Document/Exhibit Description Pages Size
1: 485APOS Post-Effective Amendment 87 500K
2: EX-99.(A)(17) Miscellaneous Exhibit 4 16K
3: EX-99.(A)(18) Miscellaneous Exhibit 4 16K
4: EX-99.(A)(19) Miscellaneous Exhibit 6 20K
5: EX-99.(A)(20) Miscellaneous Exhibit 6 21K
6: EX-99.(A)(21) Miscellaneous Exhibit 4 16K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 2005
1933 ACT FILE NO. 033-23166
1940 ACT FILE NO. 811-05624
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 55 /X/
AND/OR
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 56 /X/
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MORGAN STANLEY INSTITUTIONAL FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 548-7786
AMY R. DOBERMAN
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(Name and Address of Agent for Service)
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COPY TO:
CARL FRISCHLING, ESQ. STUART M. STRAUSS, ESQ.
KRAMER LEVIN NAFTALIS & FRANKEL LLP CLIFFORD CHANCE US LLP
1177 AVENUE OF THE AMERICAS 31 WEST 52ND STREET
NEW YORK, NEW YORK 10036 NEW YORK, NEW YORK 10019
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IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/x/ 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
[MORGAN STANLEY LOGO]
EXPLANATORY NOTE
This Post-Effective Amendment No. 55 to the Registration Statement contains
one Class A Shares and Class B Shares Prospectus and one Statement of Additional
Information describing the International Growth Equity Portfolio, a new series
of the Registrant (the "Applicable Series"). This Amendment is not intended to
amend the prospectuses and statements of additional information of other series
of the Registrant. The Registration Statement is organized as follows:
Facing Page
Prospectus relating to the Applicable Series
Statement of Additional Information relating to the Applicable Series
Part C Information
Exhibits
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION--DATED OCTOBER 7, 2005
[MORGAN STANLEY LOGO]
PROSPECTUS
December ___, 2005
MORGAN STANLEY INSTITUTIONAL FUND, INC.
INTERNATIONAL GROWTH EQUITY PORTFOLIO
THE INTERNATIONAL GROWTH EQUITY PORTFOLIO SEEKS LONG-TERM CAPITAL APPRECIATION,
WITH A SECONDARY OBJECTIVE OF INCOME.
INVESTMENT ADVISER
MORGAN STANLEY INVESTMENT MANAGEMENT INC.
DISTRIBUTOR
MORGAN STANLEY DISTRIBUTION, INC.
MORGAN STANLEY INSTITUTIONAL FUND, INC. (THE "FUND") IS A NO-LOAD MUTUAL FUND
THAT IS DESIGNED TO MEET THE INVESTMENT NEEDS OF DISCERNING INVESTORS WHO PLACE
A PREMIUM ON QUALITY AND PERSONAL SERVICE. THE FUND MAKES AVAILABLE TO
INSTITUTIONAL INVESTORS A SERIES OF PORTFOLIOS, WHICH SEEK TO BENEFIT FROM THE
INVESTMENT EXPERTISE AND COMMITMENT TO EXCELLENCE ASSOCIATED WITH MORGAN STANLEY
INVESTMENT MANAGEMENT INC. ("MORGAN STANLEY INVESTMENT MANAGEMENT" OR THE
"ADVISER") AND ITS AFFILIATES. THIS PROSPECTUS OFFERS CLASS A AND CLASS B SHARES
OF THE PORTFOLIO LISTED ABOVE (THE "PORTFOLIO").
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
[Download Table]
PAGE
INVESTMENT SUMMARY
PORTFOLIO
International Growth Equity Portfolio 1
Additional Risk Factors and Information 3
FEES AND EXPENSES OF THE PORTFOLIO 5
PRIOR PERFORMANCE OF SIMILAR FUND 7
PORTFOLIO MANAGEMENT 8
SHAREHOLDER INFORMATION 9
FINANCIAL HIGHLIGHTS 13
MORGAN STANLEY INSTITUTIONAL FUND, INC. PROSPECTUS
Investment Summary
INTERNATIONAL GROWTH EQUITY PORTFOLIO
OBJECTIVE
THE INTERNATIONAL GROWTH EQUITY PORTFOLIO SEEKS LONG-TERM CAPITAL APPRECIATION,
WITH A SECONDARY OBJECTIVE OF INCOME.
The Portfolio's investment objective may be changed by the Fund's Board of
Directors without shareholder approval, but no change is anticipated. If the
Portfolio's investment objective changes, the Portfolio will notify shareholders
and sharholders should consider whether the Portfolio remains an appropriate
investment in light of the change.
APPROACH
The Portfolio's Adviser, Morgan Stanley Investment Management Inc., seeks to
achieve the Portfolio's investment objective by investing primarily in a
diversified portfolio of equity securities of issuers located in countries other
than the United States.
PROCESS
The Adviser allocates the Portfolio's assets among various equity markets
outside the United States based upon its examination and opinion of prevailing
trends and developments. The portfolio management team determines the allocation
of the Fund's assets after examining the phases of the business cycles and
long-term growth potential of various foreign economies and taking into account
valuation of foreign currency, taxation and other pertinent financial, social,
national and political factors. The Adviser seeks to identify equity investments
in each market that are expected to provide long-term capital appreciation that
equals or exceeds the performance benchmark of such markets as a whole. The
Adviser generally seeks to identify securities of issuers that it believes share
the following characteristics: (1) industry leaders in their country, their
region or the world, (2) strong balance sheets, (3) stocks widely followed by
research analysts, (4) large market capitalization (typically greater than
$1 billion) and (5) attractive price-to-earnings ratios compared with earnings
growth potential (PEG ratio). Portfolio securities may be sold when, among other
things, company fundamentals deteriorate, stock valuation deteriorates due to a
rise in the PEG ratio or the Portfolio's portfolio is rebalanced to include a
country or industry in which prospects for capital appreciation are determined
to be better than others.
While a substantial portion of the Portfolio's assets generally are invested in
the developed countries of Europe and the Far East, the Portfolio may invest up
to 15% of its assets in securities of issuers in developing or emerging market
countries. The Portfolio may invest up to 20% of its assets in debt securities
issued or guaranteed by non-U.S. governments, but will invest only in securities
issued or guaranteed by the governments of countries which are members of the
Organization for Economic Co-operation and Development (OECD). The Portfolio may
purchase and sell certain derivative instruments, such as options, futures
contracts, options on futures contracts, structured investments and
currency-related transactions involving options, futures, contracts, forward
contracts and swaps for various portfolio management purposes, including to
facilitate portfolio management and to mitigate risks.
Under normal market conditions, the Portfolio invests at least 80% of its assets
in equity securities of issuers from at least three different foreign countries.
The Portfolio considers an issuer to be from a particular country if (i) its
principal securities trading market is in that country; (ii) alone or on a
consolidated basis it derives 50% or more of its annual revenue from either
goods produced, sales made or services performed in that country; or (iii) it is
organized under the laws of, or has a principal office in that country. By
applying these tests, it is possible that a particular issuer could be deemed to
be from more than one country. This policy may be changed without shareholder
approval; however, you will be notified in writing of any changes.
RISKS
The Portfolio's principal investment strategies are subject to the following
principal risks:
Investing in the Portfolio may be appropriate for you if you are willing to
accept the risks and uncertainties of investing in a portfolio of equity
securities of issuers located in countries other than the United States,
including emerging market countries. In general, prices of equity securities are
more volatile than those of fixed income securities. The prices of equity
securities will rise and fall in response to a number of different factors. In
particular, prices of equity securities will respond to events that affect
entire financial markets or industries (changes in inflation or consumer demand,
for example) and to events that affect particular issuers (news about the
success or failure of a new product, for example).
Investing in foreign countries, particularly emerging markets, entails the risk
that news and events unique to a country or region will affect those markets and
their issuers. These same events will not necessarily have an effect on the U.S.
economy or similar issuers located in the United States. In addition, the
Portfolio's investments in foreign countries generally will be denominated in
foreign currencies. As a result, changes in the value of a country's currency
compared to the U.S. dollar may affect the value of the Portfolio's investments.
These changes may occur separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country. The
Adviser may invest in certain instruments, such as derivatives, and may use
certain techniques, such as hedging, to manage these risks. However, the Adviser
cannot guarantee that it will be practical to hedge these risks in certain
markets or under particular conditions or that it will succeed in doing so.
1
The Portfolio may invest in the equity securities of any size company.
Investing in the securities of smaller companies involves greater risk and
price volatility than investing in larger, more established firms.
Please see "Additional Risk Factors and Information" for further information
about these and other risks of investing in the Portfolio.
PAST PERFORMANCE
The Portfolio was recently organized and, as of the date of this Prospectus, had
no historical performance to report. Performance information will be provided
once the Portfolio has completed a full calendar year of operation.
2
ADDITIONAL RISK FACTORS AND INFORMATION
PRICE VOLATILITY
The value of your investment in the Portfolio is based on the market prices of
the securities the Portfolio holds. These prices change daily due to economic
and other events that affect markets generally, as well as those that affect
particular regions, countries, industries, companies or governments. These price
movements, sometimes called volatility, may be greater or less depending on the
types of securities the Portfolio owns and the markets in which the securities
trade. Over time, equity securities have generally shown gains superior to fixed
income securities, although they have tended to be more volatile in the short
term. Fixed income securities, regardless of credit quality, also experience
price volatility, especially in response to interest rate changes. As a result
of price volatility, there is a risk that you may lose money by investing in the
Portfolio.
FOREIGN INVESTING
To the extent that the Portfolio invests in foreign issuers, there is the risk
that news and events unique to a country or region will affect those markets and
their issuers. These same events will not necessarily have an effect on the U.S.
economy or similar issuers located in the United States. In addition, some of
the Portfolio's securities, including underlying securities represented by
depositary receipts, generally will be denominated in foreign currencies. As a
result, changes in the value of a country's currency compared to the U.S. dollar
may affect the value of the Portfolio's investments. These changes may happen
separately from, and in response to, events that do not otherwise affect the
value of the security in the issuer's home country.
FOREIGN SECURITIES
Foreign issuers generally are subject to different accounting, auditing and
financial reporting standards than U.S. issuers. There may be less information
available to the public about foreign issuers. Securities of foreign issuers can
be less liquid and experience greater price movements. In some foreign
countries, there is also the risk of government expropriation, excessive
taxation, political or social instability, the imposition of currency controls
or diplomatic developments that could affect the Portfolio's investment. There
also can be difficulty obtaining and enforcing judgements against issuers in
foreign countries. Foreign stock exchanges, broker-dealers and listed issuers
may be subject to less government regulation and oversight. The cost of
investing in foreign securities, including brokerage commissions and custodial
expenses, can be higher than in the United States.
FOREIGN CURRENCY
In general, foreign securities are denominated in foreign currencies. The value
of foreign currencies fluctuates relative to the value of the U.S. dollar. Since
the Portfolio may invest in such securities, and therefore may convert the value
of foreign securities into dollars, changes in currency exchange rates can
increase or decrease the U.S. dollar value of the Portfolio's assets. The
Adviser may use derivatives to reduce this risk. The Adviser may in its
discretion choose not to hedge against currency risk. In addition, certain
market conditions may make it impossible or uneconomical to hedge against
currency risk.
EMERGING MARKET RISKS
The Portfolio may invest up to 15% of its assets in securities of issuers in
emerging market countries, which are countries that major international
financial institutions, such as the World Bank, generally consider to be less
economically mature than developed nations, such as the United States or most
nations in Western Europe. Emerging market countries can include every nation in
the world except the United States, Canada, Japan, Australia, New Zealand and
most countries located in Western Europe. Emerging market countries may be more
likely to experience political turmoil or rapid changes in economic conditions
than more developed countries, and the financial condition of issuers in
emerging market countries may be more precarious than in other countries. These
characteristics result in greater risk of price volatility in emerging market
countries, which may be heightened by currency fluctuations relative to the U.S.
dollar.
DERIVATIVES AND OTHER INVESTMENTS
The Portfolio may use various instruments that derive their values from those of
specified securities, indices, currencies or other points of reference for both
hedging and non-hedging purposes. Derivatives include futures, options, forward
contracts, swaps and structured investments. These derivatives, including those
used to manage risk, are themselves subject to risks of the different markets in
which they trade and, therefore, may not serve their intended purposes.
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific obligation underlying the
contract at a specified future time and at a specified price. The Portfolio may
use futures contracts to gain exposure to an entire market (E.G., stock index
futures) or to control its exposure to changing foreign currency exchange rates.
If the Portfolio buys an option, it buys a legal contract giving it the right to
buy or sell a specific amount of a security or futures contract at an
agreed-upon price. If the Portfolio "writes" an option, it sells to another
person the right to buy from or sell to the Portfolio a specific amount of a
security or futures contract at an agreed-upon price.
A forward contract is an obligation to purchase or sell a security or a specific
currency at a future date, which may be any fixed number of days from the date
of the contracts agreed upon by the parties at a price set at the time of the
contract. Forward foreign currency exchange contracts may be used to protect
against uncertainty in the level of future foreign currency exchange rates or to
gain or modify exposure to a particular currency.
[SIDENOTE]
THIS SECTION DISCUSSES ADDITIONAL RISK FACTORS AND INFORMATION RELATING TO THE
PORTFOLIO. THE PORTFOLIO'S INVESTMENT PRACTICES AND LIMITATIONS ARE DESCRIBED IN
MORE DETAIL IN THE STATEMENT OF ADDITIONAL INFORMATION ("SAI"), WHICH IS
INCORPORATED BY REFERENCE AND LEGALLY IS A PART OF THIS PROSPECTUS. FOR DETAILS
ON HOW TO OBTAIN A COPY OF THE SAI AND OTHER REPORTS AND INFORMATION, SEE THE
BACK COVER OF THIS PROSPECTUS.
3
The Portfolio may enter into swap transactions, which are contracts in which the
Portfolio agrees to exchange the return or interest rate on one instrument for
the return or interest rate on another instrument. Payments may be based on
currencies, interest rates, securities indices or commodity indices. Swaps may
be used to manage the maturity and duration of a fixed income portfolio, or to
gain exposure to a market without directly investing in securities traded in
that market.
Structured investments are securities that are convertible into, or the value of
which is based upon the value of, other fixed income or equity securities or
indices upon certain terms and conditions. The amount the Portfolio receives
when it sells a structured investment or at maturity of a structured investment
is not fixed, but is based on the price of the underlying security or index.
RISKS OF DERIVATIVES
The primary risks of derivatives are: (i) changes in the market value of
securities held by the Portfolio, and of derivatives relating to those
securities, may not be proportionate, (ii) there may not be a liquid market for
the Portfolio to sell a derivative, which could result in difficulty closing a
position and (iii) certain derivatives can magnify the extent of losses incurred
due to changes in the market value of the securities to which they relate. In
addition, some derivatives are subject to counterparty risk. To minimize this
risk, the Portfolio may enter into derivatives transactions only with
counterparties that meet certain requirements for credit quality and collateral.
Also, the Portfolio may invest in certain derivatives that require the Portfolio
to segregate some or all of its cash or liquid securities to cover its
obligations under those instruments. At certain levels, this can cause the
Portfolio to lose flexibility in managing its investments properly, responding
to shareholder redemption requests or meeting other obligations. If the
Portfolio is in that position, it could be forced to sell other securities that
it wanted to retain.
Hedging the Portfolio's currency risks involves the risk of mismatching the
Portfolio's obligations under a forward or futures contract with the value of
securities denominated in a particular currency.
INVESTMENT DISCRETION
In pursuing the Portfolio's investment objective, the Adviser has considerable
leeway in deciding which investments it buys, holds or sells on a day-to-day
basis, and which trading stategies it uses. For example, the Adviser may
determine to use some permitted trading strategies while not using others. The
success or failure of such decisions will affect the Portfolio's performance.
BANK INVESTORS
An investment in the Portfolio is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
TEMPORARY DEFENSIVE INVESTMENTS
When the Adviser believes that changes in economic, financial or political
conditions warrant, the Portfolio may invest without limit in certain short- and
medium-term fixed income securities for temporary defensive purposes. If the
Adviser incorrectly predicts the effects of these changes, such defensive
investments may adversely affect the Portfolio's performance and the Portfolio
may not achieve its investment objective.
PORTFOLIO TURNOVER
Consistent with its investment policies, the Portfolio will purchase and sell
securities without regard to the effect on portfolio turnover. Higher portfolio
turnover (E.G., over 100% per year) will cause the Portfolio to incur additional
transaction costs and may result in taxable gains being passed through to
shareholders.
4
MORGAN STANLEY INSTITUTIONAL FUND, INC. PROSPECTUS
Fees and Expenses of the Portfolio
FEES AND EXPENSES OF THE PORTFOLIO
[Enlarge/Download Table]
SHAREHOLDER FEES (fees paid directly from your investment)
Redemption Fee (as a % of the amount redeemed)+ 2.00%
ANNUAL PORTFOLIO OPERATING EXPENSES (expenses that are deducted from Portfolio assets)
ADVISORY FEES*
Class A %
Class B %
12b-1 FEE
Class A NONE
Class B 0.25%
OTHER EXPENSES(1)
Class A %
Class B %
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES
Class A %
Class B %
+ Payable to the Portfolio on shares redeemed within 30 days of purchase. See
"Shareholder Information--How To Redeem Shares" and "Shareholder
Information--Frequent Purchases and Redemptions of Shares" for more
information on redemption fees.
(1) "Other Expenses" are estimated for the current fiscal year.
* This table does not show the effects of the Adviser's voluntary fee waivers
and/or expense reimbursements. The Adviser has voluntarily agreed to reduce
its advisory fee and/or reimburse the Portfolio so that total annual
portfolio operating expenses, excluding certain investment related expenses
described below, will not exceed 1.00% for Class A shares and 1.25% for
Class B shares.
In determining the actual amount of voluntary advisory fee waiver and/or
expense reimbursement for the Portfolio, if any, certain investment related
expenses, such as foreign country tax expense and interest expense on
borrowing, are excluded from total annual portfolio operating expenses. If
these expenses were included, the Portfolio's total annual portfolio
operating expenses after voluntary fee waivers and/or expense
reimbursements would exceed the percentage limits in the preceding
paragraph.
Fee waivers and/or expense reimbursements are voluntary and the Adviser
reserves the right to terminate any waiver and/or reimbursement at any time
and without notice.
[SIDENOTE]
THE COMMISSION REQUIRES THAT THE FUND DISCLOSE IN THIS TABLE THE FEES AND
EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD SHARES OF THE PORTFOLIO. THE TOTAL
ANNUAL PORTFOLIO OPERATING EXPENSES IN THE TABLE DO NOT REFLECT VOLUNTARY FEE
WAIVERS AND/OR EXPENSE REIMBURSEMENTS FROM THE ADVISER, WHICH ARE DESCRIBED IN
THE FOOTNOTES.
5
EXAMPLE
[Download Table]
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
Class A $ $
Class B $ $
[SIDENOTE]
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE PORTFOLIO FOR THE TIME
PERIODS INDICATED AND THEN REDEEM ALL OF YOUR SHARES AT THE END OF THOSE
PERIODS. THE EXAMPLE ASSUMES THAT YOUR INVESTMENT HAS A 5% RETURN EACH YEAR AND
THAT THE PORTFOLIO'S OPERATING EXPENSES REMAIN THE SAME. ALTHOUGH YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE
EQUAL TO THE AMOUNTS REFLECTED IN THE TABLE TO THE RIGHT.
6
MORGAN STANLEY INSTITUTIONAL FUND, INC.
PRIOR PERFORMANCE OF SIMILAR FUND
PRIOR PERFORMANCE OF SIMILAR FUND
Because the Portfolio was recently organized, it has no historical performance
to report. However, the Portfolio is modeled after an existing fund, the Van
Kampen International Growth Fund, a series of Van Kampen Equity Trust II,
which is managed by the same portfolio managers as the Portfolio at an
affiliate of the Adviser and has investment objectives, policies and
strategies substantially similar to those of the Portfolio. Van Kampen
International Growth Fund commenced operations on , 2005 and, as of
, 2005, had $ in assets. On , 2005, the Van Kampen International
Growth Fund acquired all of the assets and liabilities of the 1838
International Equity Fund (the "Predecessor Fund") in exchange for shares of
the Van Kampen International Growth Fund. The current portfolio managers of the
portfolio and the Van Kampen International Growth Fund were the portfolio
managers primarily responsible for the day-to-day management of the Predecessor
Fund.
The following table shows the average annual total returns for the Van Kampen
International Growth Fund for the one and five year and since inception
periods ended December 31, 2004 (which reflects the performance of the
Predecessor Fund as described in footnote * below). Remember that past
performance is not indicative of future performance. The Van Kampen
International Growth Fund is a separate fund and its historical performance
is not indicative of the present or future performance of the Portfolio. The
Portfolio's future performance may be greater or less than the performance of
the Van Kampen International Growth Fund due to, among other things,
differences in inception dates, expenses, asset sizes and cash flows.
AVERAGE ANNUAL TOTAL RETURNS
for the Periods Ended December 31, 2004
[Enlarge/Download Table]
PAST PAST SINCE
ONE YEAR FIVE YEARS INCEPTION
-------- ---------- ---------
VAN KAMPEN INTERNATIONAL GROWTH FUND -- CLASS A SHARES*
Return Before Taxes % % %(1)
Return After Taxes on Distributions % % %(1)
Return After Taxes on Distributions and Sale of Fund Shares % % %(1)
VAN KAMPEN INTERNATIONAL GROWTH FUND -- CLASS B SHARES*
Return Before Taxes % % %(1)**
VAN KAMPEN INTERNATIONAL GROWTH FUND -- CLASS C SHARES*
Return Before Taxes % % %(1)
(1) Return information is provided since 8/3/95.
* Performance shown for the Van Kampen International Growth Fund's Class A
Shares, Class B Shares and Class C Shares reflects the performance of the
shares of the Predecessor Fund, adjusted to reflect the sales charges
applicable to each class of shares of the Van Kampen International Growth
Fund but not differences in expenses.
** The "Since Inception" performance for Class B Shares reflects the
conversion of such shares into Class A Shares eight years after the end of
the calendar month in which the shares were purchased.
7
INVESTMENT ADVISER
Morgan Stanley Investment Management Inc., with principal offices at 1221 Avenue
of the Americas, New York, NY 10020, conducts a worldwide portfolio management
business and provides a broad range of portfolio management services to
customers in the United States and abroad. Morgan Stanley is the direct parent
of the Adviser and Morgan Stanley Distribution, Inc. ("Morgan Stanley
Distribution"), the Fund's Distributor. Morgan Stanley is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses--securities, asset management and credit services.
Morgan Stanley is a full service securities firm engaged in securities trading
and brokerage activities, as well as providing investment banking, research and
analysis, financing and financial advisory services. As of , 2005, the
Adviser, together with its affiliated asset management companies, had
approximately $ billion in assets under management with approximately $
billion in institutional assets.
ADVISORY FEE
Pursuant to an investment advisory agreement between the Adviser and the Fund,
on behalf of the Portfolio (the "Investment Advisory Agreement"), the Adviser is
entitled to receive from the Portfolio the following advisory fee:
PORTFOLIO MANAGEMENT
The Portfolio's assets are managed within the ________ Team. The members of the
team who are currently responsible for the day-to-day management of the
Portfolio are Johannes B. van den Berg, a Managing Director of the Adviser, and
David Sugimoto, an Executive Director of the Adviser.
Johannes B. van den Berg has worked in an investment management capacity for the
Adviser since 2005 and began managing the Portfolio in 2005. Prior to joining
the Adviser, he was Managing Director and Chief Investment Officer of Equity
Investment Strategies of 1838 Investment Advisors. David Sugimoto has worked in
an investment management capacity for the Adviser since 2005 and began managing
the Portfolio in 2005. Prior to joining the Adviser, he was a Director and
portfolio manager of 1838 Investment Advisors.
Johannes B. van den Berg is the lead manager of the Portfolio. He has over 25
years of investment experience. He is supported by David Sugimoto who also has
over 25 years of investment experience. As lead portfolio manager, Johannes B.
van den Berg has ultimate responsibility for stock selection and portfolio
construction.
The Fund's STATEMENT OF ADDITIONAL INFORMATION provides additional information
about the portfolio managers' compensation structure, other accounts managed by
the portfolio managers and the portfolio managers' ownership of securities in
the Portfolio.
The composition of the team may change without notice from time to time.
8
MORGAN STANLEY INSTITUTIONAL FUND, INC.
Shareholder Information
SHAREHOLDER INFORMATION
DISTRIBUTION OF PORTFOLIO SHARES
Morgan Stanley Distribution is the exclusive Distributor of Class A shares and
Class B shares of the Portfolio. Morgan Stanley Distribution receives no
compensation from the Fund for distributing Class A shares of the Portfolio. The
Fund has adopted a Plan of Distribution with respect to the Class B shares of
the Portfolio pursuant to Rule 12b-1 (the "Plan") under the Investment Company
Act of 1940. Under the Plan, the Portfolio pays the Distributor a distribution
fee of 0.25% of the Class B shares' average daily net assets on an annualized
basis. The distribution fee compensates the Distributor for marketing and
selling Class B shares. The Distributor may pay others for providing
distribution-related and other services, including account maintenance services.
Over time the distribution fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
The Adviser and/or Distributor may pay additional compensation (out of their own
funds and not as an expense of the Portfolio) to selected affiliated or
unaffiliated brokers or other service providers in connection with the sale,
distribution, retention and/or servicing of Portfolio shares. Such compensation
may be significant in amount and the prospect of receiving any such additional
compensation may provide affiliated or unaffiliated entities with an incentive
to favor sales of shares of the Portfolio over other investment options. Any
such payments will not change the net asset value or the price of Portfolio
shares. For more information, please see the Statement of Additional
Information.
ABOUT NET ASSET VALUE
The net asset value ("NAV") per share of a class of shares of the Portfolio is
determined by dividing the total of the value of the Portfolio's investments and
other assets attributable to the class, less any liabilities attributable to the
class, by the total number of outstanding shares of that class of the Portfolio.
In making this calculation, the Portfolio generally values securities at market
price. If market prices are unavailable or may be unreliable because of events
occurring after the close of trading, including circumstances under which the
Adviser determines that a security's market price is not accurate, fair value
prices may be determined in good faith using methods approved by the Board of
Directors. In addition, with respect to securities that primarily are listed on
foreign exchanges, when an event occurs after the close of such exchanges that
is likely to have changed the value of the securities (for example, a percentage
change in value of one or more U.S. securities indices in excess of specified
thresholds), such securities will be valued at their fair value, as determined
under procedures established by the Fund's Board of Directors. Securities also
may be fair valued in the event of a significant development affecting a country
or region or an issuer-specific development which is likely to have changed the
value of the security. In these cases, the Fund's net asset value will reflect
certain portfolio securities' fair value rather than their market price.
Fair value pricing involves subjective judgment and it is possible that the fair
value determined for a security is materially different than the value that
could be realized upon the sale of that security. With respect to securities
that are primarily listed on foreign exchanges, the value of the Portfolio's
portfolio securities may change on days when you will not be able to purchase or
sell your shares.
PRICING OF PORTFOLIO SHARES
You may buy or sell (redeem) Class A and Class B shares of the Portfolio at the
NAV next determined for the class after receipt of your order. The Fund
determines the NAV per share for the Portfolio as of the close of the New York
Stock Exchange ("NYSE") (normally 4:00 p.m. Eastern Time) on each day that the
Portfolio is open for business (the "Pricing Time").
PORTFOLIO HOLDINGS
A description of the Fund's policies and procedures with respect to the
disclosure of the Portfolio's securities is available in the Fund's SAI.
HOW TO PURCHASE SHARES
You may purchase Class A shares and Class B shares of the Portfolio directly
from the Fund, from the Distributor or through certain third parties ("Financial
Intermediaries") on each day that the Portfolio is open for business.
Investors purchasing shares through a Financial Intermediary may be charged a
transaction-based or other fee by the Financial Intermediary for its services.
If you are purchasing Class A or Class B shares through a Financial
Intermediary, please consult your Financial Intermediary for purchase
instructions.
The minimum initial investment generally is $500,000 for Class A shares and
$100,000 for Class B shares of the Portfolio. The minimum additional investment
generally is $1,000 for each account that you have. If the value of your account
falls below the minimum initial investment amount for Class A shares or Class B
shares as a result of share redemptions, and remains below the minimum initial
investment amount for 60 consecutive days, your account may be subject to
involuntary conversion or involuntary redemption. You will be notified prior to
any such conversions or redemptions. The Adviser may waive the minimum initial
or additional investment and involuntary conversion or redemption features for
certain investors, including individuals purchasing through a Financial
Intermediary.
Shares may, in the Fund's discretion, be purchased with investment securities
(in lieu of or, in conjunction with, cash) acceptable to the Fund. The
securities would be accepted by the Fund at their market value in return for
Portfolio shares of equal value.
To help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain, verify
and record information that identifies each person who opens an account. What
this means to you: When you open an account, we will ask your name, address,
date of birth and other
9
information that will allow us to identify you. If we are unable to verify your
identity, we reserve the right to restrict additional transactions and/or
liquidate your account at the next calculated net asset value after your account
is closed (less any applicable sales/account charges and/or tax penalties) or
take any other action required by law.
INITIAL PURCHASE BY MAIL
You may open an account, subject to acceptance by the Fund, by completing and
signing an Account Registration Form provided by JPMorgan Investor Services
Company ("JPMorgan"), the Fund's transfer agent, which you can obtain by calling
JPMorgan at 1-800-548-7786 and mailing it to Morgan Stanley Institutional Fund,
Inc., c/o JPMorgan Investor Services Company, P.O. Box 182913, Columbus, OH
43218-2913 together with a check payable to Morgan Stanley Institutional Fund,
Inc.
Please note that payments to investors who redeem shares purchased by check will
not be made until payment of the purchase has been collected, which may take up
to eight business days after purchase. You can avoid this delay by purchasing
shares by wire.
INITIAL PURCHASE BY WIRE
You may purchase shares of the Portfolio by wiring Federal Funds to the
Custodian. YOU SHOULD FORWARD A COMPLETED ACCOUNT REGISTRATION FORM TO JPMORGAN
IN ADVANCE OF THE WIRE. NOTIFICATION MUST BE GIVEN TO JPMORGAN AT 1-800-548-7786
PRIOR TO THE DETERMINATION OF NAV. See the section above entitled "Pricing of
Portfolio Shares." (Prior notification must also be received from investors with
existing accounts.) Instruct your bank to send a Federal Funds (monies credited
by a Federal Reserve Bank) wire in a specified amount to the Custodian using the
following wire instructions:
JPMORGAN CHASE BANK
270 Park Avenue
New York, NY 10017
ABA #021000021
DDA #910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Subscription Account
Ref: (Portfolio Name, Account Number, Account Name)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
ADDITIONAL INVESTMENTS
You may purchase additional shares for your account at any time by purchasing
shares at net asset value by any of the methods described above. For additional
purchases directly from the Fund, your account name, the Portfolio name and the
class selected must be specified in the letter to assure proper crediting to
your account. In addition, you may purchase additional shares by wire by
following instructions under "Initial Purchase by Wire."
OTHER TRANSACTION INFORMATION
The Fund may suspend the offering of shares, or any class of shares, of the
Portfolio or reject any purchase orders when we think it is in the best
interests of the Fund.
Certain patterns of exchange and/or purchase or sale transactions involving the
Portfolio may result in the Fund rejecting, limiting or prohibiting, at its sole
discretion, and without prior notice, additional purchases and/or exchanges and
may result in a shareholder's account being closed. Determination in this regard
may be made based on the frequency or dollar amount of the previous exchange or
purchase or sale transaction. See "Frequent Purchases and Redemptions of
Shares."
HOW TO REDEEM SHARES
You may redeem Portfolio shares directly from the Fund, through the Distributor
or through your Financial Intermediary, each as described above under "How To
Purchase Shares." The redemption price will be the NAV per share calculated at
the next Pricing Time, which may be more or less than the purchase price of your
shares.
