SMALL COMPANY FUND FUNDS). THE PROSPECTUS AND THE FINANCIAL STATEMENTS,
INCLUDING THE INDEPENDENT ACCOUNTANTS' REPORTS THEREON, ARE AVAILABLE, WITHOUT
CHARGE UPON REQUEST FROM J.P. MORGAN FUND DISTRIBUTORS, ATTENTION: J.P. MORGAN
FUNDS (800) 221-7930.
TABLE OF CONTENTS PAGE
- --------------------------------------------------------
General........................................... 3
Investment Objective And Policies................. 3
Investment Restrictions........................... 28
Trustees And Advisory Board....................... 29
Advisory Board.................................... 31
Officers.......................................... 32
Codes Of Ethics................................... 33
Investment Adviser................................ 33
Administrator..................................... 35
Distributor....................................... 36
Sub-Administrator................................. 37
Co-Administrator.................................. 37
Services Agent.................................... 40
Custodian And Transfer Agent...................... 41
Shareholder Servicing............................. 42
Financial Professionals........................... 43
Independent Accountants........................... 43
Expenses.......................................... 43
Purchase Of Shares................................ 45
Redemption Of Shares.............................. 47
Exchange Of Shares................................ 48
Dividends And Distributions....................... 49
Net Asset Value................................... 50
Performance Data.................................. 51
Fund Transactions................................. 54
Massachusetts Trust............................... 56
Description Of Shares............................. 56
Taxes............................................. 58
Additional Information............................ 62
Financial Statements.............................. 62
Appendix A--Description Of Security Ratings....... A-1
2
GENERAL
This Statement of Additional Information relates only to the JPMorgan
Fleming International Equity Fund, the JPMorgan Fleming Emerging Markets Equity
Fund, the JPMorgan Fleming International Opportunities Fund, JPMorgan Fleming
Short Term Bond Fund, JPMorgan Bond Fund, J.P. Morgan Global Strategic Income
Fund, JPMorgan Diversified Fund, JPMorgan Disciplined Equity Fund, JPMorgan U.S.
Equity Fund, JPMorgan U.S. Small Company Fund and J.P. Morgan California Bond
Fund (collectively, the "Funds"). Each of the Funds is a separate series of
shares of beneficial interest of the JPMorgan Funds except in the case of the
JPMorgan California Bond Fund, which is a series of J.P. Morgan Series Trust,
both open-end management investment companies formed as Massachusetts business
trusts (collectively, the "Trust"). In addition to the Funds, the Trust consists
of other series representing separate investment funds (each, a "J.P. Morgan
Institutional Fund"). The other J.P. Morgan Institutional 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 Institutional Funds operate through a two-tier
master-feeder investment fund structure.
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 522 Fifth Avenue, New York, NY 10036.
Until , 2001, the Funds invested all of their investable assets in
separate Master Funds (each, a "Portfolio"), a corresponding diversified
open-end management investment company having the same investment objective as
the corresponding Fund. Each Fund invested in a Portfolio through a two-tier
master-feeder investment fund structure.
The Funds are advised by J.P. Morgan Investment Management Inc. ("JPMIM" or
the "Adviser").
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 Adviser 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 Fund as set forth in the applicable Prospectus. The investment
objectives of each Fund and the investment objectives of its corresponding Fund
are identical. Accordingly, references below to a Fund also include the
corresponding Fund; similarly, references to a Fund also include the
corresponding Fund unless the context requires otherwise.
THE J.P. MORGAN INSTITUTIONAL INTERNATIONAL EQUITY FUND (the "International
Equity Fund") is designed for investors with a long term investment horizon who
want to diversify their Funds by investing in an actively managed Fund 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 Fund's investment objective is to provide high total return from a
Fund of equity securities of foreign corporations.
The International Equity Fund 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 Fund expects to invest at least 65% of its total assets
in such securities. The Fund 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.
3
INVESTMENT PROCESS FOR THE INTERNATIONAL EQUITY FUND
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
Fund'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 Fund'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 Fund
is constructed using disciplined buy and sell rules. The Fund 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 Fund'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.
CURRENCY MANAGEMENT: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
the International Equity Fund'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 Fund's investment
strategy.
J.P. MORGAN INSTITUTIONAL 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 Fund of equity securities of companies in emerging markets.
The Emerging Markets Equity Fund seeks to achieve its investment objective
by investing primarily in Equity Securities of emerging markets issuers. Under
normal circumstances, the Emerging Markets Equity Fund expects to invest at
least 65% of its total assets in such securities and it may also invest up to
20% in debt securities of emerging markets issuers. The Emerging Markets Equity
Fund 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 FUND
COUNTRY ALLOCATION: JPMIM's country allocation decision begins with a
forecast of the expected return of each market in the Emerging Markets Equity
Fund'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
4
relative to the Emerging Markets Equity Fund'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 Fund is constructed using disciplined
buy and sell rules. The Fund manager's objective is to concentrate the Emerging
Markets Equity Fund'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.
J.P. MORGAN INSTITUTIONAL INTERNATIONAL OPPORTUNITIES FUND (the
"International Opportunities Fund") is designed for long-term investors who want
to invest in an actively managed Fund 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 Fund of equity securities of foreign companies
in developed and, to a lesser extent, developing markets.
The International Opportunities Fund 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 Fund expects to invest at least 65% of its total
assets in such securities. The International Opportunities Fund 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 FUND
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 Fund is
constructed using disciplined buy and sell rules. The Fund manager's objective
is to concentrate the International Opportunities Fund'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 Fund's investments in developed countries, in
conjunction with country and stock allocation, with the goal of protecting and
possibly enhancing the International Opportunities Fund'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 Fund's investment strategy.
COUNTRY ALLOCATION (DEVELOPED COUNTRIES): The International Opportunities
Fund'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 Fund's benchmark.
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND (the "Short Term Bond Fund")
is designed for investors who place a strong emphasis on conservation of capital
but who also want a return greater than that of a money market fund or other
very low risk investment vehicles. The Short Term Bond Fund is appropriate for
investors who do not require the stable net asset value typical of a money
market fund but who want less price fluctuation than is typical of a longer-term
bond fund. The Short Term Bond
5
Fund's investment objective is to provide high total return, consistent with low
volatility of principal. The Short Term Bond Fund seeks to achieve this high
total return to the extent consistent with modest risk of capital and the
maintenance of liquidity.
The Fund attempts to achieve its investment objective by investing primarily
in the corporate and government debt obligations and related securities of
domestic and foreign issuers described in this Statement of Additional
Information.
J.P. MORGAN INSTITUTIONAL BOND FUND (the "Bond Fund") is designed to be an
economical and convenient means of making substantial investments in a broad
range of corporate and government debt obligations and related investments of
domestic and foreign issuers, subject to certain quality and other restrictions.
See "Quality and Diversification Requirements." The Bond Fund's investment
objective is to provide a high total return consistent with moderate risk of
capital and maintenance of liquidity. Although the net asset value of the Bond
Fund will fluctuate, the Bond Fund attempts to conserve the value of its
investments to the extent consistent with its objective.
The Fund attempts to achieve its investment objective by investing primarily
in high grade and investment grade corporate and government debt obligations and
related securities of domestic and foreign issuers described in the Prospectus
and this Statement of Additional Information.
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND (the "Global
Strategic Income Fund") is designed for the aggressive investor seeking to
diversify an investment portfolio by investing in fixed-income securities of
foreign and domestic issuers. The Global Strategic Income Fund's investment
objective is high total return from a portfolio of fixed-income securities of
foreign and domestic issuers.
The Fund attempts to achieve its investment objective by investing primarily
in mortgage-backed securities and direct mortgage obligations; below investment
grade debt obligations of U.S. and non-U.S. issuers; investment grade U.S.
dollar-denominated debt obligations of U.S. and non-U.S. issuers; investment
grade non-dollar denominated debt obligations of non-U.S. issuers; and
obligations of emerging market issuers.
J.P. MORGAN INSTITUTIONAL DIVERSIFIED FUND (the "Institutional Diversified
Fund") is designed for investors who wish to invest for long term objectives
such as retirement and who seek to attain real appreciation in their investments
over the long term, but with somewhat less price fluctuation than a portfolio
consisting solely of equity securities. The Fund's investment objective is to
provide a high total return from a diversified portfolio of equity and fixed
income securities.
The mix of equities and fixed income is based on the risk premium model and
the anticipation of changing economic trends. The risk premium is the difference
between JPMIM's forecast of the long-term return on stocks (determined using
JPMIM's proprietary dividend discount model) and the current nominal yield on
30-year U.S. Treasury bonds. When the risk premium is high, more assets are
allocated to stocks. When the risk premium is low, more assets are allocated to
bonds. Within U.S. equities, the allocation between large cap and small cap
stocks is based on the relative dividend discount rate spread between large and
small cap. The equity portion of the portfolio will be invested primarily in
large and medium sized U.S. companies with market capitalizations above
$1.5 billion, with the balance in small U.S. companies primarily included in the
Russell 2000 Index and in foreign issuers primarily in developed countries and
occasionally in emerging markets. Within fixed income, the allocation among
sectors is based on JPMIM's analysis of their relative valuations.
INVESTMENT PROCESS FOR THE PORTFOLIO'S EQUITY COMPONENT
With respect to the equity portion of the portfolio, JPMIM uses:
FUNDAMENTAL RESEARCH: JPMIM's team of domestic equity analysts includes
more than 20 members, each an industry specialist with an average of over 11
years of experience, follow 600 medium and
6
large capitalization U.S. companies. Their research goal is to forecast
intermediate-term earnings and prospective dividend growth rates for the most
attractive companies among those researched.
SYSTEMATIC VALUATION: The analysts' forecasts are converted into comparable
expected returns using a proprietary dividend discount model, which calculates
the intermediate-term earnings by comparing a company's current stock price with
the "fair value" price forecasted by the estimated intermediate-term earnings
power. Within each sector, companies are ranked according to their relative
value and grouped into quintiles: those with the highest expected returns
(Quintile 1) are deemed the most undervalued relative to their long-term
earnings power, while those with the lowest expected returns (Quintile 5) are
deemed the most overvalued.
DISCIPLINED PORTFOLIO CONSTRUCTION: A broadly diversified portfolio is
constructed using disciplined buy and sell rules. Purchases are allocated among
stocks in the first three quintiles. The stocks selected reflect the portfolio
manager's judgment concerning the soundness of the underlying forecasts, the
likelihood that a perceived misvaluation will be corrected within a reasonable
time frame, and the manager's estimate of the magnitude of the risks versus the
potential rewards. A stock that falls into the fourth and fifth quintiles
generally becomes a candidate for sale, either because its price has risen or
its fundamentals have deteriorated. The portfolio's sector weightings are
matched to those of the S&P 500 Index, reflecting JPMIM's belief that its
research has the potential to add value at the individual stock level, but not
at the sector level. JPMIM also controls the portfolio's exposure to style and
theme bets and maintains near-market security weightings in individual security
holdings. This process results in an investment portfolio containing 250-300
stocks.
INVESTMENT PROCESS FOR THE PORTFOLIO'S FIXED INCOME COMPONENT
DURATION/YIELD CURVE MANAGEMENT: JPMIM's duration decision begins with an
analysis of real yields, which its research indicates are generally a reliable
indicator of longer term interest rate trends. Other factors JPMIM studies in
regard to interest rates include economic growth and inflation, capital flows
and monetary policy. Based on this analysis, JPMIM forms a view of the most
likely changes in the level and shape of the yield curve--as well as the timing
of those changes--and sets the portfolio's duration and maturity structure
accordingly. JPMIM typically limits the overall duration of the portfolio to a
range between one year shorter and one year longer than that of the Salomon
Smith Barney Broad Investment Grade Bond Index. The maturities of the individual
fixed income securities in the portfolio may vary widely, however.
SECTOR ALLOCATIONS: Sector allocations are driven by JPMIM's fundamental
and quantitative analysis of the relative valuation of a broad array of fixed
income sectors. Specifically, JPMIM utilizes market and credit analysis to
assess whether the current risk-adjusted yield spreads of various sectors are
likely to widen or narrow. JPMIM then overweights (underweights) those sectors
its analysis indicates offer the most (least) relative value, basing the speed
and magnitude of these shifts on valuation considerations.
SECURITY SELECTION: Securities are selected by the portfolio manager, with
substantial input from JPMIM's fixed income analysts and traders. Using
quantitative analysis as well as traditional valuation methods, JPMIM's applied
research analysts aim to optimize security selection within the bounds of the
portfolio's investment objective. In addition, credit analysts--supported by
JPMIM's equity analysts--assess the creditworthiness of issuers and
counterparties. A dedicated trading desk contributes to security selection by
tracking new issuance, monitoring dealer inventories, and identifying
attractively priced bonds. The traders also handle all transactions for the
portfolio.
INVESTMENT PROCESS FOR THE PORTFOLIO'S U.S. SMALL COMPANY COMPONENT
FUNDAMENTAL RESEARCH: JPMIM's domestic equity analysts also continuously
monitor 300-500 small cap stocks with the aim of identifying companies that
exhibit superior financial strength and operating returns. Meetings with
management and on-site visits play a key role in shaping their assessments.
Because JPMIM's analysts follow both the larger and smaller companies in their
industries--in
7
essence, covering their industries from top to bottom--they are able to bring
broad perspective to the research they do on both.
See "Systematic Valuation" above.
DISCIPLINED PORTFOLIO CONSTRUCTION: A diversified portfolio is constructed
as for the equity component, but purchases are concentrated among the stocks in
the top two quintiles of the rankings. Once a stock falls into the third
quintile, it generally becomes a candidate for sale. The portfolio manager seeks
to hold sector weightings close to those of the Russell 2000 Index. Sector
neutrality is also seen as a way to help to protect the portfolio from
macroeconomic risks and--together with diversification--represents an important
element of JPMIM's investment strategy.
INVESTMENT PROCESS FOR THE PORTFOLIO'S INTERNATIONAL EQUITY COMPONENT
Stock selection and country allocation: JPMIM's more than 30 international
equity analysts, each an industry and country specialist, 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. The comparable expected returns generated by the dividend discount
model are used to rank companies 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 Morgan Stanley Capital International Europe, Australasia and Far East Index
("EAFE"). 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. JPMIM's country allocation decisions are
primarily driven by its stock selection process.
CURRENCY MANAGEMENT: Currency is actively managed, in conjunction with
country and stock allocation, with the goal of protecting and possibly enhancing
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 group
recommends currency strategies that are implemented in conjunction with the
Portfolio's investment strategy.
J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND (the "Disciplined Equity
Fund") is designed for investors seeking enhanced total return relative to that
of large and medium sized companies, typically represented by the S&P 500 Index.
The Disciplined Equity Fund's investment objective is to provide a consistently
high total return from a broadly diversified portfolio of equity securities with
risk characteristics similar to the S&P 500 Index. This investment objective can
be changed without shareholder approval.
The Disciplined Equity Fund invests primarily in a diversified portfolio of
common stocks and other equity securities. Under normal circumstances, the
Disciplined Equity Fund expects to invest at least 65% of its total assets in
such securities.
INVESTMENT PROCESS FOR THE DISCIPLINED EQUITY FUND
RESEARCH: The Adviser's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, follow
approximately 600 medium and large capitalization U.S. companies. Their research
goal is to forecast intermediate-term earnings and prospective dividend growth
rates for the companies that they cover.
VALUATION: The analysts' forecasts are converted into comparable expected
returns using a proprietary dividend discount model, which calculates the
intermediate-term earnings by comparing a company's current stock price with its
forecasted dividends and earnings. Within each sector, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest
8
expected returns (Quintile 1) are deemed the most undervalued relative to their
long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
STOCK SELECTION: A broadly diversified portfolio is constructed using
disciplined buy and sell rules. Purchases are allocated among stocks in the
first three quintiles. Once a stock falls into the fourth and fifth
quintiles--either because its price has risen or its fundamentals have
deteriorated--it generally becomes a candidate for sale. The Disciplined Equity
Fund's sector weightings are matched to those of the S&P 500 Index, the
Disciplined Equity Fund's benchmark. The Adviser, also controls the Disciplined
Equity Fund's exposure to style and theme bets and maintains near-market
security weightings in individual security holdings. This process results in an
investment portfolio containing approximately 300 stocks.
