JPMorgan
Fund Services
P.O. Box 8528
Boston, MA 02266-8528
1-800-480-4111
SAI-USRE- 508
TABLE OF CONTENTS
PLEASE SEE PART II OF THIS SAI FOR ITS TABLE OF CONTENTS
GENERAL
The Trust and the Fund
JPMorgan Trust II (JPMT II or the Trust) is an open-end, management investment company formed as a statutory trust under the laws of the State of Delaware on November 12, 2004, pursuant to a Declaration of Trust dated November 5, 2004. The Fund, which is a series of JPMT II, was formerly a series of One Group Mutual Funds, a Massachusetts business trust which was formed on May 23, 1985. At shareholder meetings held on January 20, 2005 and February 3, 2005, shareholders of One Group Mutual Funds approved the redomiciliation of One Group Mutual Funds as a Delaware statutory trust to be called JPMorgan Trust II. The redomiciliation was effective after the close of business on February 18, 2005.
Security Capital U.S. Real Estate Shares. After the close of business on February 18, 2005, Security Capital U.S. Real Estate Shares (the Predecessor U.S. Real Estate Fund) reorganized into the U.S. Real Estate Fund. The Predecessor U.S. Real Estate Fund is considered the surviving fund for accounting purposes.
Fund Name
|
Prior to February 19, 2005, the Fund had the following name listed below corresponding to its current name: |
|
|
Former Name
|
Current Name
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One Group Real Estate Fund |
JPMorgan U.S. Real Estate Fund |
Share Classes
Shares in the Fund of the Trust are generally offered in multiple classes. The following chart shows the share classes offered by the Fund as of the date of this SAI:
Fund |
Class A |
Class C |
Select Class |
Class R5 |
JPMorgan U.S. Real Estate Fund |
X |
X |
X |
X |
Miscellaneous
This SAI describes the financial history, investment strategies and policies, management and operation of the Fund in order to enable investors to determine whether the Fund best suits their needs.
This SAI provides additional information with respect to the Fund and should be read in conjunction with the Funds current Prospectuses. Capitalized terms not otherwise defined herein have the meanings accorded to them in the applicable Prospectus. The Funds executive offices are located at 245 Park Avenue, New York, NY 10167.
This SAI is divided into two Parts Part I and Part II. Part I of this SAI contains information that is particular to the Fund. Part II of this SAI contains information that generally applies to the Fund and other series representing separate investment funds or portfolios of JPMorgan Trust I (JPMT I), JPMT II, J.P. Morgan Mutual Fund Group (JPMMFG), J.P. Morgan Mutual Fund Investment Trust (JPMMFIT) and J.P. Morgan Fleming Mutual Fund Group, Inc. (JPMFMFG) (each a JPMorgan Fund, and together with the Fund, the JPMorgan Funds). Throughout this SAI, JPMT I, JPMT II, JPMMFG, JPMMFIT and JPMFMFG are each referred to as a Trust and collectively, as the Trusts. Each Trusts Board of Trustees or Board of Directors in the case of JPMFMFG, are referred to herein as the Board of Trustees.
The Fund is advised by Security Capital Research & Management Incorporated (SC-R&M). Certain other of the JPMorgan Funds are advised by J.P. Morgan Investment Management Inc. (JPMIM) or JPMorgan Investment Advisors Inc. (JPMIA), and/or sub-advised by JF International Management Inc. (JFIMI) or Highbridge Capital Management, LLC (HCM). JPMIM, JPMIA, SC-R&M, JFIMI and HCM are also referred to herein as the Advisers and, individually, as the Adviser. JFIMI and HCM are also referred to herein as the Sub-Advisers and, individually, as the Sub-Adviser.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by JPMT II with respect to the Fund. The investment restrictions listed below under the heading Fundamental Investment Restrictions are fundamental policies which, under the Investment Company Act of 1940, as amended (the 1940 Act), may not be changed without the vote of a majority of the outstanding voting securities of the Fund, as such term is defined in Additional Information in Part II of this SAI. All other investment policies of the Fund (including its investment objectives) are non-fundamental, unless otherwise designated in the Prospectus or herein, and may be changed by the Trustees of the Fund without shareholder approval.
The percentage limitations contained in the restrictions below apply at the time of purchase of the securities. If a percentage or rating restriction on investment or use of assets set forth in a fundamental investment policy or a non-fundamental investment policy or in a Prospectus is adhered to at the time of investment, later changes in percentage resulting from any cause other than actions by the Fund will not be considered a violation. If the value of the Funds holdings of illiquid securities at any time exceeds the percentage limitation applicable at the time of acquisition due to subsequent fluctuations in value or other reasons, the Board of Trustees will consider what actions, if any, are appropriate to maintain adequate liquidity.
For purposes of fundamental investment restrictions regarding industry concentration, the Adviser may classify issuers by industry in accordance with classifications set forth in the Directory of Companies Filing Annual Reports with the SEC or other sources. In the absence of such classification or if the Adviser determines in good faith based on its own information that the economic characteristics affecting a particular issuer make it more appropriate to be considered engaged in a different industry, the Adviser may classify an issuer accordingly. For instance, personal credit finance companies and business credit finance companies are deemed to be separate industries and wholly-owned finance companies may be considered to be in the industry of their parents if their activities are primarily related to financing the activities of their parents.
In addition, the Fund has an 80% investment policy which is described in its Prospectus. This policy may be changed by the Board of Trustees without shareholder approval. However, the Fund will provide shareholders with written notice at least 60 days prior to a change in its 80% investment policy.
Fundamental Investment Restrictions
|
1. |
Purchase any securities that would cause more than 25% of the total assets of the Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that: (i) this limitation does not apply to investments in obligations issued or guaranteed by the U.S. government or its agencies and instrumentalities and repurchase agreements involving such securities and (ii) this limitation does not apply to an industry or group of industries in the real estate sector. For purposes of this limitation (i) utilities will be divided according to their services (for example, gas, gas transmission, electric and telephone will each be considered a separate industry); and (ii) wholly-owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to
financing the activities of their parents. |
|
2. |
Make loans, except that the Fund may (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; (iii) engage in securities lending as described in the Prospectus and the Statement of Additional Information; and (iv) make loans to the extent permitted by an order issued by the SEC. |
|
3. |
Underwrite the securities of other issuers except to the extent that the Fund may be deemed to be an underwriter under certain securities laws in the disposition of restricted securities. |
|
4. |
Purchase physical commodities or contracts relating to physical commodities, except as permitted under the 1940 Act, or operate as a commodity pool, in each case as interpreted or modified by regulatory authority having jurisdiction, from time to time. |
|
5. |
Purchase participation or other direct interests in oil, gas or mineral exploration or development programs (although investments by the Fund in marketable securities of companies engaged in such activities are not hereby precluded). |
|
6. |
Borrow money, except to the extent permitted under the 1940 Act, or the rules or regulations thereunder, as such statute, rules or regulations may be amended from time to time. |
|
7. |
Purchase securities of other investment companies except as permitted by the 1940 Act and rules, regulations and applicable exemptive relief thereunder. |
|
8. |
Issue senior securities except with respect to any permissible borrowings. |
|
9. |
Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments. This restriction does not prevent the Fund from investing in securities issued by companies in an industry or group of industries in the real estate sector. As a matter of fundamental policy, the Fund will concentrate its investments in such securities. |
|
10. |
Pledge, hypothecate, mortgage or otherwise encumber its assets, except to secure permitted borrowings. |
Non-Fundamental Investment Restrictions. The investment restrictions described below are non-fundamental restrictions of the Fund and may be changed by the Trustees of the Fund without prior shareholder approval.
|
1. |
Invest in illiquid securities in an amount exceeding, in the aggregate, 15% of the Funds net assets. An illiquid security is a security which cannot be disposed of promptly (within seven days) and in the usual course of business without a loss, and includes repurchase agreements maturing in excess of seven days, time deposits with a withdrawal penalty, non-negotiable instruments and instruments for which no market exists. |
|
2. |
Acquire the securities of registered open-end investment companies or registered unit investment trusts in reliance on Section 12(d)(1)(F) or 12(d)(1)(G) of the 1940 Act. |
|
3. |
Engage in short sales or short sales against the box if immediately following such transaction the aggregate market value of all securities sold short and sold short against the box would exceed 10% of the Funds net assets (taken at market value). |
|
4. |
Participate on a joint or joint and several basis in any securities trading account, except that the Fund may invest in joint accounts to the extent permitted by the Joint Account Procedures adopted by the Board. |
|
5. |
Invest more than 10% of its total assets in the securities of other investment companies. |
INVESTMENT PRACTICES
The U.S. Real Estate Fund invests in a variety of securities and employs a number of investment techniques. What follows is a list of some of the securities and techniques which may be utilized by the Fund. For a more complete discussion, see the Investment Strategies and Policies section in Part II of this SAI.
Instrument
|
Part II
Section Reference |
Adjustable Rate Mortgage Loans (ARMs): Loans in a mortgage pool which provide for a fixed initial mortgage interest rate for a specified period of time, after which the rate may be subject to periodic adjustments.
|
Mortgage-Related Securities |
Asset-Backed Securities: Securities secured by company receivables, home equity loans, truck and auto loans, leases, credit card receivables and other securities backed by other types of receivables or other assets.
|
Asset-Backed Securities |
Auction Rate Securities: Auction rate municipal securities and auction rate preferred securities issued by closed-end investment companies.
|
Auction Rate Securities |
Bank Obligations: Bankers' acceptances, certificates of deposit and time deposits. Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Maturities are generally six months or less. Certificates of deposit and time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds.
|
Bank Obligations |
Borrowings: A Fund may borrow for temporary purposes and/or for investment purposes. Such a practice will result in leveraging of a Funds assets and may cause a Fund to liquidate portfolio positions when it would not be advantageous to do so. A Fund must maintain continuous asset coverage of 300% of the amount borrowed, with the exception for borrowings not in excess of 5% of a Funds total assets made for temporary administrative purposes.
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Miscellaneous Investment Strategies and Risks |
Brady Bonds: Brady bonds are securities created through the exchange of existing commercial bank loans to public and private entities in certain emerging markets for new bonds in connection with debt restructurings.
|
Foreign Investments (including Foreign Currencies) |
Call and Put Options: A call option gives the buyer the right to buy, and obligates the seller of the option to sell, a security at a specified price at a future date. A put option gives the buyer the right to sell, and obligates the seller of the option to buy a security at a specified price at a future date. A Fund will sell only covered call and secured put options.
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Options and Futures Transactions |
Commercial Paper: Secured and unsecured short-term promissory notes issued by corporations and other entities. Maturities generally vary from a few days to nine months.
|
Commercial Paper |
Commodity-Linked Derivatives: Securities whose value derives from the price of a commodity, including commodity futures and commodity options.
|
Options and Futures Transactions |
Common Stock: Shares of ownership of a company.
|
Equity Securities, Warrants and Rights |
Instrument
|
Part II
Section Reference |
Common Stock Warrants and Rights: Securities, typically issued with preferred stock or bonds, that give the holder the right to buy a proportionate amount of common stock at a specified price.
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Equity Securities, Warrants and Rights |
Convertible Securities: Bonds or preferred stock that can convert to common stock.
|
Convertible Securities |
Corporate Debt Securities: Corporate debt securities may include bonds and other debt securities of domestic and foreign issuers, including obligations of industrial, utility, banking and other corporate issuers.
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Debt Instruments |
Credit Default Swaps: A swap agreement between two parties pursuant to which one party pays the other a fixed periodic coupon for the specified life of the agreement. The other party makes no payment unless a credit event, relating to a predetermined reference asset, occurs. If such an event occurs, the party will then make a payment to the first party, and the swap will terminate.
|
Swaps and Related Swap Products |
Custodial Receipts: A Fund may acquire securities in the form of custodial receipts that evidence ownership of future interest payments, principal payments or both on certain U.S. Treasury notes or bonds in connection with programs sponsored by banks and brokerage firms. These are not considered to be U.S. government securities. These notes and bonds are held in custody by a bank on behalf of the owners of the receipts.
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Custodial Receipts |
Demand Features: Securities that are subject to puts and standby commitments to purchase the securities at a fixed price (usually with accrued interest) within a fixed period of time following demand by a Fund.
|
Demand Features |
Emerging Market Securities: Securities issued by issuers or governments in countries with emerging economies or securities markets .
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Foreign Investments (including Foreign Currencies) |
Exchange Traded Funds(ETFs): Ownership interest in unit investment trusts, depository receipts, and other pooled investment vehicles that hold a portfolio of securities or stocks designed to track the price performance and dividend yield of a particular broad based, sector or international index. ETFs include a wide range of investments such as iShares, Standard & Poors Depository Receipts (SPDRs) and NASDAQ 100s.
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Investment Company Securities and Exchange Traded Funds |
Foreign Currency Transactions: Strategies used to hedge against currency risks, for other risk management purposes or to increase income or gain to a Fund. These strategies may consist of use of any of the following: options on currencies, currency futures, options on such futures,
forward foreign currency transactions (including non-deliverable forwards (NDFs)) , forward rate agreements and currency swaps, caps and floors. A Fund may engage in such transactions in both U.S. and non-U.S. markets.
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Foreign Investments (including Foreign Currencies) |
Foreign Investments: Equity and debt securities (e.g., bonds and commercial paper) of foreign entities and obligations of foreign branches of U.S. banks and foreign banks. Foreign securities may also include American Depositary Receipts, Global Depositary Receipts, European Depositary Receipts and American Depositary Securities.
|
Foreign Investments (including Foreign Currencies) |
Instrument
|
Part II
Section Reference |
High Yield/High Risk Securities/Junk Bonds: High yield, high risk bonds are securities that are generally rated below investment grade by the primary rating
agencies or are unrated but are deemed by a Funds Adviser to be of comparable quality.
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Debt Instruments |
Inflation-Linked Debt Securities: Inflation-linked securities include fixed and floating rate debt securities of varying maturities issued by the U.S. government as well as securities issued by other entities such as corporations, foreign governments and foreign issuers.
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Debt Instruments |
Initial Public Offerings (IPOs): A transaction in which a previously private company makes its first sale of stock to the public.
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Equity Securities, Warrants and Rights |
Interfund Lending: Interfund lending involves lending money and borrowing money for temporary purposes through a credit facility.
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Miscellaneous Investment Strategies and Risks |
Inverse Floating Rate Instruments: Leveraged variable debt instruments with interest rates that reset in the opposite direction from the market rate of interest to which the inverse floater is indexed.
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Inverse Floaters and Interest Rate Caps |
Investment Company Securities: Shares of other investment companies,
including funds for which the Adviser and/or its affiliates serve as investment adviser or administrator. The adviser will waive certain fees when investing in funds for which it serves as investment adviser, to the extent required by law.
|
Investment Company Securities and Exchange Traded Funds |
Loan Assignments and Participations
: Assignments of , or participations in, all or a portion of loans to corporations or to governments,
including governments of less developed countries.
|
Loan Assignments and Participations |
Master Limited Partnerships: Limited partnerships that are publicly traded on a securities exchange. |
Miscellaneous Investment Strategies and Risks |
Mortgages (Directly Held): Mortgages are debt instruments secured by real property.
|
Mortgage-Related Securities |
Mortgage-Backed Securities: Debt obligations secured by real estate loans and
pools of loans such as collateralized mortgage obligations (CMOs), commercial mortgage-backed securities (CMBSs),
and other asset-backed structures.
|
Mortgage-Related Securities |
Mortgage Dollar Rolls: A transaction in which a Fund sells securities for delivery in a current month and simultaneously contracts with the same party to repurchase similar but not identical securities on a specified future date.
|
Mortgage-Related Securities |
Municipal Securities: Securities issued by a state or political subdivision to obtain funds for various public purposes. Municipal securities include private activity bonds and industrial development bonds, as well as General Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes, other short-term tax-exempt obligations, municipal leases, obligations of municipal housing authorities and single-family revenue bonds.
|
Municipal Securities |
Instrument
|
Part II
Section Reference |
New Financial Products: New options and futures contracts and other financial products continue to be developed and a Fund may invest in such options, contracts and products.
|
Miscellaneous Investment Strategies and Risks |
Obligations of Supranational Agencies: Obligations of supranational agencies which are chartered to promote economic development and are supported by various governments and governmental agencies.
|
Foreign Investments (including Foreign Currencies) |
Options and Futures Transactions: A Fund may purchase and sell (a) exchange traded and over the counter put and call options on securities, indexes of securities and futures contracts on
securities and indexes of securities and (b) futures contracts on securities and indexes of securities .
|
Options and Futures Transactions |
Preferred Stock: A class of stock that generally pays a dividend at a specified rate and has preference over common stock in the payment of dividends and in liquidation.
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Equity Securities, Rights and Warrants |
Private Placements, Restricted Securities and Other Unregistered Securities: Securities not registered under the Securities Act of 1933, such as privately placed commercial paper and Rule 144A securities.
|
Miscellaneous Investment Strategies and Risks |
Real Estate Investment Trusts (REITs): Pooled investment vehicles which invest primarily in income producing real estate or real estate related loans or interest.
|
Real Estate Investment Trusts |
Repurchase Agreements: The purchase of a security and the simultaneous commitment to return the security to the seller at an agreed upon price on an agreed upon date. This is treated as a loan.
|
Repurchase Agreements |
Reverse Repurchase Agreements: The sale of a security and the simultaneous commitment to buy the security back at an agreed upon price on an agreed upon date. This is treated as a borrowing by a Fund.
|
Reverse Repurchase Agreements |
Securities Issued in Connection with Reorganizations and Corporate Restructurings: In connection with reorganizing or restructuring of an issuer, an issuer may issue common stock or other securities to holders of its debt securities.
|
Miscellaneous Investment Strategies and Risks |
Securities Lending: The lending of up to 33 ⅓% of a Funds total assets. In return, a Fund will receive cash, other securities, and/or letters of credit as collateral.
|
Securities Lending |
Short Selling: In short selling transactions, a Fund sells a security it does not own in anticipation of a decline in the market value of the security. To complete the transaction, a Fund must borrow the security to make delivery to the buyer. A Fund is obligated to replace the security borrowed by purchasing it subsequently at the market price at the time of replacement.
|
Short Selling |
Short-Term Funding Agreements: Agreements issued by banks and highly rated U.S. insurance companies such as Guaranteed Investment Contracts ("GICs") and Bank Investment Contracts ("BICs").
|
Short-Term Funding Agreements |
Instrument
|
Part II
Section Reference |
Sovereign Obligations: Investments in debt obligations issued or guaranteed by a foreign sovereign government, or its agencies, authorities or political subdivisions.
|
Foreign Investments (including Foreign Currencies) |
Stripped Mortgage-Backed Securities: Derivative multi-class mortgage securities which are usually structured with two classes of shares that receive different proportions of the interest and principal from a pool of mortgage assets. These include Interest Only (IO) and Principal Only (PO)
securities issued outside a Real Estate Mortgage Investment Conduit ( REMIC ) or CMO structure.
|
Mortgage-Related Securities |
Structured Investments: A structured investment is a security having a return tied to an underlying index or other security or asset class. Structured investments generally are individually negotiated agreements and may be traded over-the-counter. Structured investments are organized and operated to restructure the investment characteristics of the underlying security.
|
Structured Investments |
Swaps and Related Swap Products: Swaps involve an exchange of obligations by two parties. Caps and floors entitle a purchaser to a principal amount from the seller of the cap or floor to the extent that a specified index exceeds or falls below a predetermined interest rate or amount. A Fund may enter into these transactions to manage its exposure to changing interest rates and other factors.
|
Swaps and Related Swap Products |
Synthetic Variable Rate Instruments: Synthetic variable rate instruments generally involve the deposit of a long-term tax exempt bond in a custody or trust arrangement and the creation of a mechanism to adjust the long-term interest rate on the bond to a variable short-term rate and a right (subject to certain conditions) on the part of the purchaser to tender it periodically to a third party at par.
|
Swaps and Related Swap Products |
Temporary Defensive Positions: To respond to unusual circumstances a Fund may invest up to 100% of its
total assets in cash and cash equivalents for temporary defensive purposes.
|
Miscellaneous Investment Strategies and Risks |
Treasury Receipts: A Fund may purchase interests in separately traded interest and principal component parts of U.S. Treasury obligations that are issued by banks or brokerage firms and that are created by depositing U.S. Treasury notes and U.S. Treasury bonds into a special account at a custodian bank. Receipts include Treasury Receipts (TRs), Treasury Investment Growth Receipts (TIGRs), and Certificates of Accrual on Treasury Securities (CATS).
|
Treasury Receipts |
Trust Preferreds:
Securities with characteristics of both subordinated debt and preferred stock.
Trust preferreds are generally long term securities that make periodic fixed or variable interest payments.
|
Trust Preferred Securities |
U.S. Government Agency Securities: Securities issued by agencies and instrumentalities of the U.S. government. These include all types of securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, including funding notes, subordinated benchmark notes, collateralized mortgage obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs").
|
Mortgage-Related Securities |
Instrument
|
Part II
Section Reference |
U.S. Government Obligations: U.S. government obligations may include direct obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all of which are backed as to principal and interest payments by the full faith and credit of the United States, and separately traded principal and interest component parts of such obligations that are transferable through the Federal book-entry system known as Separate Trading of Registered Interest and Principal of Securities (STRIPS) and Coupons Under Book Entry Safekeeping (CUBES).
|
U.S. Government Obligations |
Variable and Floating Rate Instruments: Obligations with interest rates which are reset daily, weekly, quarterly or some other period and which may be payable to a Fund on demand or at the expiration of a specified term.
|
Debt Instruments |
When-Issued Securities, Delayed Delivery Securities and Forward Commitments: Purchase or contract to purchase securities at a fixed price for delivery at a future date.
|
When-Issued Securities, Delayed Delivery Securities and Forward Commitments |
Zero-Coupon, Pay-in-Kind and Deferred Payment Securities: Zero coupon securities are securities that are sold at a discount to par value and on which interest payments are not made during the life of the security. Pay-in-kind securities are securities that have interest payable by delivery of additional securities. Deferred payment securities are zero coupon debt securities which convert on a specified date to interest bearing debt securities.
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Debt Instruments |
DIVERSIFICATION
The Fund is registered as a non-diversified investment company. For a more complete discussion, see the Diversification section in Part II of this SAI.
QUALITY DESCRIPTION
Commercial Paper
The Fund only purchases commercial paper consisting of issues rated at the time of purchase in the highest or second highest rating category by at least one NRSRO (such as A-2 or better by S&P, Prime-2 or better by Moodys, F-2 or better by Fitch or R-2 or better by Dominion) or if unrated, determined by the applicable Adviser to be of comparable quality.
For a more complete discussion, see Commercial Paper in the Investment Strategies and Policies" section in Part II of this SAI
PORTFOLIO TURNOVER
A portfolio turnover rate is, in summary, the percentage computed by dividing the lesser of the Funds purchases or sales of securities (excluding short-term securities) by the average market value of the Fund. The Adviser intends to manage the Funds assets by buying and selling securities to help attain its investment objective. A rate of 100% indicates that the equivalent of all of the Funds assets have been sold and reinvested in a year. High portfolio turnover may affect the amount, timing and character of distributions, and, as a result, may increase the amount of taxes payable by shareholders. High portfolio turnover also results in higher transaction costs. To the extent that net short-term capital gains are realized by the Fund, any distributions resulting from such gains are considered ordinary income for federal income tax purposes. For a more complete
discussion, see the Distributions and Tax Matters section in Part II of this SAI.
|
The table below sets forth the Funds portfolio turnover rates for the last two fiscal years. |
Fund |
Fiscal Year Ended
12/31/ 06 |
Fiscal Year Ended 12/31/ 07 |
U.S. Real Estate Fund |
72% |
64% |
TRUSTEES
Standing Committees
There are four standing committees of the Board of Trustees: Audit Committee, Compliance Committee, Governance Committee and Investment Committee.
The Audit Committee met 4 times during the fiscal year ended
December 31, 2007. The Compliance Committee met 4 times during the fiscal year ended December 31, 2007. The Governance
Committee met 6 times during the fiscal year ended December 31, 2007. The Investment Committee met 5 times during the fiscal year ended
December 31, 2007. For a more complete discussion, see the Trustees section in Part II of this SAI.
Ownership of Securities
The following table shows the dollar
range of each Trustees beneficial ownership as of December 31, 2007 , in the Fund and each Trustees aggregate dollar range of ownership in any Fund that the Trustee oversees in the Family of Investment Companies.