The Fund will ordinarily distribute redemption proceeds in cash within one
business day of your redemption request, but it may take up to seven days.
However, if you purchased shares by check, the Fund will not distribute
redemption proceeds until it has collected your purchase payment, which may take
up to eight days. In certain circumstances, for example, if payment of
redemption proceeds in cash would be detrimental to the remaining shareholders,
the Portfolio may pay a portion of the redemption proceeds by a
distribution-in-kind of readily marketable portfolio securities.
Shares of the Portfolio redeemed within 30 days of purchase will be subject to a
2% redemption fee, payable to the Portfolio. The redemption fee is designed to
protect the Portfolio and its remaining shareholders from the effects of
short-term trading. The redemption fee is not imposed on redemptions made: (i)
through systematic withdrawal/exchange plans, (ii) through pre-approved asset
allocation programs, (iii) of shares received by reinvesting income dividends or
capital gain distributions, (iv) through certain collective trust funds or other
pooled vehicles and (v) on behalf of advisory accounts where client allocations
are solely at the discretion of the Morgan Stanley Investment Management
investment team. The redemption fee is calculated based on, and deducted from,
the redemption proceeds. Each time you redeem or exchange shares, the shares
held the longest will be redeemed or exchanged first.
The redemption fee may not be imposed on transactions that occur through certain
omnibus accounts at financial intermediaries. Certain financial intermediaries
may apply different methodologies than those described above in assessing
redemption fees, may impose their own redemption fee that may differ from the
Portfolio's redemption fee or may impose certain trading restrictions to deter
market timing and frequent trading. If you invest in the Portfolio through a
financial intermediary, please read that firm's materials carefully to learn
about any other restrictions or fees that may apply.
10
EXCHANGE PRIVILEGE
You may exchange Portfolio shares for the same Class of shares of other
available portfolios of the Fund. In addition, you may exchange Class A shares
for Institutional Class shares or Class B shares for Adviser Class shares of
available portfolios of Morgan Stanley Institutional Fund Trust. Exchanges are
effected based on the respective NAVs of the applicable portfolios (subject to
any applicable redemption fee). To obtain a prospectus for another portfolio,
call the Fund at 1-800-548-7786 or contact your Financial Intermediary. If you
purchased Portfolio shares through a Financial Intermediary, certain portfolios
may be unavailable for exchange. Contact your Financial Intermediary to
determine which portfolios are available for exchange.
You can process your exchange by contacting your Financial Intermediary.
Otherwise, you should send exchange requests to the Fund's Transfer Agent by
mail to Morgan Stanley Institutional Fund, Inc., c/o JPMorgan Investor Services
Company, P.O. Box 182913, Columbus, OH 43218-2913. Exchange requests can also be
made by calling 1-800-548-7786.
For your protection when calling the Fund, we will employ reasonable procedures
to confirm that redemption instructions communicated over the telephone are
genuine. These procedures may include requiring various forms of personal
identification such as name, mailing address, social security number or other
tax identification number. Telephone instructions may also be recorded.
When you exchange for shares of another portfolio, your transaction will be
treated the same as an initial purchase. You will be subject to the same minimum
initial investment and account size as an initial purchase. Your exchange price
will be the price calculated at the next Pricing Time after the Fund receives
your exchange order. The Fund, in its sole discretion, may waive the minimum
initial investment amount in certain cases. An exchange of shares of the
Portfolio held for less than 30 days from the date of purchase will be subject
to the 2% redemption fee described under the section "How To Redeem Shares." The
Fund may terminate or revise the exchange privilege upon required notice or in
certain cases without notice.
FREQUENT PURCHASES AND REDEMPTIONS OF SHARES
Frequent purchases and redemptions of shares by Portfolio shareholders are
referred to as "market-timing" or "short-term trading" and may present risks for
other shareholders of the Portfolio, which may include, among other things,
diluting the value of the Portfolio's shares held by long-term shareholders,
interfering with the efficient management of the Portfolio, increasing brokerage
and administrative costs, incurring unwanted taxable gains and forcing the
Portfolio to hold excess levels of cash.
In addition, the Portfolio is subject to the risk that market-timers and/or
short-term traders may take advantage of time zone differences between the
foreign markets on which the Portfolio's securities trade and the time as of
which the Portfolio's net asset value is calculated ("time-zone arbitrage"). For
example, a market timer may purchase shares of the Portfolio based on events
occurring after foreign market closing prices are established, but before the
Portfolio's net asset value calculation, that are likely to result in higher
prices in foreign markets the following day. The market-timer would redeem the
Portfolio's shares the next day when the Portfolio's share price would reflect
the increased prices in foreign markets for a quick profit at the expense of
long-term Portfolio shareholders.
Investments in other types of securities also may be susceptible to short-term
trading strategies. These investments include securities that are, among other
things, thinly traded, traded infrequently or relatively illiquid, which have
the risk that the current market price for the securities may not accurately
reflect current market values. A shareholder may seek to engage in short-term
trading to take advantage of these pricing differences (referred to as "price
arbitrage").
The Fund discourages and does not accommodate frequent purchases and redemptions
of Portfolio shares by Portfolio shareholders and the Fund's Board of Directors
has adopted policies and procedures with respect to such frequent purchases and
redemptions.
The Fund's policies with respect to purchases, exchanges and redemptions of
Portfolio shares are described in the "Shareholder Information--How To Purchase
Shares," "Shareholder Information--How To Redeem Shares" and "Shareholder
Information--Exchange Privilege" sections of this Prospectus. Except as
described in each of these sections, and with respect to trades that occur
through omnibus accounts at intermediaries as described below, the Fund's
policies regarding frequent trading of Portfolio shares are applied uniformly to
all shareholders. With respect to trades that occur through omnibus accounts at
intermediaries, such as investment managers, broker-dealers, transfer agents and
third party administrators, the Fund (i) has requested assurance that such
intermediaries currently selling Portfolio shares have in place internal
policies and procedures reasonably designed to address market timing concerns
and has instructed such intermediaries to notify the Fund immediately if they
are unable to comply with such policies and procedures and (ii) requires all
prospective intermediaries to agree to cooperate in enforcing the Fund's
policies with respect to frequent purchases, exchanges and redemptions of
Portfolio shares.
With respect to trades that occur through omnibus accounts at intermediaries,
the Fund is currently limited in its ability to monitor trading activity or
enforce the redemption fee with respect to customers of such intermediaries.
Omnibus accounts generally do not identify customers' trading activity to the
Fund on an individual basis. Consequently, the Fund must rely on the financial
intermediary to monitor frequent short-term trading within the Portfolio by the
financial intermediary's customers. Certain intermediaries may not have the
ability to assess a redemption fee. There can be no assurance that the Fund will
be able to eliminate all market-timing activities.
11
DIVIDENDS AND DISTRIBUTIONS
The Portfolio's policy is to distribute to shareholders substantially all of its
net investment income, if any, in the form of an annual dividend and to
distribute net realized capital gains, if any, at least annually.
The Fund automatically reinvests all dividends and distributions in additional
shares. However, you may elect to receive distributions in cash by giving
written notice to the Fund or your Financial Intermediary or by checking the
appropriate box in the Distribution Option section on the Account Registration
Form.
TAXES
The dividends and distributions you receive from the Portfolio may be subject to
Federal, state and local taxation, depending on your tax situation. The tax
treatment of dividends and distributions is the same whether or not you reinvest
them. For taxable years beginning before January 1, 2009, dividends that are
attributable to "qualified dividends" (as defined in the Jobs and Growth Tax
Relief Reconciliation Act of 2003) received by the Portfolio itself may be taxed
at reduced rates to individual shareholders (15% at the maximum), if certain
requirements are met by the Portfolio and the shareholders. "Qualified
dividends" include dividends distributed by certain foreign corporations
(generally, corporations incorporated in a possession of the United States, some
corporations eligible for treaty benefits under a treaty with the United States,
and corporations whose stock with respect to which such dividend is paid is
readily tradable on an established securities market in the Unites States).
Dividends not attributable to "qualified dividends" received by the Portfolio
itself, including distributions of short-term capital gains, will be taxed at
normal tax rates applicable to ordinary income. Long-term capital gains
distributions to individuals are taxed at a reduced rate (15% at the maximum)
before January 1, 2009, regardless of how long you have held your shares. Unless
further Congressional legislative action is taken, reduced rates for dividends
and long-term capital gain will cease to be in effect after January 1, 2009. The
Portfolio may be able to pass through to you a credit for foreign income taxes
it pays. The Fund will tell you annually how to treat dividends and
distributions.
If you redeem shares of the Portfolio, you may be subject to tax on any gains
you earn based on your holding period for the shares and your marginal tax rate.
An exchange of shares of the Portfolio for shares of another portfolio is a sale
of Portfolio shares for tax purposes. Conversions of shares between classes will
not result in taxation.
Because each investor's tax circumstances are unique and the tax laws may
change, you should consult your tax advisor about your investment.
THE FUND CURRENTLY CONSISTS OF THE FOLLOWING PORTFOLIOS:
U.S. EQUITY
U.S. Large Cap Growth Portfolio
Focus Equity Portfolio
Large Cap Value Portfolio+
MicroCap Portfolio+
Small Company Growth Portfolio**
U.S. Equity Plus Portfolio+
U.S. Real Estate Portfolio
Large Cap Relative Value Portfolio
GLOBAL AND INTERNATIONAL EQUITY
Active International Allocation Portfolio
China Growth Portfolio+
Emerging Markets Portfolio
Global Franchise Portfolio
Global Value Equity Portfolio
Gold Portfolio+
International Equity Portfolio**
International Growth Equity Portfolio
International Magnum Portfolio
International Real Estate Portfolio
International Small Cap Portfolio**
FIXED INCOME
Emerging Markets Debt Portfolio
Mortgage-Backed Securities Portfolio+
Municipal Bond Portfolio+
MONEY MARKET
Money Market Portfolio
Municipal Money Market Portfolio
** Portfolio is currently closed to new investors with certain exceptions
+ Portfolio is not operational
12
MORGAN STANLEY INSTITUTIONAL FUND, INC. PROSPECTUS
Financial Highlights
FINANCIAL HIGHLIGHTS
No financial information is presented for the Portfolio because the Portfolio
had not commenced operations as of the date of this Prospectus.
13
MORGAN STANLEY INSTITUTIONAL FUND, INC. PROSPECTUS
Additional Information
WHERE TO FIND ADDITIONAL INFORMATION
In addition to this Prospectus, the Portfolio has a Statement of Additional
Information ("SAI"), dated December , 2005, which contains additional, more
detailed information about the Fund and the Portfolio. The SAI is incorporated
by reference into this Prospectus and, therefore, legally forms a part of this
Prospectus.
The Fund will publish annual and semi-annual reports ("Shareholder Reports")
that contain additional information about the Portfolio's investments. In the
Fund's annual report, when available, you will find a discussion of the market
conditions and the investment strategies that significantly affected the
Portfolio's performance during the last fiscal year. For additional Fund
information, including information regarding the investments comprising the
Portfolio, please call the toll-free number below.
You may obtain the SAI and Shareholder Reports, when available, without charge
by contacting the Fund at the toll-free number below or on our internet site at:
www.morganstanley.com/funds. If you purchased shares through a Financial
Intermediary, you may also obtain these documents, without charge, by contacting
your Financial Intermediary.
Information about the Fund, including the SAI, and Shareholder Reports, may be
obtained from the Securities and Exchange Commission in any of the following
ways. (1) In person: you may review and copy documents in the Commission's
Public Reference Room in Washington D.C. (for information call 1-202-942-8090);
(2) On-line: you may retrieve information from the Commission's web site at
http://www.sec.gov; (3) By mail: you may request documents, upon payment of a
duplicating fee, by writing to Securities and Exchange Commission, Public
Reference Section, Washington, D.C. 20549-0102; or (4) By e-mail: you may
request documents, upon payment of a duplicating fee, by e-mailing the
Securities and Exchange Commission at the following address: publicinfo@sec.gov.
To aid you in obtaining this information, the Fund's Investment Company Act
registration number is 811-05624.
Morgan Stanley Institutional Fund, Inc.
c/o JPMorgan Investor Services Company
P.O. Box 182913
Columbus, OH 43218-2913
For Shareholder Inquiries, call 1-800-548-7786.
Prices and Investment Results are available at www.morganstanley.com/im.
The information in this preliminary statement of additional information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission becomes
effective. This preliminary statement of additional information is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION -- DATED OCTOBER 7, 2005
MORGAN STANLEY INSTITUTIONAL FUND, INC.
INTERNATIONAL GROWTH EQUITY PORTFOLIO
P.O. BOX 2798
BOSTON, MASSACHUSETTS 02208-2798
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
December , 2005
Morgan Stanley Institutional Fund, Inc. (the "Fund") is a no load mutual
fund consisting of 24 portfolios offering a variety of investment alternatives.
Of the 24 portfolios, seven are not operational. This Statement of Additional
Information ("SAI") sets forth information about the Fund applicable to the
International Growth Equity Portfolio (the "Portfolio").
This SAI is not a prospectus, but should be read in conjunction with the
Portfolio's prospectus dated December , 2005, as it may be supplemented from
time to time, which may be obtained by calling the Fund at 1-800-548-7786.
The Portfolio offers Class A and Class B shares.
TABLE OF CONTENTS
[Download Table]
PAGE
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Investment Policies and Strategies 1
Investment Limitations 24
Disclosure of Portfolio Holdings 25
Purchase of Shares 29
Redemption of Shares 31
Account Policies and Features 33
Management of the Fund 34
Investment Advisory and Other Services 43
Distribution of Shares 47
Brokerage Practices 48
General Information 49
Taxes 50
Control Persons and Principal Holders of Securities 55
Performance Information 55
Financial Statements 55
Appendix A Descripton of Ratings A-1
INVESTMENT POLICIES AND STRATEGIES
This SAI provides additional information about the investment policies and
operations of the Fund and the Portfolio. Morgan Stanley Investment Management
Inc. (the "Adviser" or "MSIM") acts as investment adviser to the Portfolio.
The following table summarizes the permissible strategies and investments
for the Portfolio. This table should be used in conjunction with the investment
summaries for the Portfolio contained in the Prospectus in order to provide a
more complete description of the Portfolio's investment policies.
1
[Download Table]
EQUITY SECURITIES:
Common Stocks /X/
Depositary Receipts /X/
Preferred Stocks /X/
Rights /X/
Warrants /X/
IPOs /X/
Convertible Securities /X/
Limited Partnerships /X/
Investment Company Securities /X/
Real Estate Investing /X/
--REITs /X/
--Specialized Ownership Vehicles /X/
FIXED INCOME SECURITIES:
High Yield Securities / /
U.S. Government Securities /X/
Agencies /X/
Corporates /X/
Money Market Instruments /X/
Cash Equivalents /X/
Mortgage Related Securities /X/
Repurchase Agreements /X/
Municipals
Asset-Backed Securities
Loan Participations and Assignments / /
Temporary Investments /X/
Zero Coupons, Pay-In-Kind Securities
or Deferred Payment Securities /X/
Eurodollar and Yankee Dollar Obligations /X/
FOREIGN INVESTMENT:
Foreign Equity Securities /X/
Foreign Government Fixed Income Securities /X/
Foreign Corporate Fixed Income Securities /X/
Emerging Market Country Securities /X/
Russian Equity Securities /X/
Foreign Currency Transactions /X/
Brady Bonds /X/
Investment Funds /X/
OTHER SECURITIES:
Loans of Portfolio Securities /X/
Non-Publicly Traded Securities, Private Placements
and Restricted Securities /X/
When-Issued and Delayed Delivery Securities /X/
Borrowing for Investment Purposes /X/
Temporary Borrowing /X/
Reverse Repurchase Agreements / /
Short Sales /X/
Structured Investments /X/
DERIVATIVES:
Forward Foreign Currency Exchange
Contracts /X/
Futures Contracts /X/
Forward Contracts /X/
Options /X/
Swaps, Caps, Collars and Floors /X/
2
EQUITY SECURITIES
Equity securities generally represent an ownership interest in an issuer,
or may be convertible into or represent a right to acquire an ownership interest
in an issuer. While there are many types of equity securities, prices of all
equity securities will fluctuate. Economic, political and other events may
affect the prices of broad equity markets. For example, changes in inflation or
consumer demand may affect the prices of equity securities generally in the
United States. Similar events also may affect the prices of particular equity
securities. For example, news about the success or failure of a new product may
affect the price of a particular issuer's equity securities.
COMMON STOCKS. Common stocks represent an ownership interest in a corporation,
entitling the stockholder to voting rights and receipt of dividends paid based
on proportionate ownership.
DEPOSITARY RECEIPTS. Depositary receipts represent an ownership interest in
securities of foreign companies (an "underlying issuer") that are deposited with
a depositary. Depositary receipts are not necessarily denominated in the same
currency as the underlying securities. Depositary receipts include American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other
types of depositary receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "depositary receipts"). ADRs are
dollar-denominated depositary receipts typically issued by a U.S. financial
institution which evidence an ownership interest in a security or pool of
securities issued by a foreign issuer. ADRs are listed and traded in the United
States. ADRs also include American depositary shares. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies,
although they also may be issued by U.S. financial institutions, and evidence
ownership interests in a security or pool of securities issued by either a
foreign or a U.S. corporation. Generally, depositary receipts in registered form
are designed for use in the U.S. securities market and depositary receipts in
bearer form are designed for use in securities markets outside the United
States.
Depositary receipts may be "sponsored" or "unsponsored." Sponsored
depositary receipts are established jointly by a depositary and the underlying
issuer, whereas unsponsored depositary receipts may be established by a
depositary without participation by the underlying issuer. Holders of
unsponsored depositary receipts generally bear all the costs associated with
establishing unsponsored depositary receipts. In addition, the issuers of the
securities underlying unsponsored depository receipts are not obligated to
disclose material information in the United States and, therefore, there may be
less information available regarding such issuers and there may not be a
correlation between such information and the market value of the depositary
receipts. For purposes of the Portfolio's investment policies, the Portfolio's
investments in depositary receipts will be deemed to be an investment in the
underlying securities, except that ADRs and other types of depositary receipts
may be deemed to be issued by a U.S. issuer.
PREFERRED STOCKS. Preferred stocks are securities that evidence ownership in a
corporation and pay a fixed or variable stream of dividends. Preferred stocks
have a preference over common stocks in the event of the liquidation of an
issuer and usually do not carry voting rights. Because preferred stocks pay a
fixed or variable stream of dividends they have many of the characteristics of a
fixed-income security and are, therefore, included in both the definition of
equity security and fixed-income security.
RIGHTS. Rights represent the right, but not the obligation, for a fixed period
of time to purchase additional shares of an issuer's common stock at the time of
a new issuance, usually at a price below the initial offering price of the
common stock and before the common stock is offered to the general public.
Rights are usually freely transferable. The risk of investing in a right is that
the right may expire prior to the market value of the common stock exceeding the
price fixed by the right.
WARRANTS. Warrants give holders the right, but not the obligation, to buy common
stock of an issuer at a given price, usually higher than the market price at the
time of issuance, during a specified period. Warrants are usually freely
transferable. The risk of investing in a warrant is that the warrant may expire
prior to the market value of the common stock exceeding the price fixed by the
warrant.
IPOs. The Portfolio may purchase equity securities issued as part of, or a short
period after, a company's initial public offering ("IPOs"), and may at times
dispose of those securities shortly after their acquisition. The Portfolio's
purchase of securities issued in IPOs exposes it to the risks associated with
companies that have little operating history as public companies, as well as to
the risks inherent in those sectors of the market where these issuers operate.
The market for IPO issuers has been volatile, and share prices of newly-public
companies have fluctuated significantly over short periods of time.
CONVERTIBLE SECURITIES. Convertible securities are securities that may be
exchanged under certain circumstances for a fixed number of shares of common
stock or other equity securities. Convertible securities generally represent
3
a feature of some other type of security, such as a fixed-income security or
preferred stock, so that, for example, a convertible fixed-income security would
be a fixed-income security that is convertible into common stock. Convertible
securities may be viewed as an investment in the current security or the
security into which the convertible securities may be exchanged and, therefore,
are included in both the definitions of equity security and fixed-income
security.
LIMITED PARTNERSHIPS. A limited partnership interest entitles a portfolio to
participate in the investment return of the partnership's assets as defined by
the agreement among the partners. As a limited partner, a portfolio generally is
not permitted to participate in the management of the partnership. However,
unlike a general partner whose liability is not limited, a limited partner's
liability generally is limited to the amount of its commitment to the
partnership.
INVESTMENT COMPANY SECURITIES. Investment company securities are securities of
other open-end, closed-end and unregistered investment companies, including
exchange-traded funds ("ETFs"). The Investment Company Act of 1940, as amended
(the "1940 Act"), generally prohibits an investment company from acquiring more
than 3% of the outstanding voting shares of an investment company and limits
such investments to no more than 5% of a portfolio's total assets in any one
investment company, and no more than 10% in any combination of investment
companies. The Portfolio may invest in investment company securities of
investment companies managed by MSIM or its affiliates to the extent permitted
under the 1940 Act or as otherwise authorized by the Securities and Exchange
Commission (the "SEC"). To the extent the Portfolio invests a portion of its
assets in investment company securities, those assets will be subject to the
risks of the purchased investment company's portfolio securities, and a
shareholder in the Portfolio will bear not only his proportionate share of the
expenses of the Portfolio, but also, indirectly the expenses of the purchased
investment company.
EXCHANGE TRADED FUNDS. The Portfolio may invest in shares of various ETFs,
including exchange-traded index and bond funds. Exchange-traded index funds seek
to track the performance of various securities indices. Shares of ETFs have many
of the same risks as direct investments in common stocks or bonds. In addition,
their market value is expected to rise and fall as the value of the underlying
index or bond rises and falls. The market value of their shares may differ from
the net asset value of the particular fund. As a shareholder in an investment
company, the Portfolio would bear its ratable share of that entity's expenses,
including its advisory and administration fees. At the same time, the Portfolio
would continue to pay its own investment management fees and other expenses. As
a result, the Portfolio and its shareholders, in effect, will be absorbing
duplicate levels of fees with respect to investments in other investment
companies.
REAL ESTATE INVESTING. Investments in securities of issuers engaged in the real
estate industry entail special risks and considerations. In particular,
securities of such issuers may be subject to risks associated with the direct
ownership of real estate. These risks include the cyclical nature of real estate
values, risks related to general and local economic conditions, overbuilding and
increased competition, increases in property taxes and operating expenses,
demographic trends and variations in rental income, changes in zoning laws,
casualty or condemnation losses, environmental risks, regulatory limitations on
rents, changes in neighborhood values, changes in the appeal of properties to
tenants, increases in interest rates and other real estate capital market
influences. Generally, increases in interest rates will increase the costs of
obtaining financing, which could directly and indirectly decrease the value of
the Portfolio's investments.
REITs. The Portfolio may invest in real estate investment trusts ("REITs").
REITs pool investors' funds for investment primarily in income producing real
estate or real estate related loans or interests. A REIT is not taxed on income
distributed to its shareholders or unitholders if it complies with regulatory
requirements relating to its organization, ownership, assets and income, and
with a regulatory requirement that it distribute to its shareholders or
unitholders at least 95% of its taxable income for each taxable year. Generally,
REITs can be classified as Equity REITs, Mortgage REITs or Hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
their income primarily from rents and capital gains from appreciation realized
through property sales. Equity REITs are further categorized according to the
types of real estate securities they own, E.G., apartment properties, retail
shopping centers, office and industrial properties, hotels, health-care
facilities, manufactured housing and mixed-property types. Mortgage REITs invest
the majority of their assets in real estate mortgages and derive their income
primarily from interest payments. Hybrid REITs combine the characteristics of
both Equity and Mortgage REITs.
A shareholder in the Portfolio, by investing in REITs indirectly through
the Portfolio, will bear not only his proportionate share of the expenses of the
Portfolio, but also, indirectly, the management expenses of the
4
underlying REITs. REITs may be affected by changes in the value of their
underlying properties and by defaults by borrowers or tenants. Mortgage REITs
may be affected by the quality of the credit extended. Furthermore, REITs are
dependent on specialized management skills. Some REITs may have limited
diversification and may be subject to risks inherent in investments in a limited
number of properties, in a narrow geographic area or in a single property type.
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders or unitholders, and may be subject to defaults by
borrowers and to self-liquidations. In addition, the performance of a REIT may
be affected by its failure to qualify for tax-free pass-through of income, or
its failure to maintain exemption from registration under the 1940 Act.
SPECIALIZED OWNERSHIP VEHICLES. Specialized ownership vehicles pool investors'
funds for investment primarily in income-producing real estate or real estate
related loans or interests. Such specialized ownership vehicles in which the
Portfolio may invest include property unit trusts, REITs and other similar
specialized investment vehicles. Investments in such specialized ownership
vehicles may have favorable or unfavorable legal, regulatory or tax implications
for the Portfolio and, to the extent such vehicles are structured similarly to
investment funds, a shareholder in the Portfolio will bear not only his
proportionate share of the expenses of the Portfolio, but also, indirectly the
expenses of the specialized ownership vehicle.
FIXED INCOME SECURITIES
Fixed income securities generally represent an issuer's obligation to repay
to the investor (or lender) the amount borrowed plus interest over a specified
time period. A typical fixed income security specifies a fixed date when the
amount borrowed (principal) is due in full, known as the maturity date, and
specifies dates when periodic interest (coupon) payments will be made over the
life of the security.
Fixed income securities come in many varieties and may differ in the way
that interest is calculated, the amount and frequency of payments, the type of
collateral, if any, and the presence of special features (E.G., conversion
rights). Prices of fixed income securities fluctuate and, in particular, are
subject to several key risks including, but not limited to, interest-rate risk,
credit risk, prepayment risk and spread risk.
Interest-rate risk arises due to general changes in the level of market
rates after the purchase of a fixed income security. Generally, the values of
fixed income securities vary inversely with changes in interest rates. During
periods of falling interest rates, the values of most outstanding fixed income
securities generally rise and during periods of rising interest rates, the
values of most fixed income securities generally decline. While fixed income
securities with longer final maturities often have higher yields than those with
shorter maturities, they usually possess greater price sensitivity to changes in
interest rates and other factors. Traditionally, the remaining term to maturity
has been used as a barometer of a fixed income security's sensitivity to
interest rate changes. This measure, however, considers only the time until the
final principal payment and takes no account of the pattern or amount of
principal or interest payments prior to maturity. Duration combines
consideration of yield, coupon, interest and principal payments, final maturity
and call (prepayment) features. Duration measures the likely percentage change
in a fixed income security's price for a small parallel shift in the general
level of interest rates; it is also an estimate of the weighted average life of
the remaining cash flows of a fixed income security. In almost all cases, the
duration of a fixed income security is shorter than its term to maturity.
Credit risk, also known as default risk, represents the possibility that an
issuer may be unable to meet scheduled interest and principal payment
obligations. It is most often associated with corporate bonds, although it can
be present in other fixed income securities as well (note that the market
generally assumes that obligations of the U.S. Treasury are free from credit
risk). Credit ratings and quantitative models attempt to measure the degree of
credit risk in fixed income securities, and provide insight as to whether
prevailing yield spreads afford sufficient compensation for such risk. Other
things being equal, fixed income securities with high degrees of credit risk
should trade in the market at lower prices (and higher yields) than fixed income
securities with low degrees of credit risk.
Prepayment risk, also known as call risk, arises due to the issuer's
ability to prepay all or most of the fixed income security prior to the stated
final maturity date. Prepayments generally rise in response to a decline in
interest rates as debtors take advantage of the opportunity to refinance their
obligations. This risk is often associated with mortgage securities where the
underlying mortgage loans can be refinanced, although it can also be present in
corporate or other types of bonds with call provisions. When a prepayment
occurs, the Portfolio may be forced to reinvest in lower yielding fixed income
securities. Quantitative models are designed to help assess the degree of
prepayment risk, and provide insight as to whether prevailing yield spreads
afford sufficient compensation for such risk.
5
Spread risk is the potential for the value of the Portfolio's assets to
fall due to the widening of spreads. Fixed income securities generally
compensate for greater credit risk by paying interest at a higher rate. The
difference (or "spread") between the yield of a security and the yield of a
benchmark, such as a U.S. Treasury security with a comparable maturity, measures
the additional interest paid for credit risk. As the spread on a security widens
(or increases), the price (or value) of the security falls. Spread widening may
occur, among other reasons, as a result of market concerns over the stability of
the market, excess supply, general credit concerns in other markets, security-
or market-specific credit concerns or general reductions in risk tolerance.
Economic, political and other events also may affect the prices of broad
fixed income markets, although the risks associated with such events are
transmitted to the market via changes in the prevailing levels of interest
rates, credit risk, prepayment risk or spread risk.
INVESTMENT GRADE SECURITIES. Investment grade securities are fixed income
securities rated by one or more of the rating agencies in one of the four
highest rating categories at the time of purchase (E.G., AAA, AA, A or BBB by
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
("S&P") or Fitch Ratings ("Fitch"), or Aaa, Aa, A or Baa by Moody's Investors
Service, Inc. ("Moody's")) or determined to be of equivalent quality by the
Adviser. Securities rated BBB or Baa represent the lowest of four levels of
investment grade securities and are regarded as borderline between definitely
sound obligations and those in which the speculative element begins to
predominate. Ratings assigned to fixed income securities represent only the
opinion of the rating agency assigning the rating and are not dispositive of the
credit risk associated with the purchase of a particular fixed income security.
Moreover, market risk also will affect the prices of even the highest rated
fixed income securities so that their prices may rise or fall even if the
issuer's capacity to repay its obligations remains unchanged.
U.S. GOVERNMENT SECURITIES. U.S. Government securities refers to a variety of
fixed income securities issued or guaranteed by the U.S. Government and various
instrumentalities and agencies. The U.S. government securities that the
Portfolio may purchase include U.S. Treasury bills, notes and bonds, all of
which are direct obligations of the U.S. Government. In addition, the Portfolio
may purchase securities issued by agencies and instrumentalities of the U.S.
Government which are backed by the full faith and credit of the United States.
Among the agencies and instrumentalities issuing these obligations are the
Government National Mortgage Association ("Ginnie Mae") and the Federal Housing
Administration ("FHA"). The Portfolio may also purchase securities issued by
agencies and instrumentalities which are not backed by the full faith and credit
of the United States, but whose issuing agency or instrumentality has the right
to borrow, to meet its obligations, from the U.S. Treasury. Among these agencies
and instrumentalities are the Federal National Mortgage Association ("Fannie
Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the
Federal Home Loan Banks. Further, the Portfolio may purchase securities issued
by agencies and instrumentalities which are backed solely by the credit of the
issuing agency or instrumentality. Among these agencies and instrumentalities is
the Federal Farm Credit System.
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ADJUSTABLE RATE GOVERNMENT SECURITIES. Adjustable rate government
securities are variable rate securities where the variable rate of interest is
readjusted no less frequently than every 397 days and deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate.
AGENCIES. Agencies refer to fixed income securities issued or guaranteed by
federal agencies and U.S. Government sponsored instrumentalities. They may or
may not be backed by the full faith and credit of the U.S. Government. If they
are not backed by the full faith and credit of the United States, the investor
must look principally to the agency or instrumentality 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 commitment. Agencies which are backed by the full faith and credit
of the United States include the Export-Import Bank, Farmers Home
Administration, Federal Financing Bank and others. Certain debt issued by
Resolution Funding Corporation has both its principal and interest backed by the
full faith and credit of the U.S. Treasury in that its principal is backed by
U.S. Treasury zero coupon issues, while the U.S. Treasury is explicitly required
to advance funds sufficient to pay interest on it, if needed. Certain agencies
and instrumentalities, such as Ginnie Mae, are, in effect, backed by the full
faith and credit of the United States through provisions in their charters that
they may make "indefinite and unlimited" drawings on the Treasury, if needed to
service its debt. Debt from certain other agencies and instrumentalities,
including the Federal Home Loan Bank and Fannie Mae, are not guaranteed by the
United States, but those institutions are protected by the discretionary
authority of the U.S. Treasury to purchase certain amounts of their securities
to assist them in meeting their debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System, are federally chartered
institutions under U.S. Government supervision, but their debt securities are
backed only by the credit worthiness of those institutions, not the U.S.