J.P. MORGAN INSTITUTIONAL U.S. EQUITY FUND (the "U.S. Equity Fund") is
designed for investors who want an actively managed portfolio of selected equity
securities that seeks to outperform the S&P 500 Index. The U.S. Equity Fund's
investment objective is to provide a high total return from a portfolio of
selected equity securities. This investment objective can be changed without
shareholder approval.
In normal circumstances, at least 65% of the U.S. Equity Fund's net assets
will be invested in equity securities consisting of U.S. and foreign common
stocks and other securities with equity characteristics comprised of preferred
stock, warrants, rights, convertible securities, depository receipts (such as
ADRs and EDRs) trust certifications, limited partnership interests and
investment company securities (collectively, "Equity Securities"). The U.S.
Equity Fund's primary equity investments are the common stock of large
capitalization U.S. corporations and, to a limited extent, similar securities of
foreign corporations.
INVESTMENT PROCESS FOR THE U.S. EQUITY FUND
RESEARCH: The Adviser's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, follow
approximately 700 predominantly large- and medium-sized U.S.
companies--approximately 500 of which form the universe for the U.S. Equity
Fund's investments. Their research goal is to forecast normalized, longer term
earnings and dividends for the companies that they cover. In doing this, they
may work in concert with the Adviser's international equity analysts in order to
gain a broader perspective for evaluating industries and companies in today's
global economy.
VALUATION: The analysts' forecasts are converted into comparable expected
returns using a proprietary dividend discount model, which calculates the
long-term earnings by comparing a company's current stock price with its
forecasted dividends and earnings. Within each sector, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
STOCK SELECTION: A diversified portfolio is constructed using disciplined
buy and sell rules. Purchases are concentrated among first-quintile stocks; the
specific names selected reflect the portfolio manager's judgment concerning the
soundness of the underlying forecasts, the likelihood that the perceived
misvaluation will be corrected within a reasonable time frame, and the magnitude
of the risks versus the rewards. Once a stock falls into the third
quintile--because its price has risen or its fundamentals have deteriorated--it
generally becomes a candidate for sale. The portfolio manager seeks to hold
sector weightings close to those of the S&P 500 Index, the U.S. Equity Fund's
benchmark.
J.P. MORGAN INSTITUTIONAL U.S. SMALL COMPANY FUND (the "U.S. Small Company
Fund") is designed for investors who are willing to assume the somewhat higher
risk of investing in small companies in order to seek a higher return over time
than might be expected from a portfolio of stocks of large companies. The U.S.
Small Company Fund's investment objective is to provide high total return from a
portfolio of small company stocks. This investment objective can be changed
without shareholder approval.
The U.S. Small Company Fund attempts to achieve its investment objective by
investing primarily in the common stock of small sized U.S. companies that are
included in the Russell 2000 Index, which is
9
composed of 2,000 common stocks of U.S. small-cap companies with market
capitalizations ranging from $100 million to $2 billion.
INVESTMENT PROCESS FOR THE U.S. SMALL COMPANY FUND
RESEARCH: The Adviser's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, continuously
monitor the small cap stocks in their respective sectors with the aim of
identifying companies that exhibit superior financial strength and operating
returns. Meetings with management and on-site visits play a key role in shaping
their assessments. Their research goal is to forecast normalized, long-term
earnings and dividends for the most attractive small cap companies among those
they monitor--a universe that contains a total of approximately 600 names.
Because the Adviser's analysts follow both the larger and smaller companies in
their industries--in essence, covering their industries from top to bottom--they
are able to bring broad perspective to the research they do on both.
VALUATION: The analysts' forecasts are converted into comparable expected
returns using a proprietary dividend discount model, which calculates the
long-term earnings by comparing a company's current stock price with the its
forecasted dividends and earnings. Within each industry, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5) are deemed the most overvalued.
STOCK SELECTION: A diversified portfolio is constructed using disciplined
buy and sell rules. Purchases are concentrated among the stocks in the top two
quintiles of the rankings; the specific names selected reflect the portfolio
manager's judgment concerning the soundness of the underlying forecasts, the
likelihood that the perceived misvaluation will soon be corrected, and the
magnitude of the risks versus the rewards. Once a stock falls into the third
quintile--because its price has risen or its fundamentals have deteriorated--it
generally becomes a candidate for sale. The portfolio manager seeks to hold
sector weightings close to those of the Russell 2000 Index, the U.S. Small
Company Fund's benchmark.
J.P. MORGAN CALIFORNIA BOND FUND (the "California Bond Fund") is designed
for investors subject to federal and California personal income taxes who are
seeking high after tax return but are not adverse to receiving some taxable
income and gains. The Fund is not suitable for tax-deferred retirement or
pension plans, including Individual Retirement Accounts (IRAs), 401(k) plans and
403(b) plans. The Fund is not a complete investment program and there is no
assurance that the Fund will achieve its investment objective. The investment
objective of the Fund is to provide a high after-tax total return for California
residents consistent with moderate risk of capital. The Fund invests primarily
in California Municipal Securities (defined below), the income from which is
exempt from federal and California personal income taxes. It may also invest in
other municipal securities that generate income exempt from federal income tax
but not from California income tax. In addition, in order to maximize after tax
total return, the Fund may invest in taxable debt obligations to the extent
consistent with its objective.
The following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve this
objective.
The Adviser actively manages the Fund's duration, the allocation of
securities across market sectors and the selection of securities to maximize
after tax total return. The Adviser adjusts the Fund's duration based upon
fundamental economic and capital markets research and the Adviser's interest
rate outlook. For example, if interest rates are expected to rise, the duration
may be shortened to lessen the Fund's exposure to the expected decrease in bond
prices. If interest rates are expected to remain stable, the Adviser may
lengthen the duration in order to enhance the Fund's yield.
Under normal market conditions, the Fund will have a duration of three to
seven years, although the maturities of individual portfolio securities may vary
widely. Duration measures the price sensitivity of the Fund's portfolio,
including expected cash flow under a wide range of interest rate scenarios. A
longer duration generally results in greater price volatility. As a result, when
interest rates increase, the prices of
10
longer duration securities increase more than the prices of comparable quality
securities with a shorter duration.
The Adviser also attempts to enhance after tax total return by allocating
the Fund's assets among market sectors. Specific securities which the Adviser
believes are undervalued are selected for purchase within sectors using advanced
quantitative tools, analysis of credit risk, the expertise of a dedicated
trading desk and the judgment of fixed income portfolio managers and analysts.
The Fund may engage in short-term trading to the extent consistent with its
objective. The annual portfolio turnover rate of the Fund is generally not
expected to exceed 40% in a stable interest rate environment. Portfolio turnover
rates are greatly dependent on interest rate fluctuation. Portfolio turnover
rates generally increase during periods of rising interest rates and generally
decrease during periods of falling interest rates. Portfolio transactions may
generate taxable capital gains and result in increased transaction costs.
Under normal circumstances, the Fund invests at least 65% of its total
assets in California municipal bonds. For purposes of this policy, "California
municipal bonds" has the same meaning as "California Municipal Securities,"
which are obligations of any duration (or maturity) issued by California, its
political subdivisions and their agencies, authorities and instrumentalities and
any other obligations, the interest from which is exempt from California
personal income tax. The interest from many but not all California Municipal
Securities is also exempt from federal income tax. The Fund may also invest in
debt obligations of state and municipal issuers outside of California. In
general, the interest on such securities is exempt from federal income tax but
subject to California income tax. A portion of the Fund's distributions from
interest on California Municipal Securities and other municipal securities in
which the Fund invests may under certain circumstances be subject to federal
alternative minimum tax. See "Taxes".
TAX EXEMPT OBLIGATIONS
Since the California Bond Fund invests primarily in California Municipal
Securities, its performance and the ability of California issuers to meet their
obligations may be affected by economic, political, demographic or other
conditions in California. As a result, the value of the California Bond Fund's
shares may fluctuate more widely than the value of shares of a fund investing in
securities of issuers in multiple states. The ability of state, county or local
governments to meet their obligations will depend primarily on the availability
of tax and other revenues to those governments and on their general fiscal
conditions. Constitutional or statutory restrictions may limit a municipal
issuer's power to raise revenues or increase taxes. The availability of federal,
state and local aid to issuers of California Municipal Securities may also
affect their ability to meet their obligations. Payments of principal and
interest on revenue bonds will depend on the economic or fiscal condition of the
issuer or specific revenue source from whose revenues the payments will be made.
Any reduction in the actual or perceived ability of an issuer of California
Municipal Securities to meet its obligations (including a reduction in the
rating of its outstanding securities) would probably reduce the market value and
marketability of the California Bond Fund's portfolio securities.
The California Bond Fund may invest in municipal securities of any maturity
and type. These include both general obligation bonds secured by the issuer's
pledge of its full faith, credit and taxing authority and revenue bonds payable
from specific revenue sources, but generally not backed by the issuer's taxing
authority. In addition, the California Bond Fund may invest in all types of
municipal notes, including tax, revenue and grant anticipation notes, municipal
commercial paper, and municipal demand obligations such as variable rate demand
notes and master demand obligations. There is no specific percentage limitation
on these investments.
11
EQUITY INVESTMENTS
The Equity Securities in which the Funds 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 Funds 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 Funds 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.
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 Funds 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
Certain Funds make substantial investments in foreign countries. Investors
should realize that the value of the Funds' 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 Fund
securities and could favorably or unfavorably affect the Funds' 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 Funds 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 Fund 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 Fund's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. companies. Moreover, the settlement
periods for foreign
12
securities, which are often longer than those for securities of U.S. issuers,
may affect Fund 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 Fund's assets as measured in U.S. dollars may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations,
including currency blockage. The Funds 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 Funds' currency exposure
related to foreign investments.
The Funds may also invest in countries with emerging economies or securities
markets. Political and economic structures in many of such countries may be
undergoing significant evolution and rapid development, and such countries may
lack the social, political and economic stability characteristic of more
developed countries. Certain of such countries may have in the past failed to
recognize private property rights and have at times nationalized or expropriated
the assets of private companies. As a result, the risks described above,
including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of the Funds' investments in those countries and the
availability to a Fund of additional investments in those countries. The small
size and inexperience of the securities markets in certain of such countries and
the limited volume of trading in securities in those countries may make the
Funds' investments in such countries illiquid and more volatile than investments
in more developed countries, and a Fund may be required to establish special
custodial or other arrangements before making certain investments in those
countries. There may be little financial or accounting information available
with respect to issuers located in certain of such countries, and it may be
difficult as a result to assess the value or prospects of an investment in such
issuers.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Funds buy and sell
securities and receive interest and dividends in currencies other than the U.S.
dollar, the Funds may enter from time to time into foreign currency exchange
transactions. The Funds 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
Fund's spot currency exchange transactions is generally the difference between
the bid and offer spot rate of the currency being purchased or sold.
A forward foreign currency exchange contract is an obligation by a Fund to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract. Forward foreign currency exchange
contracts establish an exchange rate at a future date. These
13
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 Fund's securities
or in foreign exchange rates, or prevent loss if the prices of these securities
should decline.
The Funds 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 Adviser may reduce a
Fund'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 Funds 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 Fund 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 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
14
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.
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 Adviser'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 Fund holdings for purposes of
determining the Fund's net asset value.
FIXED INCOME INVESTMENTS
Certain Funds may invest in a broad range of debt securities of domestic and
foreign corporate and government issuers. The corporate securities in which
these Funds may invest include debt securities of various types and maturities,
e.g., debentures, notes, mortgage securities, equipment trust certificates and
other collateralized securities and zero coupon securities. Collateralized
securities are backed by a pool of assets such as loans or receivables which
generate cash flow to cover the payments due on the securities. Collateralized
securities are subject to certain risks, including a decline in the value of the
collateral backing the security, failure of the collateral to generate the
anticipated cash flow or in certain cases more rapid prepayment because of
events affecting the collateral, such as accelerated prepayment of mortgages or
other loans backing these securities or destruction of equipment subject to
equipment trust certificates. In the event of any such prepayment a Fund will be
required to reinvest the proceeds of prepayments at interest rates prevailing at
the time of reinvestment, which may be lower. In addition, the value of zero
coupon securities which do not pay interest is more volatile than that of
interest bearing debt securities with the same maturity.
CORPORATE BONDS AND OTHER DEBT SECURITIES
Certain Funds 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
15
below. See "Quality and Diversification Requirements." For information on
short-term investments in these securities, see "Money Market Instruments."
MORTGAGE-BACKED SECURITIES. Certain Funds may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists of
mortgage loans evidenced by promissory notes secured by first mortgages or first
deeds of trust or other similar security instruments creating a first lien on
owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support to these federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
There are several types of guaranteed mortgage-backed securities currently
available, including guaranteed mortgage pass-through certificates and multiple
class securities, which include guaranteed real estate mortgage investment
conduit certificates ("REMIC Certificates"), other collateralized mortgage
obligations ("CMOs") and stripped mortgage-backed securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by U.S.
Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class mortgage-backed securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae and Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and
16
must be fully retired no later than its final distribution date. Principal
prepayments on the assets underlying the CMOs or REMIC Certificates may cause
some or all of the classes of CMOs or REMIC Certificates to be retired
substantially earlier than their final scheduled distribution dates. Generally,
interest is paid or accrues on all classes of CMOs or REMIC Certificates on a
monthly basis.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
("SMBS") are derivative multiclass mortgage securities, issued or guaranteed by
the U.S. Government, its agencies or instrumentalities or by private issuers.
Although the market for such securities is increasingly liquid, privately issued
SMBS may not be readily marketable and will be considered illiquid for purposes
of the Funds' limitation on investments in illiquid securities. The Adviser may
determine that SMBS which are U.S. Government securities are liquid for purposes
of each Fund's limitation on investments in illiquid securities in accordance
with procedures adopted by the Board of Trustees. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from Mortgage Assets are generally higher
than prevailing market yields on other mortgage-backed securities because their
cash flow patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped.
MORTGAGES (DIRECTLY HELD). Certain Funds may invest directly in mortgages.
Mortgages are debt instruments secured by real property. Unlike mortgage-backed
securities, which generally represent an interest in a pool of mortgages, direct
investments in mortgages involve prepayment and credit risks of an individual
issuer and real property. Consequently, these investments require different
investment and credit analysis by the Adviser.
The directly placed mortgages in which these Funds invest may include
residential mortgages, multifamily mortgages, mortgages on cooperative apartment
buildings, commercial mortgages, and sale-leasebacks. These investments are
backed by assets such as office buildings, shopping centers, retail stores,
warehouses, apartment buildings and single-family dwellings. In the event that
the Fund forecloses on any non-performing mortgage, and acquires a direct
interest in the real property, the Fund will be subject to the risks generally
associated with the ownership of real property. There may be fluctuations in the
market value of the foreclosed property and its occupancy rates, rent schedules
and operating expenses. There may also be adverse changes in local, regional or
general economic conditions, deterioration of the real estate market and the
financial circumstances of tenants and sellers, unfavorable changes in zoning,
building environmental and other laws, increased real property taxes, rising
interest rates, reduced availability and increased cost of mortgage borrowings,
the need for unanticipated renovations, unexpected increases in the cost of
energy, environmental factors, acts of God and other factors which are beyond
the control of the Fund or the Adviser. Hazardous or toxic substances may be
present on, at or under the mortgaged property and adversely affect the value of
the property. In addition, the owners of property containing such substances may
be held responsible, under various laws, for containing, monitoring, removing or
cleaning up such substances. The presence of such substances may also provide a
basis for other claims by third parties. Costs of clean-up or of liabilities to
third parties may exceed the value of the property. In addition, these risks may
be uninsurable. In light of these and similar risks, it may be impossible to
dispose profitably of properties in foreclosure.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Fund accrues income with respect to zero coupon and
pay-in-kind securities prior to the receipt of cash payments. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. While interest payments are not
made on such securities, holders of such securities are deemed to have received
"phantom income." Because a Fund will distribute "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the applicable Fund
will have fewer assets with which to purchase income producing
17
securities. Zero coupon, pay-in-kind and deferred payment securities may be
subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparably rated securities paying cash interest
at regular interest payment periods.
ASSET-BACKED SECURITIES. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which a Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
CORPORATE FIXED INCOME SECURITIES. Certain Funds may invest in publicly and
privately issued debt obligations of U.S. and non-U.S. corporations, including
obligations of industrial, utility, banking and other financial issuers. These
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligation and may also be subject to price
volatility due to such factors as market interest rates, market perception of
the creditworthiness of the issuer and general market liquidity.