Name of Trustee |
Dollar Range of Equity Securities in the Fund |
Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by the Trustee in Family of Investment Companies(1), (2) |
Independent Trustees |
|
|
William J. Armstrong |
None |
Over $100,000 |
John F. Finn |
None |
Over $100,000 |
Dr. Matthew Goldstein |
None |
Over $100,000 |
Robert J. Higgins |
None |
Over $100,000 |
Peter C. Marshall |
None |
Over $100,000 |
Marilyn McCoy |
None |
Over $100,000 |
William G. Morton, Jr. |
None |
Over $100,000 |
Robert A. Oden, Jr. |
None |
Over $100,000 |
Fergus Reid, III |
None |
Over $100,000 |
Frederick W. Ruebeck |
None |
Over $100,000 |
James J. Schonbachler |
None |
Over $100,000 |
Interested Trustee |
|
|
Leonard M. Spalding, Jr. |
None |
Over $100,000 |
|
(1) |
A Family of Investment Companies means any two or more registered investment companies that share the same investment adviser or principal underwriter and hold themselves out to investors as related companies for purposes of investment and investor services. The |
Family of Investment Companies for
which the Board of Trustees currently serves includes eight registered investment companies ( 145 funds).
(2) |
For Mr.. Spalding,
this amount
includes deferred compensation balances through participation in the JPMorgan Funds Deferred Compensation Plan for Eligible Trustees as of
December 31, 2007 .
For Ms. McCoy and Messrs. Finn, Marshall and Oden, these amounts include deferred compensation balances through participation in the Deferred
Compensation Plan for Trustees of One Group Mutual Fund and One Group Investment Trust as of December 31, 2007 . |
As of December 31, 2007 , none of the independent Trustees or their immediate family members owned securities of the Adviser or JPMDS or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the Adviser or JPMDS.
Trustee Compensation
The Funds of the JPMorgan Funds Complex overseen by the Trustees pay each Trustee an annual fee of $183,000 and reimburse each Trustee for expenses incurred in connection with service as a Trustee. In addition, the Funds pay the Chairman $167,000 and the Vice Chairman $67,000. The Chairman and Vice Chairman receive no additional compensation for service as committee or sub-committee chairmen. Committee chairs and sub-committee chairs who are not already receiving an additional fee are each paid $52,000 and $27,000 respectively. The Trustees may hold various other directorships unrelated to the JPMorgan Funds Complex. The Funds bear expenses related to administrative and staffing services provided to the Chairman, in lieu of establishing an office of the Chairman, in the amount of $6,000 per month.
Trustee aggregate compensation paid by the Fund and the JPMorgan Funds Complex for the fiscal year ended
December 31, 2007 , is set forth below:
Aggregate Trustee Compensation Paid by the Fund
Name of Trustee |
U.S. Real Estate Fund |
Total Compensation paid from the Fund Complex(1) |
Independent Trustees |
|
|
William J. Armstrong |
$ 817 |
$215,417 |
Roland R. Eppley, Jr. * |
636 |
167,750 |
John F. Finn |
636 |
0 ^ |
Dr. Matthew Goldstein |
730 |
192,500 |
Robert J. Higgins |
730 |
0 ^^ |
Peter C. Marshall |
869 |
229,167 |
Marilyn McCoy |
817 |
215,417 |
William G. Morton, Jr. |
636 |
167,750 |
Robert A. Oden, Jr. |
636 |
117,425 ^^^ |
Fergus Reid, III |
1,217 |
320,833 |
Frederick W. Ruebeck |
730 |
192,500 |
James J. Schonbachler |
636 |
167,750 |
Interested Trustee |
|
|
Leonard M. Spalding, Jr. |
817 |
215,417 |
|
(1) |
A Fund Complex means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services or have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. The JPMorgan Funds Complex for which the Board of Trustees currently serves includes eight registered
investment companies ( 145 funds). |
* |
Roland R. Eppley, Jr. retired as an Independent Trustee of the Board of Trustees effective December 31, 2007. |
^ |
Does not include $167,750 of Deferred Compensation. |
^^ |
Does not include $192,500 of Deferred Compensation. |
^^^ |
Does not include $50,325 of Deferred Compensation. |
INVESTMENT ADVISER
Investment Advisory Fees
For the fiscal years ended December 31, 2005
, 2006 and 2007 , the table below sets forth the investment advisory fees paid by the Fund to SC-R&M (amounts in thousands):
Fund |
Fiscal Year Ended 12/31/ 05
|
Fiscal Year Ended 12/31/ 06 |
Fiscal Year Ended 12/31/ 07 |
U.S. Real Estate Fund |
$2,994 |
$4,602 |
$5,758 |
|
|
|
|
|
|
|
For a more complete discussion, see the Investment Advisers section in Part II of this SAI. |
PORTFOLIO MANAGERS
Portfolio Managers Other Accounts Managed
The following table shows information regarding all of the other accounts managed by each portfolio manager of the U.S.
Real Estate Fund as of December 31, 2007 :
|
Non-Performance Based Fee Advisory Accounts |
|
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
|
Number of Accounts |
Total Assets ($billions) |
Number of Accounts |
Total Assets ($billions) |
Number of Accounts |
Total Assets ($billions) |
Anthony R. Manno Jr. |
5 |
$1 .1 |
1 |
$1 .0 |
540 |
$ 1.7 |
Kenneth D. Statz |
5 |
$1 .1 |
1 |
$1 .0 |
532 |
$ 1.7 |
Kevin W. Bedell |
5 |
$1 .1 |
1 |
$1 .0 |
539 |
$ 1.7 |
The following table shows information on the other accounts managed by each portfolio manager of the U.S. Real Estate Fund that have advisory fees wholly or partly based on performance as of December 31, 200 7 :
|
Performance Based Fee Advisory Accounts |
|
Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
|
Number of Accounts |
Total Assets ($billions) |
Number of Accounts |
Total Assets ($billions) |
Number of Accounts |
Total Assets ($billions) |
Anthony R. Manno Jr. |
-- |
-- |
-- |
-- |
2 |
$0 .2 |
Kenneth D. Statz |
-- |
-- |
-- |
-- |
2 |
$0 .2 |
Kevin W. Bedell |
-- |
-- |
-- |
-- |
2 |
$0 .2 |
Portfolio Managers Ownership of Securities
The following table indicates the dollar range of securities of the Fund beneficially owned by each portfolio manager, as of the fiscal year
ended December 31, 2007 :
|
Aggregate Dollar Range of Securities in the U.S. Real Estate Fund |
|
None |
$1 - $10,000 |
$10,001- $50,000 |
$50,001- $100,000 |
$100,001- $500,000 |
$500,001- $1,000,000 |
Over
$1,000,000 |
Anthony R. Manno Jr. |
|
|
X |
|
|
|
|
Kenneth D. Statz |
|
|
|
|
X |
|
|
Kevin W. Bedell |
|
|
|
|
X |
|
|
|
For a more complete discussion, see the Portfolio Manager Compensation section in Part II of this SAI. |
ADMINISTRATOR
For the period from January 22, 2005 through February 18, 2005 (the closing date of the merger of the Predecessor U.S. Real Estate Fund with the U.S. Real Estate Fund), JPMorgan Funds Management, Inc. served as administrator to the Predecessor U.S. Real Estate Fund pursuant to an administration agreement (the Stub Period Agreement). The Stub Period Agreement provided that JPMorgan Funds Management would assist in supervising all operations of the Fund (other than those performed under the investment advisory agreement, the custodian and fund accounting agreement and the transfer agency agreement). The Stub Period Agreement further provided that JPMorgan Funds Management would, among other services identified in the Stub Period Agreement, prepare annual and semi-annual reports to the SEC including the financial statements contained therein, prepare various filings required by the
federal securities laws, prepare federal and state tax returns, and generally assist in all aspects of the Predecessor U.S. Real Estate Funds operations other than those performed under the investment advisory agreement, the custodian and fund accounting agreement and the transfer agency agreement. Under the Stub Period Agreement, JPMorgan Funds Management was permitted to, at its expense, subcontract with any entity or person concerning the provision of services under the Stub Period Agreement.
The Stub Period Agreement provided that JPMorgan Funds Management would not be liable for any error of judgment or mistake of law or any loss suffered by the Predecessor U.S. Real Estate Fund in connection with the matters to which the Stub Period Agreement relates, except a loss resulting from willful misfeasance, bad faith, or negligence in the performance of its duties, or from the reckless disregard by it of its obligations and duties thereunder.
For the period of January 22, 2005 through February 18, 2005, JPMorgan Funds Management, was entitled to a fee for its services under the Stub Period Agreement, which was calculated daily and paid monthly, at the annual rate of the Predecessor U.S. Real Estate Funds average daily net assets as follows: twenty one-hundredths of one percent (0.20%) of amounts included in that portion of the aggregate daily net assets of (1) all series of One Group Mutual Funds other than the One Group Institutional Money Market Funds and the One Group Investor Funds and (2) the Predecessor U.S. Real Estate Fund (together referred in the Agreements as the Multiple Class Funds) equal to or less than $1,500, 000,000; eighteen one-hundredths of one percent (0.18%) of amounts included in the portion of the aggregate daily net assets of all Multiple Class Funds between $1,500,000,000 and
$2,000,000,000; and sixteen one-hundredths of one percent (0.16%) of amounts included in that portion of the aggregate daily net assets of all Multiple Class Funds in excess of $2,000,000,000. However, JPMorgan Funds Management agreed to waive its fee under the Stub Period Agreement to the extent necessary for the Fund to be charged an effective rate of no more than 0.10% of the Funds average daily net assets. The fees pertaining to each Multiple Class Fund were computed daily in amounts strictly proportionate to the amount of the Multiple Class Funds average daily net assets as a percentage of the aggregate daily net assets of all Multiple Class Funds. Such compensation was calculated and accrued daily, and paid to the Administrator on the first business day of each month, or at such times(s) as the Administrator requested and the parties thereto agreed.
Prior to January 22, 2005, SC-R&M served as administrator pursuant to a fund administration and accounting agreement with the Predecessor U.S. Real Estate Fund (the Security Capital Administration Agreement) under which SC-R&M performed certain administrative functions for the Fund, including, but not limited to, (i) providing office facilities and the services of a principal financial officer; (ii) furnishing statistical and research data, clerical services and stationery and office supplies; (iii) keeping and maintaining all financial accounts and required records (other than those required to be maintained by the Predecessor U.S. Real Estate Funds Custodian and Transfer Agent); (iv) computing and transmitting to the appropriate service the Predecessor U.S. Real Estate Funds net asset value, net income and net capital gain (loss) in accordance with the
Predecessor U.S. Real Estate Funds Prospectus and resolutions of its Board of Directors; (v) compiling data for and preparing required reports and notices to shareholders of record; (vi) compiling data for, preparing for execution and filing all reports of other documents, including tax returns, required by federal, state and other applicable laws and regulations (other than those required to be filed by the Predecessor U.S. Real Estate Funds Custodian or Transfer Agent); (vii) assisting in developing and monitoring compliance procedures for the Predecessor U.S. Real Estate Fund and any class or series thereof; (viii) determining, together with the Predecessor U.S. Real Estate Funds Board of Directors, the jurisdictions in which the Predecessor U.S. Real Estate Funds shares should be registered or qualified for sale and, in connection therewith, being responsible for the registration for sale and maintenance of the registrations of shares for sale under the
securities laws of any state; (ix) providing financial data requested by the Predecessor U.S.
Real Estate Fund and its outside counsel; (x) performing such other duties related to the administration of the Predecessor U.S. Real Estate Funds operations as reasonably requested by the Board of Directors, from time to time; and (xi) assisting in the monitoring of regulatory and legislative developments which may affect the Predecessor U.S. Real Estate Fund and, in response to such developments, counseling and assisting the Predecessor U.S. Real Estate Fund in routine regulatory examinations or investigations of the Predecessor U.S. Real Estate Fund and working with outside counsel to the Predecessor U.S. Real Estate Fund in connection with regulatory matters or litigation.
The Predecessor U.S. Real Estate Fund retained State Street Bank and Trust Company as sub-administrator (the Sub-Administrator) under a sub-administration agreement (the Security Capital Sub-Administration Agreement).
Under the Security Capital Sub-Administration Agreement, the Sub-Administrator assumed responsibility for performing certain of the foregoing administrative functions, including overseeing the determination and publication of the net asset value of the Predecessor U.S. Real Estate Funds shares, maintaining certain of the Funds books and records that were not maintained by SC-R&M as investment adviser, or by the Custodian or Transfer Agent, preparing financial information for the Funds income tax returns, proxy statements, semi-annual and annual shareholders reports, and SEC filings, and responding to certain shareholder inquiries. Under the terms of the Security Capital Sub-Administration Agreement, the Predecessor U.S. Real Estate Fund paid the Sub-Administrator a monthly administration fee at the annual rate of .08% of the first $750 million, 0.06% of the next $250
million and 0.04% of the Predecessor U.S. Real Estate Funds average daily net assets over $1 billion, subject to an additional $7,500 annual fee for each class of shares excluding the first class and subject to an average annual minimum fee of $85,000 per investment portfolio, lesser minimum fees for each additional investment portfolio and subject to other fees that may be applicable.
Under the Security Capital Administration Agreement,
SC-R&M remained responsible for monitoring and overseeing the performance by the Sub-Administrator of its obligations to the
Fund under the Sub-Administration Agreement, subject to the overall authority of the Predecessor U.S. Real Estate Funds Board of Directors. For its services under the Administration Agreement, SC-R&M received a monthly fee from the Predecessor U.S. Real Estate Fund at the annual rate of 0.02% of the value of the Funds average daily net assets.
For the period January 1, 2005 through January 21, 2005, SC-R&M earned $18,681 for providing services to the Predecessor U.S. Real Estate Fund.
The table below sets forth the administration, administrative services and co-administration fees paid to JPMorgan Funds Management, Inc. (the amounts voluntarily waived are in parentheses) for the fiscal periods indicated (amounts in thousands):
|
Fiscal Year Ended 12/31/05* |
Fiscal Year Ended 12/31/06 |
Fiscal Year Ended 12/31/07 |
Fund |
Paid |
Waived |
Paid |
Waived |
Paid |
Waived |
U.S. Real Estate Fund |
$466 |
($65) |
$528 |
($249) |
$543 |
($410) |
* |
Fees paid for the fiscal year
ended December 31, 2005 reflect fees paid to JPMorgan Funds Management, Inc. from February 19, 2005 to December 31, 2005.
JPMorgan Funds Management, Inc. was paid $5,817 in fees for the period from January 22, 2005
through February 18, 2005 of which $0 waived. |
For a more complete discussion, see the Administrator section in Part II of this SAI.
DISTRIBUTOR
Compensation Paid to JPMDS
The following table describes the compensation paid to the principal underwriter, JPMDS, for the fiscal year ended December 31, 2007 :
Fund |
Net Underwriting Discounts and Commissions |
Compensation on Redemptions and Repurchases |
Brokerage Commissions |
Other Compensation |
U.S. Real Estate Fund |
$33,010 |
$17,525 |
$8,983 |
$1,002,574 |
The aggregate amount of underwriting commissions retained by JPMDS for the fiscal year ended December 31, 2007 was $ 33,010 .
Distribution Fees
The Board of Directors of the Predecessor U.S. Real Estate Fund adopted a Predecessor Distribution and Servicing Plan (Predecessor Plan) with respect to Class S Shares of the Fund. The annual compensation payable by the Predecessor U.S. Real Estate Fund to the distributor under the Predecessor Plan was an amount equal to 0.25% (on an annual basis) of the value of the average daily net assets of Class S shares.
Under the Predecessor Plan, the Predecessor U.S. Real Estate Fund was authorized to pay a distribution fee for distribution activities in connection with the sale of Class S Shares and a service fee for services provided which are necessary for the maintenance of Class S Shares shareholder accounts. To the extent such fee exceeded the expenses of these distribution and shareholder servicing activities, the distributor could retain such excess as compensation for its services and could realize a profit from these arrangements.
The Predecessor Plan was a compensation plan that provided for the payment of a specified distribution and service fee without regard to the distribution and service expenses actually incurred by the distributor. The distributor could also pay third parties in respect of these services such amount as it determined.
The table below sets forth the Rule 12b-1 fees that the Fund paid to JPMDS (waived amounts are in parentheses) with respect to the fiscal periods indicated (amounts in thousands):
|
Fiscal Year Ended 12/31/ 05 |
Fiscal Year Ended 12/31/ 06 |
Fiscal Year Ended 12/31/ 07 |
U.S. Real Estate Fund |
Paid |
Waived |
Paid |
Waived |
Paid |
Waived |
|
Class A Shares |
$ 775 |
$- |
$ 946 |
$- |
$ 917 |
$- |
|
Class C Shares |
2 |
- |
44 |
- |
85 |
- |
|
|
For a more complete discussion, see the Distribution Plan section in Part II of this SAI. |
SHAREHOLDER SERVICING
Shareholder Services Fees
Under the Shareholder Servicing Agreement, the Fund has agreed to pay JPMDS, for providing Shareholder Services and Other Related Services, a fee at the following annual rates (expressed as a percentage of the average daily net asset value (NAV) of Fund shares owned by or for shareholders):
Select Class, Class A and Class C |
0.25% |
Class R5 |
0.05% |
Shareholder Servicing Agent Fees
The table below sets forth the fees paid or accrued to JPMDS (the amounts voluntarily waived are in parentheses) for the fiscal periods indicated (amounts in thousands):
|
Fiscal Year Ended 12/31/06 |
Fiscal Year Ended 12/31/07 |
U.S. Real Estate Fund |
Paid |
Waived |
Paid |
Waived |
Class A Shares |
$711 |
($235) |
$733 |
($184) |
Class C Shares |
12 |
(3) |
23 |
(6) |
Select Class Shares |
710 |
(228) |
1,109 |
(277) |
Class R5 Shares |
- |
(4) |
-- |
(13) |
|
For a more complete discussion, see the Shareholder Servicing section in Part II of this SAI. |
BROKERAGE AND RESEARCH SERVICES
Brokerage Commissions
The Fund (or its Predecessor) paid the following brokerage commissions for the indicated fiscal periods (amounts in thousands):
U.S. Real Estate Fund |
Fiscal Year Ended 12/31/ 05 |
Fiscal Year Ended 12/31/ 06 |
Fiscal Year Ended 12/31/ 07 |
Total Brokerage Commissions |
$ 478 |
$ 860 |
$ 843 |
Brokerage Commissions to Affiliated Broker Dealers |
-- |
-- |
-- |
|
For a more complete discussion, see the Portfolio Transactions section in Part II of this SAI. |
Broker Research
For the fiscal year ended December 31, 2007 , the Adviser allocated brokerage commissions of approximately $ _________ to brokers who provided broker research including third party broker research for the Fund.
Securities of Regular Broker-Dealers
|
As of December 31, 2007 , the Fund did not own any securities of its regular broker-dealers (or parents). |
FINANCIAL INTERMEDIARIES
Other Cash Compensation Payments
During the fiscal year ended December 31, 2007, JPMIM, JPMIA and SC-R&M paid approximately $ 72,236,000, $28,386,000 and $362,000, respectively, for all of the JPMorgan Funds pursuant to their other cash compensation arrangements.
Finders Fee Commissions
Financial Intermediaries who sell $1 million or more of Class A Shares in the aggregate of the JPMorgan Equity Funds, the JPMorgan Specialty Funds, the JPMorgan International Funds, the JPMorgan Investor Funds, the JPMorgan SmartRetirement Funds, and the JPMorgan Fixed Income Funds (collectively Qualifying Funds) may receive a finders fee.
With respect to sales of the U.S. Real Estate Fund, such fees are paid in accordance with the following schedule:
Amount of Purchases |
Finders Fees |
$1,000,000 $3,999,999* |
1.00% |
$4,000,000 -- $9,999,999 |
0.75% |
$10,000,000 -- $49,999,999 |
0.50% |
$50,000,000 or more |
0.25% |
* If the total sale of Class A Shares of Qualifying Fund is $1,000,000 or more but the amount of the sale applicable to the Fund is less than $1,000,000, the Financial Intermediary will receive a Finders Fee equal to 1.00% of the sale of the Class A Shares of the Fund. The Finders Fee Schedule for sales of the other Qualifying Funds can be found in the SAI for such Qualifying Funds.
Finders Fees Paid By SC-R&M and JPMDS
For the most recent fiscal year ended December 31, 2007 , SC-R&M and JPMDS paid approximately $ 3,953,000 , with respect to the Fund in finders fees.
For a more complete discussion, see the Cash Compensation to Financial Intermediaries section in Part II of this SAI.
TAX MATTERS
Capital Loss Carryforwards
For Federal income tax purposes, the Fund did not have any capital loss carryforwards for the fiscal year ended December 31, 2007 .
|
For a more complete discussion, see the Distributions and Tax Matters section in Part II of this SAI. |
PORTFOLIO HOLDINGS DISCLOSURE
A list of the entities that receive the Funds portfolio holdings information, the frequency with which it is provided to them and the length of the lag between the date of the information and the date it is disclosed is provided below:
JPMorgan Private Bank/JPMorgan Private Client Services |
Monthly |
30 days after month end |
Standard & Poors |
Monthly |
30 days after month end |
MorningStar Inc. |
Monthly |
30 days after month end |
Lipper, Inc. |
Monthly |
30 days after month end |
Thomson Financial |
Monthly |
30 days after month end |
Bloomberg LP |
Monthly |
30 days after month end |
Vickers Stock Research Corp. |
Monthly |
30 days after month end |
Canterbury Consulting Group, Inc. |
Quarterly |
30 days after month end |
Casey Quirk & Associates |
Monthly |
10 days after month end |
|
For a more complete discussion, see the Portfolio Holdings Disclosure section in Part II of this SAI. |
SHARE OWNERSHIP
Trustees and Officers. As of March 31, 2008 , the officers and Trustees, as a group, owned less than 1% of the shares of any class of the Fund.
Principal Holders. As of March 31, 2008 the following persons owned of record, or were known by the Trust to own beneficially, 5% or more of the outstanding shares of any class of the Fund included in this SAI:
U.S. REAL ESTATE FUND |
Class A Shares |
CHARLES SCHWAB & CO INC |
46.88 % |
|
ATTN MUTUAL FUNDS |
|
|
101 MONTGOMERY ST |
|
|
SAN FRANCISCO CA 94104-4151 |
|
|
Class C Shares |
CHARLES SCHWAB & CO INC |
5. 91 % |
|
SPECIAL CUSTODY ACCOUNT FBO CUSTOMERS |
|
|
ATTN: MUTUAL FUNDS |
|
|
01 MONTGOMERY ST |
|
|
SAN FRANCISCO CA 94104-4151 |
|
|
|
MORGAN STANLEY & CO |
28.96 % |
|
HARBORSIDE FINANCIAL CENTER, PLAZA TWO FL 3 |
|
|
JERSEY CITY NJ 07311 |
|
|
Class R5 Shares |
JPMIM AS AGENT FOR JPMORGAN SMARTRETIREMENT 2010 FUND* |
7.00 % |
|
ATTN CLIENT SERVICES |
|
|
245 PARK AVE FL 7 |
|
|
NEW YORK NY 10167-0002 |
|
|
|
JPMIM AS AGENT FOR JPMORGAN SMARTRETIREMENT 2015 FUND* |
19.28 % |
|
ATTN CLIENT SERVICES |
|
|
245 PARK AVE FL 7 |
|
|
NEW YORK NY 10167-0002 |
|
|
|
JPMIM AS AGENT FOR JPMORGAN SMARTRETIREMENT 2020 FUND* |
35.73 % |
|
ATTN CLIENT SERVICES |
|
|
245 PARK AVE FL 7 |
|
|
NEW YORK NY 10167-0002 |
|
|
|
JPMIM AS AGENT FOR JPMORGAN SMARTRETIREMENT 2030 FUND* |
20.17 % |
|
ATTN CLIENT SERVICES |
|
|
245 PARK AVE FL 7 |
|
|
NEW YORK NY 10167-0002 |
|
|
|
JPMIM AS AGENT FOR JPMORGAN SMARTRETIREMENT 2040 FUND* |
12. 94 % |
|
ATTN CLIENT SERVICES |
|
|
245 PARK AVE FL 7 |
|
|
NEW YORK NY 10167-0002 |
|
|
U.S. REAL ESTATE FUND |
Select Class Shares |
STRAFE & CO* |
76.82 % |
|
BOIA-ONE GROUP OPERATIONS |
|
|
1111 POLARIS PKWY |
|
|
PO BOX 710027 |
|
|
COLUMBUS OH 43271-0001 |
|
|
|
|
|
* The shareholder of record is a subsidiary or affiliate of JPMorgan Chase & Co. (a JPMorgan Affiliate). Typically, the shares are held for the benefit of underlying accounts for which the JPMorgan Affiliate may have voting or investment power. To the extent that JPMorgan Affiliates own 25% or more of a class of shares of the Fund, JPMorgan Chase & Co. may be deemed to be a controlling person of such shares under the 1940 Act. |
The persons listed above as owning 25% or more of the outstanding shares of the Predecessor Fund may be presumed to control (as that term is defined in the 1940 Act) such Fund. As a result, those persons would have the ability to vote a majority of the shares of the Fund on any matter requiring the approval of shareholders of such Fund.
FINANCIAL STATEMENTS
The Financial Statements are incorporated by reference to this SAI. The Financial Statements for the fiscal year ended December 31, 2007, have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm to the Trust, as indicated in its report with respect thereto, and are incorporated herein by reference in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. These Financial Statements are available without charge upon request by calling JPMorgan Fund Services at 1-800-480-4111.