Government. Some of the U.S. Government agencies that issue or guarantee
securities include the Export-Import Bank of the United States, Farmers Home
Administration, FHA, Maritime Administration, Small Business Administration and
The Tennessee Valley Authority ("TVA"). An instrumentality of the U.S.
Government is a government agency organized under federal charter with
government supervision. Instrumentalities issuing or guaranteeing securities
include, among others, Federal Home Loan Banks, the Federal Land Banks, Central
Bank for Cooperatives, Federal Intermediate Credit Banks and Fannie Mae.
MATURITY AND DURATION MANAGEMENT. A component of the Adviser's fixed income
investment strategy is maturity and duration management. The maturity and
duration structure of the Portfolio investing in fixed income securities is
actively managed, based upon the Adviser's assessment of the market's implied
forecasts for inflation and economic growth. Adjustments to shorten portfolio
maturity and duration are made to limit capital losses during periods when
interest rates are expected to rise. Conversely, adjustments made to lengthen
maturity are intended to produce capital appreciation in periods when interest
rates are expected to fall.
Duration is a measure of the expected life of a fixed income security on a
present value basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a callable bond, expected to be received, and weights them by
the present values of the cash to be received at each future point in time. For
any fixed income security with interest payments occurring prior to the payment
of principal, duration is always less than maturity. In general, all other
factors being the same, the lower the stated or coupon rate of interest of a
fixed income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed income security, the
shorter the duration of the security.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities generally is 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
CORPORATES. Corporates are fixed income securities issued by private businesses.
Holders, as creditors, have a prior legal claim over holders of equity
securities of the issuer as to both income and assets for the principal and
interest due the holder.
MONEY MARKET INSTRUMENTS. Money market instruments are high quality short-term
fixed income securities. Money market instruments may include obligations of
governments, government agencies, banks, corporations and special purpose
entities and repurchase agreements relating to these obligations. Certain money
market instruments may be denominated in a foreign currency.
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CASH EQUIVALENTS. Cash equivalents are short-term fixed income securities
comprising:
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a commercial
bank or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
The Portfolio may invest in obligations of U.S. banks, and in foreign
branches of U.S. banks (Eurodollars) and U.S. branches of foreign banks (Yankee
dollars). Euro and Yankee dollar investments will involve some of the same
risks of investing in international securities that are discussed in various
foreign investing sections of this SAI.
The Portfolio will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the case
of U.S. banks, it is a member of the Federal Deposit Insurance Corporation and
(iii) in the case of foreign branches of U.S. banks, the security is deemed by
the Adviser to be of an investment quality comparable with other debt securities
which the Portfolio may purchase.
(2) The Portfolio may invest in commercial paper (see below) rated at time
of purchase by one or more Nationally Recognized Statistical Rating
Organizations ("NRSROs") in one of their two highest categories, (E.G., A-l or
A-2 by S&P or Prime 1 or Prime 2 by Moody's), or, if not rated, issued by a
corporation having an outstanding unsecured debt issue rated high-grade by an
NRSRO (E.G., A or better by Moody's, S&P or Fitch);
(3) Short-term corporate obligations rated high-grade at the time of
purchase by an NRSRO (E.G., A or better by Moody's, S&P or Fitch);
(4) U.S. Government obligations, including bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) Government agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie Mae,
Federal Financing Bank, TVA and others; and
(6) Repurchase agreements collateralized by the securities listed above.
COMMERCIAL PAPER. Commercial paper refers to short-term fixed income
securities with maturities ranging from 1 to 270 days. They are primarily issued
by corporations needing to finance large amounts of receivables, but may be
issued by banks and other borrowers. Commercial paper is issued either directly
or through broker-dealers, and may be discounted or interest-bearing. Commercial
paper is unsecured, but is almost always backed by bank lines of credit.
Virtually all commercial paper is rated by Moody's or S&P.
Commercial paper rated A-1 by S&P has the following characteristics: (1)
liquidity ratios are adequate to meet cash requirements; (2) long-term senior
debt is rated "A" or better; (3) the issuer has access to at least two
additional channels of borrowing; (4) basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; (5) typically, the
issuer's industry is well established and the issuer has a strong position
within the industry; and (6) the reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is A-1, A-2 or A-3.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and the appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships that exist with the issuer; and (8) recognition by
8
the management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
MORTGAGE RELATED SECURITIES. Mortgage related securities are securities that,
directly or indirectly, represent a participation in, or are secured by and
payable from, mortgage loans on real property. Mortgage related securities
include collateralized mortgage obligations and mortgage-backed securities
issued or guaranteed by agencies or instrumentalities of the U.S. Government or
by private sector entities.
MORTGAGE-BACKED SECURITIES. With mortgage-backed securities ("MBSs"),
many mortgagees' obligations to make monthly payments to their lending
institution are pooled together and passed through to investors. The pools
are assembled by various governmental, Government-related and private
organizations. The Portfolio may invest in securities issued or guaranteed by
Ginnie Mae, FHLMC or Fannie Mae, private issuers and other government
agencies. MBSs issued by non-agency issuers, whether or not such securities
are subject to guarantees, may entail greater risk, since private issuers may
not be able to meet their obligations under the policies. If there is no
guarantee provided by the issuer, the Portfolio will purchase only MBSs that
at the time of purchase are rated investment grade by one or more NRSROs or,
if unrated, are deemed by the Adviser to be of comparable quality.
MBSs are issued or guaranteed by private sector originators of or investors
in mortgage loans and structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
however, they are generally structured with one or more of the types of credit
enhancement described below. Fannie Mae and FHLMC obligations are not backed by
the full faith and credit of the U.S. Government as GNMA certificates are. FHLMC
securities are supported by the FHLMC's right to borrow from the U.S. Treasury.
Each of GNMA, Fannie Mae and FHLMC guarantees timely distributions of interest
to certificate holders. Each of GNMA and Fannie Mae also guarantees timely
distributions of scheduled principal. Although FHLMC has in the past guaranteed
only the ultimate collection of principal of the underlying mortgage loan, FHLMC
now issues MBSs (FHLMC Gold PCS) that also guarantee timely payment of monthly
principal reductions. Resolution Funding Corporation ("REFCORP") obligations are
backed, as to principal payments, by zero coupon U.S. Treasury bonds and, as to
interest payments, ultimately by the U.S. Treasury.
There are two methods of trading MBSs. A specified pool transaction is a
trade in which the pool number of the security to be delivered on the settlement
date is known at the time the trade is made. This is in contrast with the
typical MBS transaction, called a TBA (To Be Announced) transaction, in which
the type of MBS to be delivered is specified at the time of trade but the actual
pool numbers of the securities that will be delivered are not known at the time
of the trade. The pool numbers of the pools to be delivered at settlement are
announced shortly before settlement takes place. The terms of the TBA trade may
be made more specific if desired. Generally, agency pass-through MBSs are traded
on a TBA basis. See also "Leverage Risk."
Like fixed income securities in general, MBSs will generally decline in
price when interest rates rise. Rising interest rates also tend to discourage
refinancings of home mortgages, with the result that the average life of MBSs
held by the Portfolio may be lengthened. As average life extends, price
volatility generally increases. This extension of average life causes the market
price of the MBSs to decrease further when interest rates rise than if their
average lives were fixed. However, when interest rates fall, mortgages may not
enjoy as large a gain in market value due to prepayment risk because additional
mortgage prepayments must be reinvested at lower interest rates. Faster
prepayment will shorten the average life and slower prepayments will lengthen
it. However, it is possible to determine what the range of the average life
movement could be and to calculate the effect that it will have on the price of
the MBS. In selecting MBSs, the Adviser looks for those that offer a higher
yield to compensate for any variation in average maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Portfolio may fail to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories. The
Portfolio may invest, without limit, in MBSs issued by private issuers when the
Adviser deems that the quality of the investment, the quality of the issuer, and
market conditions warrant such investments. The Portfolio will purchase
securities issued by private issuers that are rated investment grade at the time
of purchase by Moody's, Fitch or S&P or are deemed by the Adviser to be of
comparable investment quality.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed by
the full faith and credit of the U.S. Government.
Each Fannie Mae certificate represents a pro rata interest in one or more
pools of mortgage loans insured by the FHA under the Housing Act, or Title V of
the Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of
Veteran Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans") or
9
conventional mortgage loans (I.E., mortgage loans that are not insured or
guaranteed by any governmental agency) of the following types: (i) fixed rate
level payment mortgage loans; (ii) fixed rate growing equity mortgage loans;
(iii) fixed rate graduated payment mortgage loans; (iv) variable rate California
mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed rate
and adjustable mortgage loans secured by multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations solely
of Freddie Mac and are not backed by the full faith and credit of the U.S.
Government.
Freddie Mac certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates consist of fixed rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on
one-to-four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
Freddie Mac Certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and participations
comprising another Freddie Mac Certificate group.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes Ginnie Mae to guarantee the timely payment of the principal and
interest on certificates that are based on and backed by a pool of FHA Loans, VA
Loans or by pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the U.S. Government is pledged to the payment
of all amounts that may be required to be paid under any guaranty. In order to
meet its obligations under such guaranty, Ginnie Mae is authorized to borrow
from the U.S. Treasury with no limitations as to amount.
Each Ginnie Mae certificate represents a pro rata interest in one or more
of the following types of mortgage loans: (i) fixed rate level payment mortgage
loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate
growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one to
four-family housing units.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. Government or by private originators
or investors in mortgage loans. They are backed by mortgage-backed securities
(discussed above) or whole loans (all such assets, the "Mortgage Assets") and
are evidenced by a series of bonds or certificates issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways. Interest is paid or accrues on CMOs on a monthly, quarterly or
semi-annual basis.
CMOs may be issued by agencies or instrumentalities of the U.S. Government,
or by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated for federal income tax purposes as a Real
Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued after
1991 must elect to be treated as a REMIC or it will be taxable as a corporation
under rules regarding taxable mortgage pools.
The principal and interest on the Mortgage Assets may be allocated among
the several classes of a CMO in many ways. The general goal in allocating cash
flows on Mortgage Assets to the various classes of a CMO is to create certain
tranches on which the expected cash flows have a higher degree of predictability
than do the underlying Mortgage Assets. As a general matter, the more
predictable the cash flow is on a particular CMO tranche, the lower the
anticipated yield on that tranche at the time of issue will be relative to
prevailing market yields on Mortgage Assets. As part of the process of creating
more predictable cash flows on certain tranches of a CMO, one or more tranches
generally must be created that absorb most of the changes in the cash flows on
the
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underlying Mortgage Assets. The yields on these tranches are generally higher
than prevailing market yields on other mortgage related securities with similar
average lives. Principal prepayments on the underlying Mortgage Assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final scheduled distribution dates. Because of the uncertainty of the cash flows
on these tranches, the market prices and yields of these tranches are more
volatile. In addition, some inverse floating rate obligation CMOs exhibit
extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of these CMOs is sensitive not only to changes in interest rates, but
also to changes in prepayment rates on the related underlying Mortgage Assets.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of
CMO tranche or series designed to provide relatively predictable payments,
provided that, among other things, the actual prepayment experience on the
underlying Mortgage Assets falls within a predefined range. If the actual
prepayment experience on the underlying Mortgage Assets is faster or slower than
the predefined range or if deviations from other assumptions occur, payments on
the PAC Bond may be earlier or later than predicted and the yield may rise or
fall. The magnitude of the predefined range varies from one PAC Bond to another;
a narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risk of prepayment than are other types of
mortgage related securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed Securities
("SMBSs") are multi-class mortgage securities issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans. SMBSs are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of Mortgage Assets. In some cases, one class will receive all of the
interest ("interest-only" or "IO class"), while the other class will receive all
of the principal ("principal-only" or "PO class"). IOs tend to decrease in value
substantially if interest rates decline and prepayment rates become more rapid.
POs tend to decrease in value substantially if interest rates increase and the
rate of repayment decreases. The yield to maturity on IO classes and PO classes
is extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying Mortgage Assets, and significant changes in the rate
of principal repayments will have a corresponding effect on the SMBSs' yield to
maturity.
CREDIT ENHANCEMENT. Mortgage related securities are often backed by a pool
of assets representing the obligations of a number of parties. To lessen the
effect of failure by obligors on underlying assets to make payments, these
securities may have various types of credit support. Credit support falls into
two primary categories: (i) liquidity protection, and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection generally refers to the provision of advances, typically by
the entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties (referred
to herein as "third party credit support"), through various means of structuring
the transaction or through a combination of such approaches.
The ratings of mortgage related securities for which third party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could decline
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal and
interest thereon, with defaults on the underlying assets being borne first by
the holders of the most subordinated class), creation of "reserve funds" (where
cash or investments, sometimes funded from a portion of the payments on the
underlying assets, are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each security is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Portfolio purchases a security or basket of securities and simultaneously
commits to resell that security or basket to the seller (a bank, broker or
dealer) at a mutually agreed upon date and price. The resale price reflects the
purchase price plus an agreed upon
11
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security. Repurchase agreements may be viewed as a
fully collateralized loan of money by the Portfolio to the seller at a mutually
agreed upon rate and price. The term of these agreements is usually from
overnight to one week, and never exceeds one year. Repurchase agreements with a
term of over seven days are considered illiquid.
In these transactions, the Portfolio receives as collateral securities that
have a market value at least equal to the purchase price (including accrued
interest) of the repurchase agreement, and this value is maintained during the
term of the agreement. These securities are held by the Fund's custodian or an
approved third party for the benefit of the Portfolio until repurchased.
Repurchase agreements permit the Portfolio to remain fully invested while
retaining overnight flexibility to pursue investments of a longer-term nature.
If the seller defaults and the collateral value declines, the Portfolio might
incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the collateral may be delayed or
limited.
While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Portfolio follows procedures designed
to minimize such risks. These procedures include effecting repurchase
transactions only with large, well capitalized and well established financial
institutions, whose financial condition will be continually monitored by the
Adviser. In addition, as described above, the value of the collateral underlying
the repurchase agreement will always be at least equal to the repurchase price
which consists of the acquisition price paid to the seller of the securities
plus the accrued resale premium, which is determined as the amount specified in
the repurchase agreement or the daily amortization of the difference between the
acquisition price and the resale price specified in the repurchase agreement. In
the event of a default or bankruptcy by a selling financial institution, the
Portfolio will seek to liquidate such collateral. However, the exercising of the
Portfolio's right to liquidate such collateral could involve certain costs or
delays and, to the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Portfolio
could suffer a loss. In addition, the Portfolio may invest in repurchase
agreements backed by non-governmental collateral; the Portfolio may invest in
repurchase agreements that are backed by money market instruments or high grade
corporate bonds entered into only on an overnight basis and only with approved
broker-dealers. Such repurchase agreements may be subject to the automatic stay
provision of the Bankruptcy Code, and may result in the inability of the
Portfolio to immediately liquidate the collateral in the event of default or
bankruptcy by the seller.
[Pursuant to an order issued by the SEC, the Portfolio may pool its daily
uninvested cash balances in order to invest in repurchase agreements on a joint
basis with other investment companies advised by the Adviser. By entering into
repurchase agreements on a joint basis, the Portfolio expects to incur lower
transaction costs and potentially obtain higher rates of interest on such
repurchase agreements. The Portfolio's participation in the income from jointly
purchased repurchase agreements will be based on the Portfolio's percentage
share in the total repurchase agreement. See also "Leverage Risk."]
PREFERRED STOCKS. Preferred stocks are securities that evidence ownership
in a corporation and pay a fixed or variable stream of dividends. Preferred
stocks have a preference over common stocks in the event of the liquidation of
an issuer and usually do not carry voting rights. Because preferred stocks
represent an ownership interest in the issuer they have many of the
characteristics of an equity security and are, therefore, included in both the
definition of fixed income security and equity security.
TEMPORARY INVESTMENTS. When the Adviser believes that changes in economic,
financial or political conditions make it advisable, the Portfolio may invest up
to 100% of its assets in cash and certain short- and medium-term fixed income
securities for temporary defensive purposes. These temporary investments may
consist of obligations of the U.S. or foreign governments, their agencies or
instrumentalities; money market instruments; and instruments issued by
international development agencies.
ZERO COUPONS, PAY-IN-KIND SECURITIES OR DEFERRED PAYMENT SECURITIES. Zero
coupon, pay-in-kind and deferred payment securities are all types of fixed
income securities on which the holder does not receive periodic cash payments of
interest or principal. Generally, these securities are subject to greater price
volatility and lesser liquidity in the event of adverse market conditions than
comparably rated securities paying cash interest at regular intervals. Although
the Portfolio will not receive cash periodic coupon payments on these
securities, the Portfolio may be deemed to have received interest income, or
"phantom income" during the life of the obligation. The Portfolio may have to
pay taxes on this phantom income, although it has not received any cash payment.
ZERO COUPONS. Zero coupons are fixed income securities that do not make
regular interest payments. Instead, zero coupons are sold at a discount from
their face value. The difference between a zero coupon's issue or purchase price
and its face value represents the imputed interest an investor will earn if the
obligation is held until maturity.
12
Zero coupons may offer investors the opportunity to earn a higher yield than
that available on ordinary interest-paying obligations of similar credit quality
and maturity.
PAY-IN-KIND SECURITIES. 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.
DEFERRED PAYMENT SECURITIES. Deferred payment securities are securities
that remain zero coupons until a predetermined date, at which time the stated
coupon rate becomes effective and interest becomes payable at regular intervals.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From time
to time, the Portfolio may purchase securities on a when-issued or delayed
delivery basis or may purchase or sell securities on a forward commitment basis.
When these transactions are negotiated, the price is fixed at the time of the
commitment, but delivery and payment can take place a month or more after the
date of commitment. The Portfolio may sell the securities before the settlement
date, if it is deemed advisable. The securities so purchased or sold are subject
to market fluctuation and no interest or dividends accrue to the purchaser prior
to the settlement date.
At the time the Portfolio makes the commitment to purchase or sell
securities on a when-issued or delayed delivery or forward commitment basis, it
will record the transaction and thereafter reflect the value, each day, of such
security purchased, or if a sale, the proceeds to be received, in determining
its net asset value. At the time of delivery of the securities, their value may
be more or less than the purchase or sale price. An increase in the percentage
of the Portfolio's assets committed to the purchase of securities on a
when-issued or delayed delivery or forward commitment basis may increase the
volatility of its net asset value. The Portfolio will also earmark cash or
liquid assets or establish a segregated account on the Portfolio's books in
which it will continually maintain cash or cash equivalents or other liquid
portfolio securities equal in value to commitments to purchase securities on a
when-issued or delayed delivery or forward commitment basis. See also "Leverage
Risk."
EURODOLLAR AND YANKEE DOLLAR OBLIGATIONS. The Portfolio may invest in Eurodollar
and Yankee dollar obligations, which are fixed income securities. Eurodollar and
Yankee dollar obligations include time deposits, which are non-negotiable
deposits maintained in a bank for a specified period of time at a stated
interest rate. The Eurodollar obligations may include bonds issued and
denominated in euros (the new currency implemented on January 1, 1999 by the
countries participating in the EMU). Eurodollar obligations may be issued by
government and corporate issuers in Europe. Yankee bank obligations, which
include time deposits and certificates of deposit, are U.S. dollar-denominated
obligations issued in the U.S. capital markets by foreign banks. Eurodollar bank
obligations, which include time deposits and certificates of deposit, are U.S.
dollar-denominated obligations issued outside the U.S. capital markets by
foreign branches of U.S. banks and by foreign banks. The Portfolio may consider
Yankee dollar obligations to be domestic securities for purposes of their
investment policies.
Eurodollar and Yankee dollar obligations are subject to the same risks as
domestic issues, notably credit risk, market risk and liquidity risk. However,
Eurodollar (and to a limited extent, Yankee dollar) obligations are also subject
to certain sovereign risks. One such risk is the possibility that a sovereign
country might prevent capital from flowing across its borders. Other risks
include adverse political and economic developments; the extent and quality of
government regulations of financial markets and institutions; the imposition of
foreign withholding taxes; and the expropriation or nationalization of foreign
issuers.
FOREIGN INVESTMENT
Investing in foreign securities involves certain special considerations
which are not typically associated with investing in the equity securities or
fixed income securities of U.S. issuers. Foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards and
may have policies that are not comparable to those of domestic issuers. As a
result, there may be less information available about foreign issuers than about
domestic issuers. Securities of some foreign issuers are generally less liquid
and more volatile than securities of comparable domestic issuers. There is
generally less government supervision and regulation of stock exchanges, brokers
and listed issuers than in the United States. In addition, with respect to
certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, political and social instability, or diplomatic
developments which could affect U.S. investments in those countries. The costs
of investing in foreign countries frequently is higher than the costs of
investing in the United States. Although the Adviser endeavors to achieve the
most favorable execution costs in portfolio transactions, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges.
13
Investments in securities of foreign issuers generally are denominated in
foreign currencies. Accordingly, the value of the Portfolio's assets, as
measured in U.S. dollars, may be affected favorably or unfavorably by changes in
currency exchange rates and in exchange control regulations. The Portfolio may
incur costs in connection with conversions between various currencies.
Certain foreign governments may levy withholding or other taxes on dividend
and interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. The Portfolio may be
able to claim a credit for U.S. tax purposes with respect to any such foreign
taxes.
The Adviser considers an issuer to be from a particular country or
geographic region if (i) its principal securities trading market is in that
country or geographic region; (ii) alone or on a consolidated basis it derives
50% or more of its annual revenue from either goods produced, sales made or
services performed in that country or geographic region; or (iii) it is
organized under the laws of, or has a principal office in that country or
geographic region. By applying these tests, it is possible that a particular
company could be deemed to be from more than one country or geographic region.
FOREIGN EQUITY SECURITIES. Foreign equity securities are equity securities of an
issuer in a country other than the United States.
FOREIGN GOVERNMENT FIXED INCOME SECURITIES. Foreign government fixed income
securities are fixed income securities issued by a government other than the
U.S. government or government-related issuer in a country other than the United
States.
FOREIGN CORPORATE FIXED INCOME SECURITIES. Foreign corporate fixed income
securities are fixed income securities issued by a private issuer in a country
other than the United States.
EMERGING MARKET COUNTRY SECURITIES. An emerging market country security is one
issued by a foreign government or private issuer that has one or more of the
following characteristics: (i) its principal securities trading market is in an
emerging market country, (ii) alone or on a consolidated basis it derives 50% or
more of its annual revenue from either goods produced, sales made or services
performed in emerging markets or (iii) it is organized under the laws of, or has
a principal office in, an emerging market country.
Emerging market describes any country which is generally considered to be
an emerging or developing country by major organizations in the international
financial community, such as the International Bank for Reconstruction and
Development (more commonly known as the World Bank) and the International
Finance Corporation. Emerging markets can include every nation in the world
except the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
The economies of individual emerging market countries may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Further, the economies of developing countries generally are heavily dependent
upon international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures. These economies also
have been, and may continue to be, adversely affected by economic conditions in
the countries with which they trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging market countries, and the extent of
foreign investment in certain fixed income securities and domestic companies may
be subject to limitation in other emerging market countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
emerging market countries to prevent, among other concerns, violation of foreign
investment limitations. Repatriation of investment income, capital and the
proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging countries. The Portfolio could be adversely
affected by delays in, or a refusal to grant, any required governmental
registration or approval for such repatriation. Any investment subject to such
repatriation controls will be considered illiquid if it appears reasonably
likely that this process will take more than seven days.
Investing in emerging market countries may entail purchasing securities
issued by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud. Emerging
market countries also pose the risk
14
of nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
the Portfolio's investments in those countries. In addition, it may be difficult
to obtain and enforce a judgment in a court outside the United States.
Investing in emerging markets may also expose the Portfolio to an extra
degree of custodial and/or market risk, especially where the securities
purchased are not traded on an official exchange or where ownership records
regarding the securities are maintained by an unregulated entity (or even the
issuer itself).
RUSSIAN EQUITY SECURITIES. The registration, clearing and settlement of
securities transactions involving Russian issuers are subject to significant
risks not normally associated with securities transactions in the United States
and other more developed markets. Ownership of equity securities in Russian
companies is evidenced by entries in a company's share register (except where
shares are held through depositories that meet the requirements of the 1940 Act)
and the issuance of extracts from the register or, in certain limited cases, by
formal share certificates. However, Russian share registers are frequently
unreliable and a Portfolio could possibly lose its registration through
oversight, negligence or fraud. Moreover, Russia lacks a centralized registry to
record securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In addition,
while registrars are liable under law for losses resulting from their errors, it
may be difficult for the Portfolio to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by Russian law to employ an independent registrar, in practice, such
companies have not always followed this law. Because of this lack of
independence of registrars, management of a Russian company may be able to exert
considerable influence over who can purchase and sell the company's shares by
illegally instructing the registrar to refuse to record transactions on the
share register. Furthermore, these practices may prevent a Portfolio from
investing in the securities of certain Russian companies deemed suitable by the
Adviser and could cause a delay in the sale of Russian Securities by the
Portfolio if the company deems a purchaser unsuitable, which may expose the
Portfolio to potential loss on its investment.
In light of the risks described above, the Portfolio will not invest in the
equity securities of a Russian company unless that issuer's registrar has
entered into a contract with the Fund's sub-custodian containing certain
protective conditions, including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Portfolio. This
requirement will likely have the effect of precluding investments in certain
Russian companies that the Portfolio would otherwise make.
FOREIGN CURRENCY TRANSACTIONS. The U.S. dollar value of the assets of the
Portfolio, to the extent it invests in securities denominated in foreign
currencies, may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Portfolio may
incur costs in connection with conversions between various currencies. The
Portfolio may conduct its foreign currency exchange transactions on a spot
(I.E., cash) basis at the spot rate prevailing in the foreign currency exchange
market. The Portfolio also may manage its foreign currency transactions by
entering into forward foreign currency exchange contracts to purchase or sell
foreign currencies or by using other instruments and techniques described under
"Derivatives" below.
Under normal circumstances, consideration of the prospect for changes in
the values of currency will be incorporated into the long-term investment
decisions made with regard to overall diversification strategies. However, the
Adviser believes that it is important to have the flexibility to use such
derivative products when it determines that it is in the best interests of the
Portfolio. It may not be practicable to hedge foreign currency risk in all
markets, particularly emerging markets.
FOREIGN CURRENCY WARRANTS. The Portfolio may invest in foreign currency
warrants, which entitle the holder to receive from the issuer an amount of cash
(generally, for warrants issued in the U.S., in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time.
Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk which, from the point of view of
prospective purchasers of the securities, is inherent in the international
fixed-income marketplace. Foreign currency warrants may attempt to reduce the
foreign exchange risk assumed by purchasers of a security by, for example,
providing for a supplemental payment in the event that the U.S. dollar
depreciates against the value of a
15
major foreign currency such as the Japanese Yen. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (E.G., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges.
Foreign currency warrants may be exercisable only in certain minimum
amounts, and an investor wishing to exercise warrants who possesses less than
the minimum number required for exercise may be required either to sell the
warrants or to purchase additional warrants, thereby incurring additional
transaction costs. In the case of any exercise of warrants, there may be a delay
between the time a holder of warrants gives instructions to exercise and the
time the exchange rate relating to exercise is determined, during which time the
exchange rate could change significantly, thereby affecting both the market and
cash settlement values of the warrants being exercised. The expiration date of
the warrants may be accelerated if the warrants should be delisted from an
exchange or if their trading should be suspended permanently, which would result
in the loss of any remaining "time value" of the warrants (I.E., the difference
between the current market value and the exercise value of the warrants), and,
in the case where the warrants were "out-of-the-money," in a total loss of the
purchase price of the warrants.
Foreign currency warrants are generally unsecured obligations of their
issuers and are not standardized foreign currency options issued by the Options
Clearing Corporation ("OCC"). Unlike foreign currency options issued by the OCC,
the terms of foreign exchange warrants generally will not be amended in the
event of governmental or regulatory actions affecting exchange rates or in the
event of the imposition of other regulatory controls affecting the international
currency markets. The initial public offering price of foreign currency warrants
is generally considerably in excess of the price that a commercial user of
foreign currencies might pay in the interbank market for a comparable option
involving significantly larger amounts of foreign currencies. Foreign currency
warrants are subject to complex political or economic factors.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES. Principal exchange rate linked
securities are debt obligations the principal on which is payable at maturity in
an amount that may vary based on the exchange rate between the U.S. dollar and a
particular foreign currency at or about that time. The return on "standard"
principal exchange rate linked securities is enhanced if the foreign currency to
which the security is linked appreciates against the U.S. dollar, and is
adversely affected by increases in the foreign exchange value of the U.S.
dollar; "reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (I.E., at relatively higher interest
rates if the purchaser has assumed some foreign currency risk).
BRADY BONDS. Brady Bonds are fixed income securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated) and they are actively traded in the
over-the-counter secondary market. The Portfolio will invest in Brady Bonds only
if they are consistent with the Portfolio's quality specifications. However,
Brady Bonds should be viewed as speculative in light of the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds.
INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment or make it undesirable to invest directly
in the securities of their companies. However, indirect investment in the
securities of companies listed and traded on the stock exchanges in these
countries is permitted by certain emerging market countries through investment
funds that have been specifically authorized. The Portfolio may invest in these
Investment Funds subject to the provisions of the 1940 Act, as applicable, and
other applicable laws.
OTHER SECURITIES
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend its investment securities
to qualified institutional investors that need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
investment securities, the Portfolio attempts to increase its net investment
income through the receipt of interest on the loan. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Portfolio. The Portfolio may lend its
investment securities to qualified brokers, dealers, domestic and foreign banks
16
or other financial institutions, so long as the terms, structure and the
aggregate amount of such loans are not inconsistent with the 1940 Act or the
Rules and Regulations or interpretations of the SEC thereunder, which currently
require that (i) the borrower pledge and maintain with the Portfolio collateral
consisting of liquid, unencumbered assets having a value at all times not less
than 100% of the value of the securities loaned; (ii) the borrower add to such
collateral whenever the price of the securities loaned rises (I.E., the borrower
"marks to market" on a daily basis); (iii) the loan be made subject to
termination by the Portfolio at any time; and (iv) the Portfolio receive
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distributions
on the loaned securities and any increase in their market value. There may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans will be made only to borrowers deemed by the Adviser to be of good
standing and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risk. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Board of Directors.
At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's Board of Directors. In addition, voting rights may pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES.
The Portfolio may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed and restricted
securities. Such unlisted securities may involve a higher degree of business and
financial risk that can result in substantial losses. As a result of the absence
of a public trading market for these securities, they may be less liquid than
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
those originally paid by the Portfolio or less than what may be considered the
fair value of such securities. Furthermore, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements which might be applicable if their securities were
publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being sold, the Portfolio
may be required to bear the expenses of registration.
As a general matter, the Portfolio may not invest more than 15% of its net
assets in illiquid securities, such as securities for which there is not a
readily available secondary market or securities that are restricted from sale
to the public without registration. However, certain Restricted Securities can
be offered and sold to qualified institutional buyers under Rule 144A under the
Securities Act of 1933 (the "1933 Act") ("Rule 144A Securities") and may be
deemed to be liquid under guidelines adopted by the Fund's Board of Directors.
The Portfolio may invest without limit in liquid Rule 144A Securities. Rule 144A
Securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities.