MONEY MARKET INSTRUMENTS
Although the Funds intend under normal circumstances and to the extent
practicable, to be fully invested in Equity Securities, each Fund may invest in
money market instruments to the extent consistent with its investment objective
and policies. The Funds 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 Funds appears below. Also see "Quality and Diversification
Requirements."
U.S. TREASURY SECURITIES. Each of the Funds may invest in direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all
of which are backed as to principal and interest payments by the full faith and
credit of the United States.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. Each of the Funds may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, each Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which each Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
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 Federal Farm Credit System and the
18
Student Loan Marketing Association, each of whose obligations may be satisfied
only by the individual credits of the issuing agency.
FOREIGN GOVERNMENT OBLIGATIONS. Each of the Funds, subject to its
applicable investment policies, may also invest in short-term obligations of
foreign sovereign governments or of their agencies, instrumentalities,
authorities or political subdivisions. These securities may be denominated in
the U.S. dollar or in another currency. See "Foreign Investments."
BANK OBLIGATIONS. Each of the Funds may invest in negotiable certificates
of deposit, time deposits and bankers' acceptances of (i) banks, savings and
loan associations and savings banks which have more than $2 billion in total
assets 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 Funds will not invest in obligations for which the Adviser, or any of its
affiliated persons, is the ultimate obligor or accepting bank. Each of the Funds
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 Funds may invest in commercial paper,
including master demand obligations. Master demand obligations are obligations
that provide for a periodic adjustment in the interest rate paid and permit
daily changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan acting as agent, for no additional fee.
The monies loaned to the borrower come from accounts managed by Morgan or its
affiliates, pursuant to arrangements with such accounts. Interest and principal
payments are credited to such accounts. Morgan has the right to increase or
decrease the amount provided to the borrower under an obligation. The borrower
has the right to pay without penalty all or any part of the principal amount
then outstanding on an obligation together with interest to the date of payment.
Since these obligations typically provide that the interest rate is tied to the
Federal Reserve commercial paper composite rate, the rate on master demand
obligations is subject to change. Repayment of a master demand obligation to
participating accounts depends on the ability of the borrower to pay the accrued
interest and principal of the obligation on demand which is continuously
monitored by the 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 Adviser to
have a credit quality which satisfies the Fund's quality restrictions. See
"Quality and Diversification Requirements." Although there is no secondary
market for master demand obligations, such obligations are considered by the
Funds to be liquid because they are payable upon demand. The Funds do not have
any specific percentage limitation on investments in master demand obligations.
It is possible that the issuer of a master demand obligation could be a client
of Morgan to whom Morgan, in its capacity as a commercial bank, has made a loan.
REPURCHASE AGREEMENTS. Each of the Funds may enter into repurchase
agreements with brokers, dealers or banks that meet the Adviser's credit
guidelines. In a repurchase agreement, a Fund buys a security from a seller that
has agreed to repurchase the same security at a mutually agreed upon date and
price. The resale price normally is in excess of the purchase price, reflecting
an agreed upon interest rate. This interest rate is effective for the period of
time the Fund is invested in the agreement and is not related to the coupon rate
on the underlying security. A repurchase agreement may also be viewed as a fully
collateralized loan of money by a Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Funds invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however, may
have maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. The Funds will always receive securities as collateral
whose market value is, and during the entire term of the agreement remains, at
least equal to 100% of the dollar amount invested by the Funds in each agreement
plus accrued interest, and the Funds will make payment for such securities only
upon physical delivery or upon evidence of book entry transfer to the account of
the Custodian. If the seller defaults, a Fund might incur a loss if the value of
the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
19
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by a Fund may be delayed or limited.
Each of the Funds may make investments in other debt securities, including
without limitation corporate 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 Funds 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 Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
ADDITIONAL INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Funds 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 Fund until settlement takes place. At the time a Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, it will record the transaction, reflect the value each day of such
securities in determining its net asset value and calculate the maturity for the
purposes of average maturity from that date. At the time of settlement a
when-issued security may be valued at less than the purchase price. To
facilitate such acquisitions, each Fund will maintain with the Custodian a
segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, each Fund will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If a Fund chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other Fund obligation, incur a gain or loss due to market
fluctuation. Also, a Fund 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 Fund 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 Fund). As a shareholder of another investment
20
company, a Fund or Fund would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including Advisery fees.
These expenses would be in addition to the Advisery and other expenses that a
Fund or Fund bears directly in connection with its own operations.
The Securities and Exchange Commission ("SEC") has granted the Fund 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 Fund
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 Adviser will waive and/or reimburse its
Advisery fee from the Fund in an amount sufficient to offset any doubling up of
investment Advisery, 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
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 Fund 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
may not exceed 33 1/3% of a fund's total assets.
LOANS OF FUND SECURITIES. Each of the Funds may lend its securities if such
loans are secured continuously by cash or equivalent collateral or by a letter
of credit in favor of the Fund at least equal at all times to 100% of the market
value of the securities loaned, plus accrued interest. While such securities are
on loan, the borrower will pay the Fund any income accruing thereon. Loans will
be subject to termination by the Fund in the normal settlement time, generally
three business days after notice, or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated. Any gain or
loss in the market price of the borrowed securities which occurs during the term
of the loan inures to a Fund and its respective investors. The Funds may pay
reasonable finders' and custodial fees in connection with a loan. In addition, a
Fund will consider all facts and circumstances before entering into such an
agreement, including the creditworthiness of the borrowing financial
institution, and no Fund will make any loans in excess of one year. The Funds
will not lend their securities to any officer, Trustee, Director, employee or
other affiliate of the Funds, the Adviser 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
may not exceed 33 1/3% of a fund's total assets.
PRIVATELY PLACED AND CERTAIN UNREGISTERED SECURITIES. A Fund may not
acquire any illiquid securities if, as a result thereof, more than 15% of the
Fund's net assets would be in illiquid investments. Subject to this
non-fundamental policy limitation, the Funds 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 Fund. The price a Fund pays for illiquid securities or receives upon
resale may be lower than the price paid or received for similar securities with
a more liquid market. Accordingly the valuation of these securities will reflect
any limitations on their liquidity.
The Funds 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
21
established by the Adviser and approved by the Trustees. The Trustees will
monitor the Adviser's implementation of these guidelines on a periodic basis.
As to illiquid investments, a Fund is subject to a risk that should the Fund
decide to sell them when a ready buyer is not available at a price the Fund
deems representative of their value, the value of the Fund's net assets could be
adversely affected. Where an illiquid security must be registered under the 1933
Act, before it may be sold, a Fund may be obligated to pay all or part of the
registration expenses, and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a holding
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, a Fund might obtain a less favorable price
than prevailed when it decided to sell.
QUALITY AND DIVERSIFICATION REQUIREMENTS
Each of the Funds except the California Bond Fund intends to meet the
diversification requirements of the 1940 Act. Current 1940 Act diversification
requirements require that with respect to 75% of the assets of the Fund:
(1) the Fund may not invest more than 5% of its total assets in the securities
of any one issuer, except obligations of the U.S. Government, its agencies and
instrumentalities, and (2) the Fund may not own more than 10% of the outstanding
voting securities of any one issuer. As for the other 25% of the Fund's assets
not subject to the limitation described above, there is no limitation on
investment of these assets under the 1940 Act, so that all of such assets may be
invested in securities of any one issuer. Investments not subject to the
limitations described above could involve an increased risk to the Fund should
an issuer, or a state or its related entities, be unable to make interest or
principal payments or should the market value of such securities decline.
The Funds 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 Funds may invest in convertible debt securities, for which there are no
specific quality requirements. In addition, at the time a Fund 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 Adviser's opinion. At the time a
Fund 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 Adviser's opinion.
In determining suitability of investment in a particular unrated security,
the Adviser 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.
The California Bond Fund is registered as a non-diversified investment
company which means that the California Bond Fund is not limited by the 1940 Act
in the proportion of its assets that may be invested in the obligations of a
single issuer. Thus, the California Bond Fund may invest a greater proportion of
its assets in the securities of a smaller number of issuers and, as a result,
may be subject to greater risk with respect to its portfolio securities. The
California Bond Fund, however, will comply with the diversification requirements
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. See "Taxes".
It is the current policy of the California Bond Fund that under normal
circumstances at least 90% of total assets will consist of securities that at
the time of purchase are rated Baa or better by Moody's or BBB or better by
Standard & Poor's. The remaining 10% of total assets may be invested in
securities that are rated B or better by Moody's or Standard & Poor's. See
"Below Investment Grade Debt" below. In each case, the California Bond Fund may
invest in securities which are unrated, if in the Adviser's opinion, such
securities are of comparable quality. Securities rated Baa by Moody's or BBB by
Standard & Poor's are considered investment grade, but have some speculative
characteristics. Securities rated Ba or B by Moody's and BB or B by Standard &
Poor's are below investment grade and considered to be speculative with regard
to payment of interest and principal. These standards must be satisfied at the
22
time an investment is made. If the quality of the investment later declines, the
Fund may continue to hold the investment.
The California Bond Fund invests principally in a portfolio of "investment
grade" tax exempt securities. An investment grade bond is rated, on the date of
investment, within the four highest ratings of Moody's, currently Aaa, Aa, A and
Baa or of Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt
is rated, on the date of the investment, within the two highest of such ratings.
Investment grade municipal notes are rated, on the date of investment, MIG-1 or
MIG-2 by Standard & Poor's or SP-1 and SP-2 by Moody's. Investment grade
municipal commercial paper is rated, on the date of investment, Prime 1 or
Prime 2 by Moody's and A-1 or A-2 by Standard & Poor's. The California Bond Fund
may also invest up to 10% of its total assets in securities which are "below
investment grade." Such securities must be rated, on the date of investment, B
or better by Moody's or Standard & Poor's, or of comparable quality. The
California Bond Fund may invest in debt securities which are not rated or other
debt securities to which these ratings are not applicable, if in the opinion of
the Adviser, such securities are of comparable quality to the rated securities
discussed above. In addition, at the time the California Bond Fund invests in
any commercial paper, bank obligation, repurchase agreement, or any other money
market instruments, the investment must have received a short term rating of
investment grade or better (currently Prime-3 or better by Moody's or A-3 or
better by Standard & Poor's) or the investment must have been issued by an
issuer that received a short term investment grade rating or better with respect
to a class of investments or any investment within that class that is comparable
in priority and security with the investment being purchased by the California
Bond Fund. If no such ratings exists, the investment must be of comparable
investment quality in the Adviser's opinion, but will not be eligible for
purchase if the issuer or its parent has long term outstanding debt rated below
BBB.
OPTIONS AND FUTURES TRANSACTIONS
EXCHANGE TRADED AND OTC OPTIONS. All options purchased or sold by the Funds
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 Fund relies on the dealer
from which it purchased the option to perform if the option is exercised. Thus,
when a Fund purchases an OTC option, it relies on the dealer from which it
purchased the option to make or take delivery of the underlying securities.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as loss of the expected benefit of the transaction.
Provided that a Fund has arrangements with certain qualified dealers who
agree that the Fund may repurchase any option it writes for a maximum price to
be calculated by a predetermined formula, a Fund may treat the underlying
securities used to cover written OTC options as liquid. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds 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.
23
The seller of an option on a futures contract receives the premium paid by
the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by a Fund are paid by the Fund into a segregated account, in the
name of the Futures Commission Merchant, as required by the 1940 Act and the
SEC's interpretations thereunder.
COMBINED POSITIONS. The Funds 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 Fund
may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a Fund's
current or anticipated investments exactly. A Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures contracts prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures contracts prices are affected by
such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. A Fund may purchase or sell 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 Fund'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 Fund
to enter into new positions or close out existing positions. If the market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and could potentially
require a Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions could also be impaired.
(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)
POSITION LIMITS. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, a Fund or the Adviser may be required to
reduce the size of its futures and options positions or may not be able to trade
a certain futures or options contract in order to avoid exceeding such limits.
ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS. Although the
Funds will not be commodity pools, certain derivatives subject the Funds to the
rules of the Commodity Futures Trading Commission which limit the extent to
which the Fund can invest in such derivatives. Each Fund may
24
invest in futures contracts and options with respect thereto for hedging
purposes without limit. However, the Fund may not invest in such contracts and
options for other purposes if the sum of the amount of initial margin deposits
and premiums paid for unexpired options with respect to such contracts, other
than for bona fide hedging purposes, exceeds 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on such contracts and options; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount may
be excluded in calculating the 5% limitation.
In addition, each Fund 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 Fund's
assets could impede Fund management or the Fund's ability to meet redemption
requests or other current obligations.
SWAPS AND RELATED SWAP PRODUCTS
Each of the Funds may engage in swap transactions, including, but not
limited to, interest rate, currency, securities index, basket, specific security
and commodity swaps, interest rate caps, floors and collars and options on
interest rate swaps (collectively defined as "swap transactions").
Each Fund may enter into swap transactions for any legal purpose consistent
with its investment objective and policies, such as for the purpose of
attempting to obtain or preserve a particular return or spread at a lower cost
than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities a Fund anticipates purchasing at a later date, or to gain exposure to
certain markets in the most economical way possible. A Fund will not sell
interest rate caps, floors or collars if it does not own securities with coupons
which provide the interest that a Fund may be required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional counterparties for periods ranging from a few weeks to several
years. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of return) that would be earned or realized on
specified notional investments or instruments. The gross returns to be exchanged
or "swapped" between the parties are calculated by reference to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency or
commodity, or in a "basket" of securities representing a particular index. The
purchaser of an interest rate cap or floor, upon payment of a fee, has the right
to receive payments (and the seller of the cap is obligated to make payments) to
the extent a specified interest rate exceeds (in the case of a cap) or is less
than (in the case of a floor) a specified level over a specified period of time
or at specified dates. The purchaser of an interest rate collar, upon payment of
a fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a pre-specified notional
amount with pre-specified terms with the seller of the option as the
counterparty.
The "notional amount" of a swap transaction is the agreed upon basis for
calculating the payments that the parties have agreed to exchange. For example,
one swap counterparty may agree to pay a floating rate of interest (e.g., 3
month LIBOR) calculated based on a $10 million notional amount on a quarterly
basis in exchange for receipt of payments calculated based on the same notional
amount and a fixed rate of interest on a semi-annual basis. In the event a Fund
is obligated to make payments more frequently than it receives payments from the
other party, it will incur incremental credit exposure to that swap
counterparty. This risk may be mitigated somewhat by the use of swap agreements
which call for a net payment to be made by the party with the larger payment
obligation when the obligations of the parties fall due on the same date. Under
most swap agreements entered into by a Fund, payments by
25
the parties will be exchanged on a "net basis", and a Fund will receive or pay,
as the case may be, only the net amount of the two payments.
The amount of a Fund's potential gain or loss on any swap transaction is not
subject to any fixed limit. Nor is there any fixed limit on a Fund's potential
loss if it sells a cap or collar. If the Fund buys a cap, floor or collar,
however, the Fund's potential loss is limited to the amount of the fee that it
has paid. When measured against the initial amount of cash required to initiate
the transaction, which is typically zero in the case of most conventional swap
transactions, swaps, caps, floors and collars tend to be more volatile than many
other types of instruments.
The use of swap transactions, caps, floors and collars involves investment
techniques and risks which are different from those associated with Fund
security transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and other applicable factors, the investment performance
of a Fund will be less favorable than if these techniques had not been used.
These instruments are typically not traded on exchanges. Accordingly, there is a
risk that the other party to certain of these instruments will not perform its
obligations to a Fund or that a Fund may be unable to enter into offsetting
positions to terminate its exposure or liquidate its position under certain of
these instruments when it wishes to do so. Such occurrences could result in
losses to a Fund.
The Adviser will, however, consider such risks and will enter into swap and
other derivatives transactions only when it believes that the risks are not
unreasonable.
Each Fund will maintain cash or liquid assets in a segregated account with
its custodian in an amount sufficient at all times to cover its current
obligations under its swap transactions, caps, floors and collars. If a Fund
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of a Fund's accrued
obligations under the swap agreement over the accrued amount a Fund is entitled
to receive under the agreement. If a Fund enters into a swap agreement on other
than a net basis, or sells a cap, floor or collar, it will segregate assets with
a daily value at least equal to the full amount of a Fund's accrued obligations
under the agreement.
Each Fund will not enter into any swap transaction, cap, floor, or collar,
unless the counterparty to the transaction is deemed creditworthy by the
Adviser. If a counterparty defaults, a Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in which
many types of swap transactions are traded have grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the markets for certain types of swaps (e.g., interest rate swaps) have become
relatively liquid. The markets for some types of caps, floors and collars are
less liquid.