JPMorgan Funds
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes
policies and practices that apply to each of the JPMorgan Funds, for which Part I precedes this Part II. Part II is not a standalone document and must
be read in conjunction with Part I. References in this Part II to a Fund means each JPMorgan Fund, unless noted otherwise. Capitalized
terms used and not otherwise defined in this Part II have the meanings given to them in Part I of this SAI.
Part II-i
PART II
TABLE OF CONTENTS
INVESTMENT
STRATEGIES AND POLICIES |
|
|
|
|
1 |
|
Asset-Backed
Securities |
|
|
|
|
1 |
|
Auction Rate
Securities |
|
|
|
|
2 |
|
Bank
Obligations |
|
|
|
|
3 |
|
Commercial
Paper |
|
|
|
|
3 |
|
Convertible
Securities |
|
|
|
|
4 |
|
Custodial
Receipts |
|
|
|
|
4 |
|
Debt
Instruments |
|
|
|
|
4 |
|
Corporate
Debt Securities |
|
|
|
|
4 |
|
High
Yield/High Risk Securities/Junk Bonds |
|
|
|
|
4 |
|
Inflation-Linked Debt Securities |
|
|
|
|
5 |
|
Variable and
Floating Rate Instruments |
|
|
|
|
6 |
|
Zero-Coupon,
Pay-in-Kind and Deferred Payment Securities |
|
|
|
|
8 |
|
Demand
Features |
|
|
|
|
8 |
|
Equity
Securities, Warrants and Rights |
|
|
|
|
9 |
|
Common
Stock |
|
|
|
|
9 |
|
Common Stock
Warrants and Rights |
|
|
|
|
9 |
|
Preferred
Stock |
|
|
|
|
9 |
|
Initial
Public Offerings |
|
|
|
|
9 |
|
Foreign
Investments |
|
|
|
|
9 |
|
Risk Factors
of Foreign Investments |
|
|
|
|
10 |
|
Brady
Bonds |
|
|
|
|
11 |
|
Obligations
of Supranational Entities |
|
|
|
|
11 |
|
Emerging
Markets Securities |
|
|
|
|
11 |
|
Sovereign
Obligations |
|
|
|
|
13 |
|
Foreign
Currency Transactions |
|
|
|
|
13 |
|
Inverse
Floaters and Interest Rate Caps |
|
|
|
|
17 |
|
Investment
Company Securities and Exchange Traded Funds |
|
|
|
|
17 |
|
Investment
Company Securities |
|
|
|
|
17 |
|
Exchange
Traded Funds (ETFs) |
|
|
|
|
18 |
|
Loan
Assignments and Participations |
|
|
|
|
19 |
|
Miscellaneous Investment Strategies and Risks |
|
|
|
|
22 |
|
Borrowings |
|
|
|
|
22 |
|
Commodity-Linked Derivatives |
|
|
|
|
22 |
|
Interfund
Lending |
|
|
|
|
23 |
|
Master
Limited Partnerships |
|
|
|
|
23 |
|
New
Financial Products |
|
|
|
|
24 |
|
Private
Placements, Restricted Securites and Other Unregistered Securities |
|
|
|
|
24 |
|
Securities
Issued in Connection with Reorganizations and Corporate Restructuring |
|
|
|
|
25 |
|
Temporary
Defensive Positions |
|
|
|
|
26 |
|
Mortgage-Related Securities |
|
|
|
|
26 |
|
Mortgages
(Directly Held) |
|
|
|
|
26 |
|
Mortgage-Backed Securities (CMOS and REMICS) |
|
|
|
|
26 |
|
Mortgage
Dollar Rolls |
|
|
|
|
28 |
|
Stripped
Mortgage-Backed Securities |
|
|
|
|
29 |
|
Adjustable
Rate Mortgage Loans |
|
|
|
|
29 |
|
Risk Factors
of Mortgage-Related Securities |
|
|
|
|
30 |
|
Municipal
Securities |
|
|
|
|
32 |
|
Risk Factors
in Municipal Securities |
|
|
|
|
34 |
|
Limitations
on the Use of Municipal Securities |
|
|
|
|
36 |
|
Options and
Futures Transactions |
|
|
|
|
36 |
|
Futures
Contracts |
|
|
|
|
39 |
|
Real Estate
Investment Trusts (REITs) |
|
|
|
|
41 |
|
Part II-ii
Repurchase
Agreements |
|
|
|
|
42 |
|
Reverse
Repurchase Agreements |
|
|
|
|
42 |
|
Securities
Lending |
|
|
|
|
43 |
|
Short
Selling |
|
|
|
|
43 |
|
Short-Term
Funding Agreements |
|
|
|
|
44 |
|
Structured
Investments |
|
|
|
|
44 |
|
Swaps and
Related Swap Products |
|
|
|
|
45 |
|
Credit
Default Swaps |
|
|
|
|
46 |
|
Synthetic
Variable Rate Instruments |
|
|
|
|
47 |
|
Treasury
Receipts |
|
|
|
|
47 |
|
Trust
Preferred Securities |
|
|
|
|
48 |
|
U.S.
Government Obligations |
|
|
|
|
48 |
|
When-Issued
and Delayed Delivery Securities and Forward Commitments |
|
|
|
|
48 |
|
RISK
MANAGEMENT |
|
|
|
|
49 |
|
SPECIAL
FACTORS AFFECTING CERTAIN FUNDS |
|
|
|
|
50 |
|
DIVERSIFICATION |
|
|
|
|
50 |
|
DISTRIBUTIONS AND TAX MATTERS |
|
|
|
|
50 |
|
TRUSTEES |
|
|
|
|
62 |
|
Standing
Committees |
|
|
|
|
65 |
|
Trustee
Compensation |
|
|
|
|
66 |
|
OFFICERS |
|
|
|
|
67 |
|
INVESTMENT
ADVISERS AND SUB-ADVISERS |
|
|
|
|
68 |
|
POTENTIAL
CONFLICT OF INTEREST |
|
|
|
|
73 |
|
PORTFOLIO
MANAGER COMPENSATION |
|
|
|
|
75 |
|
CODES OF
ETHICS |
|
|
|
|
75 |
|
PORTFOLIO
TRANSACTIONS |
|
|
|
|
76 |
|
ADMINISTRATOR |
|
|
|
|
79 |
|
DISTRIBUTOR |
|
|
|
|
81 |
|
DISTRIBUTION
PLAN |
|
|
|
|
81 |
|
SECURITIES
LENDING AGENT |
|
|
|
|
84 |
|
CUSTODIAN |
|
|
|
|
84 |
|
CUSTODY AND
FUND ACCOUNTING FEES AND EXPENSES |
|
|
|
|
85 |
|
TRANSFER
AGENT |
|
|
|
|
86 |
|
SHAREHOLDER
SERVICING |
|
|
|
|
86 |
|
EXPENSES |
|
|
|
|
88 |
|
FINANCIAL
INTERMEDIARIES |
|
|
|
|
89 |
|
ADDITIONAL
COMPENSATION TO FINANCIAL INTERMEDIARIES |
|
|
|
|
89 |
|
TRUST
COUNSEL |
|
|
|
|
90 |
|
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM |
|
|
|
|
90 |
|
PURCHASES,
REDEMPTIONS AND EXCHANGES |
|
|
|
|
91 |
|
DIVIDENDS
AND DISTRIBUTIONS |
|
|
|
|
96 |
|
NET ASSET
VALUE |
|
|
|
|
97 |
|
DELAWARE
TRUSTS |
|
|
|
|
98 |
|
MASSACHUSETTS TRUSTS |
|
|
|
|
99 |
|
MARYLAND
CORPORATION |
|
|
|
|
100 |
|
DESCRIPTION
OF SHARES |
|
|
|
|
100 |
|
PORTFOLIO
HOLDINGS DISCLOSURE |
|
|
|
|
104 |
|
PROXY VOTING
PROCEDURES AND GUIDELINES |
|
|
|
|
105 |
|
ADDITIONAL
INFORMATION |
|
|
|
|
109 |
|
APPENDIX
ADESCRIPTION OF RATINGS |
|
|
|
|
A-1 |
|
Part II-iii
INVESTMENT STRATEGIES AND POLICIES
As noted in the applicable
Prospectuses for each of the Funds, in addition to the main investment strategy and the main investment risks described in the Prospectuses, each Fund
may employ other investment strategies and may be subject to other risks, which are described below. The Funds may engage in the practices described
below to the extent consistent with their investment objectives, strategies, polices and restrictions. However, no Fund is required to engage in any
particular transaction or purchase any particular type of securities or investment even if to do so might benefit the Fund. Because the following is a
combined description of investment strategies of all of the Funds, certain matters described herein may not apply to particular Funds.
For a list of investment strategies and policies
employed by each Fund, see INVESTMENT PRACTICES in Part I of this SAI.
Asset-Backed Securities
Asset-backed securities consist
of securities secured by company receivables, home equity loans, truck and auto loans, leases, or credit card receivables. Asset-backed securities also
include other securities backed by other types of receivables or other assets, including collateralized debt obligations (CDOs), which
include collateralized bond obligations (CBOs), collateralized loan obligations (CLOs) and other similarly structured
securities. Such assets are generally securitized through the use of trusts or special purpose corporations. Asset-backed securities are backed by a
pool of assets representing the obligations often of a number of different parties. Certain of these securities may be illiquid.
Asset-backed securities are
generally subject to the risks of the underlying assets. In addition, asset-backed securities, in general, are subject to certain additional risks
including depreciation, damage or loss of the collateral backing the security, failure of the collateral to generate the anticipated cash flow or in
certain cases more rapid prepayment because of events affecting the collateral, such as accelerated prepayment of loans backing these securities or
destruction of equipment subject to equipment trust certificates. In addition, the underlying assets (for example, the underlying credit card debt) may
be refinanced or paid off prior to maturity during periods of declining interest rates. Changes in prepayment rates can result in greater price and
yield volatility. If asset-backed securities are pre-paid, a Fund may have to reinvest the proceeds from the securities at a lower rate. Potential
market gains on a security subject to prepayment risk may be more limited than potential market gains on a comparable security that is not subject to
prepayment risk. Under certain prepayment rate scenarios, a Fund may fail to recover additional amounts paid (i.e., premiums) for securities with
higher interest rates, resulting in an unexpected loss.
A CBO is a trust or other special
purpose entity (SPE) which is typically backed by a diversified pool of fixed income securities (which may include high risk, below
investment grade securities). A CLO is a trust or other SPE that is typically collateralized by a pool of loans, which may include, among others,
domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment
grade or equivalent unrated loans. Although certain CDOs may receive credit enhancement in the form of a senior-subordinate structure,
over-collateralization or bond insurance, such enhancement may not always be present and may fail to protect a Fund against the risk of loss on default
of the collateral. Certain CDOs may use derivatives contracts to create synthetic exposure to assets rather than holding such assets
directly, which entails the risks of derivative instruments described elsewhere in this SAI. CDOs may charge management fees and administrative
expenses, which are in addition to those of a Fund.
For both CBOs and CLOs, the
cashflows from the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the equity
tranche, which bears the first loss from defaults from the bonds or loans in the SPE and serves to protect the other, more senior tranches from default
(though such protection is not complete). Since it is partially protected from defaults, a senior tranche from a CBO or CLO typically has higher
ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO
tranches can
Part II-1
experience substantial losses
due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of
defaults, as well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches of a CDO may be paid in kind (paid in the form
of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.
The risks of an investment in a
CDO depend largely on the type of the collateral securities and the class of the CDO in which a Fund invests. Normally, CBOs, CLOs and other CDOs are
privately offered and sold, and thus are not registered under the securities laws. As a result, investments in CDOs may be characterized by a Fund as
illiquid securities. However, an active dealer market may exist for CDOs, allowing a CDO to qualify for Rule 144A transactions. In addition to the
normal risks associated with fixed income securities and asset-backed securities generally discussed elsewhere in this SAI, CDOs carry additional risks
including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other
payments; (ii) the quality of the collateral may decline in value or default; (iii) a Fund may invest in tranches of CDOs that are subordinate to other
tranches; (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or
unexpected investment results; and (v) the CDOs manager may perform poorly or default.
Total Annual Operating Expenses
set forth in the fee table and Financial Highlights section of each Funds Prospectuses do not include any expenses associated with investments in
certain structured or synthetic products that may rely on the exception for the definition of investment company provided by section
3(c)(1) or 3(c)(7) of the 1940 Act.
Auction Rate Securities
Auction rate securities consist
of auction rate municipal securities and auction rate preferred securities sold through an auction process issued by closed-end investment companies,
municipalities and governmental agencies. For more information on risks associated with municipal securities, see Municipal Securities
below.
Provided that the auction
mechanism is successful, auction rate securities usually permit the holder to sell the securities in an auction at par value at specified intervals.
The dividend is reset by Dutch auction in which bids are made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded at par value, there is the risk that an auction will fail due to
insufficient demand for the securities. Since February 2008, numerous auctions have failed due to insufficient demand for securities and have
continued to fail for an extended period of time. Failed auctions may adversely impact the liquidity of auction rate securities investments. Although
some issuers of auction rate securities are redeeming or are considering redeeming such securities, such issuers are not obligated to do so and,
therefore, there is no guarantee that a liquid market will exist for a Funds investments in auction rate securities at a time when the Fund
wishes to dispose of such securities.
Dividends on auction rate
preferred securities issued by a closed-end fund may be designated as exempt from federal income tax to the extent they are attributable to tax-exempt
interest income earned by the closed-end fund on the securities in its portfolio and distributed to holders of the preferred
securities. However, such designation may be
made only if the closed-end fund treats preferred securities as equity securities for federal income tax purposes and the closed-end fund complies with
certain requirements under the Internal Revenue Code of 1986, as amended (the Code).
A Funds investment in
auction rate preferred securities of closed-end funds is subject to limitations on investments in other U.S. registered investment companies, which
limitations are prescribed under the 1940 Act. Except as permitted by rule or exemptive order (see Investment Company Securities and Exchange
Traded Funds below for more information), a Fund is generally prohibited from acquiring more than 3% of the voting securities of any other such
investment company, and investing more than 5%
Part II-2
of a Funds total assets
in securities of any one such investment company or more than 10% of its total assets in securities of all such investment companies. A Fund will
indirectly bear its proportionate share of any management fees paid by such closed-end funds in addition to the advisory fee payable directly by the
Fund.
Bank Obligations
Bank obligations consist of
bankers acceptances, certificates of deposit, and time deposits.
Bankers acceptances are
negotiable drafts or bills of exchange typically drawn by an importer or exporter to pay for specific merchandise, which are accepted by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. To be eligible for purchase by a
Fund, a bankers acceptance must be guaranteed by a domestic or foreign bank or savings and loan association having, at the time of investment,
total assets in excess of $1 billion (as of the date of its most recently published financial statements).
Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank or a savings and loan association for a definite period of time and earning
a specified return. Certificates of deposit may also include those issued by foreign banks outside the United States (U.S.) with total
assets at the time of purchase in excess of the equivalent of $1 billion. Such certificates of deposit include Eurodollar and Yankee certificates of
deposits. Eurodollar certificates of deposit are U.S. dollar-denominated certificates of deposit issued by branches of foreign and domestic banks
located outside the U.S. Yankee certificates of deposit are certificates of deposit issued by a U.S. branch of a foreign bank denominated in U.S.
dollars and held in the U.S. Certain Funds may also invest in obligations (including bankers acceptances and certificates of deposit) denominated
in foreign currencies (see Foreign Investments (including Foreign Currencies)) herein. To be eligible for purchase by a Fund, a certificate
of deposit must be issued by (i) a domestic or foreign branch of a U.S. commercial bank which is a member of the Federal Reserve System or the deposits
of which are insured by the Federal Deposit Insurance Corporation, or (ii) a domestic savings and loan association, the deposits of which are insured
by the Federal Deposit Insurance Corporation provided that, in each case, at the time of purchase, such institution has total assets in excess of $1
billion (as of the date of their most recently published financial statements).
Time deposits are
interest-bearing non-negotiable deposits at a bank or a savings and loan association that have a specific maturity date. A time deposit earns a
specific rate of interest over a definite period of time. Time deposits cannot be traded on the secondary market and those exceeding seven days and
with a withdrawal penalty are considered to be illiquid. Time deposits will be maintained only at banks and savings and loan associations from
which a Fund could purchase certificates of deposit.
The Funds will not invest in
obligations for which a Funds Adviser, or any of its affiliated persons, is the ultimate obligor or accepting bank, provided, however, that the
Funds maintain demand deposits at their affiliated custodian, JPMorgan Chase Bank.
Commercial Paper
Commercial paper is defined as
short-term obligations with maturities from 1 to 270 days issued by banks or bank holding companies, corporations and finance companies. Although
commercial paper is generally unsecured, the Funds may also purchase secured commercial paper. In the event of a default of an issuer of secured
commercial paper, a Fund may hold the securities and other investments that were pledged as collateral even if it does not invest in such securities or
investments. In such a case, the Fund would take steps to dispose of such securities or investments in a commercially reasonable manner. Commercial
paper includes master demand obligations. See Variable and Floating Rate Instruments below.
Certain Funds may also invest in
Canadian commercial paper, which is commercial paper issued by a Canadian corporation or a Canadian counterpart of a U.S. corporation, and in
Europaper, which is U.S.
Part II-3
dollar denominated commercial
paper of a foreign issuer. See Risk Factors of Foreign Investments below.
Convertible Securities
Certain Funds may invest in
convertible securities. Convertible securities include any debt securities or preferred stock which may be converted into common stock or which carry
the right to purchase common stock. Generally, convertible securities entitle the holder to exchange the securities for a specified number of shares of
common stock, usually of the same company, at specified prices within a certain period of time.
The terms of any convertible
security determine its ranking in a companys capital structure. In the case of subordinated convertible debentures, the holders claims on
assets and earnings are subordinated to the claims of other creditors, and are senior to the claims of preferred and common shareholders. In the case
of convertible preferred stock, the holders claims on assets and earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
Convertible securities have
characteristics similar to both debt and equity securities. Due to the conversion feature, the market value of convertible securities tends to move
together with the market value of the underlying common stock. As a result, selection of convertible securities, to a great extent, is based on the
potential for capital appreciation that may exist in the underlying stock. The value of convertible securities is also affected by prevailing interest
rates, the credit quality of the issuer, and any call provisions. In some cases, the issuer may cause a convertible security to convert to common
stock. In other situations, it may be advantageous for a Fund to cause the conversion of convertible securities to common stock. If a convertible
security converts to common stock, a Fund may hold such common stock in its portfolio even if it does not ordinarily invest in common
stock.
Custodial Receipts
Certain Funds may acquire
securities in the form of custodial receipts that evidence ownership of future interest payments, principal payments or both on certain U.S. Treasury
notes or bonds in connection with programs sponsored by banks and brokerage firms. These are not considered U.S. government securities and are not
backed by the full faith and credit of the U.S. government. These notes and bonds are held in custody by a bank on behalf of the owners of the
receipts.
Debt Instruments
Corporate Debt
Securities. Corporate debt securities may include bonds and other debt securities of U.S. and non-U.S. issuers, including obligations of
industrial, utility, banking and other corporate issuers. All debt securities are subject to the risk of an issuers inability to meet principal
and interest payments on the obligation and may also be subject to price volatility due to such factors as market interest rates, market perception of
the creditworthiness of the issuer and general market liquidity.
High Yield/High Risk
Securities/Junk Bonds.
Certain Funds may invest in high yield securities, to varying degrees. High yield, high risk bonds are securities that are generally
rated below investment grade by the primary rating agencies (BB+ or lower by S&P and Bal or lower by Moodys) or unrated but determined by the
Funds Adviser to be of comparable quality. Other terms used to describe such securities include lower rated bonds, non-investment
grade bonds, below investment grade bonds, and junk bonds. These securities are considered to be high-risk
investments.
High yield securities are
regarded as predominately speculative. There is a greater risk that issuers of lower rated securities will default than issuers of higher rated
securities. Issuers of lower rated securities generally are less creditworthy and may be highly indebted, financially distressed, or bankrupt. These
issuers are more vulnerable to real or perceived economic changes, political changes or adverse industry developments. In addition, high yield
securities are frequently subordinated to the prior payment of senior
Part II-4
indebtedness. If an issuer
fails to pay principal or interest, a Fund would experience a decrease in income and a decline in the market value of its investments. A Fund may also
incur additional expenses in seeking recovery from the issuer.
The income and market value of
lower rated securities may fluctuate more than higher rated securities. Non-investment grade securities are more sensitive to short-term corporate,
economic and market developments. During periods of economic uncertainty and change, the market price of the investments in lower rated securities may
be volatile. The default rate for high yield bonds tends to be cyclical, with defaults rising in periods of economic downturn.
It is often more difficult to
value lower rated securities than higher rated securities. If an issuers financial condition deteriorates, accurate financial and business
information may be limited or unavailable. The lower rated investments may be thinly traded and there may be no established secondary market. Because
of the lack of market pricing and current information for investments in lower rated securities, valuation of such investments is much more dependent
on the judgment of the Adviser than is the case with higher rated securities. In addition, relatively few institutional purchasers may hold a major
portion of an issue of lower-rated securities at times. As a result, a Fund that invests in lower rated securities may be required to sell investments
at substantial losses or retain them indefinitely even where an issuers financial condition is deteriorating.
Credit quality of non-investment
grade securities can change suddenly and unexpectedly, and even recently issued credit ratings may not fully reflect the actual risks posed by a
particular high-yield security.
Future legislation may have a
possible negative impact on the market for high yield, high risk bonds. As an example, in the late 1980s, legislation required federally-insured
savings and loan associations to divest their investments in high yield, high risk bonds. New legislation, if enacted, could have a material negative
effect on a Funds investments in lower rated securities.
Inflation-Linked Debt
Securities. Inflation-linked securities include fixed and floating rate debt securities of varying maturities issued by the U.S.
government, its agencies and instrumentalities, such as Treasury Inflation Protected Securities (TIPS), as well as securities issued by
other entities such as corporations, municipalities, foreign governments and foreign issuers, including foreign issuers from emerging markets. See also
Foreign Investments (including Foreign Currencies). Typically, such securities are structured as fixed income investments whose principal
value is periodically adjusted according to the rate of inflation. The following two structures are common: (i) the U.S. Treasury and some other
issuers issue inflation-linked securities that accrue inflation into the principal value of the security and (ii) other issuers may pay out the
Consumer Price Index (CPI) accruals as part of a semi-annual coupon. Other types of inflation-linked securities exist which use an
inflation index other than the CPI.
Inflation-linked securities
issued by the U.S. Treasury, such as TIPS, have maturities of approximately five, ten, twenty, or thirty years, although it is possible that securities
with other maturities will be issued in the future. Typically, TIPS pay interest on a semi-annual basis equal to a fixed percentage of the
inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and the rate of inflation over the first six months was 1%, the mid-year par value of the bond would be $1,010 and
the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole
years inflation of 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030
times 1.5%).
If the periodic adjustment rate
measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these
securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted
for inflation) is guaranteed in the case of TIPS, even during a period of deflation, although the inflation-adjusted principal received could be less
than the inflation-adjusted principal that had accrued to the bond at the time of purchase. However, the current market value of the bonds is not
guaranteed and will fluctuate. Other inflation-related bonds exist which may or may not provide a similar
Part II-5
guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-linked
securities is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between
nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest
rates might decline, leading to an increase in value of inflation-linked securities.
While inflation-linked securities
are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates
rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected
to the extent that the increase is not reflected in the bonds inflation measure.
The periodic adjustment of U.S.
inflation-linked securities is tied to the Consumer Price Index for All Urban Consumers (CPI-U), which is not seasonably adjusted and which
is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such
as housing, food, transportation and energy. Inflation-linked securities issued by a foreign government are generally adjusted to reflect a comparable
inflation index calculated by that government. There can be no assurance that the CPI-U or a foreign inflation index will accurately measure the real
rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be
correlated to the rate of inflation in the U.S.
Any increase in the principal
amount of an inflation-linked security will be considered taxable ordinary income, even though investors do not receive their principal until
maturity.
Variable and Floating Rate
Instruments. Certain obligations purchased by the Funds may carry variable or floating rates of interest, may involve a conditional or
unconditional demand feature and may include variable amount master demand notes. Variable and floating rate instruments are issued by a wide variety
of issuers and may be issued for a wide variety of purposes, including as a method of reconstructing cash flows.
Subject to their investment
objective policies and restrictions, certain Funds may acquire variable and floating rate instruments. A variable rate instrument is one whose terms
provide for the adjustment of its interest rate on set dates and which, upon such adjustment, can reasonably be expected to have a market value that
approximates its par value. Certain Funds may purchase extendable commercial notes. Extendable commercial notes are variable rate notes which normally
mature within a short period of time (e.g., 1 month) but which may be extended by the issuer for a maximum maturity of thirteen
months.