BORROWING FOR INVESTMENT PURPOSES. Borrowing for investment purposes creates
leverage which is a speculative characteristic. The Portfolio will do so only
when the Adviser believes that borrowing will benefit the Portfolio after taking
into account considerations such as the costs of borrowing and the likely
investment returns on securities purchased with borrowed funds. Borrowing by the
Portfolio will create the opportunity for increased net income but, at the same
time, will involve special risk considerations. Leverage that results from
borrowing will magnify declines as well as increases in the Portfolio's net
asset value per share and net yield. The Portfolio expects that all of its
borrowing will be made on a secured basis. The Portfolio will either segregate
the assets securing the borrowing for the benefit of the lenders or arrangements
will be made with a suitable sub-custodian. If assets used to secure the
borrowing decrease in value, the Portfolio may be required to pledge additional
collateral to the lender in the form of cash or securities to avoid liquidation
of those assets.
TEMPORARY BORROWING. The Portfolio is permitted to borrow from banks in an
amount up to 5% of its total assets for extraordinary or emergency purposes. For
example, the Portfolio may borrow for temporary defensive purposes or to meet
shareholder redemptions when the Adviser believes that it would not be in the
best interests of the Portfolio to liquidate portfolio holdings.
The Board of Directors of the Fund has approved procedures whereby the
Portfolio together with other investment companies advised by the Adviser or its
affiliates may enter into a joint line of credit arrangement with a bank. The
Portfolio would be liable only for its own temporary borrowings under the joint
line of credit arrangements.
17
LEVERAGE RISK. Certain transactions may give rise to a form of leverage. To
mitigate leveraging risk, the Portfolio will earmark liquid assets or establish
a segregated account or otherwise cover the transactions that may give rise to
such risk. The use of leverage may cause the Portfolio to liquidate portfolio
positions when it may not be advantageous to do so to satisfy its obligations or
to meet earmarking requirements. Leverage, including borrowing, may cause the
Portfolio to be more volatile than if the Portfolio had not been leveraged. This
is because leverage tends to exaggerate the effect of any increase or decrease
in the value of the Portfolio's portfolio securities.
REVERSE REPURCHASE AGREEMENTS. Under a reverse repurchase agreement, the
Portfolio sells a security and promises to repurchase that security at an agreed
upon future date and price. The price paid to repurchase the security reflects
interest accrued during the term of the agreement. The Portfolio will earmark
cash or liquid assets or establish a segregated account holding cash and other
liquid assets in an amount not less than the purchase obligations of the
agreement. Reverse repurchase agreements may be viewed as a speculative form of
borrowing called leveraging. The Portfolio may invest in reverse repurchase
agreements if (i) interest earned from leveraging exceeds the interest expense
of the original reverse repurchase transaction and (ii) proceeds from the
transaction are not invested for longer than the term of the reverse repurchase
agreement.
SHORT SALES. A short sale is a transaction in which the Portfolio sells
securities it owns or has the right to acquire at no added cost (I.E., "against
the box") or does not own (but has borrowed) in anticipation of a decline in the
market price of the securities. To deliver the securities to the buyer, the
Portfolio arranges through a broker to borrow the securities and, in so doing,
the Portfolio becomes obligated to replace the securities borrowed at their
market price at the time of replacement. When selling short, the Portfolio
intends to replace the securities at a lower price and therefore, profit from
the difference between the cost to replace the securities and the proceeds
received from the sale of the securities. When the Portfolio makes a short sale,
the proceeds it receives from the sale will be held on behalf of a broker until
the Portfolio replaces the borrowed securities. The Portfolio may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in
connection with a short sale will be secured by collateral deposited with the
broker that consists of cash or other liquid securities. In addition, the
Portfolio will earmark cash or liquid assets or place in a segregated account an
amount of cash or other liquid assets equal to the difference, if any, between
(i) the market value of the securities sold at the time they were sold short,
and (ii) any cash or other liquid securities deposited as collateral with the
broker in connection with the short sale. Short sales by the Portfolio involve
certain risks and special considerations. If the Adviser incorrectly predicts
that the price of the borrowed security will decline, the Portfolio will have to
replace the securities with securities with a greater value than the amount
received from the sale. As a result, losses from short sales differ from losses
that could be incurred from a purchase of a security, because losses from short
sales may be unlimited, whereas losses from purchases can equal only the total
amount invested.
STRUCTURED INVESTMENTS. The Portfolio may invest in structured investments.
Structured investments are securities that are convertible into, or the value of
which is based upon the value of, other fixed income or equity securities or
indices upon certain terms and conditions. The amount the Portfolio receives
when it sells a structured investment or at maturity of a structured investment
is not fixed, but is based on the price of the underlying security or index.
Particular structured investments may be designed so that they move in
conjunction with or differently from their underlying security or index in terms
of price and volatility. It is impossible to predict whether the underlying
index or price of the underlying security will rise or fall, but prices of the
underlying indices and securities (and, therefore, the prices of structured
investments) will be influenced by the same types of political and economic
events that affect particular issuers of fixed income and equity securities and
capital markets generally. Structured investments also may trade differently
from their underlying securities. Structured investments generally trade on the
secondary market, which is fairly developed and liquid. However, the market for
such securities may be shallow compared to the market for the underlying
securities or the underlying index. Accordingly, periods of high market
volatility may affect the liquidity of structured investments, making high
volume trades possible only with discounting.
Structured investments are a relatively new innovation and may be designed
to have various combinations of equity and fixed income characteristics. The
following sections describe four of the more common types of structured
investments that the Portfolio may invest in. The Portfolio may invest in other
structured investments, including those that may be developed in the future, to
the extent that the structured investments are otherwise consistent with the
Portfolio's investment objective and policies.
18
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically
is preferred stock with some characteristics of common stock. PERCS are
mandatorily convertible into common stock after a period of time, usually three
years, during which the investors' capital gains are capped, usually at 30%.
Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's
common stock is trading at a specified price level or better. The redemption
price starts at the beginning of the PERCS duration period at a price that is
above the cap by the amount of the extra dividends the PERCS holder is entitled
to receive relative to the common stock over the duration of the PERCS and
declines to the cap price shortly before maturity of the PERCS. In exchange for
having the cap on capital gains and giving the issuer the option to redeem the
PERCS at any time or at the specified common stock price level, a Portfolio may
be compensated with a substantially higher dividend yield than that on the
underlying common stock. Investors that seek current income find PERCS
attractive because PERCS provide a high dividend income than that paid with
respect to a company's common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock, subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to
redemption prior to maturity. ELKS usually bear interest during the three-year
term at a substantially higher rate than the dividend yield on the underlying
common stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, the Portfolio may be
compensated with the higher yield, contingent on how well the underlying common
stock does. Investors that seek current income, find ELKS attractive because
ELKS provide a higher dividend income than that paid with respect to a company's
common stock. The return on ELKS depends on the creditworthiness of the issuer
of the securities, which may be the issuer of the underlying securities or a
third party investment banker or other lender. The creditworthiness of such
third party issuer of ELKS may, and often does, exceed the creditworthiness of
the issuer of the underlying securities. The advantage of using ELKS over
traditional equity and debt securities is that the former are income producing
vehicles that may provide a higher income than the dividend income on the
underlying equity securities while allowing some participation in the capital
appreciation of the underlying equity securities. Another advantage of using
ELKS is that they may be used for hedging to reduce the risk of investing in the
generally more volatile underlying equity securities.
LYONs. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Portfolio will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par, value.
The yield on LYONs, typically, is lower-than-market rate for debt securities of
the same maturity, due in part to the fact that the LYONs are convertible into
common stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better or, at the option of the holder, upon certain fixed dates. The redemption
price typically is the purchase price of the LYONs plus accrued original issue
discount to the date of redemption, which amounts to the lower-than-market
yield. The Portfolio will receive only the lower-than-market yield unless the
underlying common stock increases in value at a substantial rate. LYONs are
attractive to investors when it appears that they will increase in value due to
the rise in value of the underlying common stock.
STRUCTURED NOTES. Structured notes are derivative securities for which the
amount of principal repayment and/or interest payments is based upon the
movement of one or more "factors." These factors include, but are not limited
to, currency exchange rates, interest rates (such as the prime lending rate and
LIBOR), referenced bonds and stock indices, such as the S&P 500. In some cases,
the impact of the movements of these factors may increase or decrease through
the use of multipliers or deflators. Structured notes may be designed to have
particular quality and maturity characteristics and may vary from money market
quality to below investment grade. Depending on the factor used and the use of
multipliers or deflators, however, changes in interest rates and movement of the
factor may cause significant price fluctuations or may cause particular
structured notes to become illiquid. The Portfolio will use structured notes to
tailor its investments to the specific risks and returns the Adviser wishes to
accept while avoiding or reducing certain other risks.
19
DERIVATIVES
The Portfolio is permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objectives of the Portfolios. These derivative products may
be based on a wide variety of underlying rates, indices, instruments, securities
and other products, such as interest rates, foreign currencies, foreign and
domestic fixed income and equity securities, groups or "baskets" of securities
and securities indices (for each derivative product, the "underlying"). The
Portfolio will limit its use of forward foreign currency exchange contracts and
other derivative products for non-hedging purposes to 33 1/3% of its total
assets, measured by the aggregate notional amount of outstanding derivative
products.
The term hedging, generally, means that the Portfolio is using a derivative
product as a way to reduce or limit risk. For example, the Portfolio may hedge
in order to limit the effects of a change in the value of a particular foreign
currency versus the U.S. dollar or the Portfolio could use a portion of its cash
to buy securities futures in order to hedge the risk of not being fully
invested. The Portfolio also may use certain complex hedging techniques. For
example, the Portfolio may use a type of hedge known as a cross hedge or a proxy
hedge, where the Portfolio hedges the risk associated with one underlying by
purchasing or selling a derivative product with an underlying that is different.
There is no limit on the use of forward foreign currency exchange contracts or
other derivative products for hedging purposes.
The Portfolio may use derivative products under a number of different
circumstances to further their investment objectives. For example, the Portfolio
may purchase derivatives to gain exposure to a market or currency quickly in
response to changes in the Portfolio's investment strategy, upon the inflow of
investable cash or when the derivative provides greater liquidity than the
underlying market. The Portfolio may also use derivatives when it is restricted
from directly owning the "underlying" or when derivatives provide a pricing
advantage or lower transaction costs. The Portfolio also may purchase
combinations of derivatives in order to gain exposure to an investment in lieu
of actually purchasing such investment. Derivatives may also be used by the
Portfolio for hedging or risk management purposes and in other circumstances
when the Adviser believes it advantageous to do so consistent with the
Portfolio's investment objectives and policies. Except under circumstances where
a segregated account is not required under the 1940 Act or the rules adopted
thereunder, the Portfolio will earmark cash or liquid assets or place them in a
segregated account in an amount necessary to cover the Portfolio's obligations
under such derivative transactions.
The use of derivative products is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of the Portfolios will be less favorable than it would
have been if these investment techniques had not been used.
Some of the derivative products in which the Portfolio may invest and some
of the risks related thereto are described in further detail below.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACT. Forward foreign currency exchange
contracts are derivatives which may be used to protect against uncertainty in
the level of future foreign exchange rates. A forward foreign currency exchange
contract is an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract agreed
upon by the parties, at a price set at the time of the contract. Such contracts
do not eliminate fluctuations caused by changes in the local currency prices of
the securities, but rather, they establish an exchange rate at a future date.
Also, although such contracts can 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.
The Portfolio may use currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases and sales of
securities denominated in foreign currencies (transaction hedge) or to lock in
the U.S. dollar value of portfolio positions (position hedge). In addition, the
Portfolio may cross hedge currencies by entering into a transaction to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which the Portfolio has or expects to have portfolio
exposure. The Portfolio may also engage in proxy hedging which is defined as
entering into positions in one currency to hedge investments denominated in
another currency, where the two currencies are economically linked. The
Portfolio's entry into forward foreign currency exchange contract, as well as
any use of cross or proxy hedging techniques will generally require the
Portfolio to hold liquid securities or cash equal to the Portfolio's obligations
in a segregated account throughout the duration of the contract.
20
The Portfolio may also combine forward foreign currency exchange contracts
with investments in securities denominated in other currencies in order to
achieve desired equity, credit and currency exposures. Such combinations are
generally referred to as synthetic securities. For example, in lieu of
purchasing foreign equity or bond, the Portfolio may purchase a U.S.
dollar-denominated security and at the same time enter into a forward foreign
currency exchange contract to exchange U.S. dollars for the contract's
underlying currency at a future date. By matching the amount of U.S. dollars to
be exchanged with the anticipated value of the U.S. dollar-denominated security,
the Portfolio may be able to lock in the foreign currency value of the security
and adopt a synthetic investment position reflecting the equity return or credit
quality of the U.S. dollar-denominated security.
Forward foreign currency exchange contracts are not traded on contract
markets regulated by the SEC or the Commodity Futures Trading Commission (the
"CFTC"). They are traded through financial institutions acting as market-makers.
By trading forward foreign currency exchange contracts, the Portfolio could lose
amounts substantially in excess of its initial investments, due to the margin
and collateral requirements associated with them.
Forward foreign currency exchange contracts may be traded on foreign
exchanges. These transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (v) lesser trading volume.
Currency hedging strategies involve certain other risks as well. There is a
risk in adopting a transaction hedge or position hedge to the extent that the
value of a security denominated in foreign currency is not exactly matched with
the Portfolio's obligation under the forward foreign currency exchange contract.
On the date of maturity, the Portfolio may be exposed to some risk of loss from
fluctuations in that currency. Although the Adviser will attempt to hold such
mismatching to a minimum, there can be no assurance that the Adviser will be
able to do so. For proxy hedges, cross hedges or a synthetic position, there is
an additional risk in that these transactions create residual foreign currency
exposure. When the Portfolio enters into a forward foreign currency exchange
contract for purposes of creating a position hedge, transaction hedge, cross
hedge or a synthetic security, it will generally be required to hold liquid
securities or cash in a segregated account with a daily value at least equal to
its obligation under the forward foreign currency exchange contract. See also
"Leverage Risk."
The Portfolio generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, the Portfolio
may either sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and terminate its contractual obligation
to deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for the Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices.
Should forward prices decline during the period between the Portfolio entering
into a forward contract for the sale of a foreign currency and the date it
enters into an offsetting contract for the purchase of the foreign currency, the
Portfolio will realize a gain to the extent that the price of the currency it
has agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Portfolio would suffer a loss to the extent
that the price of the currency it has agreed to purchase exceeds the price of
the currency it has agreed to sell. The Portfolio is not required to enter into
such transactions with regard to its foreign currency-denominated securities. It
also should be realized that this method of protecting the value of portfolio
securities against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange which one can achieve at some future point in time.
Additionally, although such contracts tend to minimize the risk of loss due to a
decline in the value of the hedged currency, at the same time, they tend to
limit any potential gain which might result should the value of such currency
increase.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS). The Portfolio may
purchase and sell futures contracts, including futures on securities indices,
baskets of securities, foreign currencies and interest rates of the
21
type generally known as financial futures. These are standardized contracts that
are bought and sold on organized exchanges. A futures contract obligates a party
to buy or sell a specific amount of the "underlying," such as a particular
foreign currency, on a specified future date at a specified price or to settle
the value in cash.
The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use forward foreign currency exchange contracts, which are separately discussed
under "Forward Foreign Currency Exchange Contracts." These forward contracts are
privately negotiated and are bought and sold in the over-the-counter market.
Like a future, a forward contract obligates a party to buy or sell a specific
amount of the underlying on a specified future date at a specified price. The
terms of the forward contract are customized. Forward contracts, like other
over-the-counter contracts that are negotiated directly with an individual
counterparty, subject the Portfolio to the risk of counterparty default. Forward
foreign currency exchange contracts may be used to protect against uncertainty
in the level of future foreign currency exchange rates or to gain or modify
exposure to a particular currency.
In some cases, the Portfolio may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolio will uses these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolio may use futures contracts, forward contracts and related options
follow.
The Portfolio may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or may purchase
securities index futures or options in order to gain market exposure. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging markets. The nature of the strategies
adopted by the Adviser, and the extent to which those strategies are used, may
depend on the development of such markets. The Portfolio may also purchase and
sell foreign currency futures to lock in rates or to adjust their exposure to a
particular currency.
The Portfolio may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
changes in interest rates. The Portfolio may engage in such transactions to
hedge its holdings of debt instruments against future changes in interest rates
or for other purposes. The Portfolio may also use futures contracts to gain
exposure to an entire market (E.G., stock index futures) or to control its
exposure to changing foreign currency exchange rates.
Gains and losses on futures contracts, forward contracts and related
options depend on the Adviser's ability to predict correctly the direction of
movement of securities prices, interest rates and other economic factors. Other
risks associated with the use of these instruments include (i) imperfect
correlation between the changes in market value of investments held by the
Portfolio and the prices of derivative products relating to investments
purchased or sold by the Portfolio, and (ii) possible lack of a liquid secondary
market for a derivative product and the resulting inability to close out a
position. The Portfolio will seek to minimize the risk by only entering into
transactions for which there appears to be a liquid exchange or secondary
market. In some strategies, the risk of loss in trading on futures and related
transactions can be substantial, due both to the low margin deposits required
and the extremely high degree of leverage involved in pricing. Except under
circumstances where a segregated account is not required under the 1940 Act or
the rules adopted thereunder, the Portfolio will earmark cash or liquid assets
or place them in a segregated account in an amount necessary to cover the
Portfolio's obligations under such contracts. See also "Leverage Risk."
LIMITATIONS ON FUTURES CONTRACTS. The CFTC recently eliminated limitations on
futures trading by certain regulated entities, including registered investment
companies, and consequently registered investment companies may engage in
unlimited futures transactions and options thereon provided that the investment
adviser to the company claims an exclusion from regulation as a commodity pool
operator. In connection with its management of the Fund, the Adviser has claimed
such an exclusion from registration as a commodity pool operator under the
Commodity Exchange Act ("CEA"). Therefore, it is not subject to the registration
and regulatory requirements of the CEA. Therefore, there are no limitations on
the extent to which the Portfolio may engage in non-hedging transactions
involving futures and options thereon, except as set forth in the Portfolio's
Prospectus or SAI. There is no overall limitation on the percentage of the
Portfolio's net assets which may be subject to a hedging position.
OPTIONS. The Portfolio may seek to increase its returns or may hedge its
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which the Portfolio may invest; other
financial instruments; and foreign currency. Various options may be purchased
and sold on exchanges or over-the-counter markets.
22
The Portfolio may purchase put and call options. Purchasing a put option
gives the Portfolio the right, but not the obligation, to sell the underlying
(such as a securities index or a particular foreign currency) at the exercise
price either on a specific date or during a specified exercise period. The
purchaser pays a premium to the seller (also known as the writer) of the option.
The Portfolio also may write put and call options on investments held in
its portfolio, as well as foreign currency options. The Portfolio that has
written an option receives a premium that increases the Portfolio's return on
the underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, the Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, the Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, the Portfolio incurs an obligation either to buy (in
the case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolio may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will continue to own (i) the underlying; (ii) securities or instruments
convertible or exchangeable without the payment of any consideration into the
underlying; or (iii) a call option on the same underlying with a strike price no
higher than the price at which the underlying was sold pursuant to a short
option position. In the case of a put option, the Portfolio will either earmark
or segregate sufficient liquid assets to cover its obligations under the option
or will own another put option on the same underlying with an equal or higher
strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolio's use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by the
Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
SWAPS, CAPS, COLLARS AND FLOORS. Swaps are privately negotiated over-the-counter
derivative products in which two parties agree to exchange payment streams
calculated in relation to a rate, index, instrument or certain securities and a
particular "notional amount." As with many of the other derivative products
available to the Portfolio, the underlying may include an interest rate (fixed
or floating), a currency exchange rate, a commodity price index, and a security,
securities index or a combination thereof. A great deal of flexibility is
possible in the way the products may be structured, with the effect being that
the parties may have exchanged amounts equal to the return on one rate, index or
group of securities for another. For example, in a simple fixed-to-floating
interest rate swap, one party makes payments equivalent to a fixed interest
rate, and the other makes payments equivalent to a specified interest rate
index. The Portfolio may engage in simple or more complex swap transactions
involving a wide variety of underlyings. The currency swaps that the Portfolio
may enter will generally involve an agreement to pay interest streams in one
currency based on a specified index in exchange for receiving interest streams
denominated in another currency. Such swaps may involve initial and final
exchanges that correspond to the agreed upon notional amount.
Caps, collars and floors are privately-negotiated option-based derivative
products. The Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Portfolio,
buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
in not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.
Swaps, caps, collars and floors are credit-intensive products. By entering
into a swap transaction, the Portfolio bears the risk of default, I.E.,
nonpayment, by the other party. The guidelines under which the Portfolio
23
enters derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under guidelines
established by the Board of Directors, the Portfolio may enter into swaps only
with parties that meet certain credit rating guidelines. Consistent with current
market practices, the Portfolio will generally enter into swap transactions on a
net basis, and all swap transactions with the same party will be documented
under a single master agreement to provide for net payment upon default. In
addition, the Portfolio's obligations under an agreement will be accrued daily
(offset against any amounts owing to the Portfolio) and any accrued, but unpaid,
net amounts owed to the other party to a master agreement will be covered by the
maintenance of a segregated account consisting of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps
generally do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, the Portfolio's risk of loss will consist of the payments
that the Portfolio is contractually entitled to receive from the other party.
This may not be true for currency swaps that require the delivery of the entire
notional amount of one designated currency in exchange for the other. If there
is a default by the other party, the Portfolio may have contractual remedies
under the agreements related to the transaction.
CREDIT DEFAULT SWAPS. The Portfolio may enter into credit default swap
contracts for hedging purposes or to add leverage to the Portfolio. As the
seller in a credit default swap contract, the Portfolio would be required to pay
the par (or other agreed-upon) value of a referenced debt obligation to the
counterparty in the event of a default by a third party, such as a U.S. or
foreign corporate issuer, on the debt obligation. In return, the Portfolio would
receive from the counterparty a periodic stream of payments over the term of the
contract provided that no event of default has occurred. If no default occurs,
the Portfolio would keep the stream of payments and would have no payment
obligations. As the seller, the Portfolio would effectively add leverage to its
portfolio because, in addition to its total net assets, the Portfolio would be
subject to investment exposure on the notional amount of the swap.
The Portfolio may also purchase credit default swap contracts in order to
hedge against the risk of default of debt securities held in its Portfolio, in
which case the Portfolio would function as the counterparty referenced in the
preceding paragraph. This would involve the risk that the investment may expire
worthless and would generate income only in the event of an actual default by
the issuer of the underlying obligation (as opposed to a credit downgrade or
other indication of financial instability). It would also involve credit risk
that the seller may fail to satisfy its payment obligations to the Portfolio in
the event of a default.
The Portfolio will earmark or segregate assets in the form of cash and cash
equivalents in an amount equal to the aggregate market value of the credit
default swaps of which it is the seller, marked to market on a daily basis.
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS
The Portfolio has adopted the following restrictions, which are fundamental
policies and may not be changed without the approval of the lesser of: (i) at
least 67% of the voting securities of the Portfolio present at a meeting if the
holders of more than 50% of the outstanding voting securities of the Portfolio
are present or represented by proxy; or (ii) more than 50% of the outstanding
voting securities of the Portfolio. The Portfolio of the Fund will not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent
the Portfolio from purchasing or selling options or futures contracts or
from investing in securities or other instruments backed by physical
commodities);
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate and may purchase and sell
securities that are secured by interests in real estate;
(3) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or repurchase
agreements;
(4) with respect to 75% of its total assets (i) purchase more than 10% of
any class of the outstanding voting securities of any issuer and (ii)
purchase securities of an issuer (except obligations of the U.S.
Government and its agencies and instrumentalities) if as a result more
than 5% of the Portfolio's total assets, at market value, would be
invested in the securities of such issuer;
(5) issue senior securities and will not borrow, except from banks and as
a temporary measure for extraordinary or emergency purposes and then, in no
event, in excess of 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings);
(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933
Act in the disposition of restricted securities;
24
(7) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of the Portfolio's
total assets would be invested in securities of companies within such
industry; provided, however, that there shall be no limitation on the
purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; and
(8) write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
NON-FUNDAMENTAL LIMITATIONS
In addition, the Portfolio has adopted the following non-fundamental
investment limitations, which may be changed by the Board without shareholder
approval. The Portfolio will not:
(1) purchase on margin or sell short, except (i) that the Portfolio may
from time to time sell securities short consistent with applicable legal
requirements as stated in the Prospectus; (ii) that the Portfolio may enter
into option transactions and futures contracts as described in the
Prospectus; and (iii) as specified above in fundamental investment
limitation number (1) above;
(2) invest in real estate limited partnership interests;
(3) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the Prospectus) that are publicly distributed; and (ii) by
lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the
1940 Act or the Rules and Regulations or interpretations of the SEC
thereunder; and
(4) borrow money, except from banks for extraordinary or emergency
purposes, and then only in an amount up to 5% of the value of the
Portfolio's total assets (including, the amount borrowed less liabilities
(other than borrowings)).
The Portfolio will diversify its holdings so that, at the close of each
quarter of its taxable year or within 30 days thereafter, (i) at least 50% of
the market value of the Portfolio's total assets is represented by cash
(including cash items and receivables), U.S. Government securities, and other
securities, with such other securities limited, in respect of any one issuer,
for purposes of this calculation to an amount not greater than 5% of the value
of the Portfolio'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). Prior to the close of each quarter (or within 30 days thereafter),
the Portfolio's holdings may be less diversified and are not required to satisfy
any diversification test.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities. A later change in percentage resulting from
changes in the value of the Portfolio's assets or in total or net assets of the
Portfolio will not be considered a violation of the restriction and the sale of
securities will not be required. The foregoing does not apply to borrowings or
investments in illiquid securities.
DISCLOSURE OF PORTFOLIO HOLDINGS
The Fund's Board of Directors and the Adviser have adopted policies and
procedures regarding disclosure of portfolio holdings (the "Policy"). Pursuant
to the Policy, the Adviser may disclose information concerning Fund portfolio
holdings only if such disclosure is consistent with the antifraud provisions of
the federal securities laws and the Fund's and the Adviser's fiduciary duties to
Fund shareholders. The Adviser may not receive compensation or any other
consideration in connection with the disclosure of information about the
portfolio securities of the Fund. Consideration includes any agreement to
maintain assets in the Fund or in other investment companies or accounts managed
by the Adviser or by any affiliated person of the Adviser. Non-public
information concerning portfolio holdings may be divulged to third parties only
when the Fund has a legitimate business purpose for doing so and the recipients
of the information are subject to a duty of confidentiality. Under no
circumstances shall current or prospective Fund shareholders receive non-public
portfolio holdings information, except as described below.
The Fund makes available on its public website the following portfolio
holdings information:
- complete portfolio holdings information quarterly on a calendar
quarter basis with a minimum 30 calendar day lag; and
- top 10 (or top 15) holdings monthly with a minimum 15 calendar day
lag.
25
The Fund provides a complete schedule of portfolio holdings for the second
and fourth fiscal quarters in its semiannual and annual reports, and for the
first and third fiscal quarters in its filings with the SEC on Form N-Q.
All other portfolio holdings information that has not been disseminated in
a manner making it available to investors generally as described above is
non-public information for purposes of the Policy.
The Fund may make selective disclosure of non-public portfolio holdings.
Third parties eligible to receive such disclosure currently include fund rating
agencies, information exchange subscribers, consultants and analysts, portfolio
analytics providers and service providers provided that the third party
expressly agrees to maintain the disclosed information in confidence and not to
trade portfolio securities based on the non-public information. Non-public
portfolio holdings information may not be disclosed to a third party unless and
until the arrangement has been reviewed and approved pursuant to the
requirements set forth in the Policy. Subject to the terms and conditions of any
agreement between the Adviser or the Fund and the third party recipient, if
these conditions for disclosure are satisfied, there shall be no restriction on
the frequency with which Fund non-public portfolio holdings information is
released, and no lag period shall apply (unless otherwise indicated below).
The Adviser may provide interest lists to broker-dealers who execute
securities transactions for the Fund without entering into a non-disclosure
agreement with the broker-dealers, provided that the interest list satisfies all
of the following criteria: (1) the interest list must contain only the CUSIP
numbers and/or ticker symbols of securities held in all registered management
investment companies advised by the Adviser or any affiliate of the Adviser (the
"MSIM Funds") on an aggregate, rather than a fund-by-fund basis; (2) the
interest list must not contain information about the number or value of shares
owned by a specified MSIM Fund; (3) the interest list may identify the
investment strategy, but not the particular MSIM Funds, to which the list
relates; and (4) the interest list may not identify the portfolio manager or
team members responsible for managing the MSIM Funds.
Fund shareholders may elect in some circumstances to redeem their shares of
the Fund in exchange for their pro rata share of the securities held by the
Fund. Under such circumstances, Fund shareholders may receive a complete listing
of the holdings of the Fund up to seven (7) calendar days prior to making the
redemption request provided that they represent orally or in writing that they
agree not to disclose or trade on the basis of the portfolio holdings
information.
The Fund may discuss or otherwise disclose performance attribution analyses
(i.e., mention the effects of having a particular security in the portfolio(s))
where such discussion is not contemporaneously made public, provided that the
particular holding has been disclosed publicly. Additionally, any discussion of
the analyses may not be more current than the date the holding was disclosed
publicly.
The Fund may disclose portfolio holdings to transition managers, provided
that the Fund has entered into a non-disclosure or confidentiality agreement
with the party requesting that the information be provided to the transition
manager and the party to the non-disclosure agreement has, in turn, entered into
a non-disclosure or confidentiality agreement with the transition manager.
The Adviser and/or the Fund have entered into ongoing arrangements to make
available public and/or non-public information about the Fund's portfolio
securities. Provided that the recipient of the information falls into one or
more of the categories listed below, and the recipient has entered into a
non-disclosure agreement with the Fund, or owes a duty of trust or confidence to
the Adviser or the Fund, the recipient may receive portfolio holdings
information pursuant to such agreement without obtaining pre-approval from
either the Portfolio Holdings Review Committee (the "PHRC") or the Fund's Board
of Directors. In all such instances, however, the PHRC will be responsible for
reporting to the Fund's Board of Directors, or designated Committee thereof,
material information concerning the ongoing arrangements at each Board's next
regularly scheduled Board meeting. Categories of parties eligible to receive
information pursuant to such ongoing arrangements include fund rating agencies,
information exchange subscribers, consultants and analysts, portfolio analytics
providers, service providers and asset allocators.