The liquidity of swap transactions, caps, floors and collars will be as set
forth in guidelines established by the Adviser and approved by the Trustees
which are based on various factors, including (1) the availability of dealer
quotations and the estimated transaction volume for the instrument, (2) the
number of dealers and end users for the instrument in the marketplace, (3) the
level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and
(5) the nature of the marketplace for trades (including the ability to assign or
offset a Fund's rights and obligations relating to the instrument). Such
determination will govern whether the instrument will be deemed within the 15%
restriction on investments in securities that are not readily marketable.
During the term of a swap, cap, floor or collar, changes in the value of the
instrument are recognized as unrealized gains or losses by marking to market to
reflect the market value of the instrument. When the instrument is terminated, a
Fund will record a realized gain or loss equal to the difference, if any,
between the proceeds from (or cost of) the closing transaction and a Fund's
basis in the contract.
The federal income tax treatment with respect to swap transactions, caps,
floors, and collars may impose limitations on the extent to which a Fund may
engage in such transactions.
RISK MANAGEMENT
The Funds may employ non-hedging risk management techniques. Examples of
risk management strategies include synthetically altering a Fund's exposure to
the equity markets of particular countries
26
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.
SPECIAL FACTORS AFFECTING THE CALIFORNIA BOND FUND
The Fund intends to invest a high proportion of its assets in municipal
obligations in California Municipal Securities. Payment of interest and
preservation of principal is dependent upon the continuing ability of California
issuers and/or obligors of California Municipal Securities to meet their
obligations thereunder.
The fiscal stability of California is related, at least in part, to the
fiscal stability of its localities and authorities. Various California agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by California through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such California agencies,
authorities and localities, in the past the State has had to provide special
assistance, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial obligations and, in some
cases, to prevent or cure defaults. The presence of such aid in the future
should not be assumed. To the extent that California agencies and local
governments require State assistance to meet their financial obligations, the
ability of California to meet its own obligations as they become due or to
obtain additional financing could be adversely affected.
For further information concerning California Municipal Obligations, see
Appendix B to this Statement of Additional Information. The summary set forth
above and in Appendix B is based on information from an official statement of
California general obligation municipal obligations and does not purport to be
complete.
FUND TURNOVER
The table below sets forth the Fund turnover rates for the Funds
corresponding to the Funds. A rate of 100% indicates that the equivalent of all
of the Fund's assets have been sold and reinvested in a year. High Fund 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 FUND--For the fiscal years ended October 31, 1998, 1999
and 2000: 74%, 70% and 80%, respectively.
THE EMERGING MARKETS EQUITY FUND--For the fiscal year ended October 31, 1998
1999 and 2000: 44%, 87% and 65%, respectively.
THE INTERNATIONAL OPPORTUNITIES FUND-- For the fiscal years ended November 30,
1998, 1999 and 2000: 143%, 80% and 86%, respectively.
THE SHORT TERM BOND FUND--For the fiscal years ended October 31, 1998, 1999 and
2000: 381%, 398% and 271%, respectively.
THE BOND FUND--For the fiscal years ended October 31, 1998, 1999 and 2000: 115%,
465% and 531%, respectively. The variation in the U.S. Fixed Income Portfolio's
turnover rate over the last two fiscal years is primarily due to the portfolio's
investments in mortgages and futures.
THE GLOBAL STRATEGIC INCOME FUND--For the fiscal years ended October 31, 1998,
1999 and 2000: 368%, 318% and 266%, respectively.
THE DIVERSIFIED FUND--
THE DISCIPLINED EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and
2000: 61%, 51% and 56% respectively. For the six months ended November 30, 2000:
38%.
27
THE U.S. EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
106%, 84% and 89%, respectively. For the six months ended November 30, 2000:
38%.
THE U.S. SMALL COMPANY FUND--For the fiscal years ended May 31, 1998, 1999 and
2000: 96%, 104% and 104%, respectively. For the six months ended November 30,
2000: 57%.
THE CALIFORNIA BOND FUND--For the years ended April 30, 1998, 1999 and 2000:
44%, 40% and 87%, respectively.
INVESTMENT RESTRICTIONS
The investment restrictions of each Fund and its corresponding Fund are
identical, unless otherwise specified. Accordingly, references below to a Fund
also include the Fund's corresponding Fund unless the context requires
otherwise; similarly, references to a Fund 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 Fund. 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 Fund, 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 Fund, the Trust will
hold a meeting of Fund shareholders and will cast its votes as instructed by the
Fund's shareholders.
Each Fund:
(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 Fund 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 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 Funds and may be changed by their
28
Trustees. These non-fundamental investment policies require that the Funds and
their corresponding Funds:
(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 Funds, as defined below, is 522 Fifth Avenue, New York, New York
10036. Their names, principal occupations during the past five years and ages
are set forth below:
WILLIAM J. ARMSTRONG--Trustee; Retired; formerly Vice President and
Treasurer Ingersoll-Rand Company. Age: 59.
ROLAND R. EPPLEY, JR.--Trustee; Retired; formerly President and Chief
Executive Officer, Eastern States Bankcard Association, Inc. (1971 - 1988);
Director, Janel Hydraulics, Inc.; formerly Director of The Hanover Funds, Inc.
Age: 68.
ANN MAYNARD GRAY--Trustee; Former President, Diversified Publishing Group
and Vice President, Capital Cities/ABC, Inc. Age: 55.
MATTHEW HEALEY--Trustee; Chief Executive Officer, Chairman, Pierpont Group,
since prior to 1993. Age: 63.
FERGUS REID, III--Trustee; Chairman and Chief Executive Officer, Lumelite
Corporation, since September 1985; Trustee, Morgan Stanley Funds. Age: 68.
JAMES J. SCHONBACHLER--Trustee; 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. Age: 58.
LEONARD M. SPALDING--Trustee; Retired; formerly Chief Executive Officer of
Chase Mutual Funds Corp.; formerly President and Chief Executive Officer of
Vista Capital Management; and formerly Chief Investment Executive of the Chase
Manhattan Private Bank. Age: 65.
29
H. RICHARD VARTABEDIAN--Trustee; Investment Management Consultant; formerly,
Senior Investment Officer, Division Executive of the Investment Management
Division of the Chase Manhattan Bank, N.A., 1980-1991. Age: 65.
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 Funds
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 and the J.P. Morgan Funds.
Each is reimbursed for expenses incurred in connection with service as a
Trustee. The Trustees may hold various other directorships unrelated to these
funds.
Trustee compensation expenses paid by the Trust for the calendar year ended
December 31, 2000 are set forth below.
PENSION OR
RETIREMENT BENEFITS TOTAL
COMPENSATION ACCRUED AS COMPENSATION FROM
FROM TRUST FUND EXPENSES "FUND COMPLEX" (1)
------------ ------------------- --------------------
William J. Armstrong, Trustee NA $ 41,781 $131,781(10)(3)
Roland R. Eppley, Jr., Trustee NA $ 58,206 $149,206(10)(3)
Ann Maynard Gray, Member of
Advisory Board of certain J.P.
Morgan Funds $75,000 NA $ 75,000(17)(3)
Matthew Healey, Trustee (2) $75,000 NA $ 75,000(17)(3)
Fergus Reid, III, Trustee NA $110,091 $312,841(10)(3)
James J. Schonbachler--Member of
Advisory Board of certain J.P.
Morgan Funds $75,000 NA $ 75,000(17)(3)
Leonard M. Spalding, Jr., Trustee NA $ 35,335 $124,335(10)(3)
H. Richard Vartabedian, Trustee NA $ 86,791 $221,141(10)(3)
(1) A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investment services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies. The Fund Complex for which the
nominees will serve includes 14 investment companies.
(2) 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.
(3) Total number of investment company boards with respect to Trustees, or
Advisory Boards with respect to Advisory Board members, served on within
the Fund Complex.
The Trustees decide upon general policies and are responsible for overseeing
the Trust's and Fund's business affairs. Each of the Funds and the Trust has
entered into a Fund Services Agreement with Pierpont Group, Inc. to assist the
Trustees in exercising their overall supervisory responsibilities over the
affairs of the Funds 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 Funds 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, Inc. are located at 461 Fifth Avenue, New
York, New York 10017. It is expected that the Trust will terminate its agreement
with Pierpont Group, Inc.
The aggregate fees paid to Pierpont Group, Inc. 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: $14,956, $8,364 and $7,871, respectively.
30
INTERNATIONAL EQUITY PORTFOLIO--For the fiscal year ended October 31, 1997:
$32,439. For the fiscal year 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: $6,699, $2,713 and $2,161, 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: $11,047, $5,885 and $7,064, respectively.
INTERNATIONAL OPPORTUNITIES PORTFOLIO--For the fiscal years ended November 30,
1998, 1999 and 2000: $13,264, $6,949 and $8,347, respectively.
SHORT TERM BOND FUND--For the fiscal years ended October 31, 1998, 1999 and
2000: $2,773, $5,606 and $5,854, respectively.
THE SHORT TERM BOND PORTFOLIO--For the fiscal years ended October 31, 1998, 1999
and 2000: $3,458, $6,343 and $6,453, respectively.
BOND FUND--For the fiscal years ended October 31, 1998, 1999 and 2000: $28,012,
$21,558 and $14,992, respectively.
THE U.S. FIXED INCOME PORTFOLIO--For the fiscal years ended October 31, 1998,
1999 and 2000: $35,661, $30,562 and $24,445, respectively.
GLOBAL STRATEGIC INCOME FUND--For the fiscal years ended October 31, 1998, 1999
and 2000: $5,519, $4,791 and $2,558, respectively.
GLOBAL STRATEGIC INCOME PORTFOLIO--For the fiscal years ended October 31, 1998,
1999 and 2000: $5,766, $5,003 and $2,674, respectively.
THE INSTITUTIONAL DIVERSIFIED FUND--For the fiscal years ended June 30, 1998,
1999 and 2000: $9,571, $10,569 and $10,326 respectively.
THE INSTITUTIONAL DIVERSIFIED PORTFOLIO--For the fiscal years ended June 30,
1998, 1999 and 2000: $13,886, $16,444 and $15,670 respectively.
DISCIPLINED EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$5,296,$13,569 and $21,716, respectively. For the six months ended November 30,
2000: $10,919.
The Disciplined Equity Portfolio--For the fiscal years ended May 31, 1998
1999 and 2000: $5,818, $14,804 and $24,487, respectively. For the six months
ended November 30, 2000: $12,093.
U.S. EQUITY FUND--For the fiscal years ended May 31, 1998,1999 and 2000:
$12,419, $7,659 and $4,651, respectively. For the six months ended November 30,
2000: $1,587.
THE U.S. EQUITY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999 and
2000: $30,613, $18,019 and $12,016, respectively. For the six months ended
November 30, 2000: $4,344.
U.S. SMALL COMPANY FUND--For the fiscal year ended May 31, 1998, 1999 and 2000:
$15,145, $8,809 and $6,792, respectively. For the six months ended November 30,
2000: $2,981.
THE U.S. SMALL COMPANY PORTFOLIO--For the fiscal year ended May 31, 1998, 1999
and 2000: $36,011, $13,942 and $11,170, respectively. For the six months ended
November 30, 2000: $5,315.
CALIFORNIA BOND FUND--For the fiscal years ended April 30, 1998, 1999 and 2000,
were: $1,472, $1,623 and $1,452, 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 investment,
management and operations of the Trust; but has no power to vote upon any matter
put to a
31
vote of the Trustees. 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 the Trusts 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 and the J.P. Morgan Funds. Each member of the Advisory Board 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 Funds' executive officers (listed below), other than the
Chief Executive Officer and the officers who are employees of the Adviser, are
provided and compensated by J.P. Morgan Fund Distributors, a subsidiary of The
BISYS Group, Inc. The officers conduct and supervise the business operations of
the Trust and the Funds. The Trust and the Funds have no employees.
The officers of the Trust and the Funds, 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 Fund. The
business address of each of the officers unless otherwise noted is 522 Fifth
Avenue, New York, NY 10036.
DAVID WEZDENKO; President and Treasurer; Vice President, J.P. Morgan
Investment Management Inc. Mr. Wedenko is the Chief Operating Officer for the
U.S. Mutual Funds and Financial Intermediaries Business. Since joining J.P.
Morgan in 1996, he has held numerous financial and operations related positions
supporting the J.P. Morgan pooled funds business. His address is 522 Fifth
Avenue, New York, New York, 10036. His date of birth is October 2, 1963.
SHARON WEINBERG; Vice President and Secretary. Vice President, J.P. Morgan
Investment Management Inc. Ms. Weinberg is head of Business and Product Strategy
for the U.S. Mutual Funds and Financial Intermediaries business. Since joining
J.P. Morgan in 1996 in New York, she has held numerous positions throughout the
asset management business in mutual funds marketing, legal, and product
development. Her address is 522 Fifth Avenue, New York, New York 10036, Her date
of birth is June 15, 1959.
PAUL M. DERUSSO; Vice President and Assistant Treasurer. Vice President,
J.P. Morgan Investment Management Inc. Mr. DeRusso has served in Funds
Administration as Manager of the Budgeting and Expense Group for the J.P. Morgan
Fund complex and their successor on the heritage Chase side since prior to 1996.
His address is 522 Fifth Avenue, New York, New York 10036. His date of birth is
December 3, 1954.
- -------------------
** Mr. Lynch may be deemed an "interested person" (as defined in the 1940 Act)
of the Adviser due to his son's affiliation with an affiliate.
32
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, J.P. Morgan
Investment Management Inc. Ms. Rotundo serves as Manager of the Funds
Infrastructure group and is responsible for the management of special projects.
Prior to January 2000, she served as Manager of the Tax Group in the Funds
Administrative group and was responsible for U.S. mutual fund tax matters. Her
address 522 Fifth Avenue, New York, New York 10036. Her date of birth is
September 26, 1965.
STEPHEN UNGERMAN; Vice President and Assistant Treasurer. Vice President,
J.P. Morgan Investment Management Inc. Mr. Ungerman is head of the Fund Service
Group within Fund Administration. Prior to joining J.P. Morgan in 2000, he held
a number of senior management positions in Prudential Insurance Co. of America's
asset management business, includes Assistant General Counsel, Tax Director, and
Co-head of Fund Administration Dept. Mr. Ungerman was also the Assistant
Treasurer of all mutual funds managed by Prudential. His address is 522 Fifth
Avenue, New York, New York 10016. His date of birth is June 2, 1953.
MARY JO PACE; Assistant Treasurer. Vice President, J.P. Morgan Investment
Management Inc. Ms. Pace serves in the Funds Administration group as a Manager
for the Budgeting and Expense Processing Group since prior to 1996. Her address
522 Fifth Avenue, New York, New York 10036. Her date of birth is March 13, 1966.
LAI MING FUNG; Assistant Treasurer. Associate, J.P. Morgan Investment
Management Inc. Ms. Fung serves in the Funds Administration group as a Budgeting
Analyst for the Budgeting & Expense Group. Prior to April to 1999, she worked
with Morgan Stanley Dean Witter as a Section Head in the Fund Accounting Group.
Her address is 522 Fifth Avenue, New York, New York 10036. Her date of birth is
September 8, 1974.
JOSEPH J. BERTINI; Vice President and Assistant Secretary. Vice President
and Assistant General Council, J.P. Morgan Investment Management Inc. Prior to
October of 1997, he was an attorney in the Mutual fund Group at SunAmerica Asset
Management Inc. His address is 522 Fifth Avenue, New York, New York 10036. His
date of birth is November 4, 1965.
JUDY R. BARTLETT; Vice President and Assistant Secretary. Vice President and
Assistant General Council, J.P. Morgan Investment Management Inc. since
September 2000. From August 1998 through August 2000, Ms. Bartlett was Associate
counsel at New York Life Insurance Company where she served as assistant
Secretary for the Mainstay Foods. From October 1995 through July 1998, Ms.
Bartlett was an associate at the law firm of Willie, Farr & Gallagher. Her
address is 522 Fifth Avenue, New York, New York 10036. Her date of birth is
May 29, 1965.
MARTIN R. DEAN; Assistant Treasurer. Vice President, Administration Service,
BISYS Fund Services, Inc.; formerly Senior Manager, KPMG Peat Mardwick
(1987-1994). His address is 3435 Stelzer Road, Columbus, OH 43219. His date of
birth is September 27, 1963.