A floating rate instrument is one
whose terms provide for the adjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be
expected to have a market value that approximates its par value. Floating rate instruments are frequently not rated by credit rating agencies; however,
unrated variable and floating rate instruments purchased by a Fund will be determined by the Funds Adviser to be of comparable quality at the
time of purchase to rated instruments eligible for purchase under the Funds investment policies. In making such determinations, a Funds
Adviser will consider the earning power, cash flow and other liquidity ratios of the issuers of such instruments (such issuers include financial,
merchandising, bank holding and other companies) and will continuously monitor their financial condition. There may be no active secondary market with
respect to a particular variable or floating rate instrument purchased by a Fund. The absence of such an active secondary market could make it
difficult for the Fund to dispose of the variable or floating rate instrument involved in the event the issuer of the instrument defaulted on its
payment obligations, and the Fund could, for this or other reasons, suffer a loss to the extent of the default. Variable or floating rate instruments
may be secured by bank letters of credit or other assets. A Fund may purchase a variable or floating rate instrument to facilitate portfolio liquidity
or to permit investment of the Funds assets at a favorable rate of return.
Part II-6
As a result of the floating and
variable rate nature of these investments, the Funds yields may decline, and they may forego the opportunity for capital appreciation during
periods when interest rates decline; however, during periods when interest rates increase, the Funds yields may increase, and they may have
reduced risk of capital depreciation.
Past periods of high inflation,
together with the fiscal measures adopted to attempt to deal with it, have seen wide fluctuations in interest rates, particularly prime
rates charged by banks. While the value of the underlying floating or variable rate securities may change with changes in interest rates
generally, the nature of the underlying floating or variable rate should minimize changes in value of the instruments. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation and the risk of potential capital depreciation is less than would be the case with a
portfolio of fixed rate securities. A Funds portfolio may contain floating or variable rate securities on which stated minimum or maximum rates,
or maximum rates set by state law limit the degree to which interest on such floating or variable rate securities may fluctuate; to the extent it does,
increases or decreases in value may be somewhat greater than would be the case without such limits. Because the adjustment of interest rates on the
floating or variable rate securities is made in relation to movements of the applicable banks prime rates or other short-term rate
securities adjustment indices, the floating or variable rate securities are not comparable to long-term fixed rate securities. Accordingly, interest
rates on the floating or variable rate securities may be higher or lower than current market rates for fixed rate obligations of comparable quality
with similar maturities.
Variable Amount Master Demand
Notes. Variable amount master demand notes are demand notes that permit the indebtedness to vary and provide for periodic adjustments in
the interest rate according to the terms of the instrument. Because master demand notes are direct lending arrangements between a Fund and the issuer,
they are not normally traded. Although there is no secondary market in the notes, a Fund may demand payment of principal and accrued interest. While
the notes are not typically rated by credit rating agencies, issuers of variable amount master demand notes (which are normally manufacturing, retail,
financial, brokerage, investment banking and other business concerns) must satisfy the same criteria as those set forth with respect to commercial
paper, if any, in Part I of this SAI under the heading Diversification and Quality Descriptions. A Funds Adviser will consider the
earning power, cash flow, and other liquidity ratios of the issuers of such notes and will continuously monitor their financial status and ability to
meet payment on demand. In determining average weighted portfolio maturity, a variable amount master demand note will be deemed to have a maturity
equal to the period of time remaining until the principal amount can be recovered from the issuer through demand.
Variable Rate Instruments and
Money Market Funds. Variable or floating rate instruments with stated maturities of more than 397 days may, under the SECs amortized cost
rule applicable to money market funds, Rule 2a-7 under the 1940 Act, be deemed to have shorter maturities as follows:
(1) Adjustable Rate Government Securities. A Government Security which is a variable rate security where the variable
rate of interest is readjusted no less frequently than every 762 days shall be deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate. A Government Security which is a floating rate security shall be deemed to have a remaining maturity of one
day.
(2) Short-Term Variable Rate Securities. A variable rate security, the principal amount of which, in accordance with
the terms of the security, must unconditionally be paid in 397 calendar days or less shall be deemed to have maturity equal to the earlier of the
period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through
demand.
(3) Long-Term Variable Rate Securities. A variable rate security, the principal amount of which is scheduled to be paid
in more than 397 days, that is subject to a demand feature shall be deemed to have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand.
Part II-7
(4) Short-Term Floating Rate Securities. A floating rate security, the principal amount of which, in accordance with
the terms of the security, must unconditionally be paid in 397 calendar days or less shall be deemed to have a maturity of one day.
(5) Long-Term Floating Rate Securities. A floating rate security, the principal amount of which is scheduled to be paid
in more than 397 days, that is subject to a demand feature, shall be deemed to have a maturity equal to the period remaining until the principal amount
can be recovered through demand.
As used above, a note is
subject to a demand feature where the Fund is entitled to receive the principal amount of the note either at any time on no more than 30
days notice or at specified intervals not exceeding 397 calendar days and upon no more than 30 days notice.
Limitations on the Use of
Variable and Floating Rate Notes. Variable and floating rate instruments for which no readily available market exists (e.g., illiquid
securities) will be purchased in an amount which, together with securities with legal or contractual restrictions on resale or for which no readily
available market exists (including repurchase agreements providing for settlement more than seven days after notice), exceeds 15% of a Funds net
assets (10% for the JPMorgan Funds which are money market funds (the Money Market Funds)) only if such instruments are subject to a demand
feature that will permit the Fund to demand payment of the principal within seven days after demand by the Fund. There is no limit on the extent to
which a Fund may purchase demand instruments that are not illiquid or deemed to be liquid in accordance with the Advisers liquidity determination
procedures. If not rated, such instruments must be found by the Funds Adviser to be of comparable quality to instruments in which a Fund may
invest. A rating may be relied upon only if it is provided by a nationally recognized statistical rating organization that is not affiliated with the
issuer or guarantor of the instruments.
Zero-Coupon, Pay-in-Kind and
Deferred Payment Securities. Zero-coupon securities are securities that are sold at a discount to par value and on which interest
payments are not made during the life of the security. Upon maturity, the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional securities. Upon maturity, the holder is entitled to receive the
aggregate par value of the securities. A Fund accrues income with respect to zero-coupon and pay-in-kind securities prior to the receipt of cash
payments. Deferred payment securities are securities that remain zero-coupon securities until a predetermined date, at which time the stated coupon
rate becomes effective and interest becomes payable at regular intervals. While interest payments are not made on such securities, holders of such
securities are deemed to have received phantom income. Because a Fund will distribute phantom income to shareholders, to the
extent that shareholders elect to receive dividends in cash rather than reinvesting such dividends in additional shares, the applicable Fund will have
fewer assets with which to purchase income-producing securities. Zero-coupon, pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market conditions than comparably rated securities paying cash interest at regular
interest payment periods.
Demand Features
Certain Funds may acquire
securities that are subject to puts and standby commitments (Demand Features) to purchase the securities at their principal amount (usually
with accrued interest) within a fixed period (usually seven days) following a demand by the Fund. The Demand Feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party and may not be transferred separately from the underlying security. The
underlying securities subject to a put may be sold at any time at market rates. Applicable Funds expect that they will acquire puts only where the puts
are available without the payment of any direct or indirect consideration. However, if advisable or necessary, a premium may be paid for put features.
A premium paid will have the effect of reducing the yield otherwise payable on the underlying security. Demand Features provided by foreign banks
involve certain risks associated with foreign investments. See Foreign Investments (including Foreign Currencies) for more information on
these risks.
Part II-8
Under a stand-by
commitment, a dealer would agree to purchase, at a Funds option, specified securities at a specified price. A Fund will acquire these
commitments solely to facilitate portfolio liquidity and does not intend to exercise its rights thereunder for trading purposes. Stand-by commitments
may also be referred to as put options.
The purpose of engaging in
transactions involving puts is to maintain flexibility and liquidity to permit a Fund to meet redemption requests and remain as fully invested as
possible.
Equity Securities, Warrants and
Rights
Common
Stock. Common stock represents a share of ownership in a company and usually carries voting rights and may earn dividends. Unlike
preferred stock, common stock dividends are not fixed but are declared at the discretion of the issuers board of directors. Common stock occupies
the most junior position in a companys capital structure. As with all equity securities, the price of common stock fluctuates based on changes in
a companys financial condition and overall market and economic conditions.
Common Stock Warrants and
Rights. Common stock warrants entitle the holder to buy common stock from the issuer of the warrant at a specific price (the
strike price) for a specific period of time. The market price of warrants may be substantially lower than the current market price of the
underlying common stock, yet warrants are subject to similar price fluctuations. As a result, warrants may be more volatile investments than the
underlying common stock. If a warrant is exercised, a Fund may hold common stock in its portfolio even if it does not ordinarily invest in common
stock.
Rights are similar to warrants
but normally have a shorter duration and are typically distributed directly by the issuers to existing shareholders, while warrants are typically
attached to new debt or preferred stock issuances.
Warrants and rights generally do
not entitle the holder to dividends or voting rights with respect to the underlying common stock and do not represent any rights in the assets of the
issuer company. Warrants and rights will expire if not exercised on or prior to the expiration date.
Preferred
Stock. Preferred stock is a class of stock that generally pays dividends at a specified rate and has preference over common stock in the
payment of dividends and liquidation. Preferred stock generally does not carry voting rights. As with all equity securities, the price of preferred
stock fluctuates based on changes in a companys financial condition and on overall market and economic conditions.
Initial Public Offerings
(IPOs). The Funds may purchase securities in initial public offerings. These securities are subject to many of the same
risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the
companies may be available for very limited periods. The prices of securities sold in IPOs may be highly volatile. At any particular time or from time
to time, a Fund may not be able to invest in securities issued in IPOs, or invest to the extent desired, because, for example, only a small portion (if
any) of the securities being offered in an IPO may be made available to the Fund. In addition, under certain market conditions, a relatively small
number of companies may issue securities in IPOs. Similarly, as the number of Funds to which IPO securities are allocated increases, the number of
securities issued to any one Fund may decrease. The investment performance of a Fund during periods when it is unable to invest significantly or at all
in IPOs may be lower than during periods when the Fund is able to do so. In addition, as a Fund increases in size, the impact of IPOs on the
Funds performance will generally decrease.
Foreign Investments (including Foreign
Currencies)
Some of the Funds may invest in
certain obligations or securities of foreign issuers. For purposes of a non-Money Market Funds investment policies and unless described otherwise
in a Funds prospectus, an issuer of a security will be deemed to be located in a particular country if: (i) the principal trading market for the
security is in such country, (ii) the issuer is organized under the laws of such country or (iii)
Part II-9
the issuer derives at least
50% of its revenues or profits from such country or has at least 50% of its total assets situated in such country. Possible investments include equity
securities and debt securities (e.g., bonds and commercial paper) of foreign entities, obligations of foreign branches of U.S. banks and of foreign
banks, including, without limitation, Eurodollar Certificates of Deposit, Eurodollar Time Deposits, Eurodollar Bankers Acceptances, Canadian Time
Deposits and Yankee Certificates of Deposit, and investments in Canadian Commercial Paper, and Europaper. Securities of foreign issuers may include
sponsored and unsponsored American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary
Receipts (GDRs). Sponsored ADRs are listed on the New York Stock Exchange; unsponsored ADRs are not. Therefore, there may be less
information available about the issuers of unsponsored ADRs than the issuers of sponsored ADRs. Unsponsored ADRs are restricted securities. EDRs and
GDRs are not listed on the New York Stock Exchange. As a result, it may be difficult to obtain information about EDRs and GDRs.
The Money Market Funds may only
invest in U.S. dollar-denominated securities.
Risk Factors of Foreign
Investments. The following is a summary of certain risks associated with foreign investments:
Political and Exchange
Risks. Foreign investments may subject a Fund to investment risks that differ in some respects from those related to investments in
obligations of U.S. domestic issuers. Such risks include potential future adverse political and economic developments, possible imposition of
withholding taxes on interest or other income, possible seizure, nationalization or expropriation of foreign deposits, possible establishment of
exchange controls or taxation at the source, greater fluctuations in value due to changes in exchange rates, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal and interest on such obligations.
Higher Transaction
Costs. Foreign investments may entail higher custodial fees and sales commissions than domestic investments.
Accounting and Regulatory
Differences. Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices
different from those of domestic issuers of similar securities or obligations. In addition, foreign issuers are usually not subject to the same degree
of regulation as domestic issuers, and their securities may trade on relatively small markets, causing their securities to experience potentially
higher volatility and more limited liquidity than securities of domestic issuers. Foreign branches of U.S. banks and foreign banks are not regulated by
U.S. banking authorities and may be subject to less stringent reserve requirements than those applicable to domestic branches of U.S. banks. In
addition, foreign banks generally are not bound by accounting, auditing, and financial reporting standards comparable to those applicable to U.S.
banks. Dividends and interest paid by foreign issuers may be subject to withholding and other foreign taxes which may decrease the net return on
foreign investments as compared to dividends and interest paid to a Fund by domestic companies.
Currency
Risk. Foreign securities may be denominated in foreign currencies, although foreign issuers may also issue securities denominated in
U.S. dollars. The value of a Funds investments denominated in foreign currencies and any funds held in foreign currencies will be affected by
changes in currency exchange rates, the relative strength of those currencies and the U.S. dollar, and exchange-control regulations.
Changes in the foreign currency
exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, to be distributed to shareholders by a Fund. The exchange rates between the U.S. dollar and other currencies are determined
by the forces of supply and demand in foreign exchange markets. Accordingly, the ability of a Fund that invests in foreign securities as part of its
principal investment strategy to achieve its investment objective may depend, to a certain extent, on exchange rate movements.
In addition, while the volume of
transactions effected on foreign stock exchanges has increased in recent years, in most cases it remains appreciably below that of domestic securities
exchanges.
Part II-10
Accordingly, a Funds
foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities of U.S. companies. Moreover, the
settlement periods for foreign securities, which are often longer than those for securities of U.S. issuers, may affect Fund liquidity. In buying and
selling securities on foreign exchanges, purchasers normally pay fixed commissions that are generally higher than the negotiated commissions charged in
the U.S. In addition, there is generally less government supervision and regulation of securities exchanges, brokers and issuers located in foreign
countries than in the U.S.
Brady
Bonds. Brady bonds are securities created through the exchange of existing commercial bank loans to public and private entities in
certain emerging markets for new bonds in connection with debt restructurings. Brady bonds have been issued since 1989. In light of the history of
defaults of countries issuing Brady bonds on their commercial bank loans, investments in Brady bonds may be viewed as speculative and subject to the
same risks as emerging market securities. Brady bonds may be fully or partially collateralized or uncollateralized, are issued in various currencies
(but primarily the U.S. dollar) and are actively traded in OTC secondary markets. Incomplete collateralization of interest or principal payment
obligations results in increased credit risk. Dollar-denominated collateralized Brady bonds, which may be either fixed-rate or floating rate bonds, are
generally collateralized by U.S. Treasury securities.
Obligations of Supranational
Entities. Obligations of supranational entities include securities designated or supported by governmental entities to promote economic
reconstruction or development and of international banking institutions and related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel Community, the Asian Development Bank and the Inter-American
Development Bank. Each supranational entitys lending activities are limited to a percentage of its total capital (including callable
capital contributed by its governmental members at the entitys call), reserves and net income. There is no assurance that participating
governments will be able or willing to honor their commitments to make capital contributions to a supranational entity.
Emerging Market
Securities. Investing in companies domiciled in emerging market countries may be subject to potentially higher risks than investments in
developed countries. These risks include: (i) less social, political, and economic stability; (ii) greater illiquidity and price volatility due to
smaller or limited local capital markets for such securities, or low non-existent trading volumes; (iii) foreign exchanges and broker-dealers may be
subject to less scrutiny and regulation by local authorities; (iv) local governments may decide to seize or confiscate securities held by foreign
investors and local governments may decide to suspend or limit an issuers ability to make dividend or interest payments; (v) local governments
may limit or entirely restrict repatriation of invested capital, profits, and dividends; (vi) capital gains may be subject to local taxation, including
on a retroactive basis; (vii) issuers facing restrictions on dollar or euro payments imposed by local governments may attempt to make dividend or
interest payments to foreign investors in the local currency; (viii) investors may experience difficulty in enforcing legal claims related to the
securities and/or local judges may favor the interests of the issuer over those of foreign investors; (ix) bankruptcy judgments may only be permitted
to be paid in the local currency; (x) limited public information regarding the issuer may result in greater difficulty in determining market valuations
of the securities, and (xi) lax financial reporting on a regular basis, substandard disclosure and differences in accounting standards may make it
difficult to ascertain the financial health of an issuer.
Emerging country securities
markets are typically marked by a high concentration of market capitalization and trading volume in a small number of issuers representing a limited
number of industries, as well as a high concentration of ownership of such securities by a limited number of investors. Although some emerging markets
have become more established and tend to issue securities of higher credit quality, the markets for securities in other emerging countries are in the
earliest stages of their development, and these countries issue securities across the credit spectrum. Even the markets for relatively widely traded
securities in emerging countries may not be able to absorb, without price disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of developed countries. The limited size of many of these securities
markets can cause prices to be erratic for reasons apart from factors that affect the soundness and competitiveness of the securities
issuers.
Part II-11
For example, prices may be
unduly influenced by traders who control large positions in these markets. Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and reduced liquidity of such markets. The limited liquidity of emerging
country securities may also affect the Funds ability to accurately value its portfolio securities or to acquire or dispose of securities at the
price and time it wishes to do so or in order to meet redemption requests.
Many emerging market countries
suffer from uncertainty and corruption in their legal frameworks. Legislation may be difficult to interpret and laws may be too new to provide any
precedential value. Laws regarding foreign investment and private property may be weak or non-existent. Sudden changes in governments may result in
policies which are less favorable to investors, such as policies designed to expropriate or nationalize sovereign assets. Certain emerging
market countries in the past have expropriated large amounts of private property, in many cases with little or no compensation, and there can be no
assurance that such expropriation will not occur in the future.
Foreign investment in the
securities markets of certain emerging countries is restricted or controlled to varying degrees. These restrictions may limit the Funds
investment in certain emerging countries and may increase the expenses of the Fund. Certain emerging countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only a specified percentage of an issuers outstanding securities or to a
specific class of securities, which may have less advantageous terms (including price) than securities of the company available for purchase by
nationals.
Many developing countries lack
the social, political, and economic stability characteristic of the U.S. Political instability among emerging market countries can be common and may be
caused by an uneven distribution of wealth, social unrest, labor strikes, civil wars, and religious oppression. Economic instability in emerging market
countries may take the form of: (i) high interest rates; (ii) high levels of inflation, including hyperinflation; (iii) high levels of unemployment or
underemployment; (iv) changes in government economic and tax policies, including confiscatory taxation; and (v) imposition of trade
barriers.
Currencies of emerging market
countries are subject to significantly greater risks than currencies of developed countries. Many emerging market countries have experienced steady
declines or even sudden devaluations of their currencies relative to the U.S. dollar. Some emerging market currencies may not be internationally traded
or may be subject to strict controls by local governments, resulting in undervalued or overvalued currencies. Some emerging market countries have
experienced balance of payment deficits and shortages in foreign exchange reserves. Governments have responded by restricting currency conversions.
Future restrictive exchange controls could prevent or restrict a companys ability to make dividend or interest payments in the original currency
of the obligation (usually U.S. dollars). In addition, even though the currencies of some emerging market countries may be convertible into U.S.
dollars, the conversion rates may be artificial to their actual market values.
A Funds income and, in some
cases, capital gains from foreign stocks and securities will be subject to applicable taxation in certain of the countries in which it invests, and
treaties between the U.S. and such countries may not be available in some cases to reduce the otherwise applicable tax rates.
Foreign markets also have
different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when a
portion of the assets of the Fund remain uninvested and no return is earned on such assets. The inability of the Fund to make intended security
purchases or sales due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio
securities, could result in the Fund deeming those securities to be illiquid, or, if the Fund has entered into a contract to sell the securities, could
result in possible liability to the purchaser.
In the past, governments within
the emerging markets have become overly reliant on the international capital markets and other forms of foreign credit to finance large public spending
programs which cause huge budget deficits. Often, interest payments have become too overwhelming for the
Part II-12
government to meet,
representing a large percentage of total GDP. These foreign obligations have become the subject of political debate and served as fuel for political
parties of the opposition, which pressure the government not to make payments to foreign creditors, but instead to use these funds for social programs.
Either due to an inability to pay or submission to political pressure, foreign governments have been forced to seek a restructuring of their loan
and/or bond obligations, have declared a temporary suspension of interest payments or have defaulted. These events have adversely affected the values
of securities issued by foreign governments and corporations domiciled in emerging market countries and have negatively affected not only their cost of
borrowing, but their ability to borrow in the future as well.
Sovereign
Obligations. Sovereign debt includes investments in securities issued or guaranteed by a foreign sovereign government or its agencies,
authorities or political subdivisions. An investment in sovereign debt obligations involves special risks not present in corporate debt obligations.
The issuer of the sovereign debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal
or interest when due, and a Fund may have limited recourse in the event of a default. During periods of economic uncertainty, the market prices of
sovereign debt, and the Funds NAV, may be more volatile than prices of U.S. debt obligations. In the past, certain emerging markets have
encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared moratoria on the payment of
principal and interest on their sovereign debts.
A sovereign debtors
willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative size of the debt service burden, the sovereign
debtors policy toward principal international lenders and local political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of economic performance or repay principal or interest when due may
result in the cancellation of third-party commitments to lend funds to the sovereign debtor, which may further impair such debtors ability or
willingness to service its debts.
Foreign Currency
Transactions. Certain Funds may engage in various strategies to hedge against currency risks. These strategies may consist of use of any
of the following, some of which also have been described elsewhere in this SAI: options on currencies, currency futures, options on such futures,
forward foreign currency transactions, forward rate agreements and currency swaps, caps and floors. Certain Funds may engage in such transactions in
both U.S. and non-U.S. markets. To the extent a Fund enters into such transactions in markets other than in the U.S., the Fund may be subject to
certain currency, settlement, liquidity, trading and other risks similar to those described above with respect to the Funds investments in
foreign securities. In addition, certain Funds may engage in such transactions as a substitute for securities in which the Fund invests, to increase
exposure to a foreign currency, to shift exposure from one foreign currency to another, for risk management purposes or to increase income or gain to
the Fund.
While a Funds use of
hedging strategies is intended to reduce the volatility of the net asset value of Fund shares, the net asset value of the Fund will fluctuate. There
can be no assurance that a Funds hedging transactions will be effective. Furthermore, a Fund may only engage in hedging activities from time to
time and may not necessarily be engaging in hedging activities when movements in currency exchange rates occur.
Certain Funds are authorized to
deal in forward foreign exchange between currencies of the different countries in which the Fund will invest and multi-national currency units as a
hedge against possible variations in the foreign exchange rate between these currencies. This is accomplished through contractual agreements entered
into in the interbank market to purchase or sell one specified currency for another currency at a specified future date (up to one year) and price at
the time of the contract. A Funds dealings in forward foreign exchange will be limited to hedging involving either specific transactions or
portfolio positions.
Transaction
Hedging. When a Fund engages in transaction hedging, it enters into foreign currency transactions with respect to specific receivables
or payables of the Fund generally arising in
Part II-13
connection with the purchase
or sale of their portfolio securities. A Fund will engage in transaction hedging when it desires to lock in the U.S. dollar price of a
security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction
hedging, a Fund will attempt to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and
the applicable foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such payments are made or received.
A Fund may purchase or sell a
foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities
denominated in that foreign currency. Certain Funds reserve the right to purchase and sell foreign currency futures contracts traded in the U.S. and
subject to regulation by the Commodity Futures Trading Commission (CFTC).
For transaction hedging purposes,
a Fund may also purchase U.S. exchange-listed call and put options on foreign currency futures contracts and on foreign currencies. A put option on a
futures contract gives a Fund the right to assume a short position in the foreign currency futures contract until expiration of the option. A put
option on currency gives a Fund the right to sell a currency at an exercise price until the expiration of the option. A call option on a futures
contract gives a Fund the right to assume a long position in the futures contract until the expiration of the option. A call option on currency gives a
Fund the right to purchase a currency at the exercise price until the expiration of the option.
Position
Hedging. When engaging in position hedging, a Fund will enter into foreign currency exchange transactions to protect against a decline
in the values of the foreign currencies in which their portfolio securities are denominated or an increase in the value of currency for securities
which a Funds Adviser expects to purchase. In connection with the position hedging, the Fund may purchase or sell foreign currency forward
contracts or foreign currency on a spot basis. A Fund may purchase U.S. exchange-listed put or call options on foreign currency and foreign currency
futures contracts and buy or sell foreign currency futures contracts traded in the U.S. and subject to regulation by the CFTC.
The precise matching of the
amounts of foreign currency exchange transactions and the value of the portfolio securities involved will not generally be possible because the future
value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the dates the
currency exchange transactions are entered into and the dates they mature.