The Adviser and/or the Fund currently have entered into ongoing
arrangements with the following parties:
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NAME INFORMATION DISCLOSED FREQUENCY(1) LAG TIME
---------------------------- ---------------------------- ---------------------- ------------------------
SERVICE PROVIDERS
Institutional Shareholder Complete portfolio holdings Twice a month (2)
Services (ISS)
(proxy voting agent)(*)
FT Interactive Data Pricing Complete portfolio holdings As needed (2)
Service Provider(*)
JP Morgan Investor Complete portfolio holdings As needed (2)
Services Co. (*)
26
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NAME INFORMATION DISCLOSED FREQUENCY(1) LAG TIME
---------------------------- ---------------------------- ---------------------- ------------------------
JP Morgan Chase Bank (*) Complete portfolio holdings As needed (2)
JP Morgan Investor Complete portfolio holdings As needed (2)
Services Company(*)
FUND RATING AGENCIES
Lipper(*) Complete portfolio holdings Quarterly basis Approximately 30 days
after quarter end
Morningstar(**) Complete portfolio holdings Quarterly basis Approximately 30 days
after quarter end
Standard & Poor's(*) Complete portfolio holdings Quarterly basis Approximately 15 day lag
Investment Company Top Ten portfolio holdings Quarterly basis Approximately 15 days
Institute(**) after quarter end
CONSULTANTS AND ANALYSTS
Americh Massena & Top Ten and Complete Quarterly basis(5) Approximately 10-12 days
Associates, Inc.(*) portfolio holdings after quarter end
Bloomberg(**) Complete portfolio holdings Quarterly basis Approximately 30 days
after quarter end
Callan Associates(*) Top Ten and Complete Monthly and quarterly Approximately 10-12 days
portfolio holdings basis, respectively(5) after month/quarter end
Cambridge Associates(*) Top Ten and Complete Quarterly basis(5) Approximately 10-12 days
portfolio holdings after quarter end
Citigroup(*) Complete portfolio holdings Quarterly basis(5) At least one day
after quarter end
CTC Consulting, Inc.(**) Top Ten and Complete Quarterly basis Approximately 15 days
portfolio holdings after quarter end and
approximately 30 days
after quarter end,
respectively
Evaluation Associates(*) Top Ten and Complete Monthly and quarterly Approximately 10-12 days
portfolio holdings basis, respectively(5) after month/quarter end
Fund Evaluation Group(**) Top Ten portfolio Quarterly basis At least 15 days after
holdings(3) quarter end
Jeffrey Slocum & Complete portfolio Quarterly basis(5) Approximately 10-12 days
Associates(*) holdings(4) after quarter end
Hammond Associates(**) Complete portfolio Quarterly basis At least 30 days after
holdings(4) quarter end
Hartland & Co.(**) Complete portfolio Quarterly basis At least 30 days after
holdings(4) quarter end
Hewitt Associates(*) Top Ten and Complete Monthly and quarterly Approximately 10-12 days
portfolio holdings basis, respectively(5) after month/quarter end
Mobius(**) Top Ten portfolio Monthly basis At least 15 days after
holdings(3) month end
Nelsons(**) Top Ten holdings(3) Quarterly basis At least 15 days after
quarter end
Prime Buchholz & Complete portfolio Quarterly basis At least 30 days after
Associates, Inc.(**) holdings(4) quarter end
PSN(**) Top Ten holdings(3) Quarterly basis At least 15 days after
quarter end
PFM Asset Management LLC(*) Top Ten and Complete Quarterly basis(5) Approximately 10-12 days
portfolio holdings after quarter end
Russell Investment Group/ Top Ten and Complete Monthly and quarterly At least 15 days after
Russell/Mellon Analytical portfolio holdings basis month end and at least
Services, Inc.(**) 30 days after quarter
end, respectively
Stratford Advisory Group, Top Ten portfolio Quarterly basis(5) Approximately 10-12 days
Inc.(*) holdings(6) after quarter end
27
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NAME INFORMATION DISCLOSED FREQUENCY(1) LAG TIME
---------------------------- ---------------------------- ---------------------- ------------------------
Thompson Financial(**) Complete portfolio Quarterly basis At least 30 days after
holdings(4) quarter end
Watershed Investment Top Ten and Complete Quarterly basis(*) Approximately 10-12 days
Consultants, Inc.(*) portfolio holdings after quarter end
Yanni Partners(**) Top Ten portfolio holdings(3) Quarterly basis At least 15 days after
quarter end
Portfolio Analytics Complete portfolio Daily One day
Providers Fact Set(*) holdings
----------
(*) This entity has agreed to maintain Fund non-public portfolio holdings
information in confidence and not to trade portfolio securities based on
the non-public portfolio holdings information.
(**) The Fund does not currently have a non-disclosure agreement in place with
this entity and therefore the entity can only receive publicly available
information.
(1) Dissemination of portfolio holdings information to entities listed above
may occur less frequently than indicated (or not at all).
(2) Information will typically be provided on a real time basis or as soon
thereafter as possible.
(3) Complete portfolio holdings will also be provided upon request from time to
time on a quarterly basis, with at least a 30 day lag.
(4) Top Ten portfolio holdings will also be provided upon request from time to
time, with at least a 15 day lag.
(5) This information will also be provided upon request from time to time.
(6) Complete portfolio holdings will also be provided upon request from time to
time.
In addition, persons who owe a duty of trust or confidence to the Adviser
or the Fund may receive non-public portfolio holdings information without
entering into a non-disclosure agreement. Currently, these persons include, (i)
the Fund's independent registered public accounting firm (as of the Fund's
fiscal year end and on an as needed basis), (ii) counsel to the Fund (on an as
needed basis), (iii) counsel to the independent directors (on an as needed
basis) and (iv) members of the Board of Directors (on an as needed basis).
All selective disclosures of non-public portfolio holdings information
made to third parties pursuant to the exemptions set forth in the Policy must be
pre-approved by both the PHRC and the Fund's Board of Directors (or designated
Committee thereof), except for (i) disclosures made to third parties pursuant to
ongoing arrangements (discussed above); (ii) disclosures made to third parties
pursuant to Special Meetings of the PHRC; (iii) broker-dealer interest lists;
(iv) shareholder in-kind distributions; (v) attribution analyses; or (vi) in
connection with transition managers. The Adviser shall report quarterly to the
Board of Directors (or a designated Committee thereof) information concerning
all parties receiving non-public portfolio holdings information pursuant to an
exemption. Procedures to monitor the use of such non-public portfolio holdings
information include requiring annual certifications that the recipients have
utilized such information only pursuant to the terms of the agreement between
the recipient and the Adviser and, for those recipients receiving information
electronically, acceptance of the information will constitute reaffirmation that
the third party expressly agrees to maintain the disclosed information in
confidence and not to trade portfolio securities based on the material nonpublic
information.
As set forth above, in no instance may the Adviser or the Fund receive any
compensation or consideration in exchange for the portfolio holdings.
The PHRC is responsible for creating and implementing the Policy and, in
this regard, has expressly adopted it. The following are some of the functions
and responsibilities of the PHRC:
(a) The PHRC, which will consist of executive officers of the Fund and
the Adviser, is responsible for establishing portfolio holdings disclosure
policies and guidelines and determining how portfolio holdings information
will be disclosed on an ongoing basis.
(b) The PHRC will periodically review and have the authority to amend as
necessary the Fund's portfolio holdings disclosure policies and guidelines
(as expressed by the Policy).
(c) The PHRC will meet at least quarterly to (among other matters): (1)
address any outstanding issues relating to the Policy, including matters
relating to (i) disclosures made to third parties pursuant to ongoing
28
arrangements (described above); (ii) broker-dealer interest lists; (iii)
shareholder in-kind distributions; (iv) attribution analyses; or (v) in
connection with transition managers; (2) review non-disclosure agreements
that have been executed with third parties and determine whether the third
parties will receive portfolio holdings information; and (3) generally
review the procedures that the Adviser employs to ensure that disclosure of
information about portfolio securities is in the best interests of Fund
shareholders, including procedures to address conflicts between the
interests of Fund shareholders, on the one hand, and those of the Adviser;
Morgan Stanley Co. Incorporated, as distributor of the Fund (the
"Distributor"); or any affiliated person of the Fund, the Adviser, or the
Distributor, on the other.
(d) Any member of the PHRC may call a Special Meeting of the PHRC to
consider whether a third party may receive non-public portfolio holdings
information pursuant to a validly executed non-disclosure agreement. At
least three members of the PHRC, or their designees, and one member of the
Funds Audit Committee, or his or her designee, shall be present at the
Special Meeting in order to constitute a quorum. At any Special Meeting at
which a quorum is present, the decision of a majority of the PHRC members
present and voting shall be determinative as to any matter submitted to a
vote; provided, however, that the Audit Committee member, or his or her
designee, must concur in the determination in order for it to become
effective.
(e) The PHRC, or its designee(s), will document in writing all of their
decisions and actions, which documentation will be maintained by the PHRC,
or its designee(s) for a period of at least 6 years. The PHRC, or its
designee(s), will report their decisions to the Board of Directors at each
Board's next regularly scheduled Board meeting. The report will contain
information concerning decisions made by the PHRC during the most recently
ended calendar quarter immediately preceding the Board meeting.
PURCHASE OF SHARES
You may purchase shares of the Portfolio on any day the New York Stock
Exchange ("NYSE") is open. The Portfolio reserves the right in its sole
discretion (i) to suspend the offering of its shares; (ii) to reject purchase
orders when in the judgment of management such rejection is in the best interest
of the Fund; and (iii) to reduce or waive the minimum for initial and subsequent
investments for certain accounts such as employee benefit plans or under
circumstances where certain economies can be achieved in sales of a Portfolio's
shares.
Shares of the Portfolio may be purchased at the net asset value per share
next determined after receipt by the Fund or its designee of a purchase order as
described under "Methods of Purchase" and "Investment through Financial
Intermediaries." Shares may, in the Fund's discretion, be purchased with
investment securities (in lieu of or, in conjunction with cash) acceptable to
the Fund. The securities would be accepted by the Fund at their market value in
return for Portfolio Shares of equal value. The net asset value per share of the
Portfolio is calculated on days that the NYSE is open for business. Net asset
value per share is determined as of the close of trading of the NYSE (normally
4:00 p.m. Eastern Time).
MINIMUM INVESTMENT
The minimum initial investment is $500,000 for Class A shares and $100,000
for Class B shares. These minimums may be waived at the Adviser's discretion
for: certain types of investors, including trust departments, brokers, dealers,
agents, financial planners, financial services firms, investment advisers or
various retirement and deferred compensation plans ("Financial Intermediaries");
certain accounts managed by the Adviser and its affiliates ("Managed Accounts");
and certain employees and customers of Morgan Stanley Distribution, Inc. and its
affiliates. The Fund's determination of an investor's eligibility to purchase
shares of a given class will take precedence over the investor's selection of a
class.
METHODS OF PURCHASE
You may purchase shares directly from the Fund by Federal Funds wire, by
bank wire or by check; however, on days that the NYSE is open but the custodian
bank is closed, you may only purchase shares by check. Investors may also invest
in the Portfolio by purchasing shares through Financial Intermediaries that have
made arrangements with the Fund. Some Financial Intermediaries may charge an
additional service or transaction fee (see also "Investment through Financial
Intermediaries"). If a purchase is canceled due to nonpayment or because your
check does not clear, you will be responsible for any loss the Fund or its
agents incur. If you are already a shareholder, the Fund may redeem shares from
your account(s) to reimburse the Fund or its agents for any loss. In addition,
you may be prohibited or restricted from making future investments in the Fund.
29
FEDERAL FUNDS WIRE. Purchases may be made by having your bank wire Federal Funds
to the Fund's bank account. Federal Funds purchase orders will be accepted only
on a day on which the Fund and JPMorgan Chase Bank ("JPMorgan Chase") are open
for business. Your bank may charge a service fee for wiring Federal Funds. In
order to ensure proper handling of your purchase by Federal Funds wire, please
follow these steps.
1. Complete and sign an Account Registration Form and mail it to the
address shown thereon.
2. Place your order by telephoning the Fund at 1-800-548-7786. A Fund
representative will request certain purchase information and provide you
with a confirmation number.
3. Instruct your bank to wire the specified amount to the Fund's Wire
Concentration Bank Account as follows:
JPMorgan Chase Bank
270 Park Avenue
New York, New York 10017
ABA# 021000021
DDA# 910-2-733293
Attn: Morgan Stanley Institutional Fund, Inc.
Subscription Account
Ref: (Portfolio name, your account number, your account name, your
confirmation number)
Please call the Fund at 1-800-548-7786 prior to wiring funds.
When a purchase order is received prior to the Pricing Time and Federal
Funds are received prior to the regular close of the Federal Funds Wire Control
Center ("FFWCC") (normally 6:00 p.m. Eastern Time) the purchase will be executed
at the net asset value computed on the date of receipt. Purchases for which an
order is received after the Pricing Time or for which Federal Funds are received
after the regular close of the FFWCC will be executed at the net asset value
next determined. Certain institutional investors and financial institutions have
entered into agreements with the Fund pursuant to which they may place orders
prior to the Pricing Time, but make payment in Federal Funds for those shares
the following business day.
BANK WIRE. A purchase of shares by bank wire must follow the same procedure as
for a Federal Funds wire, described above. However, depending on the time the
bank wire is sent and the bank handling the wire, money transferred by bank wire
may or may not be converted into Federal Funds prior to the close of the FFWCC.
Prior to conversion to Federal Funds and receipt by the Fund, an investor's
money will not be invested.
CHECK. An account may be opened by completing and signing an Account
Registration Form and mailing it, together with a check payable to "Morgan
Stanley Institutional Fund, Inc. -- International Growth Equity Portfolio" to:
Morgan Stanley Institutional Fund, Inc.
c/o JPMorgan Investor Services Co.
P.O. Box 182913
Columbus, OH 43218-2913
The Fund ordinarily is credited with Federal Funds within one business day
of deposit of a check. Thus, a purchase of shares by check ordinarily will be
credited to your account at the net asset value per share of the Portfolio
determined on the next business day after receipt.
INVESTMENT THROUGH FINANCIAL INTERMEDIARIES. Certain Financial Intermediaries
have made arrangements with the Fund so that an investor may purchase or redeem
shares at the net asset value per share next determined after the Financial
Intermediary receives the share order. In other instances, the Fund has also
authorized such Financial Intermediaries to designate other intermediaries to
receive purchase and redemption orders on the Fund's behalf at the share price
next determined after such designees receive the share order. Under these
arrangements, the Fund will be deemed to have received a purchase or redemption
order when the Financial Intermediary or, if applicable, a Financial
Intermediary's authorized designee, receives the share order from an investor.
ADDITIONAL INVESTMENTS. You may purchase additional shares for your account at
any time by purchasing shares at net asset value by any of the methods described
above. The minimum additional investment generally is $1,000. The minimum
additional investment may be lower for certain accounts described above under
"Minimum Investment." For additional purchases directly from the Fund, your
account name, the Portfolio name and the class selected must be specified in the
letter to assure proper crediting to your account. In addition, you may purchase
additional shares by wire by following instructions 2 and 3 under "Federal Funds
Wire" above.
30
CONVERSION FROM CLASS A TO CLASS B SHARES. If the value of an account containing
Class A shares of the Portfolio falls below $500,000, but remains at or above
$100,000, because of shareholder redemption(s), and if the account value remains
below $500,000, but remains at or above $100,000 for a continuous 60-day period,
the Class A shares in such account may, at the Adviser's discretion, convert to
Class B shares and will be subject to the distribution fee and other features
applicable to Class B shares. Conversion to Class B may result in holding a
share class with higher fees. The Fund will not convert Class A shares to Class
B shares based solely upon changes in the market that reduce the net asset value
of shares. Under current tax law, conversion between share classes is not a
taxable event to the shareholder. Shareholders will be notified prior to any
such conversion.
CONVERSION FROM CLASS B TO CLASS A SHARES. If the value of an account containing
Class B shares of the Portfolio increases to $500,000 or more, whether due to
shareholder purchases or market activity, the Class B shares will convert to
Class A shares. Conversions of Class B shares to Class A shares are processed on
the last business day of each month. Class B shares purchased through a
Financial Intermediary that has entered into an arrangement with the Fund for
the purchase of such shares may not be converted. Under current tax law, such
conversion is not a taxable event to the shareholder. Class A shares converted
from Class B shares are subject to the same minimum account size requirements as
are applicable to accounts containing Class A shares described above.
INVOLUNTARY REDEMPTION OF SHARES. If the value of an account falls below
$100,000, because of shareholder redemption(s), and if the account value remains
below $100,000 for a continuous 60-day period, the shares in such account will
be subject to redemption by the Fund. The Fund will not redeem shares based
solely upon changes in the market that reduce the net asset value of shares. If
redeemed, redemption proceeds will be promptly paid to the shareholder.
Shareholders will be notified prior to any such redemption.
REDEMPTION OF SHARES
The Fund normally makes payment for all shares redeemed within one business
day of receipt of the request, and in no event more than seven days after
receipt of a redemption request in good order. However, payments to investors
redeeming shares which were purchased by check will not be made until payment
for the purchase has been collected, which may take up to eight days after the
date of purchase. The Fund may suspend the right of redemption or postpone the
date of payment (i) during any period that the NYSE is closed, or trading on the
NYSE is restricted as determined by the SEC; (ii) during any period when an
emergency exists as determined by the SEC as a result of which it is not
practicable for the Portfolio to dispose of securities it owns, or fairly to
determine the value of its assets; and (iii) for such other periods as the SEC
may permit.
Class A and Class B shares of the Portfolio may be redeemed at any time at
the net asset value per share next determined after receipt by the Fund or its
designee of a redemption order as described under "Methods of Redemption" and
"Investment through Financial Intermediaries," which may be more or less than
the purchase price of your shares. Shares of the Portfolio redeemed within 30
days of purchase will be subject to a 2% redemption fee, payable to the
Portfolio. The redemption fee is designed to protect the Portfolio and its
remaining shareholders from the effects of short-term trading. The redemption
fee is not imposed on redemption made: (i) through systematic
withdrawal/exchange plans, (ii) through pre-approved asset allocation programs,
(iii) of shares received by reinvesting income dividends or capital gain
distributions, (iv) through certain collective trust funds or other pooled
vehicles and (v) on behalf of advisory accounts where client allocations are
solely at the discretion of the Morgan Stanley Investment Management investment
team. The redemption fee is calculated based on, and deducted from, the
redemption proceeds. Each time you redeem or exchange shares, the shares held
the longest will be redeemed or exchanged first. See the Prospectus for
additional information about redeeming shares of the Portfolio.
METHODS OF REDEMPTION
You may redeem shares directly from the Fund or through the Distributor by
mail or by telephone. HOWEVER, SHARES PURCHASED THROUGH A FINANCIAL INTERMEDIARY
MUST BE REDEEMED THROUGH A FINANCIAL INTERMEDIARY. Certain Financial
Intermediaries may charge an additional service or transaction fee.
BY MAIL. The Portfolio will redeem shares upon receipt of a redemption request
in "good order." Redemption requests may be sent by regular mail to Morgan
Stanley Institutional Fund, Inc., c/o JPMorgan Investor Services Co., P.O. Box
182913, Columbus, Ohio 43218-2913 or, by overnight courier, to Morgan Stanley
Institutional Fund, Inc., c/o JPMorgan Investor Services Co., 3435 Stelzer Road,
Columbus, Ohio 43219.
31
"Good order" means that the request to redeem shares must include the
following:
1. A letter of instruction or a stock assignment specifying the class and
number of shares or dollar amount to be redeemed, signed by all registered
owners of the shares in the exact names in which they are registered;
2. Any required signature guarantees; and
3. Other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and
profit-sharing plans and other organizations.
Redemption requests received in "good order" prior to the Pricing Time will
be executed at the net asset value computed on the date of receipt. Redemption
requests received after the Pricing Time will be executed at the next determined
net asset value. Shareholders who are uncertain of requirements for redemption
by mail should consult with a Fund representative.
BY TELEPHONE. If you have previously elected the Telephone Redemption Option on
the Account Registration Form, you can redeem Portfolio shares by calling the
Fund and requesting that the redemption proceeds be mailed to you or wired to
your bank. Please contact one of the Fund's representatives for further details.
To change the commercial bank or account designated to receive redemption
proceeds, send a written request to the Fund at the address above. Requests to
change the bank or account must be signed by each shareholder and each signature
must be guaranteed. The telephone redemption option may be difficult to
implement at times, particularly during volatile market conditions. If you
experience difficulty in making a telephone redemption, you may redeem shares by
mail as described above.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each telephone transaction. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied written instructions regarding transactions requests. Neither the
Fund nor the Transfer Agent will be responsible for any loss, liability, cost or
expense for following instructions received by telephone that either of them
reasonably believes to be genuine.
REDEMPTION THROUGH FINANCIAL INTERMEDIARIES. Certain Financial Intermediaries
have made arrangements with the Fund to accept redemption requests. These
redemptions may be processed in the same way as purchases made through Financial
Intermediaries, as described above.
FURTHER REDEMPTION INFORMATION
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Portfolio to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution-in-kind of readily marketable portfolio securities in accordance
with applicable SEC rules. Shareholders may incur brokerage charges on the sale
of securities received from a distribution-in-kind.
The Fund has made an election with the SEC pursuant to Rule 18f-1 under the
1940 Act to commit to pay in cash all redemptions requested by any shareholder
of record limited in amount during any 90-day period to the lesser of $250,000
or 1% of the net assets of the Portfolio at the beginning of such period. Such
commitment is irrevocable without the prior approval of the SEC. Redemptions in
excess of the above limits may be paid in whole or in part in portfolio
securities or in cash, as the Board of Directors may deem advisable as being in
the best interests of the Fund. If redemptions are paid in portfolio securities,
such securities will be valued as set forth under "Valuation of Shares." Any
redemption may be more or less than the shareholder's cost depending on the
market value of the securities held by the Portfolio.
To protect your account and the Fund from fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Fund to verify
the identity of the person who has authorized a redemption from your account.
Signature guarantees are required in connection with: (i) all redemptions,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owner(s) and/or registered address; and (ii) share
transfer requests. An "eligible guarantor institution" may include a bank, a
trust company, a credit union or savings and loan association, a member firm of
a domestic stock exchange, or a foreign branch of any of the foregoing. Notaries
public are not acceptable guarantors. The signature guarantees must appear
either: (i) on the written request for redemption; (ii) on a separate instrument
for assignment ("stock power") which should specify the total number of shares
to be redeemed; or (iii) on all stock certificates tendered for redemption and,
if shares held by the Fund are also being redeemed, on the letter or stock
power.
32
ACCOUNT POLICIES AND FEATURES
TRANSFER OF SHARES
Shareholders may transfer Portfolio shares to another person by making a
written request to the Fund. The request should clearly identify the account and
number of shares to be transferred, and include the signature of all registered
owners and all stock certificates, if any, which are subject to the transfer. It
may not be possible to transfer shares purchased through a Financial
Intermediary. The signature on the letter of request, the stock certificate or
any stock power must be guaranteed in the same manner as described under
"Redemption of Shares." As in the case of redemptions, the written request must
be received in good order before any transfer can be made. Transferring shares
may affect the eligibility of an account for a given class of the Portfolio's
shares and may result in involuntary conversion or redemption of such shares.
Under certain circumstances, the person who receives the transfer may be
required to complete a new Account Registration Form.
VALUATION OF SHARES
The net asset value per share of a class of shares of the Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to such class, less all liabilities attributable to
such class, by the total number of outstanding shares of such class of the
Portfolio. Net asset value is calculated separately for each class of the
Portfolio. Net asset value per share of the Portfolio is determined as of the
close of the NYSE (normally 4:00 p.m. Eastern Time) on each day that the NYSE is
open for business. Price information on listed securities is taken from the
exchange where the security is primarily traded. Portfolio securities are
generally valued at their market value.
In the calculation of the Portfolio's net asset value: (1) an equity
portfolio security listed or traded on the NYSE or American Stock Exchange, or
other exchange is valued at its latest sale price, prior to the time when assets
are valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the NASDAQ Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; and (3) all other portfolio securities for
which over-the-counter market quotations are readily available are valued at the
mean between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market. For equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day. When market quotations are not readily
available, including circumstances under which it is determined by the Adviser
that the sale price, the bid price or the mean between the last reported bid and
asked price are not reflective of a security's market value, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Board. For
valuation purposes, quotations of foreign portfolio securities, other assets and
liabilities and forward contracts stated in foreign currency are translated into
U.S. dollar equivalents at the prevailing market rates prior to the close of the
NYSE.
Short-term debt securities with remaining maturities of 60 days or less at
the time of purchase are valued at amortized cost, unless the Board determines
such valuation does not reflect the securities' market value, in which case
these securities will be valued at their fair market value as determined by the
Board.
Certain of the Portfolio's securities may be valued by an outside pricing
service approved by the Board. The pricing service may utilize a matrix system
incorporating security quality, maturity and coupon as the evaluation model
parameters, and/or research evaluations by its staff, including review of
broker-dealer market price quotations in determining what it believes is the
fair valuation of the portfolio securities valued by such pricing service.
Listed options on debt securities are valued at the latest sale price on
the exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options on debt securities and all options
on equity securities are valued at the mean between their latest bid and asked
prices. Futures are valued at the latest price published by the commodities
exchange on which they trade unless it is determined that such price does not
reflect their market value, in which case they will be valued at their fair
value as determined in good faith under procedures established by and under the
supervision of the Directors.
Generally, trading in foreign securities, as well as corporate bonds, U.S.
Government securities and money market instruments, is substantially completed
each day at various times prior to the close of the NYSE. The values of such
securities used in computing the net asset value of the Portfolio's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of the NYSE. Occasionally, events
33
which may affect the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of the NYSE and
will therefore not be reflected in the computation of the Portfolio's net asset
value. If events that may affect the value of such securities occur during such
period, then these securities may be valued at their fair value as determined in
good faith under procedures established by and under the supervision of the
Directors.
Although the legal rights of Class A and Class B shares will be identical,
the different expenses borne by each class will result in different net asset
values and dividends for the class. Dividends will differ by approximately the
amount of the distribution expense accrual differential among the classes. The
net asset value of Class B shares will generally be lower than the net asset
value of Class A shares as a result of the distribution expense charged to Class
B shares.
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Board consists of nine Directors. These same individuals also serve as
directors or trustees for certain of the funds advised by the Adviser and Morgan
Stanley AIP GP LP (the "Institutional Funds") and all of the funds advised by
MSIA (the "Retail Funds"). Seven Directors have no affiliation or business
connection with the Adviser or any of its affiliated persons and do not own any
stock or other securities issued by the Adviser's parent company, Morgan
Stanley. These Directors are the "non-interested" or "Independent Directors" of
the Fund. The other two Directors (the "Management Directors") are affiliated
with the Adviser.
The Independent Directors of the Fund, their age, address, term of office
and length of time served, their principal business occupations during the past
five years, the number of portfolios in the Fund Complex (defined below)
overseen by each Independent Director (as of December 31, 2004) and other
directorships, if any, held by the Directors, are shown below. The Fund Complex
includes all open-end and closed-end funds (including all of their portfolios)
advised by the Adviser and any funds that have an investment adviser that is an
affiliated person of the Adviser (including, but not limited to, MSIA).
[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS IN
FUND
POSITION(S) LENGTH OF COMPLEX OTHER
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT SERVED(1) DURING PAST 5 YEARS(2) DIRECTOR HELD BY DIRECTOR
--------------------------- ------------ ---------- ----------------------------------- ------------- -------------------
Michael Bozic (64) Director Since Private investor; Director or 198 Director of various
c/o Kramer Levin July 2003 Trustee of the Retail Funds (since business
Naftalis & Frankel LLP April 1994) and the Institutional organizations.
Counsel to the Funds (since July 2003); formerly
Independent Vice Chairman of Kmart Corporation
Directors (December 1998- October 2000),
1177 Avenue of the Chairman and Chief Executive
Americas Officer of Levitz Furniture
New York, NY 10036 Corporation (November 1995-November
1998) and President and Chief
Executive Officer of Hills
Department Stores (May 1991-July
1995); formerly variously Chairman,
Chief Executive Officer, President
and Chief Operating Officer
(1987-1991) of the Sears Merchandise
Group of Sears, Roebuck & Co.
34
[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS IN
FUND
POSITION(S) LENGTH OF COMPLEX OTHER
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT SERVED(1) DURING PAST 5 YEARS(2) DIRECTOR HELD BY DIRECTOR
--------------------------- ------------ ---------- ----------------------------------- ------------- --------------------
Edwin J. Garn (73) Director Since Consultant; Director or Trustee of 198 Director of Franklin
1031 North July 2003 the Retail Funds (since January Covey (time
Chartwell Court 1993) and the Institutional Funds management
Salt Lake City, UT (since July 2003); member of the systems),BMW Bank of
84111-2215 Utah Regional Advisory Board of North America, Inc.
Pacific Corp. (utility company); (industrial loan
formerly Managing Director of corporation), Escrow
Summit Ventures LLC (lobbying and Bank USA (industrial
consulting firm) (2000-2004); loan corporation),
United States Senator (R- Utah) United Space
(1974-1992) and Chairman, Senate Alliance (joint
Banking Committee (1980-1986), venture between
Mayor of Salt Lake City, Utah Lockheed Martin and
(1971-1974), Astronaut, Space the Boeing Company)
Shuttle Discovery (April 12-19, and Nuskin Asia
1985), and Vice Chairman, Huntsman Pacific (multilevel
Corporation (chemical company). marketing); member
of the boards of
various civic and
charitable
organizations.
Wayne E. Hedien (71) Director Since Retired; Director or Trustee of the 198 Director of The PMI
c/o Kramer Levin July 2003 Retail Funds (since September 1997) Group Inc. (private
Naftalis & Frankel LLP and the Institutional Funds (since mortgage insurance);
Counsel to the July 2003); formerly associated Trustee and Vice
Independent Directors with the Allstate Companies Chairman of The
1177 Avenue of the (1966-1994), most recently as Field Museum of
Americas Chairman of The Allstate Natural History;
New York, NY 10036 Corporation (March 1993-December director of various
1994) and Chairman and Chief other business and
Executive Officer of its charitable
wholly-owned subsidiary, Allstate organizations.
Insurance Company (July 1989-
December 1994).
Dr. Manuel H. Johnson (56) Director Since Senior Partner, Johnson Smick 198 Director of NVR,
c/o Johnson Smick July 2003 International, Inc., a consulting Inc. (home
International, Inc. firm; Chairman of the Audit construction);
888 16th Street, NW Committee and Director or Trustee Director of KFX
Suite 740 of the Retail Funds (since July Energy; Director of
Washington, D.C. 20006 1991) and the Institutional Funds RBS Greenwich
(since July 2003); Co-Chairman and Capital Holdings
a founder of the Group of Seven (financial holding
Council (G7C), an international company).
economic commission; formerly Vice
Chairman of the Board of Governors
of the Federal Reserve System and
Assistant Secretary of the U.S.
Treasury.
35
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NUMBER OF
PORTFOLIOS IN
FUND
POSITION(S) LENGTH OF COMPLEX OTHER
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT SERVED(1) DURING PAST 5 YEARS(2) DIRECTOR HELD BY DIRECTOR
--------------------------- ------------ ---------- ----------------------------------- ------------- -------------------
Joseph J. Kearns (63) Director Since President, Kearns & Associates LLC 199 Director of Electro
c/o Kearns & August (investment consulting); Deputy Rent Corporation
Associates LLC 1994 Chairman of the Audit Committee and (equipment
PMB754 Director or Trustee of the Retail leasing), The Ford
23852 Pacific Coast Funds (since July 2003) and the Family Foundation
Highway Institutional Funds (since August and the UCLA
Malibu, CA 90265 1994); previously Chairman of the Foundation.
Audit Committee of the
Institutional Funds (October 2001-
July 2003); formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (69) Director Since General Partner of Triumph Capital, 198 Director of various
c/o Triumph Capital, L.P. July 2001 L.P., a private investment business
445 Park Avenue partnership; Chairman of the organizations.
New York, NY 10022 Insurance Committee and Director or
Trustee of the Retail Funds (since
July 1991) and the Institutional
Funds (since July 2001); formerly
Vice President, Bankers Trust
Company and BT Capital Corporation
(1984-1988).
Fergus Reid (73) Director Since Chairman of Lumelite Plastics 199 Trustee and Director
c/o Lumelite Plastics June 1992 Corporation; Chairman of the of certain
Corporation Governance Committee and Director investment companies
85 Charles Colman Blvd. or Trustee of the Retail Funds in the JPMorgan
Pawling, NY 12564 (since July 2003) and the Funds complex
Institutional Funds (since June managed by J.P.
1992). Morgan Investment
Management Inc.
---------------
(1) This is the earliest date the Director began serving the Institutional
Funds. Each Director serves an indefinite term, until his or her successor
is elected.
(2) The dates referenced below indicating commencement of service as
Director/Trustee for the Retail and Institutional Funds reflect the earliest
date the Director/Trustee began serving the Retail and Institutional Funds,
as applicable.
MANAGEMENT DIRECTORS
The Directors who are affiliated with the Adviser or affiliates of the
Adviser (as set forth below) and executive officers of the Fund, their age,
address, term of office and length of time served, their principal business
occupations during the past five years, the number of portfolios in the Fund
Complex overseen by each Management Director (as of December 31, 2004) and the
other directorships, if any, held by the Director, are shown below.