LISA HURLEY; Assistant Secretary. Executive Vice President and General
Counsel, BISYS Fund Services, Inc.; formerly Counsel to Moore Capital Management
and General Counsel to Global Asset Management and Northstar Investments
Management. Her address is 90 Park Avenue, New York, NY 10016. Her date of birth
is May 29, 1955.
ALAINA METZ; Assistant Secretary. Chief Administrative Officer, BISYS Fund
Services; formerly Supervisor, Blue Sky Department, Alliance Capital Management
L.P. Her address is 3435 Stelzer Road, Columbus, OH 43219. Her date of birth is
April 7, 1967.
As of the date of this Statement of Additional Information, the officers,
Trustees and Members of the Advisery Board as a group owned less than 1% of the
shares of each Fund.
CODES OF ETHICS
The Funds, the Adviser and the Distributor 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 Funds. 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.
33
INVESTMENT ADVISER
Subject to the supervision of the Funds' Trustees, the Adviser makes each
Fund's day-to-day investment decisions, arranges for the execution of Fund
transactions and generally manages the Fund's investments. Prior to October 1,
1998, Morgan was each Fund's investment Adviser. JPMIM, a wholly owned
subsidiary of J.P. Morgan Chase & Co. ("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 Adviser and other subsidiaries, acts as
investment Adviser 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 Adviser provides to the Funds are not
exclusive under the terms of the Advisory Agreements. The Adviser is free to and
does render similar investment Advisory services to others. The Adviser serves
as investment Adviser 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 Adviser serves as trustee. The accounts which are managed or
advised by the Adviser have varying investment objectives and the Adviser
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
Funds. Such accounts are supervised by employees of the Adviser who may also be
acting in similar capacities for the Funds. See "Fund 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 Funds in which the Funds invest are
currently: The International Equity Fund--EAFE; The Emerging Markets Equity
Fund--MSCI Emerging Markets Free Index; The International Opportunities Fund--
MSCI All Country World Index Free (ex-U.S.).
The Funds are managed by employees of the Adviser who, in acting for their
customers, including the Funds, do not discuss their investment decisions with
any personnel of J.P. Morgan Chase or any personnel of other divisions of the
Adviser or with any of its affiliated persons, with the exception of certain
other investment management affiliates of J.P. Morgan Chase which 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 Adviser under the Investment
Advisory Agreements, the Fund corresponding to each Fund has agreed to pay the
Adviser a fee, which is computed daily and may be paid monthly, equal to the
annual rates of each Fund's average daily net assets shown below.
International Equity: 0.60%
Emerging Markets Equity: 1.00%
International Opportunities: 0.60%
Short Term Bond: 0.25%
U.S. Fixed Income: 0.30%
Global Strategic Income: 0.45%
Institutional Diversified Fund: 0.55%
Disciplined Equity: 0.35%
U.S. Equity: 0.40%
U.S. Small Company: 0.60%
California Bond Fund: 0.30%
34
The table below sets forth for each Fund listed the Advisery fees paid by
its corresponding Fund to Morgan and JPMIM, as applicable, for the fiscal period
indicated. See the Funds' financial statements which are incorporated herein by
reference.
INTERNATIONAL EQUITY FUND--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 FUND--For the fiscal years ended October 31, 1998, 1999
and 2000: $3,584,676, $1,648,556 and $1,771,982, respectively.
INTERNATIONAL OPPORTUNITIES FUND--For the fiscal years ended November 30, 1998
1999 and 2000: $2,687,804, $2,133,208 and $3,268,904, respectively.
THE SHORT TERM BOND FUND--For the fiscal years ended October 31, 1998, 1999 and
2000: $322,384, $807,631 and $1,018,928, respectively.
THE BOND FUND--For the fiscal years ended October 31, 1998, 1999 and 2000:
$3,583,060, $4,514,768 and $4,648,103, respectively.
THE GLOBAL STRATEGIC INCOME FUND--For the fiscal years ended October 31, 1998,
1999 and 2000: $887,960, $1,073,105 and $757,567, respectively.
INSTITUTIONAL DIVERSIFIED FUND--For the fiscal years ended June 30, 1998, 1999
and 2000 the advisory fees paid by the Fund to Morgan, the Fund's Adviser prior
to October 28, 1998, and to JPMIM, the Fund's current Adviser, after
October 28, 1998, 1999 and 2000 were $2,359,972, $3,834,721 and $5,129,204,
respectively. See the Fund's June 30, 2000 Annual Report.
THE DISCIPLINED EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and
2000: $628,965, $2,310,525 and $5,016,217, respectively. For the six months
ended November 30, 2000: $3,004,635.
THE U.S. EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$3,534,791, $2,911,314 and $2,748,787, respectively. For the six months ended
November 30, 2000: $1,223,277.
THE U.S. SMALL COMPANY FUND--For the fiscal years ended May 31, 1998, 1999 and
2000: $6,161,868, $3,367,503 and $3,870,586, respectively. For the six months
ended November 30, 2000: $2,274,480.
CALIFORNIA BOND FUND--For the fiscal years ended April 30, 1998, 1999 and 2000,
were: $133,208, $200,927 and $239,110, 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 Fund's Trustees, or by a vote of the holders of a
majority of the Fund's outstanding voting securities, on 60 days' written notice
to the Adviser and by the Adviser on 90 days' written notice to the Fund. See
"Additional Information."
Under separate agreements, Morgan also provides certain financial, fund
accounting and administrative services to the Trust and the Funds and
shareholder services for the Trust. See "Services Agent" and "Shareholder
Servicing" below.
ADMINISTRATOR
Pursuant to separate Administration Agreements (the "Administration
Agreements"), Morgan Guaranty Trust Company of New York ("Morgan") is the
administrator of the Funds and the administrator of the Portfolio. Morgan
provides certain administrative services to the Funds, including, among other
responsibilities, coordinating the negotiation of contracts and fees with, and
the monitoring of performance and billing of, the Funds' and Portfolio's
independent contractors and agents; preparation for signature by an officer of
the Trust and Portfolio of all documents required to be filed for compliance by
the Trust and Portfolio with applicable laws and regulations excluding those of
the securities laws of various states; arranging for the computation of
performance data, including net asset value and yield; responding to shareholder
inquiries, and arranging for the maintenance of books and records of the Funds
and providing, at its own expense, office facilities, equipment and personnel
necessary to carry
35
out its duties. Morgan in its capacity as administrator does not have any
responsibility or authority for the management of the Funds, the determination
of investment policy, or for any matter pertaining to the distribution of Funds
shares.
Under the Administration Agreements Morgan is permitted to render
administrative services to others. The Administration Agreements will continue
in effect from year to year with respect to each Fund only if such continuance
is specifically approved at least annually by the Board of Trustees of the Trust
or Portfolio or by vote of a majority of such Fund's or Portfolio's outstanding
voting securities and, in either case, by a majority of the Trustees who are not
parties to the Administration Agreements or "interested persons" (as defined in
the 1940 Act) of any such party. The Administration Agreements are terminable
without penalty by the Trust on behalf of each Fund or by a Portfolio on 60
days' written notice when authorized either by a majority vote of such Fund's or
Portfolio's shareholders or by vote of a majority of the Board of Trustees,
including a majority of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Trust, or by Morgan on 60 days' written notice,
and will automatically terminate in the event of their "assignment" (as defined
in the 1940 Act). The Administration Agreements also provide that neither Morgan
or its personnel shall be liable for any error of judgment or mistake of law or
for any act or omission in the administration of the Funds or Portfolio, except
for willful misfeasance, bad faith or gross negligence in the performance of its
or their duties or by reason of reckless disregard of its or their obligations
and duties under the Administration Agreements.
In addition, the Administration Agreements provide that, in the event the
operating expenses of any Fund, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for any
fiscal year exceed the most restrictive expense limitation applicable to that
Fund imposed by the securities laws or regulations thereunder of any state in
which the shares of such Fund are qualified for sale, as such limitations may be
raised or lowered from time to time, Morgan shall reduce its administration fee
(which fee is described below) to the extent of its share of such excess
expenses. The amount of any such reduction to be borne by Morgan shall be
deducted from the monthly administration fee otherwise payable to Morgan during
such fiscal year, and if such amounts should exceed the monthly fee, Morgan
shall pay to such Fund or Portfolio its share of such excess expenses no later
than the last day of the first month of the next succeeding fiscal year.
In consideration of the services provided by Morgan pursuant to the
Administration Agreements, Morgan receives from each Fund a fee computed daily
and paid monthly at an annual rate equal to % of each of the Fund's
average daily net assets, on an annualized basis for the Fund's then-current
fiscal year.
DISTRIBUTOR
J.P. Morgan Fund Distributors Inc. (the "Distributor") 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, Distributor 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 the Distributor. Under the terms of the
Distribution Agreement between the Distributor and the Trust, the Distributor
receives no compensation in its capacity as the Trust's distributor. The
Distributor is a wholly owned indirect subsidiary of The BISYS Group, Inc. The
Distributor also serves as exclusive placement agent for the Fund. The
Distributor currently provides administration and distribution services for a
number of other investment companies.
Payments may also be used to compensate broker-dealers with trail or
maintenance commissions at an annual rate of up to 0.25% of the average daily
net asset value of Class A or Class B shares invested in the Fund by Customers
of these broker-dealers. Trail or maintenance commissions are paid to broker-
dealers beginning the 13th month following the purchase of shares by their
customers. Promotional activities for the sale of Class A and Class B shares
will be conducted generally by the JPMorgan Funds, and activities intended to
promote the Fund's Class A or Class B shares may also benefit the Fund's other
shares and other JPMorgan Funds.
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
36
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 J.P. Morgan Fund Distributors, Inc. are located
at 1211 Avenue of the Americas, New York, NY 10036.
SUB-ADMINISTRATOR
The Trust has entered into a Sub-Administration Agreement with an affiliate
of the Distributor Dated , 2001 (the "Distribution Agreement") with an
affiliate of the Distributor, pursuant to which the Distributor acts as the
Funds' exclusive underwriter, provides certain administration services and
promotes and arranges for the sale of each class of Shares. The Fund's
distributor is J.P. Morgan Fund Distributors, Inc., a subsidiary of The BISYS
Group, Inc. and is unaffiliated with Chase. An affiliate of the Distributor
provides certain sub-administration services to the Trust, including providing
officers, clerical staff and office space.
Such affiliate may provide promotional incentives to broker-dealers that
meet specified sales targets for one or more J.P. Morgan Funds. These incentives
may include gifts of up to $100 per person annually; an occasional meal, ticket
to a sporting event or theater for entertainment for broker-dealers and their
guests; and payment or reimbursement for travel expenses, including lodging and
meals, in connection with attendance at training and educational meetings within
and outside the U.S.
Such affiliate may from time to time, pursuant to objective criteria
established by it, pay additional compensation to qualifying authorized
broker-dealers for certain services or activities which are primarily intended
to result in the sale of shares of the Fund. In some instances, such
compensation may be offered only to certain broker-dealers who employ registered
representatives who have sold or may sell significant amounts of shares of the
Fund and/or other JPMorgan Funds during a specified period of time. Such
compensation does not represent an additional expense to the Fund or its
shareholders, since it will be paid by the Distributor out of compensation
retained by it from the Fund or other sources available to it.
In the event the operating expenses of any Fund, including all investment
advisory, administration and sub-administration fees, but excluding brokerage
commissions and fees, taxes, interest and extraordinary expenses such as
litigation, for any fiscal year exceed the most restrictive expense limitation
applicable to that Fund imposed by the securities laws or regulations thereunder
of any state in which the shares of such Fund are qualified for sale, as such
limitations may be raised or lowered from time to time, the Distributor shall
reduce its sub-administration fee with respect to such Fund (which fee is
described below) to the extent of its share of such excess expenses. The amount
of any such reduction to be borne by the Distributor shall be deducted from the
monthly sub-administration fee otherwise payable with respect to such Fund
during such fiscal year; and if such amounts should exceed the monthly fee, the
Distributor shall pay to such Fund its share of such excess expenses no later
than the last day of the first month of the next succeeding fiscal year.
In consideration of the sub-administration services provided by the
Distributor pursuant to the Distribution Agreement, the Distributor receives an
annual fee, payable monthly, of % of the net assets of each Fund. The
Distributor may voluntarily waive a portion of the fees payable to it under the
Distribution Agreement with respect to each Fund on a month-to-month basis.
CO-ADMINISTRATOR
Under former Co-Administration Agreements with the Trust and the Funds dated
August 1, 1996, Funds Distributor, Inc. ("FDI") served as the Trust's and the
Funds' Co-Administrator.
For its services under the Co-Administration Agreements, each Fund and Fund
had agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's
37
out-of-pocket expenses. The amount allocable to each Fund is based on the ratio
of its net assets to the aggregate net assets of the Trust 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: $11,056, $6,162 and $5,576, 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: $4,833, $1,980 and $1,815, 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 year ended November 30, 1998,
1999 and 2000: $8,082, $4,351 and $5,089, respectively.
INTERNATIONAL OPPORTUNITIES PORTFOLIO--For the fiscal years ended November 30,
1998, 1999 and 2000: $8,417, $4,338 and $3,736, respectively.
SHORT TERM BOND FUND--For the fiscal years ended October 31, 1998, 1999 and
2000: $2,245, $4,271 and $4,133, respectively.
THE SHORT TERM BOND PORTFOLIO--For the fiscal years ended October 31, 1998, 1999
and 2000: $2,401, $4,065 and $2,933, respectively.
BOND FUND--For the fiscal years ended October 31, 1998, 1999 and 2000: $20,814,
$15,719 and $10,607, respectively.
THE U.S. FIXED INCOME PORTFOLIO--For the fiscal years ended October 31, 1998,
1999 and 2000: $22,913, $19,016 and $11,454, respectively.
GLOBAL STRATEGIC INCOME FUND--For the fiscal years ended October 31, 1998, 1999
and 2000: $4,108, $3,416 and $1,823, respectively.
THE GLOBAL STRATEGIC INCOME PORTFOLIO--For the fiscal years ended October 31,
1998, 1999 and 2000: $2,695, $2,188 and $1,120, respectively.
DIVERSIFIED PORTFOLIO--For the fiscal years ended June 30, 1998, 1999 and 2000:
$8,817, $9,900 and $8,873, respectively.
INSTITUTIONAL DIVERSIFIED FUND--For the fiscal years ended June 30, 1998, 1999
and 2000: $7,165, $17,847 and $7,858, respectively.
DISCIPLINED EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$4,082, $9,878 and $17,016, respectively. For the six months ended November 30,
2000: $8,208.
THE DISCIPLINED EQUITY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999
and 2000: $3,742, $9,294 and $13,826, respectively. For the six months ended
November 30, 2000: $5,219.
U.S. EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$9,349, $5,398 and $3,434, respectively. For the six months ended November 30,
2000: 1,181.
THE U.S. EQUITY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999 and
2000: $18,971, $11,075 and $6,803, respectively. For the six months ended
November 30, 2000: $1,862.
U.S. SMALL COMPANY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$11,396, $6,240 and $4,988, respectively. For the six months ended November 30,
2000: $2,261.
THE U.S. SMALL COMPANY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999
and 2000: $22,248, $8,564 and $6,159, respectively. For the six months ended
November 30, 2000: $2,303.
38
The table below sets forth for each Fund listed and its corresponding
Portfolio the administrative fees paid to Signature Broker-Dealer Services, Inc.
(which provided distribution and administrative services to the Trust and
placement agent and administrative services to the Portfolios prior to August 1,
1996) for the fiscal periods indicated.
U.S. EQUITY FUND--For the period June 1, 1996 through July 31, 1996: $4,553.
THE U.S. EQUITY PORTFOLIO--For the period June 1, 1996 through July 31, 1996:
$14,675.
U.S. SMALL COMPANY FUND--For the period June 1, 1996 through July 31, 1996:
$5,925.
THE U.S. SMALL COMPANY PORTFOLIO--For the period June 1, 1996 through July 31,
1996: $17,162.
CALIFORNIA BOND FUND--For the fiscal years ended April 30, 1998, 1999 and 2000:
$714, $747 and $616, respectively.