Forward Foreign Currency
Exchange Contracts. For hedging purposes or to increase income or gain, a Fund may purchase forward foreign currency exchange contracts,
sometimes referred to as currency forwards (Forward Contracts), which involve 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 as agreed by the parties in an amount and at a price set
at the time of the contract. In the case of a cancelable Forward Contract, the holder has the unilateral right to cancel the contract at maturity by
paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks)
and their customers, so no intermediary is required. A Forward Contract generally has no deposit requirement, and no commissions are charged at any
stage for trades.
At the maturity of a Forward
Contract, a Fund may either accept or make delivery of the currency specified in the contract or, at or prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are usually effected with
the currency trader who is a party to the original forward contract.
Foreign Currency Futures
Contracts. Certain Funds may purchase foreign currency futures contracts. Foreign currency futures contracts traded in the U.S. are
designed by and traded on exchanges regulated by the CFTC, such as the New York Mercantile Exchange. A Fund may enter into foreign currency futures
contracts for hedging purposes and other risk management purposes as defined in CFTC regulations. Certain Funds may also enter into foreign currency
futures transactions to increase exposure to a foreign currency, to shift exposure from one foreign currency to another or to increase income or gain
to the Fund.
Part II-14
At the maturity of a futures
contract, the Fund may either accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to futures contracts are effected on a
commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts.
Positions in the foreign currency
futures contracts may be closed out only on an exchange or board of trade which provides a secondary market in such contracts. There is no assurance
that a secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be
possible to close a futures position; in the event of adverse price movements, the Fund would continue to be required to make daily cash payments of
variation margin.
For more information on futures
contacts, see Futures Contracts under the heading Options and Futures Transactions below.
Foreign Currency
Options. Certain Funds may purchase U.S. exchange-listed call and put options on foreign currencies. Such options on foreign currencies
operate similarly to options on securities. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates
and investments generally.
A Fund is authorized to purchase
or sell listed foreign currency options and currency swap contracts as a short or long hedge against possible variations in foreign exchange rates.
Such transactions may be effected with respect to hedges on non-U.S. dollar denominated securities (including securities denominated in the Euro) owned
by the Fund, sold by the Fund but not yet delivered, committed or anticipated to be purchased by the Fund, or in transaction or cross-hedging
strategies. As an illustration, a Fund may use such techniques to hedge the stated value in U.S. dollars of an investment in a Japanese yen-dominated
security. In such circumstances, the Fund may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss in the value of the dollar relative to the yen will tend to be offset
by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Fund also may sell a call
option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a
straddle). By selling the call option in this illustration, the Fund gives up the opportunity to profit without limit from increases in the
relative value of the yen to the dollar.
Certain differences exist between
these foreign currency hedging instruments. Foreign currency options provide the holder thereof the right to buy or to sell a currency at a fixed price
on a future date. Listed options are third-party contracts (i.e., performance of the parties obligations is guaranteed by an exchange or clearing
corporation) which are issued by a clearing corporation, traded on an exchange and have standardized strike prices and expiration dates. OTC options
are two-party contracts and have negotiated strike prices and expiration dates. Options on futures contracts are traded on boards of trade or futures
exchanges. Currency swap contracts are negotiated two-party agreements entered into in the interbank market whereby the parties exchange two foreign
currencies at the inception of the contract and agree to reverse the exchange at a specified future time and at a specified exchange
rate.
The value of a foreign currency
option is dependent upon the value of the foreign currency and the U.S. dollar and may have no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved
in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of
less than $1 million) for the underlying foreign currencies at prices that are less favorable than those for round lots.
There is no systematic reporting
of last sale information for foreign currencies and there is no regulatory requirement that quotations available through dealer or other market sources
be firm or revised on a timely basis. Available quotation information is generally representative of very large transactions in
Part II-15
the interbank market and thus
may not reflect relatively smaller transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is
a global, around-the-clock market. To the extent that the U.S. options markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying markets that cannot be reflected in the options market.
Foreign Currency
Conversion. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based on the
difference (the spread) between prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign
currency to a Fund at one rate while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer.
Non-Deliverable
Forwards. Some of the Funds may also invest in non-deliverable forwards (NDFs). NDFs are cash-settled, short-term forward
contracts on foreign currencies that are thinly-traded, illiquid or otherwise non-convertible (each a Reference Currency). NDFs involve an
obligation to pay an amount (the Settlement Amount) equal to the difference between the prevailing market exchange rate for the Reference
Currency and the agreed upon exchange rate (the NDF Rate), with respect to an agreed notional amount. NDFs have a fixing date and a
settlement (delivery) date. The fixing date is the date and time at which the difference between the prevailing market exchange rate and the agreed
upon exchange rate is calculated. The settlement (delivery) date is the date by which the payment of the Settlement Amount is due to the party
receiving payment.
Although NDFs are similar to
forward foreign currency exchange contracts, NDFs do not require physical delivery of the Reference Currency on the settlement date. Rather, on the
settlement date, the only transfer between the counterparties is the monetary settlement amount representing the difference between the NDF Rate and
the prevailing market exchange rate. NDFs typically may have terms from one month up to two years and are settled in U.S. dollars.
NDFs are subject to many of the
risks associated with derivatives in general and forward currency transactions including risks associated with fluctuations in foreign currency and the
risk that the counterparty will fail to fulfill its obligations. The Funds will segregate or earmark liquid assets in an amount equal to the marked to
market, on a daily basis, of the NDF.
The Funds will typically use NDFs
for hedging purposes, but may from time to time, use such instruments to increase income or gain. The use of NDFs for hedging or to increase income or
gain may not be successful, resulting in losses to the Fund, and the cost of such strategies may reduce the Funds respective
returns.
Other Foreign Currency Hedging
Strategies. New options and futures contracts and other financial products, and various combinations thereof, continue to be developed,
and certain Funds may invest in any such options, contracts and products as may be developed to the extent consistent with the Funds investment
objective, and the regulatory requirements applicable to investment companies, and subject to the supervision of the Trusts Board of
Trustees.
Risk Factors in Hedging
Transactions. The following is a summary of certain risks associated with foreign currency hedging transactions:
Imperfect
Correlation. Foreign currency hedging transactions present certain risks. In particular, the variable degree of correlation between
price movements of the instruments used in hedging strategies and price movements in the security being hedged creates the possibility that losses on
the hedging transaction may be greater than gains in the value of a Funds securities.
Liquidity. Hedging instruments may not be liquid in all circumstances. As a result, in volatile markets, the Funds may not
be able to dispose of or offset a transaction without incurring losses. Although the contemplated use of hedging instruments should tend to reduce the
risk of loss due to a decline in the
Part II-16
value of the hedged security,
at the same time the use of these instruments could tend to limit any potential gain which might result from an increase in the value of such
security.
Leverage and Volatility
Risk. Derivative instruments, including foreign currency derivatives, may sometimes increase or leverage a Funds exposure to a
particular market risk. Leverage enhances the price volatility of derivative instruments held by a Fund.
Judgment of the
Adviser. Successful use of hedging instruments by a Fund depends upon the ability of the applicable Adviser to predict correctly
movements in the direction of interest and currency rates and other factors affecting markets for securities. If the expectations of the applicable
Adviser are not met, a Fund would be in a worse position than if a hedging strategy had not been pursued. For example, if a Fund has hedged against the
possibility of an increase in interest rates which would adversely affect the price of securities in its portfolio and the price of such securities
increases instead, the Fund will lose part or all of the benefit of the increased value of its securities because it will have offsetting losses in its
hedging positions. In addition, when hedging with instruments that require variation margin payments, if the Fund has insufficient cash to meet daily
variation margin requirements, it may have to sell securities to meet such requirements.
Other
Risks. Such sales of securities may, but will not necessarily, be at increased prices which reflect the rising market. Thus, a Fund may
have to sell securities at a time when it is disadvantageous to do so.
It is impossible to forecast with
precision the market value of portfolio securities at the expiration or maturity of a forward contract or futures contract. Accordingly, a Fund may
have to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security or
securities being hedged is less than the amount of foreign currency a Fund is obligated to deliver and if a decision is made to sell the security or
securities and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received
upon the sale of the portfolio security or securities if the market value of such security or securities exceeds the amount of foreign currency the
Fund is obligated to deliver.
Transaction and position hedging
do not eliminate fluctuations in the underlying prices of the securities which a Fund owns or expects to purchase or sell. Rather, an Adviser will
employ these techniques in an effort to maintain an investment portfolio that is relatively neutral to fluctuations in the value of the U.S. dollar
relative to major foreign currencies and establish a rate of exchange which one can achieve at some future point in time. Additionally, although these
techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which
might result from the increase in the value of such currency. Moreover, it may not be possible for a Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency at a price above the anticipated devaluation level.
Inverse Floaters and Interest Rate
Caps
Inverse floaters are instruments
whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. The market value of an inverse
floater will vary inversely with changes in market interest rates and will be more volatile in response to interest rate changes than that of a fixed
rate obligation. Interest rate caps are financial instruments under which payments occur if an interest rate index exceeds a certain predetermined
interest rate level, known as the cap rate, which is tied to a specific index. These financial products will be more volatile in price than securities
which do not include such a structure.
Investment Company Securities and Exchange Traded
Funds
Investment Company
Securities. A Fund may acquire the securities of other investment companies to the extent permitted under the 1940 Act and consistent
with its investment objective and strategies. As a shareholder of another investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment companys expenses, including advisory fees.
Part II-17
These expenses would be in
addition to the advisory and other expenses that a Fund bears directly in connection with its own operations. Except as described below, the 1940
Acts limits currently require that, as determined immediately after a purchase is made, (i) not more than 5% of the value of a funds total
assets will be invested in the securities of any one investment company, (ii) not more than 10% of the value of its total assets will be invested in
the aggregate in securities of investment companies as a group and (iii) not more than 3% of the outstanding voting stock of any one investment company
will be owned by a fund.
The 1940 Acts limits
summarized above do not apply to any JPMorgan Fund which is a fund of funds (Fund of Funds) such as the JPMorgan Investor Funds (the
Investor Funds) or the JPMorgan SmartRetirement Funds or to other Funds to the extent permitted by an order or rule issued by the SEC or as
permitted by the 1940 Act. Effective July 31, 2006, under Rule 12d1-1 under the 1940 Act, any of the Funds may invest in affiliated and unaffiliated
money market funds without limit subject to the acquiring Funds investment policies and restrictions and the conditions of the
rule.
Pursuant to Rule 12d1-2 under the
1940 Act, effective as of July 31, 2006, funds of funds that previously were permitted only to invest in affiliated funds, government securities and
short-term paper are now permitted under certain circumstances to invest in: (1) unaffiliated investment companies (subject to certain limits), (2)
other types of securities (such as stocks, bonds and other securities) not issued by an investment company that are consistent with the funds
investment policies and (3) affiliated or unaffiliated money market funds as part of cash sweep arrangements. One consequence of these new
rules is that any fund, whether or not previously designated as a fund of funds, may invest without limit in affiliated funds if the acquisition is
consistent with the investment policies of the fund and the restrictions of the rules. A Fund investing in affiliated funds under these new rules could
not invest in a Fund that did not have a policy prohibiting it from investing in shares of other funds in reliance on Section 12(d)(1)(F) and (G) of
the 1940 Act.
Exchange Traded Funds
(ETFs). ETFs are ownership interests in unit investment trusts, depositary receipts, and other pooled investment vehicles
that hold a portfolio of securities or stocks designed to track the price performance and dividend yield of a particular broad-based, sector or
international index. Broad based ETFs typically track a broad group of stocks from different industries and market sectors. For example, iShares
S&P 500 Index Fund and Standard and Poors Depositary Receipts are ETFs that track the S&P 500 Index. Sector ETFs track companies
represented in related industries within a sector of the economy. International ETFs track a group of stocks from a specific country.
ETFs also may hold a portfolio of
debt securities. For example, iShares Lehman 1-3 Year Treasury Bond Fund invests in a portfolio of publicly issued, U.S. Treasury securities designed
to track the Lehman Brothers 1-3 Year Treasury Index. Similarly, iShares GS $ Investor Corporate Bond Fund is designed to track a segment of the U.S.
investment grade corporate bond market as defined by the GS $ InvesTop Index.
ETFs invest in a securities
portfolio that includes substantially all of the securities (in substantially the same weights) as the securities included in the designated index.
ETFs are traded on an exchange and, in some cases may not be redeemed. The results of ETFs will not match the performance of the designated index due
to reductions in the performance attributable to transaction and other expenses, including fees paid by the ETF to service providers. ETFs are subject
to risks specific to the performance of a few component securities if such securities represent a highly concentrated weighting in the designated
index. ETFs are eligible to receive their portion of dividends, if any, accumulated on the securities held in trust, less fees and expenses of the
trust.
The investment vehicles issuing
ETFs may not be actively managed. Rather, the investment vehicles objective is to track the performance of a specified index. Therefore,
securities may be purchased, retained and sold at times when an actively managed fund would not do so. As a result, you can expect greater risk of loss
(and a correspondingly greater prospect of gain) from changes in the value of securities that are heavily weighted in the index than would be the case
if the investment vehicle was not fully invested in such securities.
Part II-18
Select sector ETFs and other
types of ETFs continue to be developed. As new products are developed, the Funds may invest in them to the extent consistent with the Funds
investment objective, policies and restrictions.
Unless permitted by the 1940 Act
or an order or rule issued by the SEC (see Investment Company Securities for more information), the Funds investments in unaffiliated ETFs are
subject to certain percentage limitations of the 1940 Act regarding investments in other investment companies. As a general matter, these percentage
limitations currently require a Fund to limit its investments in any one issue of ETFs to 5% of the Funds total assets and 3% of the outstanding
voting securities of the ETF issue. Moreover, a Funds investments in all ETFs may not currently exceed 10% of the Funds total assets under
the 1940 Act, when aggregated with all other investments in investment companies.
SEC exemptive orders granted to
various iShares funds (which are ETFs) and other ETFs and their investment advisers permit the Funds to invest beyond the 1940 Act limits, subject to
certain terms and conditions, including a finding of the Board of Trustees that the advisory fees charged by the Adviser are for services that are in
addition to, and not duplicative of, the advisory services provided to those ETFs.
Loan Assignments and
Participations Some of the Funds may invest in fixed and floating rate loans (Loans). Loans may include senior
floating rate loans (Senior Loans) and secured and unsecured loans, second lien or more junior loans and bridge loans (Junior
Loans). Loans are typically arranged through private negotiations between borrowers in the U.S. or in foreign or emerging markets which may be
corporate issuers or issuers of sovereign debt obligations (Obligors) and one or more financial institutions and other lenders
(Lenders). Generally, the Funds invest in Loans by purchasing assignments of all or a portion of Loans (Assignments) or Loan
participations (Participations) from third parties.
A Fund has direct rights against
the Obligor on the Loan when it purchases an Assignment. Because Assignments are arranged through private negotiations between potential assignees and
potential assignors, however, the rights and obligations acquired by a Fund as the purchaser of an Assignment may differ from, and be more limited
than, those held by the assigning Lender. With respect to Participations, typically, a Fund will have a contractual relationship only with the Lender
and not with the Obligor. The agreement governing Participations may limit the rights of a Fund to vote on certain changes which may be made to the
Loan agreement, such as waiving a breach of a covenant. However, the holder of a Participation will generally have the right to vote on certain
fundamental issues such as changes in principal amount, payment dates and interest rate. Participations may entail certain risks relating to the
creditworthiness of the parties from which the participations are obtained.
A Loan is typically originated,
negotiated and structured by a U.S. or foreign commercial bank, insurance company, finance company or other financial institution (the
Agent) for a group of Loan investors. The Agent typically administers and enforces the Loan on behalf of the other Loan investors in the
syndicate. The Agents duties may include responsibility for the collection of principal and interest payments from the Obligor and the
apportionment of these payments to the credit of all Loan investors. The Agent is also typically responsible for monitoring compliance with the
covenants contained in the Loan agreement based upon reports prepared by the Obligor. In addition, an institution, typically but not always the Agent,
holds any collateral on behalf of the Loan investors. In the event of a default by the Obligor, it is possible, though unlikely, that the Fund could
receive a portion of the borrowers collateral. If the Fund receives collateral other than cash, any proceeds received from liquidation of such
collateral will be available for investment as part of the Funds portfolio.
In the process of buying, selling
and holding Senior Loans, a Fund may receive and/or pay certain fees. These fees are in addition to interest payments received and may include facility
fees, commitment fees, commissions and prepayment penalty fees. When a Fund buys or sells a Loan it may pay a fee. In certain circumstances, a Fund may
receive a prepayment penalty fee upon prepayment of a Loan.
Additional Information
concerning Senior Loans. Senior Loans typically hold the most senior position in the capital structure of the Obligor, are typically
secured with specific collateral and have a claim on the assets and/or stock of the Obligor that is senior to that held by subordinated debtholders
and
Part II-19
shareholders of the Obligor.
Collateral for Senior Loans may include (i) working capital assets, such as accounts receivable and inventory; (ii) tangible fixed assets, such as real
property, buildings and equipment; (iii) intangible assets, such as trademarks and patent rights; and/or (iv) security interests in shares of stock of
subsidiaries or affiliates.
Additional Information
concerning Junior Loans. Junior Loans include secured and unsecured loans including subordinated loans, second lien and more
junior loans, and bridge loans. Second lien and more junior loans (Junior Lien Loans) are generally second or further in line in terms of
repayment priority. In addition, Junior Lien Loans may have a claim on the same collateral pool as the first lien or other more senior liens or may be
secured by a separate set of assets. Junior Lien Loans generally give investors priority over general unsecured creditors in the event of an asset
sale.
Junior Loans that are bridge
loans or bridge facilities (Bridge Loans) are short-term loan arrangements (e.g., 12 to 18 months) typically made by an Obligor in
anticipation of intermediate-term or long-term permanent financing. Most Bridge Loans are structured as floating-rate debt with step-up provisions
under which the interest rate on the Bridge Loan rises the longer the Loan remains outstanding. In addition, Bridge Loans commonly contain a conversion
feature that allows the Bridge Loan investor to convert its Loan interest to senior exchange notes if the Loan has not been prepaid in full on or prior
to its maturity date. Bridge Loans may be subordinate to other debt and may be secured or undersecured.
Additional Information
concerning u nfunded c ommitments. Unfunded c ommitments are contractual obligation s pursuant to which the Fund agrees
to invest in a Loan at a future date. Typically, the Fund receives a commitment fee for entering into the Unfunded Commitment.
Additional Information
concerning synthetic letters of credit. Loans include synthetic letters of credit. In a synthetic letter of credit transaction, the
Lender typically creates a special purpose entity or a credit-linked deposit account for the purpose of funding a letter of credit to the borrower.
When a Fund invests in a synthetic letter of credit, the Fund is typically paid a rate based on the Lenders borrowing costs and the terms of the
synthetic letter of credit. Synthetic letters of credit are typically structured as Assignments with the Fund acquiring direct rights against the
Obligor.
Limitations on Investments in
Loan Assignments and Participations. If a government entity is a borrower on a Loan, the Fund will consider the government to be the
issuer of a n Assignment or Participation for purposes of a Funds fundamental investment policy that it will not invest 25% or more of its total
assets in securities of issuers conducting their principal business activities in the same industry (i.e., foreign government).
Risk Factors of Loan
Assignments and Participations. Loans are subject to the risks associated with debt obligations in general including interest rate risk,
credit risk and market risk. When a Loan is acquired from a Lender, the risk includes the credit risk associated with the Obligor of the underlying
Loan. The Fund may incur additional credit risk when the Fund acquires a participation in a Loan from another lender because the Fund must assume the
risk of insolvency or bankruptcy of the other lender from which the Loan was acquired. To the extent that Loans involve Obligors in foreign or emerging
markets, such Loans are subject to the risks associated with foreign investments or investments in emerging markets in general. The following outlines
some of the additional risks associated with Loan Assignments and Participations.
High Yield
Securities Risk. The Loans that a Fund invests in may not be rated by a n NRSRO, will not be registered with the SEC or any state
securities commission and will not be listed on any national securities exchange. To the extent that such high yield Loans are rated, they typically
will be rated below investment grade and are subject to an increased risk of default in the payment of principal and interest as well as the other
risks described under High Yield/High Risk Securities/Junk Bonds. Loans are vulnerable to market sentiment such that economic
conditions or other events may reduce the demand for Loans and cause their value to decline rapidly and unpredictably.
Part II-20
Liquidity
Risk. Although the Funds limit their investments in illiquid securities to no more than 15% of the Funds net assets at the time of
purchase, Loans that are deemed to be liquid at the time of purchase may become illiquid or less liquid. No active trading market may exist for certain
Loans and certain Loans may be subject to restrictions on resale or have a limited secondary market. Certain Loans may be subject to irregular trading
activity, wide bid/ask spreads and extended trade settlement periods. The inability to dispose of certain Loans in a timely fashion or favorable price
could result in losses to a Fund.
Collateral, Subordination and
Litigation Risk. With respect to Loans that are secured, a Fund is subject to the risk that collateral securing the Loan will decline in
value or have no value or that the Funds lien is or will become junior in payment to other liens. A decline in value, whether as a result of
bankruptcy proceedings or otherwise, could cause the Loan to be undercollateralized or unsecured. There may be no formal requirement for the Obligor to
pledge additional collateral. In addition, collateral may consist of assets that may not be readily liquidated, and there is no assurance that the
liquidation of such assets would satisfy an Obligors obligation on a Loan.
If an Obligor becomes involved in
bankruptcy proceedings, a court may invalidate the Loan or the Funds security interest in loan collateral or subordinate the Funds rights
under a Senior Loan or Junior Loan to the interest of the Obligors other creditors, including unsecured creditors, or cause interest or principal
previously paid to be refunded to the Obligor. If a court required interest or principal to be refunded, it could negatively affect Fund performance.
Such action by a court could be based, for example, on a fraudulent conveyance claim to the effect that the Obligor did not receive fair
consideration for granting the security interest in the Loan collateral to a Fund. For Senior Loans made in connection with a highly leveraged
transaction, consideration for granting a security interest may be deemed inadequate if the proceeds of the Loan were not received or retained by the
Obligor, but were instead paid to other persons (such as shareholders of the Obligor) in an amount which left the Obligor insolvent or without
sufficient working capital. There are also other events, such as the failure to perfect a security interest due to faulty documentation or faulty
official filings, which could lead to the invalidation of a Funds security interest in Loan collateral. If the Funds security interest in
Loan collateral is invalidated or the Senior Loan is subordinated to other debt of an Obligor in bankruptcy or other proceedings, the Fund would have
substantially lower recovery, and perhaps no recovery on the full amount of the principal and interest due on the Loan, or the Fund could have to
refund interest.
Lenders and investors in Loans
can be sued by other creditors and shareholders of the Obligors. Losses can be greater than the original Loan amount and occur years after the
principal and interest on the Loan has been repaid.
Agent
Risk. Selling Lenders, Agents and other entities who may be positioned between a Fund and the Obligor will likely conduct their
principal business activities in the banking, finance and financial services industries. Investments in Loans may be more impacted by a single
economic, political or regulatory occurrence affecting such industries than other types of investments. Entities engaged in such industries may be more
susceptible to, among other things, fluctuations in interest rates, changes in the Federal Open Market Committees monetary policy, government
regulations concerning such industries and concerning capital raising activities generally and fluctuations in the financial markets generally. An
Agent, Lender or other entity positioned between a Fund and the Obligor may become insolvent or enter FDIC receivership or bankruptcy. The Fund might
incur certain costs and delays in realizing payment on a Loan or suffer a loss of principal and/or interest if assets or interests held by the Agent,
Lender or other party positioned between the Fund and the Obligor are determined to be subject to the claims of the Agents, Lenders or such
other partys creditors.
Regulatory
Changes. To the extent that legislation or state or federal regulators that regulate certain financial institutions impose additional
requirements or restrictions with respect to the ability of such institutions to make Loans, particularly in connection with highly leveraged
Part II-21
transactions, the availability of Loans for investment may be adversely affected. Furthermore, such legislation or regulation could depress the market
value of Loans held by the Fund.
Inventory
Risk. Affiliates of the Adviser may participate in the primary and secondary market for Loans. Because of limitations imposed by
applicable law, the presence of the Advisers affiliates in the Loan market may restrict a Funds ability to acquire some Loans, affect the
timing of such acquisition or affect the price at which the Loan is acquired.
Information
Risk. There is typically less publicly available information concerning Loans than other types of fixed income investments. As a result,
a Fund generally will be dependent on reports and other information provided by the Obligor, either directly or through an Agent, to evaluate the
Obligors creditworthiness or to determine the Obligors compliance with the covenants and other terms of the Loan Agreement. Such reliance
may make investments in Loans more susceptible to fraud than other types of investments. In addition, because the Adviser may wish to invest in the
publicly traded securities of an Obligor, it may not have access to material non-public information regarding the Obligor to which other Loan investors
have access.