[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS IN
FUND
POSITION(S) LENGTH OF COMPLEX OTHER
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT SERVED(3) DURING PAST 5 YEARS(4) DIRECTOR HELD BY DIRECTOR
--------------------------- ------------ ---------- ----------------------------------- ------------- -------------------
Charles A. Fiumefreddo (72) Chairman Since Chairman and Director or Trustee of 198 None.
c/o Morgan Stanley Trust of the July 2003 the Retail Funds (since July 1991)
Harborside Financial Board and and the Institutional Funds (since
Center, Plaza Two, Director July 2003); formerly Chief
Jersey City, NJ 07311 Executive Officer of the Retail
Funds (until September 2002).
36
[Enlarge/Download Table]
NUMBER OF
PORTFOLIOS IN
FUND
POSITION(S) LENGTH OF COMPLEX OTHER
NAME, AGE AND ADDRESS OF HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
INDEPENDENT DIRECTOR REGISTRANT SERVED(3) DURING PAST 5 YEARS(4) DIRECTOR HELD BY DIRECTOR
--------------------------- ------------ ---------- ----------------------------------- ------------- -------------------
James F. Higgins (57) Director Since Director or Trustee of the Retail 198 Director of AXA
c/o Morgan Stanley Trust July 2003 Funds (since June 2000) and the Financial, Inc. and
Harborside Financial Center, Institutional Funds (since July The Equitable Life
Plaza Two, 2003); Senior Advisor of Morgan Assurance Society of
Jersey City, NJ 07311 Stanley (since August 2000); the United States
Director of Morgan Stanley (financial
Distributors Inc. and Dean Witter services).
Realty Inc; previously President
and Chief Operating Officer of the
Private Client Group of Morgan
Stanley (May 1999-August 2000),
and President and Chief Operating
Officer of Individual Securities of
Morgan Stanley (February 1997-May
1999).
---------------
(3) This is the date the Director began serving the Institutional Funds. Each
Director serves an indefinite term, until his or her successor is elected.
(4) The dates referenced below indicating commencement of service as
Director/Trustee for the Retail and Institutional Funds reflect the
earliest date the Director/Trustee began serving the Retail and
Institutional Funds, as applicable.
[Enlarge/Download Table]
POSITION(S)
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S)
EXECUTIVE OFFICER REGISTRANT TIME SERVED* DURING PAST 5 YEARS**
------------------------------- -------------- --------------------- -------------------------------------------------------
Ronald E. Robison (66) President and President since President and Principal Executive Officer of the funds
1221 Avenue of the Americas Principal September 2005 and in the Fund Complex (since May 2003); Managing Director
New York, NY 10020 Executive Principal Executive of Morgan Stanley & Co. Incorporated and Morgan Stanley;
Officer Officer since July Managing Director and Director of MSIA and Morgan
2003 Stanley Services Company Inc.; Director of Morgan
Stanley Trust; Managing Director and Director of Morgan
Stanley Distributors Inc.; President and Principal
Executive Officer of the Institutional Funds (since
July 2003) and the Retail Funds (since April 2003);
Director of Morgan Stanley SICAV (since May 2004);
previously President and Director of the Retail Funds
(March 2001-July 2003) and Chief Global Operations
Officer of MSIM.
Joseph J. McAlinden (62) Vice President Since July 2003 Managing Director and Chief Investment Officer of MSIA
1221 Avenue of the Americas and MSIM; Director of Morgan Stanley Trust; Chief
New York, NY 10020 Investment Officer of the Van Kampen Funds; Vice
President of the Institutional Funds (since July 2003)
and the Retail Funds (since July 1995).
Barry Fink (50) Vice President Since July 2003 General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas (since December 2000) of Morgan Stanley Investment
New York, NY 10020 Management; Managing Director (since December 2000),
Secretary (since February 1997) and Director (since
July 1998) of MSIA and Morgan Stanley Services Company
Inc.; Assistant Secretary of Morgan Stanley DW Inc.;
Vice President of the Retail Funds and Institutional
Funds (since July 2003); Managing Director, Secretary
and Director of Morgan Stanley Distributors Inc.;
previously Secretary (February 1997-July 2003) and
General Counsel (February 1997-April 2004) of the
Retail Funds; Vice President and Assistant General
Counsel of MSIA and Morgan Stanley Services Company
Inc. (February 1997- December 2001).
37
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POSITION(S)
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S)
EXECUTIVE OFFICER REGISTRANT TIME SERVED* DURING PAST 5 YEARS**
------------------------------- -------------- --------------------- -------------------------------------------------------
Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management; Managing Director of MSIM and MSIA (since
New York, NY 10020 July 2004); Vice President of the Retail Funds and the
Institutional Funds (since July 2004); Vice President
of the Van Kampen Funds (since August 2004);
previously, Managing Director and General
Counsel--Americas, UBS Global Asset Management (July
2000-July 2004) and General Counsel, Aeltus Investment
Management, Inc. (January 1997-July 2000).
Carsten Otto (41) Chief Since October 2004 Executive Director and U.S. Director of Compliance for
1221 Avenue of the Americas Compliance Morgan Stanley Investment Management (since October
New York, NY 10020 Officer 2004); Executive Director of MSIA and MSIM; formerly
Assistant Secretary and Assistant General Counsel of
the Retail Funds.
Stefanie V. Chang (38) Vice President Since December 1997 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, MSIM and MSIA; Vice President of the
New York, NY 10020 Institutional Funds (since December 1997) and the Retail
Funds (since July 2003); formerly practiced law with the
New York law firm of Rogers & Wells (now Clifford Chance
US LLP).
Mary E. Mullin (38) Secretary Since June 1999 Executive Director of Morgan Stanley & Co.
1221 Avenue of the Americas Incorporated, MSIM and MSIA; Secretary of the
New York, NY 10020 Institutional Funds (since June 1999) and the Retail
Funds (since July 2003); formerly practiced law with
the New York law firms of McDermott, Will & Emery and
Skadden, Arps, Slate, Meagher & Flom LLP.
James Garrett (36) Treasurer and Treasurer since Head of Global Fund Administration of Morgan Stanley
1221 Avenue of the Americas Chief Financial February 2002 and Investment Management; Executive Director of Morgan
New York, NY 10020 Officer Chief Financial Stanley & Co. Incorporated and MSIM; Treasurer and
Officer since July Chief Financial Officer of the Institutional Funds;
2003 previously with PriceWaterhouse LLP (now
PricewaterhouseCoopers LLP).
Michael Leary (39) Assistant Since March 2003 Assistant Director and Vice President of Fund
JPMorgan Investor Services Co. Treasurer Administration, JPMorgan Investor Services Co.
73 Tremont Street (formerly Chase Global Funds Services Company);
Boston, MA 02108 formerly Audit Manager at Ernst & Young LLP.
---------------
* This is the earliest date the Officer began serving the Institutional
Funds. Each Officer serves an indefinite term, until his or her successor
is elected.
** The dates referenced below indicating commencement of service as Officer of
the Retail and Institutional Funds reflect the earliest date the Officer
began serving the Retail or Institutional Funds, as applicable.
38
For each Director, the dollar range of equity securities beneficially owned
by the Director in the Fund and in the Family of Investment Companies (Family of
Investment Companies includes all of the registered investment companies advised
by the Adviser, MSIA or Morgan Stanley AIP GP LP) for the calendar year ended
December 31, 2004 is set forth in the table below.
[Enlarge/Download Table]
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT COMPANIES
DOLLAR RANGE OF EQUITY SECURITIES OVERSEEN BY DIRECTOR IN
IN THE FUND FAMILY OF INVESTMENT COMPANIES
NAME OF DIRECTOR (AS OF DECEMBER 31, 2004) (AS OF DECEMBER 31, 2004)
---------------- --------------------------------- -------------------------------
INDEPENDENT:
Michael Bozic none over $100,000
Edwin J. Garn none over $100,000
Wayne E. Hedien none over $100,000
Dr. Manuel H. Johnson none over $100,000
Joseph J. Kearns(1) over $100,000 over $100,000
Michael E. Nugent $50,001-$100,000 over $100,000
Fergus Reid(1) over $100,000 over $100,000
INTERESTED:
Charles A. Fiumefreddo none over $100,000
James F. Higgins none over $100,000
----------
(1) Includes the total amount of compensation deferred by the Director at his
election pursuant to a deferred compensation plan. Such deferred
compensation is placed in a deferral account and deemed to be invested in
one or more of the Retail Funds or Institutional Funds (or portfolio
thereof) that are offered as investment options under the plan. As of
December 31, 2004, Messrs. Kearns and Reid had deferred a total of
$584,856 and $667,002, respectively, pursuant to the deferred compensation
plan.
As to each Independent Director and his immediate family members, no person
owned beneficially or of record securities in an investment advisor or principal
underwriter of the Fund, or a person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common
control with an investment adviser or principal underwriter of the Fund.
As of ____________, 2005, [the Directors and Officers of the Fund, as a
group, owned less than 1% of the outstanding common stock of each Portfolio of
the Fund].
INDEPENDENT DIRECTORS AND THE COMMITTEES
Law and regulation establish both general guidelines and specific duties
for the Independent Directors. The Institutional Funds seek as Independent
Directors individuals of distinction and experience in business and finance,
government service or academia. These are people whose advice and counsel are in
demand by others and for whom there is often competition. To accept a position
on the Institutional Funds' Boards, such individuals may reject other attractive
assignments because the Institutional Funds make substantial demands on their
time. All of the Independent Directors serve as members of the Audit Committee.
In addition, three Directors, including two Independent Directors, serve as
members of the Insurance Committee, and three Directors, all of whom are
Independent Directors, serve as members of the Governance Committee.
The Independent Directors are charged with recommending to the full Board
approval of management, advisory and administration contracts, Rule 12b-1 plans
and distribution and underwriting agreements, continually reviewing fund
performance, checking on the pricing of portfolio securities, brokerage
commissions, transfer agent costs and performance and trading among funds in the
same complex; and approving fidelity bond and related insurance coverage and
allocations, as well as other matters that arise from time to time. The
Independent Directors are required to select and nominate individuals to fill
any Independent Director vacancy on the Board of any fund that has a Rule 12b-1
plan of distribution.
The Board of Directors has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended. The Audit Committee is charged with recommending to the
full Board the engagement or discharge of the Fund's independent registered
public
39
accounting firm; directing investigations into matters within the scope of the
independent registered public accounting firm's duties, including the power to
retain outside specialists; reviewing with the independent registered public
accounting firm the audit plan and results of the auditing engagement; approving
professional services provided by the independent registered public accounting
firm and other accounting firms prior to the performance of the services;
reviewing the independence of the independent registered public account firm;
considering the range of audit and non-audit fees; reviewing the adequacy of the
Fund's system of internal controls; and preparing and submitting Committee
meeting minutes to the full Board. The Fund has adopted a formal, written Audit
Committee Charter. The Fund held nine Audit Committee meetings during its fiscal
year ended December 31, 2004.
The members of the Audit Committee of the Fund are currently Michael Bozic,
Edwin J. Garn, Wayne E. Hedien, Dr. Manuel H. Johnson, Joseph J. Kearns, Michael
E. Nugent and Fergus Reid. None of the members of the Fund's Audit Committee is
an "interested person," as defined under the 1940 Act, of the Fund (with such
disinterested Directors being Independent Directors or individually, Independent
Director). Each Independent Director is also "independent" from the Fund under
the listing standards of the New York Stock Exchange, Inc. (NYSE). The current
Chairman of the Audit Committee of the Fund is Dr. Manuel H. Johnson.
The Board of Directors of the Fund also has a Governance Committee. The
Governance Committee identifies individuals qualified to serve as Independent
Directors on the Fund's Board and on committees of the Board and recommends such
qualified individuals for nomination by the Fund's Independent Directors as
candidates for election as Independent Directors, advises the Fund's Board with
respect to Board composition, procedures and committees, develops and recommends
to the Fund's Board a set of corporate governance principles applicable to the
Fund, monitors and makes recommendations on corporate governance matters and
policies and procedures of the Fund's Board of Directors and any Board
committees and oversees periodic evaluations of the Fund's Board and its
committees. The members of the Governance Committee of the Fund are currently
Michael Bozic, Edwin J. Garn and Fergus Reid, each of whom is an Independent
Director. The current Chairman of the Governance Committee is Fergus Reid. The
Governance Committee held two meetings during its fiscal year ended December 31,
2004.
The Fund does not have a separate nominating committee. While the Fund's
Governance Committee recommends qualified candidates for nominations as
Independent Directors, the Board of Directors of the Fund believes that the task
of nominating prospective Independent Directors is important enough to require
the participation of all current Independent Directors, rather than a separate
committee consisting of only certain Independent Directors. Accordingly, each
current Independent Director (Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Dr.
Manuel H. Johnson, Joseph J. Kearns, Michael E. Nugent and Fergus Reid)
participates in the election and nomination of candidates for election as
Independent Directors for the Fund for which the Independent Director serves.
Persons recommended by the Fund's Governance Committee as candidates for
nomination as Independent Directors shall possess such knowledge, experience,
skills, expertise and diversity so as to enhance the Board's ability to manage
and direct the affairs and business of the Fund, including, when applicable, to
enhance the ability of committees of the Board to fulfill their duties and/or to
satisfy any independence requirements imposed by law, regulation or any listing
requirements of the NYSE. While the Independent Directors of the Fund expect to
be able to continue to identify from their own resources an ample number of
qualified candidates for the Fund's Board as they deem appropriate, they will
consider nominations from shareholders to the Board. Nominations from
shareholders should be in writing and sent to the Independent Directors as
described below under the caption "Shareholder Communications."
There were 26 meetings of the Board of Directors of the Fund held during
the fiscal year ended December 31, 2004. The Independent Directors of the Fund
also met four times during that period, in addition to the 26 meetings of the
full Board.
Finally, the Board has formed an Insurance Committee to review and monitor
the insurance coverage maintained by the Fund. The Insurance Committee currently
consists of Messrs. Nugent, Fiumefreddo and Hedien. Messrs. Nugent and Hedien
are Independent Directors. The Insurance Committee held six Insurance Committee
meetings during the fiscal year ended December 31, 2004.
40
ADVANTAGES OF HAVING THE SAME INDIVIDUALS AS INDEPENDENT DIRECTORS FOR THE
RETAIL FUNDS AND INSTITUTIONAL FUNDS
The Independent Directors and the funds' management believe that having the
same Independent Director for each of the Retail Funds and Institutional Funds
avoids the duplication of effort that would arise from having different groups
of individuals serving as Independent Directors for each of the funds or even of
sub-groups of funds. They believe that having the same individuals serve as
Independent Directors of these funds tends to increase their knowledge and
expertise regarding matters which affect the Fund Complex generally and enhances
their ability to negotiate on behalf of each fund with the fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Directors arriving at conflicting decisions regarding operations and
management of the funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Directors serve on the boards of the
Retail Funds and Institutional Funds enhances the ability of each fund to
obtain, at modest cost to each, the services of Independent Directors of the
caliber, experience and business acumen of the individuals who serve as
Independent Directors of the Retail Funds and Institutional Funds.
SHAREHOLDER COMMUNICATIONS
Shareholders may send communications to the Board of Directors.
Shareholders should send communications intended for the Board by addressing the
communication directly to that Board (or individual Board members) and/or
otherwise clearly indicating in the salutation that the communication is for the
Board (or individual Board members) and by sending the communication to either
the Fund's office or directly to such Board member(s) at the address specified
for each director previously noted. Other shareholder communications received by
the Fund not directly addressed and sent to the Board will be reviewed and
generally responded to by management, and will be forwarded to the Board only at
management's discretion based on the matters contained therein.
COMPENSATION OF DIRECTORS AND OFFICERS
Each Independent Director receives an annual retainer fee of $168,000 for
serving the Retail Funds and the Institutional Funds. In addition, each
Independent Director receives $2,000 for attending each of the four quarterly
board meetings and two performance meetings that occur each year, so that an
Independent Director who attended all six meetings would receive total
compensation of $180,000 for serving the funds. The Chairman of the Audit
Committee receives an additional annual retainer fee of $60,000. Other Committee
Chairmen and the Deputy Chairman of the Audit Committee receive an additional
annual retainer fee of $30,000. The aggregate compensation paid to each
Independent Director is paid by the Retail Funds and the Institutional Funds,
and is allocated on a pro rata basis among each of the operational
funds/portfolios of the Retail Funds and the Institutional Funds based on the
relative net assets of each of the Funds' portfolios. Mr. Fiumefreddo receives
an annual fee for his services as Chairman of the Boards of the Retail Funds and
the Institutional Funds and for administrative services provided to each Board.
The Fund also reimburses the Independent Directors for travel and other
out-of-pocket expenses incurred by them in connection with attending such
meetings. Directors of the Fund who are employed by the Adviser or an affiliated
company receive no compensation or expense reimbursement from the Fund for their
services as a Director.
Effective April 1, 2004, the Fund began a Deferred Compensation Plan (the
"DC Plan"), which allows each Independent Director to defer payment of all, or a
portion, of the fees he or she receives for serving on the Board of Directors
throughout the year. Each eligible Director generally may elect to have the
deferred amounts credited with a return equal to the total return on one or more
of the Retail Funds or Institutional Funds (or portfolios thereof) that are
offered as investment options under the Plan. At the Director's election,
distributions are either in one lump sum payment, or in the form of equal annual
installments over a period of five years. The rights of an eligible Director and
the beneficiaries to the amounts held under the DC Plan are unsecured and such
amounts are subject to the claims of the creditors of the Fund.
Prior to April 1, 2004, the Fund maintained a similar Deferred Compensation
Plan (the "Prior DC Plan"), which also allowed each Independent Director to
defer payment of all, or a portion, of the fees he or she received for serving
on the Board of Directors throughout the year. The DC Plan amends and supersedes
the Prior DC Plan and all amounts payable under the Prior DC Plan are now
subject to the terms of the Plan (except for amounts paid during the calendar
year 2004 which remain subject to the terms of the Prior DC Plan).
41
The following table shows aggregate compensation payable to each of the
Fund's Directors from the Fund for the fiscal year ended December 31, 2004 and
the aggregate compensation payable to each of the Fund's Directors by the Fund
Complex (which includes all of the Retail and Institutional Funds) for the
calendar year ended December 31, 2004.
COMPENSATION
[Enlarge/Download Table]
TOTAL NUMBER OF PORTFOLIOS IN THE
COMPENSATION FUND COMPLEX FROM WHICH THE TOTAL COMPENSATION FROM THE FUND
NAME OF DIRECTOR FROM FUND DIRECTOR RECEIVED COMPENSATION COMPLEX PAYABLE TO DIRECTORS
---------------- -------------- ------------------------------- --------------------------------
Michael Bozic $ 17,427 197 $ 178,000
Charles A. Fiumefreddo* $ 35,094 197 $ 360,000
Edwin J. Garn $ 17,427 197 $ 178,000
Wayne E. Hedien $ 17,427 197 $ 178,000
James F. Higgins* $ 0 197 $ 0
Manuel H. Johnson $ 23,275 197 $ 238,000
Joseph J. Kearns(1) $ 27,625 198 $ 219,903
Michael E. Nugent $ 20,352 197 $ 208,000
Fergus Reid(1) $ 20,352 198 $ 221,376
----------
* Directors Messrs. Fiumefreddo and Higgins are deemed to be "interested
persons" of the Fund as that term is defined in the 1940 Act.
(1) The total amounts of deferred compensation under the DC Plan and the Prior
DC Plan (including interest) payable or accrued by Messrs. Kearns and Reid
are $584,856 and $667,002, respectively.
Prior to December 31, 2003, 49 of the Retail Funds (the "Adopting Funds")
had adopted a retirement program under which an Independent Director who retired
after serving for at least five years as an Independent Director of any such
fund (an "Eligible Director") would have been entitled to retirement payments
based on factors such as length of service, upon reaching the eligible
retirement age. On December 31, 2003, the amount of accrued retirement benefits
for each Eligible Director was frozen, and will be payable, together with a
return of 8% per annum, at or following each such Eligible Director's retirement
as shown in the table below.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Directors by the Adopting Funds for the calendar year ended
December 31, 2004, and the estimated retirement benefits for the Independent
Directors from the Adopting Funds for each calendar year following retirement.
Messrs. Kearns and Reid did not participate in the retirement program.
[Enlarge/Download Table]
RETIREMENT BENEFITS ACCRUED AS ESTIMATED ANNUAL BENEFITS
FUND EXPENSES UPON RETIREMENT(1)
------------------------------ -------------------------
NAME OF INDEPENDENT DIRECTOR BY ALL ADOPTING FUNDS FROM ALL ADOPTING FUNDS
---------------------------- ------------------------------ -------------------------
Michael Bozic $ 19,437 $ 46,871
Edwin J. Garn $ 28,779 $ 46,917
Wayne E. Hedien $ 37,860 $ 40,020
Dr. Manuel H. Johnson $ 19,701 $ 68,630
Michael E. Nugent $ 35,471 $ 61,377
----------
(1) Total compensation accrued under the retirement plan, together with a return
of 8% per annum, will be paid annually commencing upon retirement and
continuing for the remainder of the Director's life.
42
In addition, as a result of the liquidation of one of the Adopting Funds in
2004, the Fund's Independent Directors received a lump sum benefit payment as
follows:
[Download Table]
LUMP SUM
NAME OF INDEPENDENT DIRECTOR BENEFIT PAYMENT
---------------------------- ---------------
Michael Bozic $ 3,639
Edwin J. Garn $ 6,935
Wayne E. Hedien $ 5,361
Dr. Manuel H. Johnson $ 2,915
Michael E. Nugent $ 6,951
CODE OF ETHICS
Pursuant to Rule 17j-1 under the 1940 Act, the Board of Directors has
adopted a Code of Ethics for the Fund and approved a Code of Ethics adopted by
Morgan Stanley Investment Management, Morgan Stanley Distribution, Inc. and each
Sub-Adviser (collectively the "Codes"). The Codes are intended to ensure that
the interests of shareholders and other clients are placed ahead of any personal
interest, that no undue personal benefit is obtained from the person's
employment activities and that actual and potential conflicts of interest are
avoided.
The Codes are designed to detect and prevent improper personal trading. The
Codes permit personnel subject to the Codes to invest in securities, including
securities that may be purchased, sold or held by the Fund, subject to a number
of restrictions and controls, including prohibitions against purchases of
securities in an Initial Public Offering and a pre-clearance requirement with
respect to personal securities transactions.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
The Adviser is a wholly-owned subsidiary of Morgan Stanley, a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses--securities, asset management and credit
services. Morgan Stanley is a full service securities firm engaged in securities
trading and brokerage activities, as well as providing investment banking,
research and analysis, financing and financial advisory services. The principal
offices of Morgan Stanley are located at 1585 Broadway, New York, NY 10036, and
the principal offices of the Adviser are located at 1221 Avenue of the Americas,
New York, NY 10020. As of ___________, 2005, the Adviser, together with its
affiliated asset management companies, had approximately $____ billion in assets
under management with approximately $____ billion in institutional assets.
The Adviser provides investment advice and portfolio management services
pursuant to an Investment Advisory Agreement and, subject to the supervision of
the Fund's Board of Directors, makes the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Portfolio's investments. Pursuant to the Investment Advisory
Agreement, the Adviser is entitled to receive from the Class A and Class B
shares of the Portfolio an annual management fee, payable quarterly, equal to
______________________________________________________________________________
_________________________. The Adviser has voluntarily agreed to a reduction in
the fees payable to it and to reimburse the Portfolio, if necessary, if such
fees would cause the total annual operating expenses of the Portfolio to exceed
1.00% for Class A Shares and 1.25% for Class B shares. In determining the actual
amount of voluntary fee waiver and/or expense reimbursement for the Portfolio,
the Adviser excludes from annual operating expenses certain investment related
expenses, such as foreign country tax expense and interest expense on borrowing.
The Adviser reserves the right to terminate any of its fee waivers and/or
expense reimbursements at any time in its sole discretion.
43
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
The Board of Directors believes that the voting of proxies on securities
held by the Fund is an important element of the overall investment process. As
such, the Directors have delegated the responsibility to vote such proxies to
the Adviser. The following is a summary of the Adviser's Proxy Voting Policy
("Proxy Policy").
The Adviser uses its best efforts to vote proxies on securities held in the
Fund as part of its authority to manage, acquire and dispose of Fund assets. In
this regard, the Adviser has formed a Proxy Review Committee ("Committee")
comprised of senior investment professionals that is responsible for creating
and implementing the Policy. The Committee meets monthly but may meet more
frequently as conditions warrant. The Proxy Policy provides that the Adviser
will vote proxies in the best interests of clients consistent with the objective
of maximizing long-term investment returns. The Proxy Policy provides that the
Adviser will generally vote proxies in accordance with pre-determined guidelines
contained in the Proxy Policy. The Adviser may vote in a manner that is not
consistent with the pre-determined guidelines, provided that the vote is
approved by the Committee. The Adviser generally will not vote a proxy if it has
sold the affected security between the record date and the meeting date.
The Proxy Policy provides that, unless otherwise determined by the
Committee, votes will be cast in the manner described below:
- Generally, routine proposals will be voted in support of management.
- With regard to the election of directors, where no conflict exists and
where no specific governance deficiency has been noted, votes will be
cast in support of management's nominees.
- The Adviser will vote in accordance with management's recommendation
with respect to certain non-routine proposals (i.e., reasonable
capitalization changes, stock repurchase programs, stock splits,
certain compensation-related matters, certain anti-takeover measures,
etc.)
- The Adviser will vote against certain non-routine proposals (i.e.,
unreasonable capitalization changes, establishment of cumulative
voting rights for the election of directors, requiring supermajority
shareholder votes to amend by-laws, indemnification of auditors, etc.)
(notwithstanding management support).
- The Adviser will vote in its discretion with respect to certain
non-routine proposals (i.e., mergers, acquisitions, take-overs,
spin-offs, etc.), which may have a substantive financial or best
interest impact on an issuer.
- The Adviser will vote for certain proposals it believes call for
reasonable charter provisions or corporate governance practices (i.e.,
requiring auditors to attend annual shareholder meetings, requiring
that members of compensation, nominating and audit committees be
independent, reducing or eliminating supermajority voting
requirements, etc).
- The Adviser will vote against certain proposals it believes call for
unreasonable charter provisions or corporate governance practices
(i.e., proposals to declassify boards, proposals to require a company
to prepare reports that are costly to provide or that would require
duplicative efforts or expenditure that are of a non-business nature
or would provide no pertinent information from the perspective of
institutional shareholders, etc.)
- Certain other proposals (i.e., proposals requiring directors to own
large amounts of company stock to be eligible for election, etc.)
generally are evaluated by the Committee based on the nature of the
proposal and the likely impact on shareholders.
While the proxy voting process is well-established in the United States and
other developed markets with a number of tools and services available to assist
an investment manager, voting proxies of non-U.S. companies located in certain
jurisdictions, particularly emerging markets, may involve a number of problems
that may restrict or prevent the Adviser's ability to vote such proxies. As a
result, non-U.S. proxies will be voted on a best efforts basis only, after
weighing the costs and benefits to the Fund of voting such proxies.
CONFLICTS OF INTEREST
If the Committee determines that an issue raises a material conflict of
interest, or gives rise to a potential material conflict of interest, the
Committee will request a special committee to review, and recommend a course of
action with respect to, the conflict in question and that the Committee will
have sole discretion to cast a vote.
44
THIRD PARTIES
To assist in its responsibility for voting proxies, the Adviser has
retained Institutional Shareholder Services ("ISS") and Glass Lewis as experts
in the proxy voting and corporate governance area. In addition to ISS and Glass
Lewis, the Investment Adviser may from time to time retain other proxy research
providers. ISS, Glass Lewis and these other proxy research providers are
referred to herein as "Research Providers." The services provided to the Adviser
include in-depth research, global issuer analysis and voting recommendations.
While the Adviser may review and utilize the ISS recommendations made by
Research Providers in making proxy voting decisions, it is in no way obligated
to follow such recommendations. In addition to research, the Research Providers
provide vote execution, reporting and recordkeeping. The Committee carefully
monitors and supervises the services provided by the Research Providers.
FURTHER INFORMATION
A copy of the Proxy Policy, as well as the Fund's most recent proxy voting
record filed with the SEC are available (i) without charge by visiting the
Mutual Fund Center on our web site at www.morganstanley.com/funds. The Fund's
proxy voting record is also available without charge on the SEC's web site at
www.sec.gov.
APPROVAL OF THE ADVISORY AGREEMENT
In approving the Investment Advisory Agreement, the board of directors,
including the independent directors, considered [to come]
PRINCIPAL UNDERWRITER
Morgan Stanley Distribution, Inc., with principal offices at One Tower
Bridge, 100 Front Street, Suite 1100, West Conshohocken, Pennsylvania
19428-2881, serves as principal underwriter to the Fund. For information
relating to the services provided by Morgan Stanley Distribution, Inc. See
"Distribution of Shares."
FUND ADMINISTRATION
The Adviser also provides administrative services to the Fund pursuant to
an Administration Agreement. The services provided under the Administration
Agreement are subject to the supervision of the officers and the Board of
Directors of the Fund and include day-to-day administration of matters related
to the corporate existence of the Fund, maintenance of records, preparation of
reports, supervision of the Fund's arrangements with its custodian, and
assistance in the preparation of the Fund's registration statement under federal
laws. For its services under the Administration Agreement, the Fund pays the
Adviser a monthly fee which on an annual basis equals 0.08% of the average daily
net assets of the Portfolio. The Adviser may compensate other service providers
for performing shareholder servicing and administrative services.
SUB-ADMINISTRATOR. Under an agreement between the Adviser and J.P. Morgan
Investor Services Co. ("JPMorgan"), JPMorgan, a corporate affiliate of JPMorgan
Chase Bank, provides certain administrative and accounting services to the Fund.
The Adviser supervises and monitors the administrative and accounting services
provided by JPMorgan. Their services are also subject to the supervision of the
officers and Board of Directors of the Fund. JPMorgan provides operational and
administrative services to investment companies with approximately $_____
billion in assets and having approximately _____ shareholder accounts as of
_________, 2005. JPMorgan's business address is 73 Tremont Street, Boston, MA
02108-3913.
CUSTODIAN
JPMorgan Chase, located at 270 Park Avenue, New York, NY 10017, acts as the
Fund's custodian. JPMorgan Chase is not an affiliate of the Adviser or the
Distributor. In maintaining custody of foreign assets held outside the United
States, JPMorgan Chase employs sub-custodians approved by the Board of Directors
of the Fund in accordance with regulations of the SEC for the purpose of
providing custodial services for such assets.
45
In the selection of foreign sub-custodians, the Directors or their
delegates consider a number of factors, including, but not limited to, the
reliability and financial stability of the institution, the ability of the
institution to provide efficiently the custodial services required for the Fund,
and the reputation of the institution in the particular country or region.
DIVIDEND DISBURSING AND TRANSFER AGENT
JPMorgan, P.O. Box 182913, Columbus, OH 43218-2913, provides dividend
disbursing and transfer agency services for the Fund pursuant to a Transfer
Agency Agreement with the Fund.
FUND MANAGEMENT
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS. Because the portfolio managers
manage assets for other investment companies, pooled investment vehicles and/or
other accounts (including institutional clients, pension plans and certain high
net worth individuals), there may be an incentive to favor one client over
another resulting in conflicts of interest. For instance, the Adviser may
receive fees from certain accounts that are higher than the fee it receives from
the Portfolio, or it may receive a performance-based fee on certain accounts. In
those instances, the portfolio managers may have an incentive to favor the
higher and/or performance-based fee accounts over the Portfolio. The Adviser has
adopted trade allocation and other policies and procedures that it believes are
reasonably designed to address these and other conflicts of interest.
PORTFOLIO MANAGER COMPENSATION STRUCTURE. The portfolio managers receive a
combination of base compensation and discretionary compensation, comprising a
cash bonus and several deferred compensation programs described below. The
methodology used to determine portfolio manager compensation is applied across
all accounts managed by the portfolio managers.