DISTRIBUTION PLANS
The Trust has adopted separate plans of distribution pursuant to Rule 12b-1
under the 1940 Act (a "Distribution Plan") including Distribution Plans on
behalf of certain classes of certain JPMorgan Funds, which provide that each of
such classes of such Funds shall pay for distribution services a distribution
fee (the "Distribution Fee"), including payments to the Distributor, at annual
rates not to exceed the amounts set forth in their respective Prospectuses. The
Distributor may use all or any portion of such Distribution Fee to pay for Fund
expenses of printing prospectuses and reports used for sale purposes, expenses
of the preparation and printing of sales literature and other such
distribution-related expenses. Promotional activities for the sale of each class
of shares of each Fund will be conducted generally by the JPMorgan Funds, and
activities intended to promote one class of shares of a Fund may also benefit
the Fund's other shares and other JPMorgan Funds.
Class B and Class C shares pay a Distribution Fee of up to 0.75% of average
daily net assets. The Distributor currently expects to pay sales commissions to
a dealer at the time of sale of Class B shares of the Income Funds of up to
4.00% of the purchase price of the shares sold by such dealer. The Distributor
will use its own funds (which may be borrowed or otherwise financed) to pay such
amounts. Because the Distributor will receive a maximum Distribution Fee of
0.75% of average daily net assets with respect to Class B and Class C shares, it
will take the Distributor several years to recoup the sales commissions paid to
dealers and other sales expenses.
No class of shares of a Fund will make payments or be liable for any
distribution expenses incurred by other classes of shares of such Fund.
Some payments under the Distribution Plans may be used to compensate
broker-dealers with trail or maintenance commissions in an amount not to exceed
0.25% annualized of the average net asset value of the Class A shares, 0.25%
annualized of the average net asset value of the Class B shares or 0.75%
annualized of the average net asset value of the Class C shares maintained in a
Fund by such broker-dealers' customers. Trail or maintenance commissions will be
paid to broker-dealers beginning the 13th month following the purchase of such
shares. Since the distribution fees are not directly tied to expenses, the
amount of distribution fees paid by a class of a Fund during any year may be
more or less than actual expenses incurred pursuant to the Distribution Plans.
For this reason, this type of distribution fee arrangement is characterized by
the staff of the Securities and Exchange Commission as being of the
"compensation variety" (in contrast to "reimbursement" arrangements by which a
distributor's payments are directly linked to its expenses). With respect to
Class B shares of the Income Funds, because of the 0.75% annual limitation on
the compensation paid to the Distributor during a fiscal year, compensation
relating to a large portion of the commissions attributable to sales of Class B
shares in any one year will be accrued and paid by a Fund to the Distributor in
fiscal years subsequent thereto. However, the Shares are not liable for any
distributions expenses incurred in excess of the Distribution Fee paid. In
determining whether to purchase Class B shares of the Income Funds, investors
should consider that compensation payment could continue until the Distributor
has been fully reimbursed for the commissions paid on sales of the Class B
shares.
Each class of shares is entitled to exclusive voting rights with respect to
matters concerning its Distribution Plan.
39
Each Distribution Plan provides that it will continue in effect indefinitely
if such continuance is specifically approved at least annually by a vote of both
a majority of the Trustees and a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and who have no
direct or indirect financial interest in the operation of the Distribution Plan
or in any agreement related to such Plan ("Qualified Trustees"). The continuance
of each Distribution Plan was most recently approved on October 13, 1995.
Each Distribution Plan requires that the Trust shall provide to the Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended (and the purposes therefor) under the
Distribution Plan. Each Distribution Plan further provides that the selection
and nomination of Qualified Trustees shall be committed to the discretion of the
disinterested Trustees (as defined in the 1940 Act) then in office. Each
Distribution Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees or, with respect to a particular Fund, by vote of a majority
of the outstanding voting Shares of the class of such Fund to which it applies
(as defined in the 1940 Act). Each Distribution Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of shareholders and may not be materially amended in any case without a
vote of the majority of both the Trustees and the Qualified Trustees. Each of
the Funds will preserve copies of any plan, agreement or report made pursuant to
a Distribution Plan for a period of not less than six years from the date of the
Distribution Plan, and for the first two years such copies will be preserved in
an easily accessible place.
SERVICES AGENT
The Trust, on behalf of each Fund, and each Fund's corresponding Fund have
entered into Administrative Services Agreements (the "Services Agreements") with
Morgan Guaranty Trust Company of New York ("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 Fund. 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 Fund, 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 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 Funds 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 the Distributor. The portion of this charge payable
by each Fund is determined by the proportionate share that its net assets bear
to the total net assets of the Trust, the Funds, the other investors in the
Funds 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.
Under prior administrative services agreements in effect from December 29,
1995 through July 31, 1996, with Morgan, certain Funds and its corresponding
Portfolio paid Morgan a fee equal to its proportionate share of an annual
complex-wide charge. This charge was calculated daily based on the aggregate net
assets of the Master Portfolios in accordance with the following schedule: 0.06%
of the first $7 billion of the Master Portfolios' aggregate average daily net
assets, and 0.03% of the Master Portfolios' average daily net assets in excess
of $7 billion.
INTERNATIONAL EQUITY FUND--For the fiscal years ended October 31, 1998, 1999 and
2000: $142,358,$107,063 and $120,035, respectively.
INTERNATIONAL EQUITY PORTFOLIO--For the fiscal years ended October 31, 1998,
1999 and 2000: $174,789, $124,528 and $134,468, respectively.
40
EMERGING MARKETS EQUITY FUND--For the fiscal years ended October 31, 1998, 1999
and 2000: $61,627, $34,406 and $32,971, 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: $108,365, $77,070 and $111,950, respectively.
INTERNATIONAL OPPORTUNITIES PORTFOLIO--For the fiscal years ended November 30,
1998, 1999 and 2000: $129,873, $91,386 and $132,072, respectively.
SHORT TERM BOND FUND--For the fiscal years ended October 31, 1998, 1999 and
2000: $30,377, $74,145 and $89,708, respectively.
THE SHORT TERM BOND PORTFOLIO--For the fiscal years ended October 31, 1998, 1999
and 2000: $37,243, $83,666 and $99,162, respectively.
BOND FUND--For the fiscal year ended October 31, 1998, 1999 and 2000: $271,190,
$272,572 and $227,964, respectively.
THE U.S. FIXED INCOME PORTFOLIO--For the fiscal years ended October 31, 1998,
1999 and 2000: $348,110, $390,355 and $377,452, respectively.
GLOBAL STRATEGIC INCOME FUND--For the fiscal years ended October 31, 1998, 1999
and 2000: $54,594, $59,186 and $39,147, respectively.
THE GLOBAL STRATEGIC INCOME PORTFOLIO--For the fiscal years ended October 31,
1998, 1999 and 2000: $57,247, $61,940 and $41,043, respectively.
INSTITUTIONAL DIVERSIFIED FUND--For the fiscal years ended June 30, 1997, 1998,
and 1999: $85,827, $121,374 and $156,038, respectively.
DIVERSIFIED PORTFOLIO--For the fiscal years ended June 30, 1998, 1999 and 2000:
$127,584, $186,594 and $238,077, respectively.
DISCIPLINED EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$49,243, $161,459 and $319,256, respectively. For the six months ended
November 30, 2000: $185,835.
THE DISCIPLINED EQUITY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999
and 2000: $53,654, $176,331 and $359,899, respectively. For the six months ended
November 30, 2000: $205,831.
U.S. EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$108,362, $83,547 and $66,606, respectively. For the six months ended
November 30, 2000: $26,709.
THE U.S. EQUITY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999 and
2000: $265,956, $198,407 and $172,419, respectively. For the six months ended
November 30, 2000: $73,354.
U.S. SMALL COMPANY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$131,588, $97,116 and $97,973, respectively. For the six months ended
November 30, 2000: $50,998.
THE U.S. SMALL COMPANY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999
and 2000: $309,695, $153,123 and $162,199, respectively. For the six months
ended November 30, 2000: $90,870.
CALIFORNIA BOND FUND--For the fiscal years ended April 30, 1998, 1999 and 2000:
$26,754, $36,727 and $39,930, 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 Fund's custodian and fund accounting
agent. Pursuant to the Custodian Contracts, BONY is responsible for holding Fund
securities and cash and maintaining the books of account and records of Fund
transactions. In the case of foreign assets held outside the United States, the
custodian employs various subcustodians.
41
DST Systems, Inc. ("DST") serves as each Fund's transfer and dividend
disbursing agent. As transfer agent and dividend disbursing agent, DST 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 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 0.10% (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 year ended October 31, 1998, 1999 and
2000: $486,276, $413,127 and $492,491, respectively.
EMERGING MARKETS EQUITY FUND--For the fiscal years ended October 31, 1998. 1999
and 2000: $209,870, $132,803 and $136,321, respectively.
INTERNATIONAL OPPORTUNITIES FUND--For the fiscal year ended November 30, 1998,
1999 and 2000: $373,884, $299,841 and $461,918, respectively.
EUROPEAN EQUITY FUND--For the period January 1, 1998 through November 30, 1998:
$13,726. For the fiscal years ended November 30, 1999 and 2000: $11,397 and
$10,868, respectively.
SHORT TERM BOND FUND--For the fiscal years ended October 31, 1998, 1999 and
2000: $90,716, $286,323 and $368,780, respectively.
BOND FUND--For the fiscal year ended October 31, 1998, 1999 and 2000: $759,423,
$1,050,038 and $935,096, respectively.
GLOBAL STRATEGIC INCOME FUND--For the fiscal year ended October 31, 1998, 1999
and 2000: $188,159, $227,867 and $160,594, respectively.
INSTITUTIONAL DIVERSIFIED FUND--For the fiscal years ended June 30, 1998, 1999
and 2000: $288,049, $455,106 and $628,625, respectively.
DISCIPLINED EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$165,144, $604,339 and $1,284,481, respectively. For the six months ended
November 30, 2000: $774,979.
U.S. EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$360,672, $305,516 and $267,241, respectively. For the six months ended
November 30, 2000: $111,332.
U.S. SMALL COMPANY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$437,716, $356,273 and $394,165, respectively. For the six months ended
November 30, 2000: $212,751.
42
CALIFORNIA BOND FUND
SELECT SHARES--For fiscal years ended April 30, 1998, 1999 and 2000: $7,131,
$35,787 and $36,500, respectively.
INSTITUTIONAL SHARES--For the fiscal years ended April 30, 1998, 1999 and 2000:
$20,775, $46,812 and $65,103, respectively.
The Funds may be sold to or through financial intermediaries who are
customers of J.P. Morgan Chase ("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.
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 Funds 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, assists in the preparation and/or review of
each Fund's federal and state income tax returns and consults with the Funds 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
the Distributor under various agreements discussed under "Trustees and Members
of the Advisory Board," "Officers," "Investment Adviser," "Sub-Administrator",
"Distributor," "Services Agent" and "Shareholder Servicing" above, the Funds 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. 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 Funds, such expenses also include applicable registration fees under
foreign securities laws, custodian fees and brokerage expenses.
43
Morgan, an affiliate of JPMC, 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
Fund) at the following annual rates of the Fund's average daily net assets.
Emerging Markets Equity Fund: 1.45%
Short-Term Bond Fund: 0.30%
Global Strategic Income Fund: 0.65%
Institutional Diversified Fund: 0.65%
Disciplined Equity Fund: 0.45%
California Bond Fund (Institutional Shares): 0.50%
California Bond Fund (Select Shares): 0.65%
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 and its corresponding Portfolio
listed the fees and other expenses Morgan reimbursed under the expense
reimbursement arrangements described above or pursuant to prior expense
reimbursement arrangements for the fiscal periods indicated.
INTERNATIONAL EQUITY FUND--For the fiscal years ended October 31, 1998,1999 and
2000. : N/A, $13,160 and N/A, respectively.
INTERNATIONAL EQUITY PORTFOLIO--For the fiscal year ended October 31, 1998, 1999
and 2000: N/A, N/A and N/A, respectively.
EMERGING MARKETS EQUITY FUND--For the fiscal years ended October 31, 1998, 1999
and 2000: $75,781, $94,972 and $139,097, 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: $110,646, $23,785 and N/A, respectively.
INTERNATIONAL OPPORTUNITIES PORTFOLIO--For the fiscal years ended November 30,
1998, 1999 and 2000: $2,053, N/A and N/A, respectively.
SHORT TERM BOND FUND--For the fiscal years ended October 31, 1998, 1999 and
2000: $394,386, $633,545 and $420,528, respectively.
THE SHORT TERM BOND PORTFOLIO--For the fiscal years ended October 31, 1998, 1999
and 2000: $166,257, $171,744 and $45,204, respectively.
GLOBAL STRATEGIC INCOME FUND--For the fiscal years ended October 31, 1998, 1999
and 2000: $331,863, $291,973 and $240,528, respectively.
THE GLOBAL STRATEGIC INCOME PORTFOLIO--For the fiscal year ended October 31,
1998, 1999 and 2000: N/A, $14,518 and $3,645, respectively.
The table below sets forth the fees and other expenses Morgan reimbursed
pursuant to prior expense reimbursement arrangements for the fiscal periods
indicated.
BOND FUND--For the fiscal years ended October 31, 1998, 1999 and 2000: $42,614,
$73,381 and N/A, respectively.
THE U.S. FIXED INCOME PORTFOLIO--For the fiscal years ended October 31, 1998,
1999 and 2000: N/A, N/A and N/A, respectively.
FUND--(Includes expense reimbursement allocated from the Portfolio) For the
fiscal years ended June 30, 1998, 1999 and 2000: $507,083, $756,422 and
$924,695, respectively.
PORTFOLIO--For the fiscal years ended June 30, 1998, 1999 and 2000: $247,773,
$183,744 and $238,773, respectively.
DISCIPLINED EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$356,413, $902,328 and $1,299,067, respectively. For the six months ended
November 30, 2000: $735,129.
44
THE DISCIPLINED EQUITY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999
and 2000: $110,241, N/A and N/A, respectively. For the six months ended
November 30, 2000: N/A.
U.S. EQUITY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$114,954, $77,429 and $64,994, respectively. For the six months ended
November 30, 2000: $28,212.
U.S. EQUITY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999 and 2000:
N/A, N/A and N/A, respectively. For the six months ended November 30, 2000: N/A.
U.S. SMALL COMPANY FUND--For the fiscal years ended May 31, 1998, 1999 and 2000:
$230,707, $160,843 and $79,145, respectively. For the six months ended
November 30, 2000: $2,874.
U.S. SMALL COMPANY PORTFOLIO--For the fiscal years ended May 31, 1998, 1999 and
2000: N/A, N/A and N/A, respectively. For the six months ended November 30,
2000: N/A.
(CALIFORNIA BOND FUND SELECT SHARES)--For the fiscal years ended April 30, 1998,
1999 and 2000: $9,911, $31,561 and $31,087, respectively.
(CALIFORNIA BOND FUND INSTITUTIONAL SHARES)--For the fiscal years ended
April 30, 1998, 1999 and 2000: $141,455, $118,189 and $123,536, 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 Adviser, appropriate
investments for the Fund's corresponding Fund. In addition, securities accepted
in payment for shares must: (i) meet the investment objective and policies of
the acquiring Fund's corresponding Fund; (ii) be acquired by the applicable Fund
for investment and not for resale (other than for resale to the Fund's
corresponding Fund); (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.
45
Investors in Class A shares may qualify for reduced initial sales charges by
signing a statement of intention (the "Statement"). This enables the investor to
aggregate purchases of Class A shares in the Fund with purchases of Class A
shares of any other Fund in the Trust (or if a Fund has only one class, shares
of such Fund), excluding shares of any Vista money market fund, during a
13-month period. The sales charge is based on the total amount to be invested in
Class A shares during the 13-month period. All Class A or other qualifying
shares of these funds currently owned by the investor will be credited as
purchases (at their current offering prices on the date the Statement is signed)
toward completion of the Statement. A 90-day back-dating period can be used to
include earlier purchases at the investor's cost. The 13-month period would then
begin on the date of the first purchase during the 90-day period. No retroactive
adjustment will be made if purchases exceed the amount indicated in the
Statement. A shareholder must notify the Transfer Agent or Distributor whenever
a purchase is being made pursuant to a Statement.