Junior Loan
Risk. Junior Loans are subject to the same general risks inherent to any Loan investment. Due to their lower place in the Obligors
capital structure and possible unsecured status, Junior Loans involve a higher degree of overall risk than Senior Loans of the same Obligor. Junior
Loans that are Bridge Loans generally carry the expectation that the Obligor will be able to obtain permanent financing in the near future. Any delay
in obtaining permanent financing subjects the Bridge Loan investor to increased risk. An Obligors use of Bridge Loans also involves the risk that
the Obligor may be unable to locate permanent financing to replace the Bridge Loan, which may impair the Obligors perceived
creditworthiness.
Miscellaneous Investment Strategies and
Risks
Borrowings. A
Fund may borrow for temporary purposes and/or for investment purposes. Such a practice will result in leveraging of a Funds assets and may cause
a Fund to liquidate portfolio positions when it would not be advantageous to do so. This borrowing may be secured or unsecured. If a Fund utilizes
borrowings, for investment purposes or otherwise, it may pledge up to 33-1/3% of its total assets to secure such borrowings. Provisions of the 1940 Act
require a Fund to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of
the amount borrowed, with an exception for borrowings not in excess of 5% of the Funds total assets made for temporary administrative or
emergency purposes. Any borrowings for temporary administrative purposes in excess of 5% of the Funds total assets must maintain continuous asset
coverage. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a Fund may be required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market
value of a Funds portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities
purchased. A Fund also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
Certain types of investments are
considered to be borrowings under precedents issued by the SEC. Such investments are subject to the limitations as well as asset segregation
requirements. In addition, each Fund may enter into Interfund Lending Arrangements. Please see Interfund Lending.
Commodity-Linked
Derivatives. Commodity-linked derivatives are derivative instruments the value of which is linked to the value of a commodity, commodity
index or commodity futures contract. A Funds investment in commodity-linked derivative instruments may subject the Fund to greater volatility
than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may
be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry
or
Part II-22
commodity, such as drought,
floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged
commodity-linked derivatives creates the possibility for greater loss (including the likelihood of greater volatility of the Funds net asset
value), and there can be no assurance that a Funds use of leverage will be successful. Tax considerations may limit a Funds ability to
pursue investments in commodity-linked derivatives.
Interfund
Lending. To satisfy redemption requests or to cover unanticipated cash shortfalls, a Fund may enter into lending agreements
(Interfund Lending Agreements) under which the Fund would lend money and borrow money for temporary purposes directly to and from another
JPMorgan Fund through a credit facility (Interfund Loan), subject to meeting the conditions of an SEC exemptive order granted to the Funds
permitting such interfund lending. No Fund may borrow more than the lesser of the amount permitted by Section 18 of the 1940 Act or the amount
permitted by its investment limitations. All Interfund Loans will consist only of uninvested cash reserves that the Fund otherwise would invest in
short-term repurchase agreements or other short-term instruments.
If a Fund has outstanding
borrowings, any Interfund Loans to the Fund (a) will be at an interest rate equal to or lower than any outstanding bank loan, (b) will be secured at
least on an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding bank loan that requires
collateral, (c) will have a maturity no longer than any outstanding bank loan (and in any event not over seven days) and (d) will provide that, if an
event of default occurs under any agreement evidencing an outstanding bank loan to the Fund, the event of default will automatically (without need for
action or notice by the lending Fund) constitute an immediate event of default under the Interfund Lending Agreement entitling the lending Fund to call
the Interfund Loan (and exercise all rights with respect to any collateral) and that such call will be made if the lending bank exercises its right to
call its loan under its agreement with the borrowing Fund.
A Fund may make an unsecured
borrowing through the credit facility if its outstanding borrowings from all sources immediately after the interfund borrowing total 10% or less of its
total assets; provided, that if the Fund has a secured loan outstanding from any other lender, including but not limited to another JPMorgan Fund, the
Funds interfund borrowing will be secured on at least an equal priority basis with at least an equivalent percentage of collateral to loan value
as any outstanding loan that requires collateral. If a Funds total outstanding borrowings immediately after an interfund borrowing would be
greater than 10% of its total assets, the Fund may borrow through the credit facility on a secured basis only. A Fund may not borrow through the credit
facility nor from any other source if its total outstanding borrowings immediately after the interfund borrowing would exceed the limits imposed by
Section 18 of the 1940 Act.
No Fund may lend to another Fund
through the interfund lending credit facility if the loan would cause its aggregate outstanding loans through the credit facility to exceed 15% of the
lending Funds net assets at the time of the loan. A Funds Interfund Loans to any one Fund shall not exceed 5% of the lending Funds
net assets. The duration of Interfund Loans is limited to the time required to receive payment for securities sold, but in no event may the duration
exceed seven days. Loans effected within seven days of each other will be treated as separate loan transactions for purposes of this condition. Each
Interfund Loan may be called on one business days notice by a lending Fund and may be repaid on any day by a borrowing Fund.
The limitations detailed above
and the other conditions of the SEC exemptive order permitting interfund lending are designed to minimize the risks associated with interfund lending
for both the lending fund and the borrowing fund. However, no borrowing or lending activity is without risk. When a Fund borrows money from another
Fund, there is a risk that the loan could be called on one days notice or not renewed, in which case the Fund may have to borrow from a bank at
higher rates if an Interfund Loan were not available from another Fund. A delay in repayment to a lending Fund could result in a lost opportunity or
additional lending costs.
Master Limited
Partnerships. Certain companies are organized as master limited partnerships (MLPs) in which ownership interests are
publicly traded. MLPs often own several properties or businesses (or directly own interests) that are related to real estate development and oil and
gas industries,
Part II-23
but they also may finance
motion pictures, research and development and other projects or provide financial services. Generally, a n MLP is operated under the supervision
of one or more managing general partners. Limited partners (like a Fund that invests in a n MLP) are not involved in the day-to-day management of
the partnership. They are allocated income and capital gains associated with the partnership project in accordance with the terms established in the
partnership agreement.
The risks of investing in a n MLP
are generally those inherent in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less
restrictive than state law governing corporations. Accordingly, there may be less protections afforded investors in a n MLP than investors in a
corporation. Additional risks involved with investing in an MLP are risks associated with the specific industry or industries in which the partnership
invests, such as the risks of investing in real estate, or oil and gas industries.
New Financial
Products. New options and futures contracts and other financial products, and various combinations thereof, including over-the-counter
products, continue to be developed. These various products may be used to adjust the risk and return characteristics of certain Funds
investments. These various products may increase or decrease exposure to security prices, interest rates, commodity prices, or other factors that
affect security values, regardless of the issuers credit risk. If market conditions do not perform as expected, the performance of a Fund would
be less favorable than it would have been if these products were not used. In addition, losses may occur if counterparties involved in transactions do
not perform as promised. These products may expose the Fund to potentially greater return as well as potentially greater risk of loss than more
traditional fixed income investments.
Private Placements, Restricted
Securities and Other Unregistered Securities. Subject to its policy limitation, a Fund may acquire investments that are illiquid or have
limited liquidity, such as commercial obligations issued in reliance on the so-called private placement exemption from registration
afforded by Section 4(2) under the Securities Act of 1933, as amended (the 1933 Act), and cannot be offered for public sale in the U.S.
without first being registered under the 1933 Act. An illiquid investment is any investment that cannot be disposed of within seven days in the normal
course of business at approximately the amount at which it is valued by a Fund. The price a Fund pays for illiquid securities or receives upon resale
may be lower than the price paid or received for similar securities with a more liquid market. Accordingly the valuation of these securities will
reflect any limitations on their liquidity.
A Fund is subject to a risk that
should the Fund decide to sell illiquid securities when a ready buyer is not available at a price the Fund deems representative of their value, the
value of the Funds net assets could be adversely affected. Where an illiquid security must be registered under the 1933 Act before it may be
sold, a Fund may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the time of the decision to
sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than prevailed when it decided to sell.
The Funds may invest in
commercial paper issued in reliance on the exemption from registration afforded by Section 4(2) of the 1933 Act and other restricted securities (i.e.,
other securities subject to restrictions on resale). Section 4(2) commercial paper (4(2) paper) is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as the Funds, that agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. 4(2) paper is normally
resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in 4(2) paper, thus
providing liquidity. The Funds believe that 4(2) paper and possibly certain other restricted securities which meet the criteria for liquidity
established by the Trustees are quite liquid. The Funds intend, therefore, to treat restricted securities that meet the liquidity criteria established
by the Board of Trustees, including 4(2) paper and Rule 144A Securities, as determined by the Funds Adviser, as liquid and not subject to the
investment limitation applicable to illiquid securities.
The ability of the Trustees to
determine the liquidity of certain restricted securities is permitted under an SEC Staff position set forth in the adopting release for Rule 144A under
the 1933 Act (Rule
Part II-24
144A). Rule 144A is a
nonexclusive safe-harbor for certain secondary market transactions involving securities subject to restrictions on resale under federal securities
laws. Rule 144A provides an exemption from registration for resales of otherwise restricted securities to qualified institutional buyers. Rule 144A was
expected to further enhance the liquidity of the secondary market for securities eligible for resale. The Funds believe that the Staff of the SEC has
left the question of determining the liquidity of all restricted securities to the Trustees. The Trustees have directed each Funds Adviser to
consider the following criteria in determining the liquidity of certain restricted securities:
|
|
the frequency of trades and quotes for the security; |
|
|
the number of dealers willing to purchase or sell the security
and the number of other potential buyers; |
|
|
dealer undertakings to make a market in the security;
and |
|
|
the nature of the security and the nature of the marketplace
trades. |
Certain 4(2) paper programs
cannot rely on Rule 144A because, among other things, they were established before the adoption of the rule. However, the Trustees may determine for
purposes of the Trusts liquidity requirements that an issue of 4(2) paper is liquid if the following conditions, which are set forth in a 1994
SEC no-action letter, are met:
|
|
The 4(2) paper must not be traded flat or in default as to
principal or interest; |
|
|
The 4(2) paper must be rated in one of the two highest rating
categories by at least two Nationally Recognized Statistical Rating Organizations (NRSROs) , or if only one NRSRO rates the security, by
that NRSRO, or if unrated, is determined by a Funds Adviser to be of equivalent quality; |
|
|
The Funds Adviser must consider the trading market for the
specific security, taking into account all relevant factors, including but not limited, to whether the paper is the subject of a commercial paper
program that is administered by an issuing and paying agent bank and for which there exists a dealer willing to make a market in that paper, or is
administered by a direct issuer pursuant to a direct placement program; |
|
|
The Funds Adviser shall monitor the liquidity of the 4(2)
paper purchased and shall report to the Board of Trustees promptly if any such securities are no longer determined to be liquid if such determination
causes a Fund to hold more than 10% of its net assets in illiquid securities in order for the Board of Trustees to consider what action, if any, should
be taken on behalf of the Trust, unless the Funds Adviser is able to dispose of illiquid assets in an orderly manner in an amount that reduces
the Funds holdings of illiquid assets to less than 10% of its net assets; and |
|
|
The Funds Adviser shall report to the Board of Trustees on
the appropriateness of the purchase and retention of liquid restricted securities under these guidelines no less frequently than quarterly. |
Securities Issued in
Connection with Reorganizations and Corporate Restructuring. Debt securities may be downgraded and issuers of debt securities including
investment grade securities may default in the payment of principal or interest or be subject to bankruptcy proceedings. In connection with
reorganizing or restructuring of an issuer, an issuer may issue common stock or other securities to holders of its debt securities. A Fund may hold
such common stock and other securities even though it does not ordinarily invest in such securities.
Part II-25
Temporary Defensive
Positions. To respond to unusual market conditions, all of the Funds may invest their assets in cash or cash equivalents. Cash
equivalents are highly liquid, high quality instruments with maturities of three months or less on the date they are purchased (Cash
Equivalents) for temporary defensive purposes. These investments may result in a lower yield than lower-quality or longer term investments and
may prevent the Funds from meeting their investment objectives. The percentage of Funds total assets that a Fund may invest in cash or cash
equivalents is described in the applicable Funds Prospectuses. They include securities issued by the U.S. government, its agencies and
instrumentalities, repurchase agreements with maturities of 7 days or less (other than equity repurchase agreements), certificates of deposit,
bankers acceptances, commercial paper (rated in one of the two highest rating categories), variable rate master demand notes, money market mutual
funds, and bank money market deposit accounts.
Mortgage-Related Securities
Mortgages (Directly
Held). Mortgages are debt instruments secured by real property. Unlike mortgage-backed securities, which generally represent an interest
in a pool of mortgages, direct investments in mortgages involve prepayment and credit risks of an individual issuer and real property. Consequently,
these investments require different investment and credit analysis by a Funds Adviser.
Directly placed mortgages may
include residential mortgages, multifamily mortgages, mortgages on cooperative apartment buildings, commercial mortgages, and sale-leasebacks. These
investments are backed by assets such as office buildings, shopping centers, retail stores, warehouses, apartment buildings and single-family
dwellings. In the event that a Fund forecloses on any non-performing mortgage, and acquires a direct interest in the real property, such Fund will be
subject to the risks generally associated with the ownership of real property. There may be fluctuations in the market value of the foreclosed property
and its occupancy rates, rent schedules and operating expenses. There may also be adverse changes in local, regional or general economic conditions,
deterioration of the real estate market and the financial circumstances of tenants and sellers, unfavorable changes in zoning, building, environmental
and other laws, increased real property taxes, rising interest rates, reduced availability and increased cost of mortgage borrowings, the need for
unanticipated renovations, unexpected increases in the cost of energy, environmental factors, acts of God and other factors which are beyond the
control of a Fund or the Funds Adviser. Hazardous or toxic substances may be present on, at or under the mortgaged property and adversely affect
the value of the property. In addition, the owners of property containing such substances may be held responsible, under various laws, for containing,
monitoring, removing or cleaning up such substances. The presence of such substances may also provide a basis for other claims by third parties. Costs
of clean up or of liabilities to third parties may exceed the value of the property. In addition, these risks may be uninsurable. In light of these and
similar risks, it may be impossible to dispose profitably of properties in foreclosure.
Mortgage-Backed Securities
(CMOS and REMICS) Mortgage-backed securities include collateralized mortgage obligations (CMOs) and Real Estate Mortgage
Investment Conduits (REMICs). A REMIC is a CMO that qualifies for special tax treatment under the Code and invests in certain mortgages
principally secured by interests in real property and other permitted investments.
Mortgage-backed securities
represent pools of mortgage loans assembled for sale to investors by:
|
|
various governmental agencies such as the Government National
Mortgage Association (Ginnie Mae); |
|
|
organizations such as the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac); and |
|
|
non-governmental issuers such as commercial banks, savings and
loan institutions, mortgage bankers, and private mortgage insurance companies (non-governmental mortgage securities cannot be treated as U.S.
government securities for purposes of investment policies). |
Part II-26
There are a number of important
differences among the agencies and instrumentalities of the U.S. government that issue mortgage-related securities and among the securities that they
issue.
Ginnie Mae
Securities. Mortgage-related securities issued by Ginnie Mae include Ginnie Mae Mortgage Pass-Through Certificates which are guaranteed
as to the timely payment of principal and interest by Ginnie Mae. Ginnie Maes guarantee is backed by the full faith and credit of the U.S..
Ginnie Mae is a wholly-owned U.S. government corporation within the Department of Housing and Urban Development. Ginnie Mae certificates also are
supported by the authority of Ginnie Mae to borrow funds from the U.S. Treasury to make payments under its guarantee.
Fannie Mae
Securities. Mortgage-related securities issued by Fannie Mae include Fannie Mae Guaranteed Mortgage Pass-Through Certificates which are
solely the obligations of Fannie Mae and are not backed by or entitled to the full faith and credit of the U.S.. Fannie Mae is a government-sponsored
organization owned entirely by private stockholders. Fannie Mae Certificates are guaranteed as to timely payment of the principal and interest by
Fannie Mae.
Freddie Mac
Securities. Mortgage-related securities issued by Freddie Mac include Freddie Mac Mortgage Participation Certificates. Freddie Mac is a
corporate instrumentality of the U.S., created pursuant to an Act of Congress, which is owned by private stockholders. Freddie Mac Certificates are not
guaranteed by the U.S. or by any Federal Home Loan Bank and do not constitute a debt or obligation of the U.S. or of any Federal Home Loan Bank.
Freddie Mac Certificates entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate
collection or timely payment of all principal payments on the underlying mortgage loans. When Freddie Mac does not guarantee timely payment of
principal, Freddie Mac may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
CMOs and guaranteed REMIC
pass-through certificates (REMIC Certificates) issued by Fannie Mae, Freddie Mac, Ginnie Mae and private issuers are types of multiple
class pass-through securities. Investors may purchase beneficial interests in REMICs, which are known as regular interests or
residual interests. The Funds do not currently intend to purchase residual interests in REMICs. The REMIC Certificates represent beneficial
ownership interests in a REMIC Trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac or Ginnie Mae guaranteed mortgage pass-through
certificates (the Mortgage Assets). The obligations of Fannie Mae, Freddie Mac or Ginnie Mae under their respective guaranty of the REMIC
Certificates are obligations solely of Fannie Mae, Freddie Mac or Ginnie Mae, respectively.
Fannie Mae
REMIC Certificates. Fannie Mae REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by
Fannie Mae. In addition, Fannie Mae will be obligated to distribute the principal balance of each class of REMIC Certificates in full, whether or not
sufficient funds are otherwise available.
Freddie Mac
REMIC Certificates. Freddie Mac guarantees the timely payment of interest, and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates (PCs). PCs represent undivided interests in specified residential
mortgages or participation therein purchased by Freddie Mac and placed in a PC pool. With respect to principal payments on PCs, Freddie Mac generally
guarantees ultimate collection of all principal of the related mortgage loans without offset or deduction. Freddie Mac also guarantees timely payment
of principal on certain PCs referred to as Gold PCs.
Ginnie Mae
REMIC Certificates. Ginnie Mae guarantees the full and timely payment of interest and principal on each class of securities (in
accordance with the terms of those classes as specified in the related offering circular supplement). The Ginnie Mae guarantee is backed by the full
faith and credit of the U.S.
Part II-27
REMIC Certificates issued by
Fannie Mae, Freddie Mac and Ginnie Mae are treated as U.S. Government securities for purposes of investment policies.
CMOs and REMIC Certificates
provide for the redistribution of cash flow to multiple classes. Each class of CMOs or REMIC Certificates, often referred to as a tranche,
is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution date. This reallocation of
interest and principal results in the redistribution of prepayment risk across different classes. This allows for the creation of bonds with more or
less risk than the underlying collateral exhibits. Principal prepayments on the mortgage loans or the Mortgage Assets underlying the CMOs or REMIC
Certificates may cause some or all of the classes of CMOs or REMIC Certificates to be retired substantially earlier than their final distribution
dates. Generally, interest is paid or accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on
the Mortgage Assets may be allocated among the several classes of CMOs or REMIC Certificates in various ways. In certain structures (known as
sequential pay CMOs or REMIC Certificates), payments of principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their respective final distribution dates. Thus, no payment of principal will
be made on any class of sequential pay CMOs or REMIC Certificates until all other classes having an earlier final distribution date have been paid in
full.
Additional structures of CMOs and
REMIC Certificates include, among others, principal only structures, interest only structures, inverse floaters and parallel pay CMOs and
REMIC Certificates. Certain of these structures may be more volatile than other types of CMO and REMIC structures. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken into account in calculating the final distribution date of each
class.
A wide variety of REMIC
Certificates may be issued in the parallel pay or sequential pay structures. These securities include accrual certificates (also known as
Z-Bonds), which only accrue interest at a specified rate until all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and planned amortization class (PAC) certificates, which are parallel
pay REMIC Certificates which generally require that specified amounts of principal be applied on each payment date to one or more classes of REMIC
Certificates (the PAC Certificates), even though all other principal payments and prepayments of the Mortgage Assets are then required to
be applied to one or more other classes of the certificates. The scheduled principal payments for the PAC Certificates generally have the highest
priority on each payment date after interest due has been paid to all classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount of principal payable on the next payment date. The PAC Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or more tranches generally must be created that absorb most of the
volatility in the underlying Mortgage Assets. These tranches tend to have market prices and yields that are much more volatile than the PAC classes.
The Z-Bonds in which the Funds may invest may bear the same non-credit-related risks as do other types of Z-Bonds. Z-Bonds in which the Fund may invest
will not include residual interest.
Total Annual Operating Expenses
set forth in the fee table and Financial Highlights section of each Funds Prospectuses do not include any expenses associated with investments in
certain structured or synthetic products that may rely on the exception for the definition of investment company provided by section
3(c)(1) or 3(c)(7) of the 1940 Act.
Mortgage Dollar
Rolls. When a Fund enters into mortgage dollar rolls, it sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and maturity) but not identical securities on a specified future date. When a Fund
enters into mortgage dollar rolls, the Fund will earmark and reserve until the settlement date Fund
Part II-28
assets, in cash or liquid
securities, in an amount equal to the forward purchase price. A Fund benefits to the extent of:
|
|
any difference between the price received for the securities
sold and the lower forward price for the future purchase (often referred to as the drop); or |
|
|
fee income plus the interest earned on the cash proceeds of the
securities sold until the settlement date of the forward purchase. |
Unless such benefits exceed the
income, capital appreciation or gains on the securities sold as part of the mortgage dollar roll, the investment performance of a Fund will be less
than what the performance would have been without the use of mortgage dollar rolls. The benefits of mortgage dollar rolls may depend upon a Funds
Advisers ability to predict mortgage prepayments and interest rates. There is no assurance that mortgage dollar rolls can be successfully
employed. The Funds currently intend to enter into mortgage dollar rolls that are accounted for as a financing transaction. For purposes of
diversification and investment limitations, mortgage dollar rolls are considered to be mortgage-backed securities.
Stripped Mortgage-Backed
Securities. Stripped Mortgage-Backed Securities (SMBS) are derivative multi-class mortgage securities issued outside the
REMIC or CMO structure. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions
from a pool of mortgage assets. A common type of SMBS will have one class receiving all of the interest from the mortgage assets (IOs),
while the other class will receive all of the principal (POs). Mortgage IOs receive monthly interest payments based upon a notional amount
that declines over time as a result of the normal monthly amortization and unscheduled prepayments of principal on the associated mortgage
POs.
In addition to the risks
applicable to Mortgage-Related Securities in general, SMBS are subject to the following additional risks:
Prepayment/Interest Rate Sensitivity. SMBS are extremely sensitive to changes in prepayments and interest rates. Even though
these securities have been guaranteed by an agency or instrumentality of the U.S. government, under certain interest rate or prepayment rate scenarios,
the Funds may lose money on investments in SMBS.
Interest
Only SMBS. Changes in prepayment rates can cause the return on investment in IOs to be highly volatile. Under extremely high prepayment
conditions, IOs can incur significant losses.
Principal
Only SMBS. POs are bought at a discount to the ultimate principal repayment value. The rate of return on a PO will vary with
prepayments, rising as prepayments increase and falling as prepayments decrease. Generally, the market value of these securities is unusually volatile
in response to changes in interest rates.
Yield
Characteristics. Although SMBS may yield more than other mortgage-backed securities, their cash flow patterns are more volatile and
there is a greater risk that any premium paid will not be fully recouped. A Funds Adviser will seek to manage these risks (and potential
benefits) by investing in a variety of such securities and by using certain analytical and hedging techniques.
Adjustable Rate Mortgage
Loans. Certain Funds may invest in adjustable mortgage rate loans (ARMs). ARMs eligible for inclusion in a mortgage pool
will generally provide for a fixed initial mortgage interest rate for a specified period of time. Thereafter, the interest rates (the Mortgage
Interest Rates) may be subject to periodic adjustment based on changes in the applicable index rate (the Index Rate). The adjusted
rate would be equal to the Index Rate plus a gross margin, which is a fixed percentage spread over the Index Rate established for each ARM at the time
of its origination.
Adjustable interest rates can
cause payment increases that some borrowers may find difficult to make. However, certain ARMs may provide that the Mortgage Interest Rate may not be
adjusted to a rate above an applicable lifetime maximum rate or below an applicable lifetime minimum rate for such ARM.
Part II-29
Certain ARMs may also be
subject to limitations on the maximum amount by which the Mortgage Interest Rate may adjust for any single adjustment period (the Maximum
Adjustment). Other ARMs (Negatively Amortizing ARMs) may provide instead or as well for limitations on changes in the monthly payment
on such ARMs. Limitations on monthly payments can result in monthly payments which are greater or less than the amount necessary to amortize a
Negatively Amortizing ARM by its maturity at the Mortgage Interest Rate in effect in any particular month. In the event that a monthly payment is not
sufficient to pay the interest accruing on a Negatively Amortizing ARM, any such excess interest is added to the principal balance of the loan, causing
negative amortization and will be repaid through future monthly payments. It may take borrowers under Negatively Amortizing ARMs longer periods of time
to achieve equity and may increase the likelihood of default by such borrowers. In the event that a monthly payment exceeds the sum of the interest
accrued at the applicable Mortgage Interest Rate and the principal payment which would have been necessary to amortize the outstanding principal
balance over the remaining term of the loan, the excess (or accelerated amortization) further reduces the principal balance of the ARM.