BASE SALARY COMPENSATION. Generally, the portfolio managers receive base
salary compensation based on the level of his or her position with the Adviser.
DISCRETIONARY COMPENSATION. In addition to base compensation, the portfolio
managers may receive discretionary compensation. Discretionary compensation can
include:
- Cash Bonus;
- Morgan Stanley's Equity Incentive Compensation Program (EICP)
Awards--a mandatory program that defers a portion of discretionary
year-end compensation into restricted stock units or other awards
based on Morgan Stanley common stock that are subject to vesting and
other conditions;
- Investment Management Deferred Compensation Plan (IMDCP) Awards--a
mandatory program that defers a portion of discretionary year-end
compensation and notionally invests it in designated funds advised by
the Adviser or its affiliates. The award is subject to vesting and
other conditions. A portfolio manager must notionally invest a minimum
of 25% to a maximum of 50% of the IMDCP deferral into a combination of
the designated funds he or she manages that are included in the IMDCP
fund menu, which may or may not include the Portfolio;
- Voluntary Deferred Compensation Plans--voluntary programs that permit
certain employees to elect to defer a portion of their discretionary
year-end compensation and directly or notionally invest the deferred
amount: (1) across a range of designated investment funds, including
funds advised by the adviser or its affiliates, and/or (2) In Morgan
Stanley stock units.
Several factors determine discretionary compensation, which can vary by
portfolio management team and circumstances. In order of relative importance,
these factors include:
- Investment performance. A portfolio manager's compensation is linked
to the pre-tax investment performance of the funds/accounts managed by
the portfolio manager. Investment performance is calculated for one-,
three- and five-year periods measured against a fund's/account's
primary benchmark, indices and/or peer groups, where applicable.
Generally, the greatest weight is placed on the three- and five-year
periods;
- Revenues generated by the investment companies, pooled investment
vehicles and other accounts managed by the portfolio manager;
- Contribution to the business objectives of the Adviser;
- The dollar amount of assets managed by the portfolio manager;
46
- Market compensation survey research by independent third parties;
- Other qualitative factors, such as contributions to client objectives;
and
- Performance of Morgan Stanley and Morgan Stanley Investment
Management, and the overall performance of the Global Investor Group,
a department within Morgan Stanley Investment Management that includes
all investment professionals.
Occasionally, to attract new hires or to retain key employees, the total
amount of compensation will be guaranteed in advance of the fiscal year end
based on current market levels. In limited circumstances, the guarantee may
continue for more than one year. The guaranteed compensation is based on the
same factors as those comprising overall compensation described above.
INTERNATIONAL GROWTH EQUITY PORTFOLIO
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS. As of __________, 2005,
Johannes B. Van den Berg managed ___ mutual funds with a total of $____ million
in assets; ___ pooled investment vehicles other than mutual funds with a total
of $____ million in assets; and _____ other accounts with a total of $______
million in assets. David Sugimoto managed ___ mutual funds with a total of $____
million in assets; ____ pooled investment vehicles other than mutual funds with
a total of $____ million in assets; and ____ other accounts with a total of
$____ million in assets.
SECURITIES OWNERSHIP OF PORTFOLIO MANAGER. As of __________, 2005, Johannes
B. Van den Berg and David Sugimoto did not own any securities in the Portfolio.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
____________________, serves as the Fund's independent registered public
accounting firm and will audit the annual financial statements of the Portfolio.
FUND COUNSEL
Clifford Chance US LLP, located at 31 West 52nd Street, New York, NY 10019,
acts as the Fund's legal counsel.
DISTRIBUTION OF SHARES
Morgan Stanley Distribution, Inc., a wholly owned subsidiary of Morgan
Stanley, serves as the Fund's exclusive distributor of Portfolio shares pursuant
to a Distribution Agreement. In addition, to promote the sale of Fund shares,
the Fund has adopted a Plan of Distribution with respect to the Class B shares
of the Portfolio under Rule 12b-1 of the 1940 Act (the "Plan"). Under the Plan,
Morgan Stanley Distribution, Inc. is entitled to receive as compensation from
the Portfolio a fee, which is accrued daily and paid monthly, at an annual rate
of 0.25% of the average daily net assets of the Class B shares. The Plan is
designed to compensate Morgan Stanley Distribution, Inc. for its services in
connection with distributing shares of the Portfolio. Morgan Stanley
Distribution, Inc. may retain any portion of the fees it does not expend in
meeting its obligations to the Fund. Morgan Stanley Distribution, Inc. may
compensate financial intermediaries, plan fiduciaries and administrators, which
may or may not be affiliated with Morgan Stanley, for providing
distribution-related services, including account maintenance services, to
shareholders (including, where applicable, underlying beneficial owners) of the
Fund. Morgan Stanley Distribution, Inc. and the Adviser also may compensate
third parties out of their own assets.
The Plan for the Class B shares was most recently approved by the Fund's
Board of Directors, including the Independent Directors, none of whom has a
direct or indirect financial interest in the operation of the Plan or in any
agreements related thereto, on __________, 2005.
REVENUE SHARING
The Adviser and/or the Distributor may pay compensation, out of their own
funds and not as an expense of the Portfolio, to affiliates, certain insurance
companies and/or other financial intermediaries ("Intermediaries") in connection
with the sale or retention of shares of the Portfolio. For example, the Adviser
or the Distributor may pay additional compensation to Intermediaries for the
purpose of promoting the sale of Portfolio shares, maintaining share balances
and/or for sub-accounting, recordkeeping, administrative or transaction
processing services. Such payments are in addition to any distribution-related
or shareholder servicing fees that may be payable by the Portfolio. The
additional payments are generally based on current assets, but may also be based
on other measures as determined from time to time by the Adviser or Distributor
(e.g. gross sales or number of accounts). The amount of these payments, as
determined from time to time by the Adviser or the Distributor, may be different
for different Intermediaries.
47
The additional payments currently made to certain affiliated entities of
the Adviser or the Distributor ("Affiliated Entities") and Intermediaries
include the following annual rates paid out of the Adviser's or the
Distributor's own funds:
(1) With respect to Affiliated Entities, an amount equal to 35% of the
Portfolio's advisory fees accrued from the average daily net assets of
shares of the Portfolio held in the Affiliated Entity's accounts; and
(2) With respect to Intermediaries, an amount up to 0.10% of the average
daily net assets of shares of the Portfolio held in the Intermediaries'
accounts.
The prospect of receiving, or the receipt of, additional compensation as
described above by Affiliated Entities or other Intermediaries out of the
Adviser's or Distributor's own funds, may provide Affiliated Entities and such
Intermediaries and/or their representatives or employees with an incentive to
favor sales of shares of the Portfolio over other investment options with
respect to which the Affiliated Entity or Intermediary does not receive
additional compensation (or receives lower levels of additional compensation).
These payment arrangements, however, will not change the price that an investor
pays for shares of the Portfolio. Investors may wish to take such payment
arrangements into account when considering and evaluating any recommendations
relating to Portfolio shares. Investors should review carefully any disclosure
provided by an Affiliated Entity or Intermediary as to its compensation.
BROKERAGE PRACTICES
PORTFOLIO TRANSACTIONS
MSIM, as the Portfolio's investment adviser, is responsible for decisions
to buy and sell securities for the Portfolio, for broker-dealer selection and
for negotiation of commission rates. The Adviser are prohibited from directing
brokerage transactions on the basis of the referral of clients or the sale of
shares of advised investment companies. Purchases and sales of securities on a
stock exchange are effected through brokers who charge a commission for their
services. In the over-the-counter market, securities may be traded as agency
transactions through broker dealers or traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission, although
the price of the security usually includes profit to the dealer. 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. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid.
On occasion, the Portfolio may purchase certain money market instruments
directly from an issuer without payment of a commission or concession. Money
market instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer.
The Fund anticipates that certain of its transactions involving foreign
securities will be effected on securities exchanges. Fixed commissions on such
transactions are generally higher than negotiated commissions on domestic
transactions. There is also generally less government supervision and regulation
of foreign securities exchanges and brokers than in the United States.
MSIM serves as investment adviser to a number of clients, including other
investment companies. The Adviser attempts to equitably allocate purchase and
sale transactions among the portfolios of the Fund and other client accounts. To
that end, the Adviser considers various factors, including respective investment
objectives, relative size of portfolio holdings of the same or comparable
securities, availability of cash for investment, size of investment commitments
generally held and the opinions of the persons responsible for managing the
portfolios of the Fund and other client accounts.
The Adviser selects the brokers or dealers that will execute the purchases
and sales of investment securities for the Portfolio. The Adviser seeks the best
execution for all portfolio transactions. The Portfolio may pay higher
commission rates than the lowest available when the Adviser believes it is
reasonable to do so in light of the value of the research, statistical, and
pricing services provided by the broker effecting the transaction. In seeking to
determine the reasonableness of brokerage commissions paid in any transaction,
the Adviser relies upon its experience and knowledge regarding commissions
generally charged by various brokers and on its judgment in evaluating the
brokerage and research services received from the broker effecting the
transaction. The Adviser is unable to ascertain the value of these services due
to the subjective nature of their determinations.
AFFILIATED BROKERS
Subject to the overriding objective of obtaining the best execution of
orders, the Fund may use broker-dealer affiliates of the Adviser to effect
Portfolio brokerage transactions under procedures adopted by the Fund's Board of
Directors. Pursuant to these procedures, the Adviser uses two broker-dealer
affiliates, Morgan Stanley Distribution, Inc. (including Morgan Stanley
International Limited) and Morgan Stanley DW Inc.
48
("Morgan Stanley DW"), each of which is wholly owned by Morgan Stanley, for such
transactions, the commission rates and other remuneration paid to Morgan Stanley
Distribution, Inc. or Morgan Stanley DW must be fair and reasonable in
comparison to those of other broker-dealers for comparable transactions
involving similar securities being purchased or sold during a comparable time
period. This standard would allow the affiliated broker or dealer to receive no
more than the remuneration which would be expected to be received by an
unaffiliated broker.
BROKERAGE COMMISSIONS PAID
Not applicable.
DIRECTED BROKERAGE.
Not applicable.
REGULAR BROKER-DEALERS
Not applicable.
PORTFOLIO TURNOVER
The Portfolio generally does not invest for short-term trading purposes;
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolio will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with its investment
objectives and policies. Higher portfolio turnover (E.G., over 100%) necessarily
will cause the Portfolio to pay correspondingly increased brokerage and trading
costs. In addition to transaction costs, higher portfolio turnover may result in
the realization of capital gains. As discussed under "Taxes," 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.
GENERAL INFORMATION
FUND HISTORY
The Fund was incorporated pursuant to the laws of the State of Maryland on
June 16, 1988 under the name Morgan Stanley Institutional Fund, Inc. The Fund
filed a registration statement with the SEC registering itself as an open-end
management investment company offering diversified and non-diversified series
under the 1940 Act and its shares under the 1933 Act, as amended, and commenced
operations on November 15, 1988. On December 1, 1998, the Fund changed its name
to Morgan Stanley Dean Witter Institutional Fund, Inc. Effective May 1, 2001,
the Fund changed its name to Morgan Stanley Institutional Fund, Inc.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Amended and Restated Articles of Incorporation permit the
Directors to issue [31 billion] shares of common stock, par value $.001 per
share, from an unlimited number of classes or series of shares. The shares of
each Portfolio of the Fund, when issued, are fully paid and nonassessable, and
have no preference as to conversion, exchange, dividends, retirement or other
features. Portfolio shares have no pre-emptive rights. The shares of the Fund
have non-cumulative voting rights, which means that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. Shareholders are entitled to one vote for
each full share held (and a fractional vote for each fractional share held),
then standing in their name on the books of the Fund.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of the Portfolio's
net investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see "Taxes"). However, the Fund may also choose
to retain net realized capital gains and pay taxes on such gains. The amounts of
any income dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of
the Portfolio by an investor may have the effect of reducing the per share net
asset value of the Portfolio by the per share amount of the dividend or
49
distribution. Furthermore, such dividends or distributions, although in effect a
return of capital, are subject to income taxes for shareholders subject to tax
as set forth herein and in the applicable Prospectus.
As set forth in the Prospectus, unless you elect otherwise in writing, all
dividends and capital gains distributions for a class of shares are
automatically reinvested in additional shares of the same class of the Portfolio
at net asset value (as of the business day following the record date). This
automatic reinvestment of dividends and distributions will remain in effect
until you notify the Fund in writing that either the Income Option (income
dividends in cash and capital gains distributions reinvested in shares at net
asset value) or the Cash Option (both income dividends and capital gains
distributions in cash) has been elected.
TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund, Portfolio and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund, Portfolio
or shareholders, and the discussion here and in the Prospectus is not intended
to be a substitute for careful tax planning.
The following general discussion of certain federal income tax
consequences is based on the Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
REGULATED INVESTMENT COMPANY QUALIFICATION
The Portfolio intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
In order to so qualify, the Portfolio must, among other things, (i) derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, and other income derived
with respect to its business of investing in such stock securities or
currencies, including, generally, certain gains from options, futures and
forward contracts; and (ii) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (a) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
U.S. Government securities, securities of other RICs, and other securities, with
such other securities limited, in respect to any one issuer, to an amount not
greater than 5% of the value of the Portfolio's total assets or 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets are invested in the securities (other than U.S.
Government securities or securities of other RICs) of any one issuer or two or
more issuers which the Portfolio controls and which are engaged in the same,
similar, or related trades or businesses. For purposes of the 90% of gross
income requirement described above, foreign currency gains will generally be
treated as qualifying income under current federal income tax law. However, the
Code expressly provides the U.S. Treasury with authority to issue regulations
that would exclude foreign currency gains from qualifying income if such gains
are not directly related to a RIC's business of investing in stock or securities
(or options or futures with respect to stocks or securities). While to date the
U.S. Treasury has not exercised this regulatory authority, there can be no
assurance that it will not issue regulations in the future (possibly with
retroactive application) that would treat some or all of the Portfolio's foreign
currency gains as non-qualifying income. For purposes of the diversification
requirement described above, the Portfolio will not be treated as in violation
of such requirement as a result of a discrepancy between the value of its
various investments and the diversification percentages described above, unless
such discrepancy exists immediately following the acquisition of any security or
other property and is wholly or partly the result of such acquisition. Moreover,
even in the event of noncompliance with the diversification requirement as of
the end of any given quarter, the Portfolio is permitted to cure the violation
by eliminating the discrepancy causing such noncompliance within a period of 30
days from the close of the relevant quarter other than its first quarter
following its election to be taxed as a RIC.
The American Jobs Creation Act of 2004 (the "2004 Tax Act") provides that
for taxable years of a RIC beginning after October 22, 2004, net income derived
from an interest in a "qualified publicly traded partnership," as defined in the
Code, will be treated as qualifying income for purposes of the Income
Requirement in clause (i) above. In addition, for the purposes of the
diversification requirements in clause (ii) above, the outstanding voting
securities of any issuer includes the equity securities of a qualified publicly
traded partnership, and no more than 25% of the value of a RIC's total assets
may be invested in the securities of one or more qualified publicly traded
partnerships. The 2004 Tax Act also provides that the separate treatment for
publicly traded partnerships under the passive loss rules of the Code applies to
a RIC holding an interest in a qualified publicly traded partnership, with
respect to items attributable to such interest.
50
In addition to the requirements described above, in order to qualify as a
RIC, the Portfolio must distribute at least 90% of its investment company
taxable income (which generally includes dividends, taxable interest, and the
excess of net short-term capital gains over net long-term capital losses less
operating expenses) and at least 90% of its net tax-exempt interest income, for
each tax year, if any, to its shareholders. If the Portfolio meets all of the
RIC requirements, it will not be subject to federal income tax on any of its
investment company taxable income or capital gains that it distributes to
shareholders.
If the Portfolio fails to qualify as a RIC for any taxable year, all of its
net income will be subject to tax at regular corporate rates (whether or not
distributed to shareholders), and its distributions (including capital gains
distributions) will be taxable as ordinary income dividends to its shareholders
to the extent of the Portfolio's current and accumulated earnings and profits,
and will be eligible for the corporate dividends-received deduction for
corporate shareholders.
GENERAL TAX TREATMENT OF QUALIFYING RICs AND SHAREHOLDERS
The Portfolio intends to distribute substantially all of its net investment
income (including, for this purpose, net short-term capital gains) to
shareholders. Dividends from the Portfolio's net investment income generally are
taxable to shareholders as ordinary income, whether received in cash or in
additional shares. Under the "Jobs and Growth Tax Relief Reconciliation Act of
2003" (the "2003 Tax Act"), certain income distributions paid by the Portfolio
to individual shareholders are taxed at rates equal to those applicable to net
long-term capital gains (15%, or 5% for individuals in the 10% or 15% tax
brackets). This tax treatment applies only if certain holding period
requirements are satisfied by the shareholder and the dividends are attributable
to qualified dividends received by the Portfolio itself. For this purpose,
"qualified dividends" means dividends received by the Portfolio from certain
United States corporations and qualifying foreign corporations, provided that
the Portfolio satisfies certain holding period and other requirements in respect
of the stock of such corporations. Distributions received from REITs are
generally comprised of ordinary income dividends and capital gains dividends,
which are generally passed along to shareholders retaining the same character
and are subject to tax accordingly, as described above. In the case of
securities lending transactions, payments in lieu of dividends are not qualified
dividends. [Dividends received by the Portfolio from REITs are qualified
dividends eligible for this lower tax rate only in limited circumstances.] These
special rules relating to the taxation of ordinary income dividends from
regulated investment companies generally apply to taxable years beginning before
January 1, 2009. Thereafter, the Portfolio's dividends, other than capital gain
dividends, will be fully taxable at ordinary income tax rates unless further
Congressional legislative action is taken.
A dividend paid by the Portfolio to a shareholder will not be treated as
qualified dividend income of the shareholder if (1) the dividend is received
with respect to any share held for fewer than 61 days during the 121-day period
beginning on the date which is 60 days before the date on which such share
becomes ex-dividend with respect to such dividend, (2) to the extent that the
recipient is under an obligation (whether pursuant to a short sale or otherwise)
to make related payments with respect to positions in substantially similar or
related property, or (3) if the recipient elects to have the dividend treated as
investment income for purposes of the limitation on deductibility of investment
interest.
You should also be aware that the benefits of the reduced tax rate
applicable to long-term capital gains and qualified dividend income may be
impacted by the application of the alternative minimum tax to individual
shareholders.
Dividends paid to you out of the Portfolio's investment company taxable
income that are not attributable to qualified dividends generally will be
taxable to you as ordinary income (currently at a maximum federal income tax
rate of 35%, except as noted below) to the extent of the Portfolio's earnings
and profits. Distributions to you of net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any, will be
taxable to you as long-term capital gain, regardless of how long you have held
your Fund shares.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Portfolio's shares and regardless of whether the distribution is
received in additional shares or in cash. Under current law, the maximum tax
rate on long-term capital gains available to non-corporate shareholders
generally is 15%.
The Portfolio will decide whether to distribute or to retain all or part
of any net capital gains (the excess of net long-term capital gains over net
short-term capital losses) in any year for reinvestment. Distributions of net
capital gains are taxable to shareholders as a long-term capital gain regardless
of how long shareholders have held their shares. The Portfolio will send reports
annually to shareholders regarding the federal income tax status of all
51
distributions made for the preceding year. [To the extent such amounts include
distributions received from a REIT, they may be based on estimates and be
subject to change as REITs do not always have the information available by the
time these reports are due and can recharacterize certain amounts after the end
of the tax year. As a result, the final character and amount of distributions
may differ from that initially reported.] If any such gains are retained, the
Portfolio will pay federal income tax thereon, and, if the Portfolio makes an
election, the shareholders will include such undistributed gains in their
income, and will increase their tax basis in Portfolio shares by the difference
between the amount of the includable gains and the tax deemed paid by the
shareholder in respect of such shares. The shareholder will be able to claim
their share of the tax paid by the Portfolio as a refundable credit.
Shareholders generally are taxed on any ordinary dividend or capital gain
distributions from the Portfolio in the year they are actually distributed.
However, if any such dividends or distributions are declared in October,
November or December, to shareholders of record of such month and paid in
January, then such amounts will be treated for tax purposes as received by the
shareholders on December 31.
After the end of each calendar year, shareholders will be sent information
on their dividends and capital gain distributions for tax purposes, including
the portion taxable as ordinary income, the portion taxable as long-term capital
gains, and the amount of any dividends eligible for the federal dividends
received deduction for corporations.
Gains or losses on the sale of securities by the Portfolio held as a
capital asset will generally be long-term capital gains or losses if the
securities have a tax holding period of more than one year at the time of such
sale. Gains or losses on the sale of securities with a tax holding period of one
year or less will be short-term capital gains or losses. Special tax rules
described below may change the normal treatment of gains and losses recognized
by the Portfolio when it makes certain types of investments. Those special tax
rules can, among other things, affect the treatment of capital gain or loss as
long-term or short-term and may result in ordinary income or loss rather than
capital gain or loss. The application of these special rules would therefore
also affect the character of distributions made by the Portfolio.
A gain or loss realized by a shareholder on the sale, exchange or
redemption of shares of the Portfolio held as a capital asset will be capital
gain or loss, and such gain or loss will be long-term if the holding period for
the shares exceeds one year and otherwise will be short-term. Any loss realized
on a sale, exchange or redemption of shares of the Portfolio will be disallowed
to the extent the shares disposed of are replaced with substantially identical
shares within the 61-day period beginning 30 days before and ending 30 days
after the shares are disposed of. Any loss realized by a shareholder on the
disposition of shares held 6 months or less is treated as a long-term capital
loss to the extent of any distributions of net long-term capital gains received
by the shareholder with respect to such shares or any inclusion of undistributed
capital gain with respect to such shares. The ability to deduct capital losses
may otherwise be limited under the Code.
The Portfolio will generally be subject to a nondeductible 4% federal
excise tax to the extent it fails to distribute by the end of any calendar year
at least 98% of its ordinary income for that year and 98% of its capital gain
net income (the excess of short- and long-term capital gains over short- and
long-term capital losses, including any available capital loss carryforwards)
for the one-year period ending on October 31 of that year, plus certain other
amounts. The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary income and capital gain net income, prior to the
end of each calendar year to avoid liability for federal excise tax, but can
give no assurances that all such liability will be eliminated.
The Fund may be required to withhold and remit to the U.S. Treasury an
amount equal (as of the date hereof) to 28% of any dividends, capital gains
distributions and redemption proceeds paid to any individual or certain other
non-corporate shareholder (i) who has failed to provide a correct taxpayer
identification number (generally an individual's social security number or
non-individual's employer identification number) on the Account Registration
Form; (ii) who is subject to backup withholding as notified by the Internal
Revenue Service ("IRS"); or (iii) who has not certified to the Fund that such
shareholder is not subject to backup withholding. This backup withholding is not
an additional tax, and any amounts withheld would be sent to the IRS as an
advance payment of taxes due on a shareholder's income for such year.
Under certain tax rules, the Portfolio may be required to accrue a portion
of any discount at which certain securities are purchased as income each year
even though the Portfolio receives no payments in cash on the securities during
the year. To the extent that the Portfolio invests in such securities, it would
be required to pay out such income as an income distribution in each year in
order to avoid taxation at the Portfolio level. Such distributions will be made
from the available cash of the Portfolio or by liquidation of portfolio
securities if necessary. If a distribution of cash necessitates the liquidation
of portfolio securities, the Adviser will select which
52
securities to sell. The Portfolio may realize a gain or loss from such sales. In
the event the Portfolio realizes net capital gains from such transactions, its
shareholders may receive a larger capital gain distribution, if any, than they
would in the absence of such transactions.
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY AND DERIVATIVES TRANSACTIONS
In general, gains from foreign currencies and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies are currently
considered to be qualifying income for purposes of determining whether the
Portfolio qualifies as a RIC.
Under Section 988 of the Code, special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional currency
(I.E., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from forward contracts,
from futures contracts that are not "regulated futures contracts", and from
unlisted options will be treated as ordinary income or loss under Section 988 of
the Code. Also, certain foreign exchange gains or losses derived with respect to
foreign fixed-income securities are also subject to Section 988 treatment. In
general, therefore, Section 988 gains or losses will increase or decrease the
amount of the Portfolio's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Portfolio's net capital gain.
The Portfolio's investment in options, swaps and related transactions,
futures contracts and forward contracts, options on futures contracts and stock
indices and certain other securities, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. For example, over-the-counter options on debt
securities and equity options, including options on stock and on narrow-based
stock indexes, will be subject to tax under Section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise, lapse or
closing out of the option or sale of the underlying stock or security. By
contrast, the Portfolio's treatment of certain other options, futures and
forward contracts entered into by the Portfolio is generally governed by Section
1256 of the Code. These "Section 1256" positions generally include listed
options on debt securities, options on broad-based stock indexes, options on
securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
When the Portfolio holds options or futures contracts which substantially
diminish their risk of loss with respect to other positions (as might occur in
some hedging transactions), this combination of positions could be treated as a
"straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Portfolio securities and conversion of
short-term capital losses into long-term capital losses. Certain tax elections
exist for mixed straddles (I.E., straddles comprised of at least one Section
1256 position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
A Section 1256 position held by the Portfolio will generally be
marked-to-market (i.e., treated as if it were sold for fair market value) on the
last business day of the Fund's fiscal year, and all gain or loss associated
with fiscal year transactions and mark-to-market positions at fiscal year end
(except certain currency gain or loss covered by Section 988 of the Code) will
generally be treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss. The effect of Section 1256 mark-to-market rules may be to
accelerate income or to convert what otherwise would have been long-term capital
gains into short-term capital gains or short-term capital losses into long-term
capital losses within the Portfolio. The acceleration of income on Section 1256
positions may require the Portfolio to accrue taxable income without the
corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, the Portfolio may be required to dispose
of portfolio securities that it otherwise would have continued to hold or to use
cash flows from other sources. Any or all of these rules may, therefore, affect
the amount, character and timing of income earned and, in turn, distributed to
shareholders by the Portfolio.
SPECIAL TAX CONSIDERATIONS RELATING TO FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates that occur between the time the Portfolio accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities are treated as ordinary income or
ordinary loss to the Portfolio. Similarly, gains or losses on disposition of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss
to the Portfolio. These gains or losses increase or decrease the amount of the
Portfolio's net investment income available to be distributed to its
shareholders as ordinary income.
53
It is expected that the Portfolio will be subject to foreign withholding
taxes with respect to its dividend and interest income from foreign countries,
and the Portfolio may be subject to foreign income taxes with respect to other
income. So long as more than 50% in value of the Portfolio's total assets at the
close of the taxable year consists of stock or securities of foreign
corporations, the Portfolio may elect to treat certain foreign income taxes
imposed on it for U.S. federal income tax purposes as paid directly by its
shareholders. The Portfolio will make such an election only if it deems it to be
in the best interest of its shareholders and will notify shareholders in writing
each year if it makes an election and of the amount of foreign income taxes, if
any, to be treated as paid by the shareholders. If the Portfolio makes the
election, shareholders will be required to include in income their proportionate
share of the amount of foreign income taxes treated as imposed on the Portfolio
and will be entitled to claim either a credit (subject to the limitations
discussed below) or, if they itemize deductions, a deduction, for their shares
of the foreign income taxes in computing their federal income tax liability.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Except it is not
expected that the Portfolio or its shareholders would be able to claim a credit
for U.S. tax purposes with respect to any such foreign taxes. However, these
foreign withholding taxes may not have a significant impact on the Portfolio,
considering that the Portfolio's investment objective is to seek long-term
capital appreciation and any dividend or interest income should be considered
incidental.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to a number of complex limitations regarding the
availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by the Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, distributions of
investment company taxable income will generally be subject to U.S. withholding
tax at the rate of 30% (or such lower treaty rate as may be applicable) upon the
gross amount of the dividend. Furthermore, Foreign Shareholders will generally
be exempt from U.S. federal income tax on gains realized on the sale of shares
of the Portfolio, distributions of net long-term capital gains, and amounts
retained by the Fund that are designated as undistributed capital gains.
Under the provisions the 2004 Tax Act, dividends paid by the Portfolio to
Foreign Shareholders that are derived from short-term capital gains and
qualifying net interest income (including income from original issue discount
and market discount), and that are properly designated by the Portfolio as
"interest-related dividends" or "short-term capital gain dividends," will
generally not be subject to U.S. withholding tax, provided that the income would
not be subject to U.S. federal income tax if earned directly by the Foreign
Shareholder. In addition, the 2004 Tax Act provides that distributions of the
Portfolio attributable to gains from sales or exchanges of "U.S. real property
interests," as defined in the Code and Treasury regulations (including gains on
the sale or exchange of shares in certain "U.S. real property holding
corporations," which may include certain REITs and certain REIT capital gain
dividends) will generally cause the Foreign Shareholder to be treated as
recognizing such gain as income effectively connected to a trade or business
within the United States, generally subject to the rules described in the next
paragraph below. Such distributions may be subject to U.S. withholding tax and
may give rise to an obligation on the part of the Foreign Shareholder to file a
U.S. federal income tax return. These provisions generally would apply to
distributions with respect to taxable years of the Portfolio beginning after
December 31, 2004 and before January 1, 2008.
If the income from the Portfolio is effectively connected with a U.S. trade
or business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations. In addition, Foreign Shareholders that
are corporations may be subject to a branch profits tax.
54
The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described here.
Furthermore, Foreign Shareholders are strongly urged to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Portfolio, including the potential application of the
provisions of the Foreign Investment in Real Estate Property Tax Act of 1980, as
amended.
STATE AND LOCAL TAX CONSIDERATIONS
Rules of U.S. state and local taxation of dividend and capital gains from
regulated investment companies often differ from the rules for U.S. federal
income taxation described above. Shareholders are urged to consult their tax
advisors as to the consequences of these and other U.S. state and local tax
rules regarding an investment in the Fund.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The Investment Adviser provided the initial capital for the Portfolio by
purchasing _______ shares each of Class A and Class B of the Portfolio for
$_______, respectively, on _______, 2005. As of the date of this Statement of
Additional Information, the Investment Adviser owned 100% of the outstanding
shares of the Portfolio. The Investment Adviser may be deemed to control the
Fund until such time as it owns less than 25% of the outstanding shares of the
Fund.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Portfolio owned by the
Portfolio's officers and Directors as a group was less than 1% of the
Portfolio's shares of beneficial interest outstanding.
PERFORMANCE INFORMATION
The Portfolio is newly organized. As a result, it has no operating history
or performance information to include.
FINANCIAL STATEMENTS
No financial information is presented for the Portfolio because the
Portfolio had not commenced operations as of the date of this Statement of
Additional Information.
55
APPENDIX A
DESCRIPTION OF RATINGS
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
I. EXCERPTS FROM MOODY'S DESCRIPTION OF BOND RATINGS:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues. Aa--Bonds which are rated Aa
are judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than 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 some time 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. Moody's applies numerical modifiers
1, 2 and 3 in each generic voting classification from Aa through B. The modifier
1 indicates that the security ranks at a higher end of the rating category;
modifier 2 indicates a mid-range rating; and the modifier 3 indicates that the
issue ranks at the lower end of the rating category.
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.
II. EXCERPTS FROM S&P'S DESCRIPTION OF BOND RATINGS:
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation and indicate an extremely strong capacity to pay principal
and interest. AA--Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only to a small degree.
A--Bonds 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 bonds in higher rated categories.
BBB--Bonds 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, B, CCC, CC: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
C--The rating C 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. D--Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
III. DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used are as follows:
MIG-1--best quality, enjoying strong protection from established cash flows
of funds for their servicing or from established broad-based access to the
market for refinancing, or both; MIG-2--high quality
A-1
with margins of protection ample although not so large as in the preceding
group; MIG-3--favorable quality, with all security elements accounted for
but lacking the undeniable strength of the preceding grades.
IV. DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("Pl")
-Judged to be of the best quality. Their short-term debt obligations carry
the smallest degree of investment risk.
V. EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: SP-l+--very strong
capacity to pay principal and interest; SP-2--strong capacity to pay
principal and interest.
VI. DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-l+-- this
designation indicates the degree of safety regarding timely payment is
extremely strong. A-1--this designation indicates the degree of safety
regarding timely payment is strong.
VII. EXCERPTS FROM FITCH IBCA BOND RATINGS:
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short term debt of these issuers is generally rated "-,+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD AND D: Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
Plus (+) Minus(-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD," "DD" or "D" categories.
A-2
MORGAN STANLEY INSTITUTIONAL FUND, INC.
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
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(a)(1) Articles of Amendment and Restatement is incorporated herein by
reference to Exhibit 1(a) to Post-Effective Amendment No. 26 to the
Registrant's Registration Statement on Form N-1A (File No. 33-23166), as
filed with the Securities and Exchange Commission via EDGAR (Accession
No. 0000912057-95-008594) on October 13, 1995.
(2) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (reclassifying shares) is incorporated herein by reference
to Exhibit 1(b) to Post-Effective Amendment No. 30 to Registrant's
Registration Statement on Form N-1A (File No. 33-23166), as filed with
the Securities and Exchange Commission via EDGAR (Accession No.
0000912057-96-010828) on May 24, 1996.
(3) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding new Technology Portfolio) is incorporated herein by
reference to Exhibit 1(c) to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A (File No. 33-23166), as
filed with the Securities and Exchange Commission via EDGAR (Accession
No. 0000912057-96-010828) on May 24, 1996.
(4) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding U.S. Equity Plus Portfolio) is incorporated herein
by reference to Exhibit 1(d) to Post-Effective Amendment No. 38 to
Registrant's Registration Statement on Form N-1A (File No. 33-23166), as
filed with the Securities and Exchange Commission via EDGAR (Accession
No. 0001047469-98-008051) on February 27, 1998.
(5) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding European Real Estate and Asian Real Estate
Portfolios) is incorporated herein by reference to Exhibit 1(e) to
Post-Effective Amendment No. 38 to Registrant's Registration Statement
on Form N-1A (File No. 33-23166), as filed with the Securities and
Exchange Commission via EDGAR (Accession No. 00001047469-98-008051) on
February 27, 1998.
(6) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding Class B shares to the Money Market Portfolio) is
incorporated herein by reference to Exhibit 1(f) to Post-Effective
Amendment No. 38 to Registrant's Registration Statement on Form N-1A
(File No. 33-23166), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 00001047469-98-008051) on February
27, 1998.
(7) Articles of Amendment to Registrant's Articles of Amendment and
Restatement (Active Country Allocation Portfolio name changed to Active
International Portfolio) is incorporated herein by reference to Exhibit
(a)(7) to Post-Effective Amendment No. 40 to the Registrant's
Registration Statement on Form N-1A (File No. 33-23166), as filed with
the Securities and Exchange Commission via EDGAR (Accession No.
0001047469-99-002378) on January 27, 1999.
(8) Articles of Amendment to Registrant's Articles of Amendment and
Restatement (Active International Portfolio name changed to Active
International Allocation Portfolio) is incorporated herein by reference
to Exhibit (a)(8) to Post-Effective Amendment No. 40 to the Registrant's
Registration Statement on Form N-1A (File No. 33-23166), as filed with
the Securities and
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Exchange Commission via EDGAR (Accession No. 0001047469-99-002378) on
January 27, 1999.
(9) Articles of Amendment to Registrant's Articles of Amendment and
Restatement (changing corporate name to Morgan Stanley Dean Witter
Institutional Fund, Inc.) is incorporated herein by reference to Exhibit
(a)(9) to Post-Effective Amendment No. 40 to the Registrant's
Registration Statement on Form N-1A (File No. 33-23166), as filed with
the Securities and Exchange Commission via EDGAR (Accession No.
0001047469-99-002378) on January 27, 1999.
(10) Articles of Amendment to Registrant's Articles of Amendment and
Restatement (Aggressive Equity Portfolio name changed to Focus Equity
Portfolio and Emerging Growth Portfolio name changed to Small Company
Growth Portfolio) is incorporated herein by reference to Exhibit (a)(10)
to Post-Effective Amendment No. 43 to Registrant's Registration
Statement on Form N-1A (File No. 33-23166), as filed with the Securities
and Exchange Commission via EDGAR (Accession No. 0000912057-00-02610) on
May 1, 2000.
(11) Articles of Amendment to Registrant's Articles of Amendment and
Restatement (changing corporate name to Morgan Stanley Institutional
Fund, Inc., Global Equity Portfolio name changed to Global Value Equity
Portfolio, European Equity Portfolio named changed to European Value
Equity Portfolio and Japanese Equity Portfolio name changed to Japanese
Value Equity Portfolio) is incorporated herein by reference to Exhibit
(a)(11) to Post-Effective Amendment No. 45 to Registrant's Registration
Statement on Form N-1A (File No. 33-23166), as filed with the Securities
and Exchange Commission via EDGAR (Accession No. 0000912057-01-511512)
on April 30, 2001.
(12) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding new Global Franchise Portfolio) is incorporated
herein by reference to Exhibit (a)(7) to Post-Effective Amendment No. 48
to Registrant's Registration Statement on Form N-1A (Registration No.
33-23166), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000912057-01-540924) on November 26, 2001.
(13) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding Large Cap Relative Value Portfolio) is incorporated
herein by reference to Exhibit (a)(13) to Post-Effective Amendment No.
50 to Registrant's Registration Statement on Form N-1A (Registration No.
33-23166), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001047469-03-020707) on June 6, 2003.
(14) Certificate of Correction to the Articles Supplementary is incorporated
herein by reference to Exhibit (a)(14) to Post-Effective Amendment No.
53 to Registrant's Registration Statement on Form N1-A (Registration No.
33-23166), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001047469-05-012373) on April 29, 2005.
(15) Certificate of Correction to the Articles Supplementary is incorporated
herein by reference to Exhibit (a)(15) to Post-Effective Amendment No.
53 to Registrant's Registration Statement on Form N1-A (Registration No.
33-23166), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001047469-05-012373) on April 29, 2005.
(16) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (liquidating the Asian Equity, Asian Real Estate, European
Value Equity, Japanese Value Equity, Latin American and Technology
Portfolios) are incorporated herein by reference to Exhibit (a)(16) to
Post-Effective Amendment No. 53 to Registrant's Registration Statement
on Form N1-A (Registration No. 33-23166), as filed with the Securities
and Exchange Commission via EDGAR (Accession No. 0001047469-05-012373)
on April 29, 2005.
(17) Articles of Amendment to the Articles of Amendment and Restatement is
filed herewith.
(18) Articles of Amendment to the Articles of Amendment and Restatement is
filed herewith.
(19) Certificate of Correction to the Articles Supplementary is filed
herewith.
(20) Certificate of Correction to the Articles Supplementary is filed
herewith.
(21) Articles of Amendment to Registrant's Articles of Amendment and
Restatement (changing the name of the Value Equity Portfolio to the
Large Cap Relative Value Portfolio and the Equity Growth Portfolio to
the U.S. Large Cap Growth Portfolio) is filed herewith.
(22) Articles Supplementary to Registrant's Articles of Amendment and
Restatement (adding International Growth Equity Portfolio), to be
filed by amendment.
(b) Amended and Restated By-Laws, dated July 31, 2003, are incorporated
herein by reference to Exhibit (b) to Post-Effective Amendment No. 52 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-23166), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001047469-05-003242) on February 11, 2005.
(c)(1) Specimen Security with respect to Morgan Stanley Institutional Fund,
Inc. Class A shares is incorporated herein by reference to Exhibit 1(a)
(Amended and Restated Articles of Incorporation), as amended to date to
Post-Effective Amendment No. 26 to Registrant's Registration Statement
(File No. 33-23166), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000912057-95-008594) on October 13,
1995 and is incorporated by reference to Exhibit 2 (Amended and Restated
By-Laws), as amended to date to Post-Effective Amendment No. 33 to
Registrant's Registration Statement (File No. 33-01-540924), as filed
with the Securities and Exchange Commission via EDGAR (Accession No.
0000912057-97-007488) on February 28, 1997.
2
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(2) Specimen Security with respect to Morgan Stanley Institutional Fund,
Inc. Class B shares is incorporated herein by reference to Exhibit 1(a)
(Amended and Restated Articles of Incorporation), as amended to date to
Post-Effective Amendment No. 26 to Registrant's Registration Statement
(Registration No. 33-23166), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000912057-95-008594) on October 13,
1995 and is incorporated by reference to Exhibit 2 (Amended and Restated
By-Laws), as amended to date to Post-Effective Amendment No. 33 to
Registrant's Registration Statement (File No. 33-01-540924), as filed
with the Securities and Exchange Commission via EDGAR (Accession No.
0000912057-97-007488) on February 28, 1997.
(d)(1) Amended and Restated Investment Advisory Agreement between the
Registrant and Morgan Stanley Investment Management Inc., is
incorporated herein by reference to Exhibit (d)(1) to Post-Effective
Amendment No. 54 to Registrant's Registration Statement on Form N-1A
(File No. 33-23166), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0001047469-05-018132) on
June 27, 2005.
(2) Sub-Advisory Agreement between Morgan Stanley Investment Management Inc.
and Morgan Stanley Investment Advisors Inc. (formerly Morgan Stanley
Dean Witter Investment Advisors Inc.) (with respect to the Money Market
and Municipal Money Market Portfolios) is incorporated herein by
reference to Exhibit (d)(6) to Post-Effective Amendment No. 43 to
Registrant's Registration Statement on Form N-1A (File No. 33-23166), as
filed with the Securities and Exchange Commission via EDGAR (Accession
No. 0000912057-00-020610) on May 1, 2000.
(3) Sub-Advisory Agreement between Morgan Stanley Investment Management Inc.
and Morgan Stanley Investment Management Limited (relating to the Global
Value Equity Portfolio, International Equity Portfolio, International
Magnum Portfolio, International Small Cap Portfolio, European Value
Equity Portfolio and Global Franchise Portfolio) is incorporated herein
by reference to Exhibit (d)(8) to Post-Effective Amendment No. 52 to
Registrant's Registration Statement on Form N-1A (File No. 33-23166), as
filed with the Securities and Exchange Commission via EDGAR (Accession
No. 0000912057-04-000455) on April 30, 2004.
(4) Sub-Advisory Agreement between Morgan Stanley Investment Management Inc.
and Morgan Stanley Investment Management Company (relating to the
International Magnum Portfolio) is incorporated herein by reference to
Exhibit (d)(9) to Post-Effective Amendment No. 52 to Registrant's
Registration Statement on Form N-1A (File No. 33-23166), as filed with
the Securities and Exchange Commission via EDGAR (Accession No.
0000912057-04-000455) on April 30, 2004.
(5) Sub-Advisory Agreement between Morgan Stanley Investment Management Inc.
and Morgan Stanley Asset & Investment Trust Management Co., Limited
(relating to the Japanese Value Equity Portfolio and International
Magnum Portfolio) is incorporated herein by reference to Exhibit (d)(10)
to Post-Effective Amendment No. 52 to Registrant's Registration
Statement on Form N-1A (File No. 33-23166), as filed with the Securities
and Exchange Commission via EDGAR (Accession No. 0000912057-04-000455)
on April 30, 2004.
(6) Supplement to Amended and Restated Investment Advisory Agreement,
to be filed be amendment.
(e)(1) Amended and Restated Distribution Agreement, between Registrant and
Morgan Stanley & Co. Incorporated, is incorporated herein by reference
to Exhibit (e)(3) to Post-Effective Amendment No. 49 to Registrant's
Registration Statement on Form N-1A (File. No. 33-23166) as filed with
the Securities and Exchange Commission via EDGAR (Accession No.
0001047469-03-014676) on April 25, 2003.
(2) Form of Distribution Agreement, between Registrant and Morgan Stanley
Distribution, Inc. is incorporated herein by reference to Exhibit
(e)(2) to Post-Effective Amendment No. 53 to Registrant's Registration
Statement on Form N1-A (Registration No. 33-23166), as filed with the
Securities and Exchange Commission via EDGAR (Accession No.
0001047469-05-012373) on April 29, 2005.
(f) Not applicable.
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(g)(1) Mutual Fund Domestic Custody Agreement between Registrant and J.P.
Morgan Investor Services Co. (formerly United States Trust Company), is
incorporated by reference to Exhibit 8(a) to Post-Effective Amendment
No. 25 to Registrant's Registration Statement on Form N-1A (File No.
33-23166), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000912057-95-005830) on August 1, 1995.
(2) Amendment to the Custody Fee Schedule effective October 1, 2002, is
incorporated herein by reference to Exhibit (g)(2) to Post-Effective
Amendment No. 49 to Registrant's Registration Statement on Form N-1A
(File. No. 33-23166) as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0001047469-03-014676) on April 25,
2003.
(3) International Custody Agreement between Registrant and J.P. Morgan
Investor Services Co. (formerly Morgan Stanley Trust Company), is
incorporated herein by reference to Exhibit 8(b) to Post-Effective
Amendment No. 25 to Registrant's Registration Statement on Form N-1A
(File No. 33-23166), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000912057-95-005830) on August 1,
1995.
(4) Amendment to International Custody Agreement between Registrant and J.P.
Morgan Investor Services Co. (formerly Morgan Stanley Trust Company), is
incorporated herein by reference to Exhibit 8(c) to Post-Effective
Amendment No. 30 to Registrant's Registration Statement on Form N-1A
(File No. 33-23166), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000912057-96-010828) on May 24,
1996.
(5) Amendment to International Custody Agreement between Registrant and J.P.
Morgan Investor Services Co. (formerly The Chase Manhattan Bank), is
incorporated herein by reference to Exhibit (g)(4) to Post-Effective
Amendment No. 43 to Registrant's Registration Statement on Form N-1A
(File No. 33-23166), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000912057-00-02610) on May 1, 2000.
(h)(1) Amended and Restated Administration Agreement between the Registrant and
Morgan Stanley Investment Management Inc., dated as of November 1, 2004,
is incorporated herein by reference to Exhibit (h)(1) to Post-Effective
Amendment No. 52 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-23166), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0001047469-05-003242) on
February 11, 2005.
(2) Amended and Restated Sub-Administration Agreement between Morgan Stanley
Investment Management Inc. and J.P. Morgan Investor Services Co., dated
as of November 1, 2004, is incorporated herein by reference to Exhibit
(h)(2) to Post-Effective Amendment No. 52 to Registrant's Registration
Statement on Form N-1A (Registration No. 33-23166), as filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 0001047469-05-003242) on February 11, 2005.
(3) Transfer Agency Agreement between the Registrant and J. P. Morgan
Investor Services Co., dated as of November 1, 2004, is incorporated
herein by reference to Exhibit (h)(3) to Post-Effective Amendment No. 52
to Registrant's Registration Statement on Form N-1A (Registration No.
33-23166), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001047469-05-003242) on February 11, 2005.
(i)(1) Opinion of Ballard Spahr Andrews & Ingersoll, LLP is incorporated herein
by reference to Exhibit (i)(1) to Post-Effective Amendment No. 53 to
Registrant's Registration Statement on Form N1-A (Registration No.
33-23166), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001047469-05-012373) on April 29, 2005.
(2) Opinion and Consent of Clifford Chance US LLP is incorporated herein by
reference to Exhibit (i)(2) to Post-Effective Amendment No. 53 to
Registrant's Registration Statement on Form N1-A (Registration No.
33-23166), as filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0001047469-05-012373) on April 29, 2005.
(j) Consent of Independent Registered Public Accounting Firm, to be filed
by amendment.
(k) Not applicable.
(l) Purchase Agreement, is incorporated herein by reference to Exhibit 13 to
Post-Effective Amendment No. 25 to Registrant's Registration Statement
on Form N-1A (File No. 33-23166), as filed with the Securities and
Exchange Commission via EDGAR (Accession No. 0000912057-95-005830) on
August 1,1995.
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(m) Form of 12b-1 Distribution Plan with respect to the Class B shares (the "Class B
Plan") is incorporated herein by reference to Exhibit (m) to Post-Effective
Amendment No. 53 to Registrant's Registration Statement on Form N1-A
(Registration No. 33-23166), as filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0001047469-05-012373) on April 29, 2005.
(n) Not applicable.
(o) Multi-Class 18f-3 Plan, is incorporated by reference to Exhibit 19 to
Post-Effective Amendment No. 33 to Registrant's Registration Statement
on Form N-1A (File No. 33-23166) is filed with the Securities and
Exchange Commission via EDGAR (Accession No. 0000912057-97-007488) on
February 28, 1997.
(p)(1) Code of Ethics for the Fund, dated June 6, 2002, is incorporated herein
by reference to Exhibit p(1) to Post-Effective Amendment No. 49 to
Registrant's Registration Statement on Form N-1A (File. No. 33-23166 as
filed with the Securities and Exchange Commission via EDGAR (Accession
No. 0001047469-03-014676) on April 25, 2003.
(2) Code of Ethics for Morgan Stanley Investment Management, dated December
31, 2004, is incorporated herein by reference to Exhibit (p)(2) to
Post-Effective Amendment No. 52 to Registrant's Registration Statement
on Form N-1A (Registration No. 33-23166), as filed with the Securities
and Exchange Commission via EDGAR (Accession No. 0001047469-05-003242)
on February 11, 2005.
Other Powers of Attorney, dated May 1, 2005, are incorporated herein by
reference to Exhibit Other to Post-Effective Amendment No. 54 to
Registrant's Registration Statement on Form N1-A (File No. 33-23166),
as filed with the Securities and Exchange Commission via EDGAR
(Accession No. 0001047469-05-018132) on June 27, 2005.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Provide a list or diagram of all persons directly or indirectly
controlled by or under common control with the Registrant. For any person
controlled by another person, disclose the percentage of voting securities owned
by the immediately controlling person or other basis of that person's control.
For each company, also provide the state or other sovereign power under the laws
of which the company is organized.
None.
ITEM 25. INDEMNIFICATION
State the general effect of any contract, arrangements or statute under
which any director, officer, underwriter or affiliated person of the Registrant
is insured or indemnified against any liability incurred in their official
capacity, other than insurance provided by any director, officer, affiliated
person, or underwriter for their own protection.
Reference is made to Article Seven of the Registrant's Articles of
Incorporation which is incorporated by reference herein:
5
Insofar as indemnification for liability may be permitted to trustees,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Pursuant to paragraph 7 of the Registrant's Investment Advisory Agreement,
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Adviser in performance of its obligations and duties hereunder, reckless
disregard by the Adviser of its obligations and duties hereunder or a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the Investment
Company Act), the Adviser shall not be subject to any liability whatsoever to
the Registrant, or to any shareholder of the Registrant, for any error or
judgment, mistake of law or any other act or omission in the course of, or
connected with, rendering services hereunder including, without limitation, for
any losses that may be sustained in connection with the purchase, holding,
redemption or sale of any security on behalf of any Portfolio of the Registrant.
Pursuant to paragraph 6 of the Registrant's Administration Agreement, the
Administrator has no liability for any loss or damage resulting from the
performance or nonperformance of its duties unless solely caused by or resulting
from the gross negligence or willful misconduct. The Registrant agrees to
indemnify and hold the Administrator, and third parties providing services for
the benefit of the Registrant through arrangements with the Administrator,
harmless from all loss, cost, damage and expense, including reasonable expenses
for counsel, incurred by such person resulting from any claim, demand, action or
omission by it in the performance of its duties under the Agreement or such
arrangements with the Administrator, or as a result of acting upon any
instructions reasonably believed by any such person to have been executed by a
duly authorized officer of the Registrant or of its investment advisers,
provided that this indemnification shall not apply to actions or omissions of
the Administrator, its officers, employees or agents in cases of its or their
own gross negligence or willful misconduct. Further, the Agreement does not
protect the Administrator, its directors, officers and/or employees against
liability to the Registrant or its shareholders to which it might otherwise be
subject by reason of any fraud, willful misfeasance or gross negligence in the
performance of its duties or the reckless disregard of its obligations under the
Agreement.
Pursuant to section 5 of the Registrant's Distribution Agreement, the
Registrant has agreed to indemnify, defend and hold the Distributor, its
officers and directors and any person who controls the Distributor, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection therewith)
which the Distributor, its officers, directors or any such controlling
person, arising out of or based upon any untrue statement of a material fact
contained in the Registration Statement or Prospectus or arising out of or
based upon any alleged omission to state a material fact required to be
stated in either thereof or necessary to make the statements in either
thereof not misleading, except insofar as such claims, demands, liabilities
or expenses arise out of or are based upon any such untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by the Distributor to the
Registrant for use in the Registration Statement or Prospectus, but only in
the event that a court of competent jurisdiction shall determine, or it shall
have been determined by controlling precedent, that such result would not be
against public policy as expressed in the 1933 Act; and except in the case of
the Distributor's willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(a) Describe any other business, profession, vocation or employment of
a substantial nature in which the investment adviser and each director, officer
or partner of the investment adviser, is or has been, engaged within the last
two fiscal years for his or her own account or in the capacity of director,
officer, employee, partner or trustee. (Disclose the name and principal business
address of any company for which a person listed above serves in the capacity of
director, officer, employee, partner or trustee, and the nature of the
relationship.)
Morgan Stanley Investment Management Inc. provides investment services
to employee benefit plans, endowment funds, foundations and other institutional
investors.
6
Listed below are the officers and Directors of Morgan Stanley Investment
Management Inc.:
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NAME AND POSITION WITH
MORGAN STANLEY INVESTMENT OTHER SUBSTANTIAL BUSINESS,
MANAGEMENT INC. PROFESSION OR VOCATION
-------------------------------------------------- --------------------------------------------------------------------------
Ronald E. Robison President and Principal Executive Officer of the funds in the Fund Complex
Managing Director and Director (since May 2003); Managing Director of Morgan Stanley & Co. Incorporated
and Morgan Stanley; Managing Director, Chief Administrative Officer and
Director of Morgan Stanley Investment Advisors Inc. and Morgan Stanley
Services Company Inc.; Chief Executive Officer and Director of Morgan
Stanley Trust; Managing Director and Director of Morgan Stanley Distributors
Inc.; President (since September 2005) and Principal Executive Officer of the
Institutional Funds (since July 2003) and the Retail Funds (since April
2003); Director of Morgan Stanley SICAV (since May 2004); previously
Executive Vice president (July 2003-September 2005) of funds in the Fund
Complex, President and Director of the Retail Funds (March 2001 - July 2003)
and Chief Global Operations Officer of Morgan Stanley Investment
Management Inc.
Joseph J. McAlinden Managing Director and Chief Investment Officer of Morgan Stanley
Managing Director and Chief Investment Officer Investment Advisers Inc.; Chief Investment Officer of the Van-Kampen
Funds; Vice President of the Institutional Funds (since July 2003) and
the Retail Funds (since July 1995).
Rajesh K. Gupta Managing Director and Chief Administrative Officer - Investments of
Managing Director and Chief Administrative Morgan Stanley Investment Advisers Inc.
Officer-Investments
7
[Enlarge/Download Table]
P. Dominic Caldecott Managing Director of Morgan Stanley Investment Advisors Inc. and
Managing Director Morgan Stanley Investment Management Limited; Vice President and
Investment Manager of Morgan Stanley & Co. International.
Barry Fink Managing Director (since December 2000), Secretary (since February
General Counsel and Managing Director 1997) and Director (since July 1998) of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc.; Assistant
Secretary of Morgan Stanley DW Inc.; Vice President of the Retail
Funds and Institutional Funds (since July 2003); Managing Director,
Secretary and Director of Morgan Stanley Distributors Inc.; previously
Secretary (February 1997 - July 2003) and General Counsel (February
1997 - April 2004) of the Retail Funds; Vice President and Assistant
General Counsel of Morgan Stanley Investment Advisors Inc. and Morgan
Stanley Services Company Inc. (February 1997 - December 2001).
Carsten Otto Executive Director of Morgan Stanley Investment Advisors Inc.;
Executive Director and U.S. Director of Compliance formerly Assistant Secretary and Assistant General Counsel of the
Retail Funds.
Alexander C. Frank Global Treasurer of Morgan Stanley.
Managing Director and Treasurer
In addition, the Investment Adviser and the Sub-Advisers act as
investment adviser or sub-adviser to several other registered investment
companies.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) State the name of each investment company (other than the Registrant)
for which each principal underwriter currently distributing securities of the
Registrant also acts as a principal underwriter, depositor or investment
adviser.
Morgan Stanley Distribution, Inc. acts as distributor for The Universal
Institutional Funds, Inc., Morgan Stanley Institutional Fund Trust and Morgan
Stanley Institutional Liquidity Funds, each a registered open-end management
investment company.
(b) Provide the information required by the following table with respect
to each director, officer or partner of each principal underwriter named in
answer to Item 27.
The principal address for Morgan Stanley Distribution, Inc. and each
director, officer or partner listed below is One Tower Bridge, 100 Front
Street, Suite 1100, West Conshohocken, PA 19428.
[Enlarge/Download Table]
POSITION AND OFFICES WITH POSITIONS AND
NAME AND PRINCIPAL MORGAN STANLEY OFFICES WITH THE
BUSINESS ADDRESS* DISTRIBUTION, INC. FUND
----------------------------------------------------------------------------------------------------------------------------------
Ronald E. Robison Managing Director and Director President and Principal Executive Officer
Michael Kiley Director, Vice President and
Alternative AML Officer N/A
Jonathan Thomas Chairman, President and Chief Executive Officer N/A
Stefanie Chang Yu Executive Director and Assistant Secretary Vice President
Brian Drummond Vice President and Client Account Manager N/A
Winston McLaughlin Vice President and Chief Compliance Officer N/A
Gina Germane Vice President and Chief AML Officer N/A
Bud Rein Vice President N/A
Bruce R. Sandberg Vice President N/A
Eric J. Marmoll Vice President N/A
Bernard V. Peterson Secretary N/A
Kevin Perry Treasurer N/A
David R. Breck Assistant Secretary N/A
Mary Ann Fappiano Assistant Treasurer N/A
Laurence Murphy Assistant Treasurer N/A
Justin Caulfield Assistant Treasurer N/A
8
(c) Provide the information required by the following table for all commissions
and other compensation received, directly or indirectly, from the Fund during
the last fiscal year by each principal underwriter who is NOT an affiliated
person of the Fund or any affiliated person of an affiliated person:
Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
State the name and address of each person maintaining principal possession
of each account, book or other document required to be maintained by section
31(a) of the 1940 Act [15 U.S.C. 80a-30(a)] and the rules under that section.
J.P. Morgan Investor Services Co., Registrant's transfer agent and dividend
disbursing agent, P.O. Box 2798, Boston, Massachusetts, 02208-2798, maintains
physical possession of each such account, book or other document of the Fund.
In particular, with respect to the records required by Rule 31a-1(b)(1),
J.P. Morgan Investor Services Co. maintains physical possession of all journals
containing itemized daily records of all purchases and sales of securities,
including sales and redemptions of Fund securities, and also maintains physical
possession all receipts and deliveries of securities (including certificate
numbers if such detail is not recorded by custodian or transfer agent), all
receipts and disbursements of cash, and all other debts and credits.
In addition, Morgan Stanley Investment Management Inc., Registrant's
investment adviser and administrator, 1221 Avenue of the Americas, New York, New
York 10020, maintains possession of the Fund's corporate organizational records,
in addition to certain other records required by Rule 31a-1(b).
9
ITEM 29. MANAGEMENT SERVICES
Provide a summary of the substantive provisions of any management-related
service contract not discussed in part A or part B, disclosing the parties to
the contract and the total amount paid and by whom, for the fund's last three
fiscal years.
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
Registrant hereby undertakes that whenever a Shareholder or Shareholders
who meet the requirements of Section 16(c) of the 1940 Act inform the Board of
Directors of his or their desire to communicate with other Shareholders of the
Fund, the Directors will inform such Shareholder(s) as to the approximate number
of Shareholders of record and the approximate costs of mailing or afford said
Shareholders access to a list of Shareholders.
Registrant hereby undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's annual report to shareholders, upon
request and without charge.
10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund has duly caused this Post-Effective
Amendment No. 55 to Registration Statement No. 811-05624 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 7th day of October, 2005.
MORGAN STANLEY INSTITUTIONAL FUND, INC.
By: /s/ Ronald E. Robison
--------------------------------
Ronald E. Robison
President
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment No. 55 has been signed below by the following persons in the
capacities and on the dates indicated.
[Enlarge/Download Table]
SIGNATURES TITLE DATE
---------- ----- ----
(1) Principal Executive Officer President and Principal
Executive Officer
By: /s/Ronald E. Robison October 7, 2005
---------------------------
Ronald E. Robison
(2) Principal Financial Officer Treasurer and
Chief Financial Officer
By: /s/James Garrett October 7, 2005
---------------------------
James Garrett
(3) Majority of the Directors
INDEPENDENT DIRECTORS
Michael Bozic Joseph J. Kearns
Edwin J. Garn Michael E. Nugent
Wayne E. Hedien Fergus Reid
Dr. Manuel H. Johnson
By: /s/Carl Frischling October 7, 2005
---------------------------
Carl Frischling
Attorney-In-Fact for the
Independent Directors
MANAGEMENT DIRECTORS
Charles A. Fiumefreddo (Chairman)
James F. Higgins
By: /s/Barry Fink October 7, 2005
---------------------------
Barry Fink
Attorney-In-Fact for the
Management Directors
EXHIBIT INDEX
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(a)
(17) Articles of Amendment to the Articles of Amendment and Restatement.
(18) Articles of Amendment to the Articles of Amendment and Restatement.
(19) Certificate of Correction to the Articles Supplementary.
(20) Certificate of Correction to the Articles Supplementary.
(21) Articles of Amendment to Registrant's Articles of Amendment and Restatement (changing the name of the Value Equity
Portfolio to the Large Cap Relative Value Portfolio and the Equity Growth Portfolio to the U.S. Large Cap Growth
Portfolio).
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘485APOS’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 1/1/09 | | 16 | | 69 |
| | 1/1/08 | | 72 |
| Filed on: | | 10/7/05 | | 1 | | 86 |
| | 6/27/05 | | 78 | | 80 | | | 485APOS |
| | 5/1/05 | | 80 |
| | 4/29/05 | | 77 | | 80 | | | 485BPOS |
| | 2/11/05 | | 77 | | 80 | | | 485APOS |
| | 12/31/04 | | 11 | | 80 | | | 24F-2NT, N-CSR, N-CSR/A, NSAR-B |
| | 11/1/04 | | 79 | | | | | 497 |
| | 10/22/04 | | 68 |
| | 4/30/04 | | 78 | | | | | 485BPOS |
| | 4/1/04 | | 59 |
| | 12/31/03 | | 60 | | | | | 24F-2NT, 24F-2NT/A, N-CSR, NSAR-B, NSAR-B/A |
| | 7/31/03 | | 77 | | | | | 497 |
| | 6/6/03 | | 77 | | | | | 485APOS |
| | 4/25/03 | | 78 | | 80 | | | 485BPOS |
| | 10/1/02 | | 79 |
| | 6/6/02 | | 80 |
| | 11/26/01 | | 77 | | | | | 485BPOS |
| | 5/1/01 | | 67 |
| | 4/30/01 | | 77 | | | | | 485BPOS |
| | 5/1/00 | | 77 | | 79 | | | 485BPOS |
| | 1/27/99 | | 76 | | 77 | | | 485APOS |
| | 1/1/99 | | 31 |
| | 12/1/98 | | 67 |
| | 2/27/98 | | 76 | | | | | 485APOS |
| | 2/28/97 | | 77 | | 80 | | | 485APOS, 485BPOS, NSAR-B, NSAR-B/A |
| | 5/24/96 | | 76 | | 79 | | | 485APOS |
| | 10/13/95 | | 76 | | 78 | | | 485BPOS |
| | 8/1/95 | | 79 | | | | | 485APOS |
| List all Filings |
26 Subsequent Filings that Reference this Filing
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