The Statement is not a binding obligation on the investor to purchase the
full amount indicated; however, on the initial purchase, if required (or
subsequent purchases if necessary), 5% of the dollar amount specified in the
Statement will be held in escrow by the Transfer Agent in Class A shares (or if
a Fund has only one class and is subject to an initial sales charge, shares of
such Fund) registered in the shareholder's name in order to assure payment of
the proper sales charge. If total purchases pursuant to the Statement (less any
dispositions and exclusive of any distributions on such shares automatically
reinvested) are less than the amount specified, the investor will be requested
to remit to the Transfer Agent an amount equal to the difference between the
sales charge paid and the sales charge applicable to the aggregate purchases
actually made. If not remitted within 20 days after written request, an
appropriate number of escrowed shares will be redeemed in order to realize the
difference. This privilege is subject to modification or discontinuance at any
time with respect to all shares purchased thereunder. Reinvested dividend and
capital gain distributions are not counted toward satisfying the Statement.
Class A shares of a Fund may also be purchased by any person at a reduced
initial sales charge which is determined by (a) aggregating the dollar amount of
the new purchase and the greater of the purchaser's total (i) net asset value or
(ii) cost of any shares acquired and still held in the Fund, or any other Vista
fund excluding any Vista money market fund, and (b) applying the initial sales
charge applicable to such aggregate dollar value (the "Cumulative Quantity
Discount"). The privilege of the Cumulative Quality Discount is subject to
modification or discontinuance at any time with respect to all Class A shares
(or if a Fund has only one class and is subject to an initial sales charge,
shares of such Fund) purchased thereafter.
An individual who is a member of a qualified group (as hereinafter defined)
may also purchase Class A shares of a Fund (or if a Fund has only one class and
is subject to an initial sales charge, shares of such Fund) at the reduced sales
charge applicable to the group taken as a whole. The reduced initial sales
charge is based upon the aggregate dollar value of Class A shares (or if a Fund
has only one class and is subject to an initial sales charge, shares of such
Fund) previously purchased and still owned by the group plus the securities
currently being purchased and is determined as stated in the preceding
paragraph. In order to obtain such discount, the purchaser or investment dealer
must provide the Transfer Agent with sufficient information, including the
purchaser's total cost, at the time of purchase to permit verification that the
purchase qualifies for a cumulative quantity discount, and confirmation of the
order is subject to such verification. Information concerning the current
initial sales charge applicable to a group may be obtained by contacting the
Transfer Agent.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Class A shares (or if a Fund has
only one class and is subject to an initial sales charge, shares of such Fund)
at a discount and (iii) satisfies uniform criteria which enables the Distributor
to realize economies of scale in its costs of distributing Class A shares (or if
a Fund has only one class and is subject to an initial sales charge, shares of
such Fund). A qualified group must have more than 10 members, must be available
to arrange for group meetings between representatives of the Fund and the
members, must agree to include sales and other materials related to the Fund in
its publications and mailings to members at reduced or no cost to the
Distributor, and must seek to arrange for payroll deduction or other bulk
transmission of investments in the Fund. This privilege is subject to
modification or discontinuance at any time with respect to all Class A shares
(or if a Fund has only one class and is subject to an initial sales charge,
shares of such Fund) purchased thereafter.
46
Investors may be eligible to buy Class A shares at reduced sales charges.
One's investment representative or the JPMorgan Funds Service Center should be
consulted for details about JPMorgan Fund's combined purchase privilege,
cumulative quantity discount, statement of intention, group sales plan, employee
benefit plans and other plans. Sales charges are waived if an investor is using
redemption proceeds received within the prior ninety days from non-JPMorgan
mutual funds to buy the shares, and on which he or she paid a front-end or
contingent deferred sales charge.
Some participant-directed employee benefit plans participate in a
"multi-fund" program which offers both JPMorgan and non-JPMorgan mutual funds.
The money that is invested in JPMorgan Funds may be combined with the other
mutual funds in the same program when determining the plan's eligibility to buy
Class A shares for purposes of the discount privileges and programs described
above.
No initial sales charge will apply to the purchase of a Fund's Class A
shares if (i) one is investing proceeds from a qualified retirement plan where a
portion of the plan was invested in the JPMorgan Funds, (ii) one is investing
through any qualified retirement plan with 50 or more participants or (iii) the
investor is a participant in certain qualified retirement plans and is investing
(or reinvesting) the proceeds from the repayment of a plan loan made to him or
her.
Purchases of a Fund's Class A shares may be made with no initial sales
charge through an investment adviser or financial planner that charges a fee for
its services.
Purchases of a Fund's Class A shares may be made with no initial sales
charge (i) by an investment adviser, broker or financial planner, provided
arrangements are preapproved and purchases are placed through an omnibus account
with the Fund or (ii) by clients of such investment adviser or financial planner
who place trades for their own accounts, if such accounts are linked to a master
account of such investment adviser or financial planner on the books and records
of the broker or agent. Such purchases may also be made for retirement and
deferred compensation plans and trusts used to fund those plans.
Purchases of a Fund's Class A shares may be made with no initial sales
charge in accounts opened by a bank, trust company or thrift institution which
is acting as a fiduciary exercising investment discretion, provided that
appropriate notification of such fiduciary relationship is reported at the time
of the investment to the Fund, the Fund's distributor or the JPMorgan Funds
Service Center.
A Fund may sell Class A shares without an initial sales charge to the
current and retired Trustees (and their immediate families), current and retired
employees (and their immediate families) of Chase, the Fund's distributor and
transfer agent or any affiliates or subsidiaries thereof, registered
representatives and other employees (and their immediate families) of
broker-dealers having selected dealer agreements with the Fund's distributor,
employees (and their immediate families) of financial institutions having
selected dealer agreements with the Fund's distributor (or otherwise having an
arrangement with a broker-dealer or financial institution with respect to sales
of JPMorgan Fund shares) and financial institution trust departments investing
an aggregate of $1 million or more in the JPMorgan Funds.
Shareholders of record of any JPMorgan fund as of November 30, 1990 and
certain immediate family members may purchase a Fund's Class A shares with no
initial sales charge for as long as they continue to own Class A shares of any
JPMorgan fund, provided there is no change in account registration.
Shareholders of other JPMorgan Funds may be entitled to exchange their
shares for, or reinvest distributions from their funds in, shares of the Fund at
net asset value.
REDEMPTION OF SHARES
If the Trust on behalf of a Fund and its corresponding Fund determine that
it would be detrimental to the best interest of the remaining shareholders of a
Fund to make payment wholly or partly in cash, payment of the redemption price
may be made in whole or in part by a distribution in kind of securities from the
Fund, in lieu of cash, in conformity with the applicable rule of the SEC. If
shares are redeemed in kind, the redeeming shareholder might incur transaction
costs in converting the assets into cash. The method of valuing Fund 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 has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to
which the Funds and their corresponding Funds are obligated to redeem shares
solely in cash up to the lesser of $250,000 or one
47
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 Fund and therefore shareholders of the
Fund that receive redemptions in kind will receive securities of the Fund. The
Funds have advised the Trust that the Funds 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 Funds 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 Fund of, or evaluation of the net asset value of, its Fund
securities to be unreasonable or impracticable, or (iv) for such other periods
as the SEC may permit.
For information regarding redemption orders placed through a financial
professional, please see "Financial Professionals" above.
EXCHANGE OF SHARES
An investor may exchange shares from any Fund into shares of any other J.P.
Morgan Institutional Fund or J.P. Morgan 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 Fund 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.
The Funds reserve the right to change any of these policies at any time and
may reject any request to purchase shares at a reduced sales charge.
Investors may incur a fee if they effect transactions through a broker or
agent.
Under the Exchange Privilege, shares may be exchanged for shares of another
fund only if shares of the fund exchanged into are registered in the state where
the exchange is to be made. Shares of a Fund may only be exchanged into another
fund if the account registrations are identical. With respect to exchanges from
any Vista money market fund, shareholders must have acquired their shares in
such money market fund by exchange from one of the Vista non-money market funds
or the exchange will be done at relative net asset value plus the appropriate
sales charge. Any such exchange may create a gain or loss to be recognized for
federal income tax purposes. Normally, shares of the fund to be acquired are
purchased on the redemption date, but such purchase may be delayed by either
fund for up to five business days if a fund determines that it would be
disadvantaged by an immediate transfer of the proceeds.
48
The contingent deferred sales charge for Class B shares will be waived for
certain exchanges and for redemptions in connection with a Fund's systematic
withdrawal plan, subject to the conditions described in the Prospectuses. In
addition, subject to confirmation of a shareholder's status, the contingent
deferred sales charge will be waived for: (i) a total or partial redemption made
within one year of the shareholder's death or initial qualification for Social
Security disability payments; (ii) a redemption in connection with a Minimum
Required Distribution form an IRA, Keogh or custodial account under section
403(b) of the Internal Revenue Code or a mandatory distribution from a qualified
plan; (iii) redemptions made from an IRA, Keogh or custodial account under
section 403(b) of the Internal Revenue Code through an established Systematic
Redemption Plan; (iv) a redemption resulting from an over-contribution to an
IRA; (v) distributions from a qualified plan upon retirement; and (vi) an
involuntary redemption of an account balance under $500. Up to 12% of the value
of Class B shares subject to a systematic withdrawal plan may also be redemeed
each year without a CDSC, provided that the Class B account had a minimum
balance of $20,000 at the time the systematic withdrawal plan was established.
Class B shares automatically convert to Class A shares (and thus are then
subject to the lower expenses borne by Class A shares) after a period of time
specified below has elapsed since the date of purchase (the "CDSC Period"),
together with the pro rate portion of all Class B shares representing dividends
and other distributions paid in additional Class B shares attributable to the
Class B shares then converting. The conversion of Class B shares purchased on or
after May 1, 1996, will be effected at the relative net asset values per share
of the two classes on the first business day of the month following the eighth
anniversary of the original purchase. The conversion of Class B shares purchased
prior to May 1, 1996, will be effected at the relative net asset values per
share of the two classes on the first business day of the month following the
seventh anniversary of the original purchase. If any exchanges of Class B shares
during the CDSC Period occurred, the holding period for the shares exchanged
will be counted toward the CDSC Period. At the time of the conversion the net
asset value per share of the Class A shares may be higher or lower than the net
asset value per share of the Class B shares; as a result, depending on the
relative net asset value per share, a shareholder may receive fewer or more
Class A shares than the number of Class B shares converted.
A Fund may require signature guarantees for changes that shareholders
request be made in Fund records with respect to their accounts, including but
not limited to, changes in bank accounts, for any written requests for
additional account services made after a shareholder has submitted an initial
account application to the Fund, and in certain other circumstances described in
the Prospectuses. A Fund may also refuse to accept or carry out any transaction
that does not satisfy any restrictions then in effect. A signature guarantee may
be obtained from a bank, trust company, broker-dealer or other member of a
national securities exchange. Please note that a notary public cannot provide a
signature guarantee.
DIVIDENDS AND DISTRIBUTIONS
Each Fund anticipates distributing substantially all of its net investment
income for each taxable year. Such distributions will be taxable to shareholders
as ordinary income and treated as dividends for federal income tax purposes, but
they will not qualify for the 70% dividends-received deduction for corporations
only to the extent described below. Dividends paid on Class A, Class B and
Class C shares are calculated at the same time. In general, dividends on
Class B and Class C shares are expected to be lower than those on Class A shares
due to the higher distribution expenses borne by the Class B and Class C shares.
Dividends may also differ between classes as a result of differences in other
class specific expenses.
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
49
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 Funds 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 Fund (which is equal to the Fund's pro rata
share of the total investment of the Fund and of any other investors in the Fund
less the Fund's pro rata share of the Fund's liabilities) less the Fund's
liabilities. The following is a discussion of the procedures used by the Funds
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 Fund 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 Fund was more than 60 days, unless
this is determined not to represent fair value by the Trustees.
Listed options on debt securities traded on U.S. option exchanges shall be
valued at their closing price on such exchanges. Futures on debt securities and
related options traded on commodities exchanges shall be valued at their closing
price as of the close of such commodities exchanges, which is currently
4:15 p.m., New York time. Options and future traded on foreign exchanges shall
be valued at
50
the last sale or close price available prior to the calculation of the Funds'
net asset value. Non-listed OTC options and swaps shall be valued at the closing
price provided by a counterparty or third-party broker.
Fixed income securities with a maturity of 60 days or more, are generally
valued using bid quotations generally readily available from and supplied daily
by third party pricing services or brokers of comparable securities. If such
prices are not supplied by the Fund's independent pricing services, such
securities are priced in accordance with fair value procedures adopted by 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. Fixed income securities with a remaining maturity of less
than 60 days are valued by the amortized cost method.
Securities or other assets for which market quotations are not readily
available (including certain illiquid securities) are valued at fair value in
accordance with procedures established by and under the general supervision and
responsibility of the Trustees. 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 Fund 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
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.
A Fund may provide period and average annual "total rates of return." The
"total rate of return" refers to the change in the value of an investment in a
Fund over a period (which period shall be stated in any advertisement or
communication with a shareholder) based on any change in net asset value per
share including the value of any shares purchased through the reinvestment of
any dividends or capital gains distributions declared during such period. For
Class A shares, the average annual total rate of return figures will assume
payment of the maximum initial sales load at the time of purchase. For Class B
and Class C shares, the average annual total rate of return figures will assume
deduction of the applicable contingent deferred sales charge imposed on a total
redemption of shares held for the period. One-, five-, ten-year periods will be
shown, unless the class has been in existence for a shorter-period.
Each Fund presents performance information for each class thereof since the
commencement of operations of that Fund, rather than the date such class was
introduced. Performance information for each class introduced after the
commencement of operations of the related Fund is therefore based on the
performance history of predecessor class or classes. Performance information is
restated to reflect the current maximum front-end sales charge (in the case of
Class A Shares) or the maximum contingent deferred sales charge (in the case of
Class B Shares) when presented inclusive of sales charges. Additional
performance information may be presented which does not reflect the deduction or
sales charges. Historical expenses reflected in performance information are
based upon the distribution, shareholder servicing fees and other expenses
actually incurred during the period presented and have not been restated, for
periods during which the performance information for a particular class is based
upon the performance history of a predecessor class, to reflect the ongoing
expenses currently borne by the particular class.
YIELD QUOTATIONS. As required by regulations of the SEC, the annualized
yield for the Funds is computed by dividing each Fund's net investment income
per share earned during a 30-day period by the net asset value on the last day
of the period. The average daily number of shares outstanding during
51
the period that are eligible to receive dividends is used in determining the net
investment income per share. Income is computed by totaling the interest earned
on all debt obligations during the period and subtracting from that amount the
total of all recurring expenses incurred during the period. The 30-day yield is
then annualized on a bond-equivalent basis assuming semi-annual reinvestment and
compounding of net investment income.
Below is set forth historical yield information for the Funds for the
periods indicated:
SHORT TERM BOND FUND (10/31/00): 30-day yield: 7.41%.
BOND FUND (10/31/00): 30-day yield: 6.44%.
GLOBAL STRATEGIC INCOME FUND (10/31/00): 30-day yield: 7.04%.
CALIFORNIA BOND FUND (SELECT SHARES): (April 30, 2000): 30-day yield: 4.40%;
30-day tax equivalent yield at 39.6%; tax rate: (7.28%).
CALIFORNIA BOND FUND (INSTITUTIONAL SHARES): (April 30, 2000): 30-day yield:
4.54%; 30-day tax equivalent yield at 39.6%; tax rate: (7.52%).
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 any period prior to the establishment
of a Fund will be that of its corresponding predecessor J.P. Morgan fund and
will be presented in accordance with applicable SEC staff interpretations.
The ongoing fees and expenses borne by Class B Shares are greater than those
borne by Class A Shares. The performance information for each class introduced
after the commencement of operations of the related Fund is based on the
performance history of a predecessor class or classes and historical expenses
have not been restated, for periods during which the performance information for
a particular class is based upon the performance history of a predecessor class,
to reflect the ongoing expenses currently borne by the particular class.
Accordingly, the performance information presented in the table below may be
used in assessing each Fund's performance history but does not reflect how the
distinct classes would have performed on a relative basis prior to the
introduction of those classes which would require an adjustment to the ongoing
expenses.
The performance quoted reflects fee waivers that subsidize and reduce the
total operating expenses of certain Funds (or classes thereof). Returns on these
Funds (or classes) would have been lower if there were no such waivers. With
respect to certain Funds, Morgan and/or other service providers are obligated to
waive certain fees and/or reimburse expenses. Each Fund's Prospectus discloses
the extent of any agreements to waive fees and/or reimburse expenses.
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:
(5.16%); average annual total return, 5 years: 7.69%; average annual total
return, 10 years: (5.16%); aggregate total return, 1 year: (5.16%); aggregate
total return, 5 years: 44.87%; aggregate total return, 10 years: 85.28%.