Negatively Amortizing ARMs do not provide for the extension of their original maturity to accommodate changes in their Mortgage Interest Rate. As a
result, unless there is a periodic recalculation of the payment amount (which there generally is), the final payment may be substantially larger than
the other payments. These limitations on periodic increases in interest rates and on changes in monthly payment protect borrowers from unlimited
interest rate and payment increases.
Certain ARMs may provide for
periodic adjustments of scheduled payments in order to amortize fully the mortgage loan by its stated maturity. Other ARMs may permit their stated
maturity to be extended or shortened in accordance with the portion of each payment that is applied to interest as affected by the periodic interest
rate adjustments.
There are two main categories of
indices which provide the basis for rate adjustments on ARMs: those based on U.S. Treasury securities and those derived from a calculated measure such
as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year, three-year and five-year constant
maturity Treasury bill rates, the three-month Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month, three-month, six-month or one-year London Interbank
Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity
Treasury rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Federal Home Loan Bank Cost of Funds index,
tend to lag behind changes in market rate levels and tend to be somewhat less volatile. The degree of volatility in the market value of the Funds
portfolio and therefore in the net asset value of the Funds shares will be a function of the length of the interest rate reset periods and the
degree of volatility in the applicable indices.
In general, changes in both
prepayment rates and interest rates will change the yield on Mortgage-Backed Securities. The rate of principal prepayments with respect to ARMs has
fluctuated in recent years. As is the case with fixed mortgage loans, ARMs may be subject to a greater rate of principal prepayments in a declining
interest rate environment. For example, if prevailing interest rates fall significantly, ARMs could be subject to higher prepayment rates than if
prevailing interest rates remain constant because the availability of fixed rate mortgage loans at competitive interest rates may encourage mortgagors
to refinance their ARMs to lock-in a lower fixed interest rate. Conversely, if prevailing interest rates rise significantly, ARMs may
prepay at lower rates than if prevailing rates remain at or below those in effect at the time such ARMs were originated. As with fixed rate mortgages,
there can be no certainty as to the rate of prepayments on the ARMs in either stable or changing interest rate environments. In addition, there can be
no certainty as to whether increases in the principal balances of the ARMs due to the addition of deferred interest may result in a default rate higher
than that on ARMs that do not provide for negative amortization.
Other factors affecting
prepayment of ARMs include changes in mortgagors housing needs, job transfers, unemployment, mortgagors net equity in the mortgage
properties and servicing decisions.
Risk Factors of
Mortgage-Related Securities. The following is a summary of certain risks associated with Mortgage-Related Securities:
Part II-30
Guarantor
Risk. There can be no assurance that the U.S. government would provide financial support to Fannie Mae or Freddie Mac if necessary in
the future. Although certain mortgage-related securities are guaranteed by a third party or otherwise similarly secured, the market value of the
security, which may fluctuate, is not so secured.
Interest
Rate Sensitivity. If a Fund purchases a mortgage-related security at a premium, that portion may be lost if there is a decline in the
market value of the security whether resulting from changes in interest rates or prepayments in the underlying mortgage collateral. As with other
interest-bearing securities, the prices of such securities are inversely affected by changes in interest rates. Although the value of a
mortgage-related security may decline when interest rates rise, the converse is not necessarily true since in periods of declining interest rates the
mortgages underlying the securities are prone to prepayment. For this and other reasons, a mortgage-related securitys stated maturity may be
shortened by unscheduled prepayments on the underlying mortgages and, therefore, it is not possible to predict accurately the securitys return to
the Fund. In addition, regular payments received in respect of mortgage-related securities include both interest and principal. No assurance can be
given as to the return the Fund will receive when these amounts are reinvested.
Market
Value. The market value of the Funds adjustable rate Mortgage-Backed Securities may be adversely affected if interest rates
increase faster than the rates of interest payable on such securities or by the adjustable rate mortgage loans underlying such securities. Furthermore,
adjustable rate Mortgage-Backed Securities or the mortgage loans underlying such securities may contain provisions limiting the amount by which rates
may be adjusted upward and downward and may limit the amount by which monthly payments may be increased or decreased to accommodate upward and downward
adjustments in interest rates.
Prepayments. Adjustable rate Mortgage-Backed Securities have less potential for capital appreciation than fixed rate
Mortgage-Backed Securities because their coupon rates will decline in response to market interest rate declines. The market value of fixed rate
Mortgage-Backed Securities may be adversely affected as a result of increases in interest rates and, because of the risk of unscheduled principal
prepayments, may benefit less than other fixed rate securities of similar maturity from declining interest rates. Finally, to the extent
Mortgage-Backed Securities are purchased at a premium, mortgage foreclosures and unscheduled principal prepayments may result in some loss of the
Funds principal investment to the extent of the premium paid. On the other hand, if such securities are purchased at a discount, both a scheduled
payment of principal and an unscheduled prepayment of principal will increase current and total returns and will accelerate the recognition of
income.
Yield
Characteristics. The yield characteristics of Mortgage-Backed Securities differ from those of traditional fixed income securities. The
major differences typically include more frequent interest and principal payments, usually monthly, and the possibility that prepayments of principal
may be made at any time. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic, social and other
factors and cannot be predicted with certainty. As with fixed rate mortgage loans, adjustable rate mortgage loans may be subject to a greater
prepayment rate in a declining interest rate environment. The yields to maturity of the Mortgage-Backed Securities in which the Funds invest will be
affected by the actual rate of payment (including prepayments) of principal of the underlying mortgage loans. The mortgage loans underlying such
securities generally may be prepaid at any time without penalty. In a fluctuating interest rate environment, a predominant factor affecting the
prepayment rate on a pool of mortgage loans is the difference between the interest rates on the mortgage loans and prevailing mortgage loan interest
rates taking into account the cost of any refinancing. In general, if mortgage loan interest rates fall sufficiently below the interest rates on fixed
rate mortgage loans underlying mortgage pass-through securities, the rate of prepayment would be expected to increase. Conversely, if mortgage loan
interest rates rise above the interest rates on the fixed rate mortgage loans underlying the mortgage pass-through securities, the rate of prepayment
may be expected to decrease.
Part II-31
Municipal Securities
Municipal Securities are issued
to obtain funds for a wide variety of reasons. For example, municipal securities may be issued to obtain funding for the construction of a wide range
of public facilities such as:
5. |
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waterworks and sewer systems; and |
Other public purposes for which
Municipal Securities may be issued include:
1. |
|
refunding outstanding obligations; |
2. |
|
obtaining funds for general operating expenses; and |
3. |
|
obtaining funds to lend to other public institutions and
facilities. |
In addition, certain debt
obligations known as Private Activity Bonds may be issued by or on behalf of municipalities and public authorities to obtain funds to
provide:
1. |
|
water, sewage and solid waste facilities; |
2. |
|
qualified residential rental projects; |
3. |
|
certain local electric, gas and other heating or cooling
facilities; |
4. |
|
qualified hazardous waste facilities; |
5. |
|
high-speed intercity rail facilities; |
6. |
|
governmentally-owned airports, docks and wharves and mass
transportation facilities; |
8. |
|
student loan and redevelopment bonds; and |
9. |
|
bonds used for certain organizations exempt from Federal income
taxation. |
Certain debt obligations known as
Industrial Development Bonds under prior Federal tax law may have been issued by or on behalf of public authorities to obtain funds to
provide:
1. |
|
privately operated housing facilities; |
Part II-32
4. |
|
convention or trade show facilities; |
5. |
|
airport, mass transit, port or parking facilities; |
6. |
|
air or water pollution control facilities; |
7. |
|
sewage or solid waste disposal facilities; and |
8. |
|
facilities for water supply. |
Other private activity bonds and
industrial development bonds issued to fund the construction, improvement, equipment or repair of privately-operated industrial, distribution,
research, or commercial facilities may also be Municipal Securities, however the size of such issues is limited under current and prior Federal tax
law. The aggregate amount of most private activity bonds and industrial development bonds is limited (except in the case of certain types of
facilities) under Federal tax law by an annual volume cap. The volume cap limits the annual aggregate principal amount of such obligations
issued by or on behalf of all governmental instrumentalities in the state.
The two principal classifications
of Municipal Securities consist of general obligation and limited (or revenue) issues. General obligation bonds are obligations
involving the credit of an issuer possessing taxing power and are payable from the issuers general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of general obligation bonds vary according to the law applicable to the
particular issuer, and payment may be dependent upon appropriation by the issuers legislative body. Limited obligation bonds are payable only
from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific
revenue source. Private activity bonds and industrial development bonds generally are revenue bonds and thus not payable from the unrestricted revenues
of the issuer. The credit and quality of such bonds is generally related to the credit of the bank selected to provide the letter of credit underlying
the bond. Payment of principal of and interest on industrial development revenue bonds is the responsibility of the corporate user (and any
guarantor).
The Funds may also acquire
moral obligation issues, which are normally issued by special purpose authorities, and in other tax-exempt investments including pollution
control bonds and tax-exempt commercial paper. Each Fund that may purchase municipal bonds may purchase:
1. |
|
Short-term tax-exempt General Obligations Notes; |
2. |
|
Tax Anticipation Notes; |
3. |
|
Bond Anticipation Notes; |
4. |
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Revenue Anticipation Notes; |
6. |
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Other forms of short-term tax-exempt loans. |
Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of bond placements, or other revenues. Project Notes are issued by a
state or local housing agency and are sold by the Department of Housing and Urban Development. While the issuing agency has the primary obligation with
respect to its Project Notes, they are also secured by the full faith and credit of the U.S. through agreements with the issuing authority which
provide that, if required, the Federal government will lend the issuer an amount equal to the principal of and interest on the Project
Notes.
Part II-33
There are, of course, variations
in the quality of Municipal Securities, both within a particular classification and between classifications. Also, the yields on Municipal Securities
depend upon a variety of factors, including:
1. |
|
general money market conditions; |
3. |
|
the financial condition of the issuer; |
4. |
|
general conditions of the municipal bond market; |
5. |
|
the size of a particular offering; |
6. |
|
the maturity of the obligations; and |
7. |
|
the rating of the issue. |
The ratings of Moodys and
S&P represent their opinions as to the quality of Municipal Securities. However, ratings are general and are not absolute standards of quality.
Municipal Securities with the same maturity, interest rate and rating may have different yields while Municipal Securities of the same maturity and
interest rate with different ratings may have the same yield. Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease to be
rated or its rating may be reduced below the minimum rating required for purchase by the Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the obligations.
Municipal Securities may include
obligations of municipal housing authorities and single-family mortgage revenue bonds. Weaknesses in Federal housing subsidy programs and their
administration may result in a decrease of subsidies available for payment of principal and interest on housing authority bonds. Economic developments,
including fluctuations in interest rates and increasing construction and operating costs, may also adversely impact revenues of housing authorities. In
the case of some housing authorities, inability to obtain additional financing could also reduce revenues available to pay existing
obligations.
Single-family mortgage revenue
bonds are subject to extraordinary mandatory redemption at par in whole or in part from the proceeds derived from prepayments of underlying mortgage
loans and also from the unused proceeds of the issue within a stated period which may be within a year from the date of issue.
Municipal leases are obligations
issued by state and local governments or authorities to finance the acquisition of equipment and facilities. Municipal leases may be considered to be
illiquid. They may take the form of a lease, an installment purchase contract, a conditional sales contract, or a participation interest in any of the
above. The Board of Trustees is responsible for determining the credit quality of unrated municipal leases on an ongoing basis, including an assessment
of the likelihood that the lease will not be canceled.
Premium
Securities. During a period of declining interest rates, many Municipal Securities in which the Funds invest likely will bear coupon
rates higher than current market rates, regardless of whether the securities were initially purchased at a premium.
Risk Factors in Municipal
Securities. The following is a summary of certain risks associated with Municipal Securities:
Tax Risk. The
Code, imposes certain continuing requirements on issuers of tax-exempt bonds regarding the use, expenditure and investment of bond proceeds and the
payment of rebates to the U.S.. Failure by the issuer to comply subsequent to the issuance of tax-exempt bonds with certain of these
Part II-34
requirements could cause
interest on the bonds to become includable in gross income retroactive to the date of issuance.
As discussed in the prospectuses
for certain Funds, the Supreme Court has agreed to hear an appeal of a state court decision that might significantly affect how states tax in-state and
out-of-state municipal bonds. A Kentucky state court held that a Kentucky law violates the U.S. Constitution by treating, for Kentucky state tax
purposes, the interest income on in-state municipal bonds differently from the income on out-of-state municipal bonds. If the Supreme Court affirms
this holding, most states likely will revisit the way in which they treat the interest on municipal bonds, and this has the potential to increase
significantly the amount of state tax paid by shareholders on exempt-interest dividends. The Supreme Court held oral arguments on this case in the fall
of 2007 and will issue a decision sometime soon. You should consult your tax advisor to discuss the tax consequences of your investment in the
Funds.
Housing Authority Tax
Risk. The exclusion from gross income for Federal income tax purposes for certain housing authority bonds depends on qualification under
relevant provisions of the Code and on other provisions of Federal law. These provisions of Federal law contain requirements relating to the cost and
location of the residences financed with the proceeds of the single-family mortgage bonds and the income levels of tenants of the rental projects
financed with the proceeds of the multi-family housing bonds. Typically, the issuers of the bonds, and other parties, including the originators and
servicers of the single-family mortgages and the owners of the rental projects financed with the multi-family housing bonds, covenant to meet these
requirements. However, there is no assurance that the requirements will be met. If such requirements are not met:
|
|
the interest on the bonds may become taxable, possibly
retroactively from the date of issuance; |
|
|
the value of the bonds may be reduced; |
|
|
you and other Shareholders may be subject to unanticipated tax
liabilities; |
|
|
a Fund may be required to sell the bonds at the reduced
value; |
|
|
it may be an event of default under the applicable
mortgage; |
|
|
the holder may be permitted to accelerate payment of the bond;
and |
|
|
the issuer may be required to redeem the bond. |
In addition, if the mortgage
securing the bonds is insured by the Federal Housing Administration (FHA), the consent of the FHA may be required before insurance proceeds
would become payable.
Information
Risk. Information about the financial condition of issuers of Municipal Securities may be less available than about corporations having
a class of securities registered under the SEC.
State and Federal
Laws. An issuers obligations under its Municipal Securities are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors. These laws may extend the time for payment of principal or interest, or restrict the Funds
ability to collect payments due on Municipal Securities. In addition, recent amendments to some statutes governing security interests (e.g., Revised
Article 9 of the Uniform Commercial Code) change the way in which security interests and liens securing Municipal Securities are perfected. These
amendments may have an adverse impact on existing Municipal Securities (particularly issues of Municipal Securities that do not have a corporate
trustee who is responsible for filing UCC financing statements to continue the security interest or lien).
Litigation and Current
Developments. Litigation or other conditions may materially and adversely affect the power or ability of an issuer to meet its
obligations for the payment of interest on and
Part II-35
principal of its Municipal
Securities. Such litigation or conditions may from time to time have the effect of introducing uncertainties in the market for tax-exempt obligations,
or may materially affect the credit risk with respect to particular bonds or notes. Adverse economic, business, legal or political developments might
affect all or a substantial portion of a Funds Municipal Securities in the same manner.
New
Legislation. From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal
income tax exemption for interest on tax exempt bonds, and similar proposals may be introduced in the future. The Supreme Court has held that Congress
has the constitutional authority to enact such legislation. It is not possible to determine what effect the adoption of such proposals could have on
(i) the availability of Municipal Securities for investment by the Funds, and (ii) the value of the investment portfolios of the
Funds.
Limitations on the Use of
Municipal Securities. Certain Funds may invest in Municipal Securities if the Adviser determines that such Municipal Securities offer
attractive yields. The Funds may invest in Municipal Securities either by purchasing them directly or by purchasing certificates of accrual or similar
instruments evidencing direct ownership of interest payments or principal payments, or both, on Municipal Securities, provided that, in the opinion of
counsel to the initial seller of each such certificate or instrument, any discount accruing on such certificate or instrument that is purchased at a
yield not greater than the coupon rate of interest on the related Municipal Securities will to the same extent as interest on such Municipal Securities
be exempt from federal income tax and state income tax (where applicable) and not treated as a preference item for individuals for purposes of the
federal alternative minimum tax. The Funds may also invest in Municipal Securities by purchasing from banks participation interests in all or part of
specific holdings of Municipal Securities. Such participation interests may be backed in whole or in part by an irrevocable letter of credit or
guarantee of the selling bank. The selling bank may receive a fee from a Fund in connection with the arrangement.
Each Fund will limit its
investment in municipal leases to no more than 5% of its total assets.
Options and Futures Transactions. A Fund
may purchase and sell (a) exchange traded and over-the-counter (OTC) put and call options on securities, indexes of securities and futures
contracts on securities and indexes of securities and (b) futures contracts on securities and indexes of securities. Each of these instruments is a
derivative instrument as its value derives from the underlying asset or index.
Subject to its investment
objective and policies, a Fund may use futures contracts and options for hedging and risk management purposes and to seek to enhance portfolio
performance.
Options and futures contracts may
be used to manage a Funds exposure to changing interest rates and/or security prices. Some options and futures strategies, including selling
futures contracts and buying puts, tend to hedge a Funds investments against price fluctuations. Other strategies, including buying futures
contracts and buying calls, tend to increase market exposure. Options and futures contracts may be combined with each other or with forward contracts
in order to adjust the risk and return characteristics of a Funds overall strategy in a manner deemed appropriate by the Funds Adviser and
consistent with the Funds objective and policies. Because combined options positions involve multiple trades, they result in higher transaction
costs and may be more difficult to open and close out.
The use of options and futures is
a highly specialized activity which involves investment strategies and risks different from those associated with ordinary portfolio securities
transactions, and there can be no guarantee that their use will increase a Funds return. While the use of these instruments by a Fund may reduce
certain risks associated with owning its portfolio securities, these techniques themselves entail certain other risks. If a Funds Adviser applies
a strategy at an inappropriate time or judges market conditions or trends incorrectly, options and futures strategies may lower a Funds return.
Certain strategies limit a Funds possibilities to realize gains, as well as its exposure to losses. A Fund could also experience losses if the
prices of its options and futures positions were poorly correlated with its other investments, or if it could not close out its positions because of an
illiquid secondary market. In addition, the Fund will incur transaction costs, including trading commissions and option premiums, in connection with
its futures and options transactions, and these transactions could significantly increase the Funds turnover rate.
Part II-36
The Funds have filed a 4.5 notice
under the Commodity Exchange Act and are operated by a person who has claimed an exclusion from the definition of the term commodity pool
operator under the Commodity Exchange Act and, therefore, who is not subject to registration or regulation as a pool operator under the Commodity
Exchange Act.
Purchasing Put and Call
Options. By purchasing a put option, a Fund obtains the right (but not the obligation) to sell the instrument underlying the option at a
fixed strike price. In return for this right, a Fund pays the current market price for the option (known as the option premium). Options have various
types of underlying instruments, including specific securities, indexes of securities, indexes of securities prices, and futures contracts. A Fund may
terminate its position in a put option it has purchased by allowing it to expire or by exercising the option. A Fund may also close out a put option
position by entering into an offsetting transaction, if a liquid market exists. If the option is allowed to expire, a Fund will lose the entire premium
it paid. If a Fund exercises a put option on a security, it will sell the instrument underlying the option at the strike price. If a Fund exercises an
option on an index, settlement is in cash and does not involve the actual purchase or sale of securities. If an option is American style, it may be
exercised on any day up to its expiration date. A European style option may be exercised only on its expiration date.
The buyer of a typical put option
can expect to realize a gain if the value of the underlying instrument falls substantially. However, if the price of the instrument underlying the
option does not fall enough to offset the cost of purchasing the option, a put buyer can expect to suffer a loss (limited to the amount of the premium
paid, plus related transaction costs).
The features of call options are
essentially the same as those of put options, except that the purchaser of a call option obtains the right to purchase, rather than sell, the
instrument underlying the option at the options strike price. A call buyer typically attempts to participate in potential price increases of the
instrument underlying the option with risk limited to the cost of the option if security prices fall. At the same time, the buyer can expect to suffer
a loss if security prices do not rise sufficiently to offset the cost of the option.
Selling (Writing) Put and Call
Options. When a Fund writes a put option, it takes the opposite side of the transaction from the options purchaser. In return for
the receipt of the premium, a Fund assumes the obligation to pay the strike price for the instrument underlying the option if the other party to the
option chooses to exercise it. A Fund may seek to terminate its position in a put option it writes before exercise by purchasing an offsetting option
in the market at its current price. If the market is not liquid for a put option a Fund has written, however, it must continue to be prepared to pay
the strike price while the option is outstanding, regardless of price changes, and must continue to post margin as discussed below. If the market value
of the underlying securities does not move to a level that would make exercise of the option profitable to its holder, the option will generally expire
unexercised, and the Fund will realize as profit the premium it received.
If the price of the underlying
instrument rises, a put writer would generally expect to profit, although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will also profit, because it should be able to close out the option at a lower
price. If security prices fall, the put writer would expect to suffer a loss. This loss should be less than the loss from purchasing and holding the
underlying instrument directly, however, because the premium received for writing the option should offset a portion of the decline.
Writing a call option obligates a
Fund to sell or deliver the options underlying instrument in return for the strike price upon exercise of the option. The characteristics of
writing call options are similar to those of writing put options, except that writing calls generally is a profitable strategy if prices remain the
same or fall. Through receipt of the option premium a call writer offsets part of the effect of a price decline. At the same time, because a call
writer must be prepared to deliver the underlying instrument in return for the strike price, even if its current value is greater, a call writer gives
up some ability to participate in security price increases.
Part II-37
The writer of an exchange traded
put or call option on a security, an index of securities or a futures contract is required to deposit cash or securities or a letter of credit as
margin and to make mark to market payments of variation margin as the position becomes unprofitable.
Certain Funds will usually sell
covered options. A call option is covered if the writer either owns the underlying security (or comparable securities satisfying the cover requirements
of the securities exchanges) or has the right to acquire such securities. A put option is covered if the writer segregates cash, high-grade short-term
debt obligations, or other permissible collateral equal to the exercise price. As the writer of a covered call option, the Fund foregoes, during the
options life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium
and the strike price of the call, but has retained the risk of loss should the price of the underlying security decline. As the Fund writes covered
calls over more of its portfolio, its ability to benefit from capital appreciation becomes more limited. The writer of an option has no control over
the time when it may be required to fulfill its obligation, but may terminate its position by entering into an offsetting option. Once an option writer
has received an exercise notice, it cannot effect an offsetting transaction in order to terminate its obligation under the option and must deliver the
underlying security at the exercise price.
When the Fund writes covered put
options, it bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is
exercised, the Fund could incur a loss if it is required to purchase the stock underlying the put option at a price greater than the market price of
the stock at the time of exercise plus the put premium the Fund received when it wrote the option. While the Funds potential gain in writing a
covered put option is limited to distributions earned on the liquid assets securing the put option plus the premium received from the purchaser of the
put option, the Fund risks a loss equal to the entire exercise price of the option minus the put premium.
Engaging in Straddles and
Spreads. In a straddle transaction, a Fund either buys a call and a put or sells a call and a put on the same security. In a spread, a
Fund purchases and sells a call or a put. A Fund will sell a straddle when the Funds Adviser believes the price of a security will be stable. The
Fund will receive a premium on the sale of the put and the call. A spread permits a Fund to make a hedged investment that the price of a security will
increase or decline.
Options on
Indexes. Options on securities indexes are similar to options on securities, except that the exercise of securities index options is
settled by cash payment and does not involve the actual purchase or sale of securities. In addition, these options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. A Fund, in purchasing or
selling index options, is subject to the risk that the value of its portfolio securities may not change as much as an index because a Funds
investments generally will not match the composition of an index.
For a number of reasons, a liquid
market may not exist and thus a Fund may not be able to close out an option position that it has previously entered into. When a Fund purchases an OTC
option (as defined below), it will be relying on its counterparty to perform its obligations and the Fund may incur additional losses if the
counterparty is unable to perform.
Exchange-Traded and OTC
Options. All options purchased or sold by a Fund will be traded on a securities exchange or will be purchased or sold by securities
dealers (OTC options) that meet the Funds creditworthiness standards. While exchange-traded options are obligations of the Options
Clearing Corporation, in the case of OTC options, a Fund relies on the dealer from which it purchased the option to perform if the option is exercised.
Thus, when a Fund purchases an OTC option, it relies on the dealer from which it purchased the option to make or take delivery of the underlying
securities. Failure by the dealer to do so would result in the loss of the premium paid by a Fund as well as loss of the expected benefit of the
transaction.
Provided that a Fund has
arrangements with certain qualified dealers who agree that a Fund may repurchase any option it writes for a maximum price to be calculated by a
predetermined formula, a Fund may treat the underlying securities used to cover written OTC options as liquid. In these cases, the OTC
Part II-38
option itself would only be
considered illiquid to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option.