EMERGING MARKETS EQUITY FUND: 10/31/00: Average annual total return, 1 year:
(6.88)%; average annual total return, 5 years: (3.66)%; average annual total
return, commencement of operations * to period end: (3.18%); aggregate total
return, 1 year: (6.88)%; aggregate total return, 5 years: (17.02%); aggregate
total return, commencement of operations * to period end: 18.38%.
52
INTERNATIONAL OPPORTUNITIES FUND: 11/30/00: Average annual total return, 1 year:
(10.55)%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations ** to period end: 5.19%; aggregate total
return, 1 year: (10.55)%; aggregate total return, 5 years: N/A; aggregate total
return, commencement of operations ** to period end: 20.41%.
SHORT TERM BOND FUND (10/31/00): Average annual total return, 1 year: 5.49%;
average annual total return, 5 years: 5.63%; average annual total return,
commencement of operations (July 13, 1993) to period end: 5.28%; aggregate total
return, 1 year: 5.49%; aggregate total return, 5 years: 31.50%; aggregate total
return, commencement of operations (July 13, 1993) to period end: 45.57%.
BOND FUND (10/31/00): Average annual total return, 1 year: 6.83%; average annual
total return, 5 years: 5.76%; average annual total return, 10 years: 7.28%;
aggregate total return, 1 year: 6.83%; aggregate total return, 5 years: 31.31%;
aggregate total return, 10 years: 102.01%.
GLOBAL STRATEGIC INCOME FUND (10/31/00): Average annual total return, 1 year:
6.93%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations (March 14, 1997) to period end: 5.11%; aggregate
total return, 1 year: 6.93%; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (March 14, 1997) to period end: 19.86%.
INSTITUTIONAL DIVERSIFIED FUND (6/30/00): Average annual total return, 1 year:
6.88%; average annual total return, 5 years: 15.24%; average annual total
return, commencement of operations(****) to period end: 13.47%; aggregate total
return, 1 year: 6.88%; aggregate total return, 5 years: 103.21%; aggregate total
return, commencement of operations(*) to period end: 138.34%.
DISCIPLINED EQUITY FUND (11/30/00): Average annual total return, 1 year:
(7.67)%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations (January 3, 1997) to period end: 16.72%; aggregate
total return, 1 year: (7.67)%; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (January 3, 1997) to period end:
82.92%.
U.S. EQUITY FUND (11/30/00): Average annual total return, 1 year: (3.74)%;
average annual total return, 5 years: 16.02%; average annual total return,
10 years: 16.36%; aggregate total return, 1 year: (3.74)%; aggregate total
return, 5 years: 110.22%; aggregate total return, 10 years: 355.18%.
U.S. SMALL COMPANY FUND (11/30/00): Average annual total return, 1 year:
(5.86)%; average annual total return, 5 years: 10.46%; average annual total
return, 10 years: 15.90%; aggregate total return, 1 year: (5.86)%; aggregate
total return, 5 years: 68.18%; aggregate total return, 10 years: 337.46%.
CALIFORNIA BOND FUND (SELECT SHARES): (April 30, 2000): Average annual total
return, 1 year: (0.60%); average annual total return, 5 years: N/A; average
annual total return, commencement of operations (April 21, 1997) to period end:
(5.13%); aggregate total return, 1 year: (0.60%); aggregate total return,
5 years: N/A; aggregate total return, commencement of operations (April 21,
1997) to period end: (15.37%).
CALIFORNIA BOND FUND (INSTITUTIONAL SHARES): (April 30, 2000): Average annual
total return, 1 year: (0.70%); average annual total return, 5 years: N/A;
average annual total return, commencement of operations (December 23, 1996) to
period end: (4.48%); aggregate total return, 1 year: (0.70%); aggregate total
return, 5 years: N/A; aggregate total return, commencement of operations
(December 23, 1996) to period end: (15.83%).
GENERAL. A Fund's performance will vary from time to time depending upon
market conditions, the composition of its corresponding Fund, and its operating
expenses. Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in a Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
- -------------------
* Emerging Markets Equity Fund commenced operations on November 15, 1993.
** International Opportunities Fund commenced operations on February 26, 1997.
**** Institutional Diversified Fund Commenced public investment operations on
September 10, 1993.
53
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 Adviser" 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 Fund 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.
FUND TRANSACTIONS
The Adviser places orders for all Funds for all purchases and sales of Fund
securities, enters into repurchase agreements, and may enter into reverse
repurchase agreements and execute loans of Fund securities on behalf of all
Funds. See "Investment Objectives and Policies."
Fixed income and debt securities and municipal bonds and notes are generally
traded at a net price with dealers acting as principal for their own accounts
without a stated commission. The price of the security usually includes profit
to the dealers. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
Fund transactions for a Fund will be undertaken principally to accomplish
the Fund's objective in relation to expected movements in the general level of
interest rates. The Funds may engage in short-term trading consistent with their
objectives. See "Investment Objectives and Policies--Fund Turnover".
In connection with Fund transactions, the overriding objective is to obtain
the best execution of purchase and sales orders.
In selecting a broker, the Adviser 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
Adviser decides that the broker chosen will provide the best execution. The
Adviser monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of each Fund review regularly the
reasonableness of commissions and other transaction costs incurred by the Funds
in light of facts and circumstances deemed relevant from time to time, and, in
that connection, will receive reports from the Adviser and published data
concerning transaction costs incurred by institutional investors generally.
Research services provided by brokers to which the Adviser has allocated
brokerage business in the past include economic statistics and forecasting
services, industry and company analyses, Fund 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 Adviser's
clients and not solely or necessarily for the benefit of an individual Fund. The
Adviser believes that the value of research services received is not
determinable and does not significantly reduce its expenses. The Funds do not
reduce their fee to the Adviser by any amount that might be attributable to the
value of such services.
54
The Funds or their predecessors corresponding to the International Equity,
Emerging Markets Equity or International Opportunities paid the following
brokerage commissions for the indicated fiscal periods:
INTERNATIONAL EQUITY FUND--For the fiscal years ended October 31, 1998, 1999,
and 2000: $1,920,469, $1,073,526 and $1,826,819, respectively.
EMERGING MARKETS EQUITY FUND--For the fiscal years ended October 31, 1998, 1999
and 2000: $1,089,000, $866,867 and $470,666, respectively.
INTERNATIONAL OPPORTUNITIES FUND--For the fiscal years ended November 30, 1998,
1999 and 2000: $2,294,676, $982,901 and $1,645,894 respectively.
INSTITUTIONAL DIVERSIFIED FUND--For the fiscal years ended June 30, 2000:
$712,450; June 30, 1999; $557,819; June 30, 1998: $314,363.
DISCIPLINED EQUITY--For the fiscal years ended May 31, 1998, 1999 and 2000:
$175,629, $504,145 and $833.195, respectively. For the six months ended
November 30, 2000: $897,374.
U.S. EQUITY--For the fiscal years ended May 31, 1998, 1999 and 2000: $1,614,293,
$1,163,432 and $1,148,804, respectively. For the six months ended November 30,
2000: $527,624.
U.S. SMALL COMPANY--For the fiscal years ended May 31, 1998, 1999 and 2000:
$1,662,968, $979,033 and $410,368, respectively. For the six months ended
November 30, 2000: $475,041.
The increases in brokerage commissions for the Disciplined Equity and U.S.
Equity Funds reflected above were due to increased portfolio activity and an
increase in net investments by investors in a Portfolio or its predecessor.
Subject to the overriding objective of obtaining the best execution of
orders, the Adviser may allocate a portion of a Fund's brokerage transactions to
affiliates of the Adviser. Under the 1940 Act, persons affiliated with the Fund
and persons who are affiliated with such persons are prohibited from dealing
with the Fund 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 Fund 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 Fund 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 Fund that either
comply with rules adopted by the SEC or with interpretations of the SEC's staff.
On those occasions when the Adviser deems the purchase or sale of a security
to be in the best interests of a Fund as well as other customers including other
Funds, the Adviser 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 Fund 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 Adviser in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to a Fund. In some instances, this procedure might adversely affect a Fund.
If a Fund 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 Fund 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 Fund may write may be affected by options written by
the Adviser 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.
55
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 JPM Institutional Funds" was
changed to "J.P. Morgan Institutional Funds" and the name of "JPM Series Trust"
was changed to "J.P. Morgan Series Trust." Each corresponding Fund's name
changed accordingly.
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 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 comprised of two open-end management investment companies
organized as Massachusetts business trusts 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.
56
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.
Each share of a series or class represents an equal proportionate interest
in that series or class with each other share of that series or class. The
shares of each series or class participate equally in the earnings, dividends
and assets of the particular series or class. Expenses of the Trust which are
not attributable to a specific series or class are allocated among all the
series in a manner believed by management of the Trust to be fair and equitable.
Shares have no pre-emptive or conversion rights. Shares when issued are fully
paid and non-assessable, except as set forth below. Shareholders are entitled to
one vote for each share held. Shares of each series or class generally vote
together, except when required under federal securities laws to vote separately
on matters that may affect a particular class, such as the approval of
distribution plans for a particular class.
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, 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 22
series of J.P. Morgan Institutional Funds. 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 Funds 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
57
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".
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.
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. Each
Fund expects that a portion of these distributions to corporate shareholders
will be eligible for the dividend-received deduction, subject to applicable
limitations under the Code. 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.
58
Gains or losses on sales of Fund securities will be treated as long-term
capital gains or losses if the securities have been held for more than one year
except in certain cases where, if applicable, a put option is acquired or a call
option is written thereon or the straddle rules described below are otherwise
applicable. Other gains or losses on the sale of securities will be short-term
capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by a Fund lapses or is terminated
through a closing transaction, such as a repurchase by the Fund of the option
from its holder, the Fund 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 Fund in the closing transaction. If securities are purchased by a Fund
pursuant to the exercise of a put option written by it, the Fund 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 by an individual after December 31, 2000 and held for
more than five years, the maximum long-term capital gain tax rate generally will
be reduced to 18%. Any loss realized by a shareholder upon the redemption or
exchange of shares in the Fund held for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain distributions
received by the shareholder with respect to such shares. In addition, no loss
will be allowed on the redemption or exchange of shares of the Fund, if within a
period beginning 30 days before the date of such redemption or exchange and
ending 30 days after such date, the shareholder acquires (such as through
dividend reinvestment) securities that are substantially identical to shares of
the Fund. Investors are urged to consult their tax Advisers 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 Fund accrues income or receivables or expenses
or other liabilities denominated in a foreign currency and the time a Fund
actually collects such income or pays such liabilities, are generally treated as
ordinary income or loss. Similarly, gains or losses on the disposition of debt
securities held by a Fund, if any, denominated in foreign currency, to the
extent attributable to fluctuations in exchange rates between the acquisition
and disposition dates are also treated as ordinary income or loss.
Certain forward currency contracts, options and futures contracts entered
into by a Fund 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 Fund
on forward currency contracts, options and futures contracts or on the
underlying securities.
Certain options, futures and foreign currency contracts held by a Fund at
the end of each taxable year will be required to be "marked to market" for
federal income tax purposes - i.e., treated as having been sold at market value.
For certain options and futures contracts, 60% of any gain or loss recognized on
these deemed sales and on actual dispositions will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss regardless of how long the Fund 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 Fund
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 any "excess distribution" from
such foreign corporation, including any gain from the disposition of such
shares. In addition, certain interest charges may be imposed on a Fund as a
result of such excess distributions. Alternatively, a Fund
59
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 Funds will be permitted to "mark to market" any marketable stock held by
a Fund in a PFIC. If a Fund 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.
For federal income tax purposes, the funds listed below had capital loss
carryforwards for the periods indicated:
EMERGING MARKETS EQUITY FUND: For the fiscal year ended October 31, 2000:
$107,293,205, of which $79,167,992 expires in the year 2006, and $28,125,213
expires in 2007.
SHORT TERM BOND FUND: For the fiscal year ended October 31, 2000: $9,066,577,
of which $4,257,708 expires in the year 2007 and $4,808,869 expires in the year
2008.
BOND FUND: For the fiscal year ended October 31, 2000: $43,138,433, of which
expires $26,404,085, in the year 2007 and $16,734,348 expires in the year 2008.
GLOBAL STRATEGIC INCOME FUND: For the fiscal year ended October 31, 2000:
$19,992,145, of which $8,890,820 expires in the year 2006, $4,747,768 expires in
the year 2007 and $6,353,557 expires in the year 2008.
CALIFORNIA BOND FUND: For the fiscal year ended April 30, 2000: $663,336, all
of which expires in the year 2008.
To the extent that these capital losses are used to offset future capital
gains, it is probable that gains so offset will not be distributed to
shareholders.
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 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. Under United States Treasury regulations
that will generally apply to such dividends paid after December 31, 2000, (the
"Final Withholding Regulations"), you must satisfy certain certification
requirements in order to claim the benefit of a lower treaty rate. In addition,
in the case of Fund shares held by a foreign partnership, the certification
requirement generally will also apply to the partners of the partnership and the
partnership must provide certain information. The Final Withholding Regulations
also provide look-through rules for tiered partnerships.
If you are eligible for a reduced rate of United States withholding tax
under a tax treaty, you may obtain a refund or any amounts withheld in excess of
that rate by filing a refund claim with the United States Internal Revenue
Service. 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, the 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 such foreign shareholder provides IRS Form
W-8BEN (or
60
satisfies certain documentary evidence requirements for establishing that it is
a non-U.S. holder for U.S. federal income tax purposes). Transfers by gift of
shares of the 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 Fund) 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.) 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
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. 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 Advisers 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
61
Massachusetts, provided that each Fund continues to qualify as a regulated
investment company under Subchapter M of the Code. The Funds are organized as
New York trusts. The Funds 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 Fund 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 Fund's outstanding voting securities present
at a meeting, if the holders of more than 50% of the Fund's outstanding shares
or the Fund's outstanding voting securities are present or represented by proxy,
or (ii) more than 50% of the Fund's outstanding shares or the Fund's outstanding
voting securities, whichever is less.
Telephone calls to the Funds, J.P. Morgan or a Financial Professional as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's registration statement
filed with the SEC under the 1933 Act and the 1940 Act and the Funds'
registration statements filed under the 1940 Act. Pursuant to the rules and
regulations of the SEC, certain portions have been omitted. The registration
statements including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and the
Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Funds or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by any Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
FINANCIAL STATEMENTS
The following financial statements and the reports thereon of
PricewaterhouseCoopers LLP of the 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
62
reports are available without charge upon request by calling J.P. Morgan Funds
Services at (800) 521-5411.
DATE OF ANNUAL REPORT; DATE ANNUAL REPORT FILED;
NAME OF FUND AND ACCESSION NUMBER
- ------------ --------------------------------------------------
J.P. Morgan Institutional International
Equity Fund 10/31/00; 12/27/00; 0000894088-00-000029
J.P. Morgan Institutional Emerging Markets
Equity Fund 10/31/00; 12/27/00; 0000894088-00-000030
J.P. Morgan Institutional International
Opportunities Fund 11/30/00; 02/02/01; 0000894088-01-000012
J.P. Morgan Institutional Short Term Bond Fund 10/31/00; 12/26/00; 0000894088-00-000027
J.P. Morgan Institutional Bond Fund 10/31/00; 12/28/00; 0000894088-00-000034
J.P. Morgan Institutional Global Strategic
Income Fund 10/31/00; 12/28/00; 0000894088-00-000033
J.P. Morgan Institutional Diversified Fund 06/30/00; 08/25/00; 0000912057-00-039113
J.P. Morgan Institutional Disciplined Equity Fund 11/30/00*; 01/29/01*; 0000894088-01-000010
J.P. Morgan Institutional U.S. Equity Fund 11/30/00*; 01/29/01*; 0000894088-01-000010
J.P. Morgan Institutional U.S. Small Company Fund 11/30/00*; 01/29/01*; 0000894088-01-000023
J.P. Morgan California Bond Fund 11/30/00; 07/10/00; 0000912057-00-031244
* Indicates semi-annual report
63
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.
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
A-1
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
SHORT-TERM TAX EXEMPT NOTES
MIG-1--The short-term tax-exempt note rating MIG-1 is the highest rating
assigned by Moody's for notes judged to be the best quality. Notes with this
rating enjoy strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
MIG-2--MIG-2 rated notes are of high quality but with margins of protection
not as large as MIG-1.
A-2