Futures
Contracts. When a Fund purchases a futures contract, it agrees to purchase a specified quantity of an underlying instrument at a
specified future date or, in the case of an index futures contract, to make a cash payment based on the value of a securities index. When a Fund sells
a futures contract, it agrees to sell a specified quantity of the underlying instrument at a specified future date or, in the case of an index futures
contract, to receive a cash payment based on the value of a securities index. The price at which the purchase and sale will take place is fixed when a
Fund enters into the contract. Futures can be held until their delivery dates or the position can be (and normally is) closed out before then. There is
no assurance, however, that a liquid market will exist when the Fund wishes to close out a particular position.
When a Fund purchases a futures
contract, the value of the futures contract tends to increase and decrease in tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase a Funds exposure to positive and negative price fluctuations in the underlying instrument, much as if it
had purchased the underlying instrument directly. When a Fund sells a futures contract, by contrast, the value of its futures position will tend to
move in a direction contrary to the value of the underlying instrument. Selling futures contracts, therefore, will tend to offset both positive and
negative market price changes, much as if the underlying instrument had been sold.
The purchaser or seller of a
futures contract is not required to deliver or pay for the underlying instrument unless the contract is held until the delivery date. However, when a
Fund buys or sells a futures contract it will be required to deposit initial margin with a futures commission merchant (FCM).
Initial margin deposits are typically equal to a small percentage of the contracts value. If the value of either partys position declines,
that party will be required to make additional variation margin payments equal to the change in value on a daily basis. The party that has
a gain may be entitled to receive all or a portion of this amount. A Fund may be obligated to make payments of variation margin at a time when it is
disadvantageous to do so. Furthermore, it may not always be possible for a Fund to close out its futures positions. Until it closes out a futures
position, a Fund will be obligated to continue to pay variation margin. Initial and variation margin payments do not constitute purchasing on margin
for purposes of a Funds investment restrictions. In the event of the bankruptcy of an FCM that holds margin on behalf of a Fund, the Fund may be
entitled to return of margin owed to it only in proportion to the amount received by the FCMs other customers, potentially resulting in losses to
the Fund. Each Fund will earmark and reserve Fund assets, in cash or liquid securities, in connection with its use of options and futures contracts to
the extent required by the staff of the SEC. Each Fund will earmark and reserve liquid assets in an amount equal to the current mark-to-market
exposure, on a daily basis, of a futures contract that is contractually required to cash settle. Such assets cannot be sold while the futures contract
or option is outstanding unless they are replaced with other suitable assets. By setting aside assets equal only to its net obligation under
cash-settled futures, a Fund will have the ability to have exposure to such instruments to a greater extent than if a Fund were required to set aside
assets equal to the full notional value of such contracts. There is a possibility that earmarking and reservation of a large percentage of a
Funds assets could impede portfolio management or a Funds ability to meet redemption requests or other current
obligations.
The Funds only invest in futures
contracts to the extent they could invest in the underlying instrument directly.
Cash
Equitization. The objective where equity futures are used to equitize cash is to match the notional value of all futures
contracts to a Funds cash balance. The notional values of the futures contracts and of the cash are monitored daily. As the cash is invested in
securities and/or paid out to participants in redemptions, the Adviser simultaneously adjusts the futures positions. Through such procedures, a Fund
not only gains equity exposure from the use of futures, but also benefits from increased flexibility in responding to client cash flow needs.
Additionally, because it can be less expensive to trade a list of securities as a package or program trade rather than as a group of individual orders,
futures provide a means through which transaction costs can be reduced. Such non-hedging risk management techniques involve leverage
and thus, present , as do all leveraged transactions, the possibility of losses as well as gains that are
Part II-39
greater than if these
techniques involved the purchase and sale of the securities themselves rather than their synthetic derivatives.
Options on Futures
Contracts. Futures contracts obligate the buyer to take and the seller to make delivery at a future date of a specified quantity of a
financial instrument or an amount of cash based on the value of a securities index. Currently, futures contracts are available on various types of
securities, including but not limited to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and on indexes of securities. Unlike
a futures contract, which requires the parties to buy and sell a security or make a cash settlement payment based on changes in a financial instrument
or securities index on an agreed date, an option on a futures contract entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to exercise its option, the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium thereon. The purchaser of an option on a futures contract pays a premium for
the option but makes no initial margin payments or daily payments of cash in the nature of variation margin payments to reflect the change
in the value of the underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a
futures contract receives the premium paid by the purchaser and may be required to pay initial margin. Amounts equal to the initial margin and any
additional collateral required on any options on futures contracts sold by a Fund are earmarked by a Fund and set aside by the Fund, as required by the
1940 Act and the SECs interpretations thereunder.
Combined
Positions. Certain Funds may purchase and write options in combination with futures or forward contracts, to adjust the risk and return
characteristics of the overall position. For example, a Fund may purchase a put option and write a call option on the same underlying instrument, in
order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined
position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written
call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction
costs and may be more difficult to open and close out.
Correlation of Price
Changes. Because there are a limited number of types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match a Funds current or anticipated investments exactly. A Fund may invest in
options and futures contracts based on securities with different issuers, maturities, or other characteristics from the securities in which it
typically invests, which involves a risk that the options or futures position will not track the performance of a Funds other
investments.
Options and futures contracts
prices can also diverge from the prices of their underlying instruments, even if the underlying instruments match the Funds investments well.
Options and futures contracts prices are affected by such factors as current and anticipated short term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and futures markets and the securities markets, from structural differences
in how options and futures and securities are traded, or from imposition of daily price fluctuation limits or trading halts. A Fund may purchase or
sell options and futures contracts with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the securities, although this may not be successful in all cases. If price changes in
a Funds options or futures positions are poorly correlated with its other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
Liquidity of Options and
Futures Contracts. There is no assurance that a liquid market will exist for any particular option or futures contract at any particular
time even if the contract is traded on an exchange. In addition, exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contracts price moves up or down more than the limit in a given day. On volatile trading days when the price
fluctuation limit is reached or a trading halt is imposed, it may be
Part II-40
impossible for a Fund to
enter into new positions or close out existing positions. If the market for a contract is not liquid because of price fluctuation limits or otherwise,
it could prevent prompt liquidation of unfavorable positions, and could potentially require a Fund to continue to hold a position until delivery or
expiration regardless of changes in its value. As a result, a Funds access to other assets held to cover its options or futures positions could
also be impaired. (See Exchange-Traded and OTC Options above for a discussion of the liquidity of options not traded on an
exchange.)
Position
Limits. Futures exchanges can limit the number of futures and options on futures contracts that can be held or controlled by an entity.
If an adequate exemption cannot be obtained, a Fund or the Funds Adviser may be required to reduce the size of its futures and options positions
or may not be able to trade a certain futures or options contract in order to avoid exceeding such limits.
Asset Coverage for Futures
Contracts and Options Positions. A Fund will comply with guidelines established by the SEC with respect to coverage of options and
futures contracts by mutual funds, and if the guidelines so require, will set aside or earmark appropriate liquid assets in the amount prescribed. Such
assets cannot be sold while the futures contract or option is outstanding, unless they are replaced with other suitable assets. As a result, there is a
possibility that the reservation of a large percentage of a Funds assets could impede portfolio management or a Funds ability to meet
redemption requests or other current obligations.
Real Estate Investment Trusts
(REITs)
Certain of the Funds may invest
in equity interests or debt obligations issued by REITs. REITs are pooled investment vehicles which invest primarily in income producing real estate or
real estate related loans or interest. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can
also realize capital gains by selling property that has appreciated in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Similar to investment companies, REITs are not taxed on income distributed to
shareholders provided they comply with several requirements of the Code. A Fund will indirectly bear its proportionate share of expenses incurred by
REITs in which a Fund invests in addition to the expenses incurred directly by a Fund.
Investing in REITs involves
certain unique risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by
changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs
are dependent upon management skills and on cash flows, are not diversified, and are subject to default by borrowers and self-liquidation. REITs are
also subject to the possibilities of failing to qualify for tax free pass-through of income under the Code and failing to maintain their exemption from
registration under the 1940 Act.
REITs (especially mortgage REITs)
are also subject to interest rate risks. When interest rates decline, the value of a REITs investment in fixed rate obligations can be expected
to rise. Conversely, when interest rates rise, the value of a REITs investment in fixed rate obligations can be expected to decline. In contrast,
as interest rates on adjustable rate mortgage loans are reset periodically, yields on a REITs investment in such loans will gradually align
themselves to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations.
Investment in REITs involves
risks similar to those associated with investing in small capitalization companies. These risks include:
|
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limited financial resources; |
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infrequent or limited trading; and |
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more abrupt or erratic price movements than larger company
securities. |
Part II-41
In addition, small capitalization
stocks, such as REITs, historically have been more volatile in price than the larger capitalization stocks included in the S&P 500
Index.
Repurchase Agreements
Repurchase agreements may be
entered into with brokers, dealers or banks that meet the Advisers credit guidelines. A Fund will enter into repurchase agreements only with
member banks of the Federal Reserve System and securities dealers believed by the Adviser to be creditworthy. In a repurchase agreement, a Fund buys a
security from a seller that has agreed to repurchase the same security at a mutually agreed upon date and price. The resale price normally is in excess
of the purchase price, reflecting an agreed upon interest rate. This interest rate is effective for the period of time a Fund is invested in the
agreement and is not related to the coupon rate on the underlying security. A repurchase agreement may also be viewed as a fully collateralized loan of
money by a Fund to the seller. Except in the case of a tri-party agreement, the maximum maturity of a repurchase agreement will be seven days. In the
case of a tri-party agreement, the maximum maturity of a repurchase agreement will be 95 days, or as limited by the specific repurchase agreement. The
securities which are subject to repurchase agreements, however, may have maturity dates in excess of 95 days from the effective date of the repurchase
agreement. Repurchase agreements maturing in more than seven days are treated as illiquid for purposes of a Funds restrictions on purchases of
illiquid securities. A Fund will always receive securities as collateral during the term of the agreement whose market value is at least equal to 100%
of the dollar amount invested by the Fund in each agreement plus accrued interest. The repurchase agreements further authorize the Fund to demand
additional collateral in the event that the dollar value of the collateral falls below 100%. A Fund will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the custodian. Repurchase agreements are considered under the 1940 Act to
be loans collateralized by the underlying securities.
Certain Funds may also engage in
repurchase agreement transactions that are collateralized by money market instruments or corporate debt securities that are rated below
investment grade by the requisite NRSROs. For these repurchase agreement transactions, the Fund would look to the counterparty, and not the collateral,
for determining such diversification. Other Funds may engage in repurchase agreement transactions that are collateralized by equity securities, debt
securities, loan participations, or other securities including securities that are rated below investment grade or unrated securities of comparable
quality.
A repurchase agreement is subject
to the risk that the seller may fail to repurchase the security. In the event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities would not be owned by the Fund, but would only constitute collateral for the sellers obligation to
pay the repurchase price. Therefore, a Fund may suffer time delays and incur costs in connection with the disposition of the collateral. The collateral
underlying repurchase agreements may be more susceptible to claims of the sellers creditors than would be the case with securities owned by the
Fund.
Reverse Repurchase Agreements
In a reverse repurchase
agreement, a Fund sells a security and agrees to repurchase the same security at a mutually agreed upon date and price reflecting the interest rate
effective for the term of the agreement. For purposes of the 1940 Act, a reverse repurchase agreement is considered borrowing by a Fund and, therefore,
a form of leverage. Leverage may cause any gains or losses for a Fund to be magnified. The Funds will invest the proceeds of borrowings under reverse
repurchase agreements. In addition, except for liquidity purposes, a Fund will enter into a reverse repurchase agreement only when the expected return
from the investment of the proceeds is greater than the expense of the transaction. A Fund will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase agreement. A Fund would be required to pay interest on amounts obtained
through reverse repurchase agreements, which are considered borrowings under federal securities laws. The repurchase price is generally equal to the
original sales price plus interest. Reverse repurchase agreements
Part II-42
are usually for seven days or
less and cannot be repaid prior to their expiration dates. Each Fund will earmark and reserve Fund assets, in cash or liquid securities, in an amount
at least equal to its purchase obligations under its reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities transferred may decline below the price at which a Fund is obliged to purchase the securities. All forms of borrowing
(including reverse repurchase agreements) are limited in the aggregate and may not exceed 33 1/3% of a Funds total assets, except as permitted by
law.
Securities Lending
To generate additional income,
certain Funds may lend up to 33 1/3% of such Funds total assets pursuant to agreements requiring that the loan be continuously secured by
collateral equal to at least 100% of the market value plus accrued interest on the securities lent. Typically, such collateral will consist of cash,
but, to the extent permitted in the Securities Lending Agreement approved by the Board of Trustees, may include U.S. government securities or letters
of credit. The Fund receives payments from the borrowers equivalent to the dividends and interest which would have been earned on the securities lent
while simultaneously seeking to earn interest on the investment of cash collateral in U.S. government securities, shares of an investment trust or
mutual fund, commercial paper, repurchase agreements, variable and floating rate instruments, restricted securities, asset-backed securities, and the
other types of investments permitted by the applicable Funds Prospectuses or SAI and the investment guidelines included in the Securities Lending
Agreement. Collateral is marked to market daily to provide a level of collateral at least equal to the market value plus accrued interest of the
securities lent. 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. There are no limits on the number of borrowers the Fund may use and the Fund may lend securities to only one or a small
group of borrowers. Loans are subject to termination by the Fund or the borrower at any time, and are therefore not considered to be illiquid
investments. The Fund does not have the right to vote proxies for securities on loan. However, the Funds Adviser will terminate a loan if the
vote is considered material with respect to an investment.
Short Selling
In short selling transactions, a
Fund sells a security it does not own in anticipation of a decline in the market value of the security. To complete the transaction, a Fund must borrow
the security to make delivery to the buyer. A Fund is obligated to replace the security borrowed by purchasing it subsequently at the market price at
the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund, which may result in a loss
or gain, respectively. Unlike taking a long position in a security by purchasing the security, where potential losses are limited to the purchase
price, short sales have no cap on maximum losses, and gains are limited to the price of the security at the time of the short sale.
Short sales of forward
commitments and derivatives do not involve borrowing a security. These types of short sales may include futures, options, contracts for differences,
forward contracts on financial instruments and options such as contracts, credit linked instruments, and swap contracts.
A Fund may not always be able to
borrow a security it wants to sell short. A Fund also may be unable to close out an established short position at an acceptable price and may have to
sell long positions at disadvantageous times to cover its short positions. The value of your investment in a Fund will fluctuate in response to
movements in the market. Fund performance also will depend on the effectiveness of the Advisers research and the management teams
investment decisions.
Short sales also involve other
costs. A Fund must repay to the lender an amount equal to any dividends or interest that accrues while the loan is outstanding. To borrow the security,
a Fund may be required to pay a premium. A Fund also will incur transaction costs in effecting short sales. The amount of any ultimate gain for a Fund
resulting from a short sale will be decreased and the amount of any ultimate loss will be increased, by the amount of premiums, interest or expenses a
Fund may be required to pay in connection with the short shale. Until a Fund closes the short position, it will earmark and reserve
Fund
Part II-43
assets, in cash or liquid
securities, to offset a portion of the leverage risk. Realized gains from short sales are typically treated as short-term
gains/losses.
Short-Term Funding Agreements
Short-term funding agreements
issued by insurance companies are sometimes referred to as Guaranteed Investment Contracts (GICs), while those issued by banks are referred
to as Bank Investment Contracts (BICs). Pursuant to such agreements, a Fund makes cash contributions to a deposit account at a bank or
insurance company. The bank or insurance company then credits to the Fund on a monthly basis guaranteed interest at either a fixed, variable or
floating rate. These contracts are general obligations of the issuing bank or insurance company (although they may be the obligations of an insurance
company separate account) and are paid from the general assets of the issuing entity.
A Fund will purchase short-term
funding agreements only from banks and insurance companies which, at the time of purchase, are rated in one of the three highest rating categories and
have assets of $1 billion or more. Generally, there is no active secondary market in short-term funding agreements. Therefore, short-term funding
agreements may be considered by a Fund to be illiquid investments. To the extent that a short-term funding agreement is determined to be illiquid, such
agreements will be acquired by a Fund only if, at the time of purchase, no more than 15% of the Funds net assets (10% for the Money Market Funds)
will be invested in short-term funding agreements and other illiquid securities.
Structured Investments
A structured investment is a
security having a return tied to an underlying index or other security or asset class. Structured investments generally are individually negotiated
agreements and may be traded over-the-counter. Structured investments are organized and operated to restructure the investment characteristics of the
underlying security. This restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, or specified instruments
(such as commercial bank loans) and the issuance by that entity or one or more classes of securities (structured securities) backed by, or
representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued structured
securities to create securities with different investment characteristics, such as varying maturities, payment priorities and interest rate provisions,
and the extent of such payments made with respect to structured securities is dependent on the extent of the cash flow on the underlying instruments.
Because structured securities typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying
instruments. Investments in structured securities are generally of a class of structured securities that is either subordinated or unsubordinated to
the right of payment of another class. Subordinated structured securities typically have higher yields and present greater risks than unsubordinated
structured securities. Structured instruments include structured notes. In addition to the risks applicable to investments in structured investments
and debt securities in general, structured notes bear the risk that the issuer may not be required to pay interest on the structured note if the index
rate rises above or falls below a certain level. Structured securities are typically sold in private placement transactions, and there currently is no
active trading market for structured securities. Investments in government and government-related restructured debt instruments are subject to special
risks, including the inability or unwillingness to repay principal and interest, requests to reschedule or restructure outstanding debt and requests to
extend additional loan amounts. Structured investments include a wide variety of instruments including, without limitation, Collateralized Debt
Obligations.
Structured instruments that are
registered under the federal securities laws may be treated as liquid. In addition, many structured instruments may not be registered under the federal
securities laws. In that event, a Funds ability to resell such a structured instrument may be more limited than its ability to resell other Fund
securities. The Funds will treat such instruments as illiquid and will limit their investments in such instruments to no more than 15% of each
Funds net assets (10% for the Money Market Funds), when combined with all other illiquid investments of each Fund.
Total Annual Operating Expenses
set forth in the fee table and Financial Highlights section of each Funds Prospectuses do not include any expenses associated with investments in
certain structured or
Part II-44
synthetic products that may
rely on the exception for the definition of investment company provided by section 3(c)(1) or 3(c)(7) of the 1940 Act.
Swaps and Related Swap Products
Swap transactions may include,
but are not limited to, interest rate swaps, currency swaps, cross-currency interest rate swaps, forward rate agreements, contracts for differences,
total return swaps, index swaps, basket swaps, specific security swaps, fixed income sectors swaps, commodity swaps, asset-backed swaps (ABX), credit
default swaps, interest rate caps, floors and collars and swaptions (collectively defined as swap transactions).
A Fund may enter into swap
transactions for any legal purpose consistent with its investment objective and policies, such as for the purpose of attempting to obtain or preserve a
particular return or spread at a lower cost than obtaining that return or spread through purchases and/or sales of instruments in cash markets, to
protect against currency fluctuations, to protect against any increase in the price of securities a Fund anticipates purchasing at a later date, or to
gain exposure to certain markets in the most economical way possible.
Swap agreements are two-party
contracts entered into primarily by institutional counterparties for periods ranging from a few weeks to several years. In a standard swap transaction,
two parties agree to exchange the returns (or differentials in rates of return) that would be earned or realized on specified notional investments or
instruments. The gross returns to be exchanged or swapped between the parties are calculated by reference to a notional amount,
i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency or
commodity, or in a basket of securities representing a particular index. The purchaser of an interest rate cap or floor, upon payment of a
fee, has the right to receive payments (and the seller of the cap or floor is obligated to make payments) to the extent a specified interest rate
exceeds (in the case of a cap) or is less than (in the case of a floor) a specified level over a specified period of time or at specified dates. The
purchaser of an interest rate collar, upon payment of a fee, has the right to receive payments (and the seller of the collar is obligated to make
payments) to the extent that a specified interest rate falls outside an agreed upon range over a specified period of time or at specified dates. The
purchaser of an option on an interest rate swap also known as a swaption, upon payment of a fee (either at the time of purchase or in the
form of higher payments or lower receipts within an interest rate swap transaction) has the right, but not the obligation, to initiate a new swap
transaction of a pre-specified notional amount with pre-specified terms with the seller of the swaption as the counterparty.
The notional amount
of a swap transaction is the agreed upon basis for calculating the payments that the parties have agreed to exchange. For example, one swap
counterparty may agree to pay a floating rate of interest (e.g., 3 month LIBOR) calculated based on a $10 million notional amount on a quarterly basis
in exchange for receipt of payments calculated based on the same notional amount and a fixed rate of interest on a semi-annual basis. In the event a
Fund is obligated to make payments more frequently than it receives payments from the other party, it will incur incremental credit exposure to that
swap counterparty. This risk may be mitigated somewhat by the use of swap agreements which call for a net payment to be made by the party with the
larger payment obligation when the obligations of the parties fall due on the same date. Under most swap agreements entered into by a Fund, payments by
the parties will be exchanged on a net basis, and a Fund will receive or pay, as the case may be, only the net amount of the two
payments.
The amount of a Funds
potential gain or loss on any swap transaction is not subject to any fixed limit. Nor is there any fixed limit on a Funds potential loss if it
sells a cap or collar. If a Fund buys a cap, floor or collar, however, the Funds potential loss is limited to the amount of the fee that it has
paid. When measured against the initial amount of cash required to initiate the transaction, which is typically zero in the case of most conventional
swap transactions, swaps, caps, floors and collars tend to be more volatile than many other types of instruments.
Part II-45
The use of swap transactions,
caps, floors and collars involves investment techniques and risks that are different from those associated with portfolio security transactions. If a
Funds Adviser is incorrect in its forecasts of market values, interest rates, and other applicable factors, the investment performance of the
Fund will be less favorable than if these techniques had not been used. These instruments are typically not traded on exchanges. Accordingly, there is
a risk that the other party to certain of these instruments will not perform its obligations to a Fund or that a Fund may be unable to enter into
offsetting positions to terminate its exposure or liquidate its position under certain of these instruments when it wishes to do so. Such occurrences
could result in losses to a Fund. A Funds Adviser will consider such risks and will enter into swap and other derivatives transactions only when
it believes that the risks are not unreasonable.
A Fund will earmark and reserve
Fund assets, in cash or liquid securities, in an amount sufficient at all times to cover its current obligations under its swap transactions, caps,
floors and collars. If a Fund enters into a swap agreement on a net basis, it will earmark and reserve assets with a daily value at least equal to the
excess, if any, of a Funds accrued obligations under the swap agreement over the accrued amount a Fund is entitled to receive under the
agreement. If a Fund enters into a swap agreement on other than a net basis, or sells a cap, floor or collar, it will earmark and reserve assets with a
daily value at least equal to the full amount of a Funds accrued obligations under the agreement. A Fund will not enter into any swap
transaction, cap, floor, or collar, unless the counterparty to the transaction is deemed creditworthy by the Funds Adviser. If a counterparty
defaults, a Fund may have contractual remedies pursuant to the agreements related to the transaction. The swap markets in which many types of swap
transactions are traded have grown substantially in recent years, with a large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the markets for certain types of swaps (e.g., interest rate swaps) have become
relatively liquid. The markets for some types of caps, floors and collars are less liquid.
The liquidity of swap
transactions, caps, floors and collars will be as set forth in guidelines established by a Funds Adviser and approved by the Trustees which are
based on various factors, including: (1) the availability of dealer quotations and the estimated transaction volume for the instrument, (2) the number
of dealers and end users for the instrument in the marketplace, (3) the level of market making by dealers in the type of instrument, (4) the nature of
the instrument (including any right of a party to terminate it on demand) and (5) the nature of the marketplace for trades (including the ability to
assign or offset a Funds rights and obligations relating to the instrument). Such determination will govern whether the instrument will be deemed
within the applicable liquidity restriction on investments in securities that are not readily marketable.
During the term of a swap, cap,
floor or collar, changes in the value of the instrument are recognized as unrealized gains or losses by marking to market to reflect the market value
of the instrument. When the instrument is terminated, a Fund will record a realized gain or loss equal to the difference, if any, between the proceeds
from (or cost of) the closing transaction and a Funds basis in the contract.
The federal income tax treatment
with respect to swap transactions, caps, floors, and collars may impose limitations on the extent to which a Fund may engage in such
transactions.
Credit Default
Swaps. As described above, swap agreements are two party contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In the case of a credit default swap (CDS), the contract gives one party (the buyer) the right to
recoup the economic value of a decline in the value of debt securities of the reference issuer if the credit event (a downgrade or default) occurs.
This value is obtained by delivering a debt security of the reference issuer to the party in return for a previously agreed payment from the other
party (frequently, the par value of the debt security). CDS include credit default swaps, which are contracts on individual securities, and CDX, which
are contracts on baskets or indices of securities.
Credit default swaps may require
initial premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of a reference
obligation. A Fund will earmark and reserve assets, in cash or liquid securities, to cover any accrued payment obligations when
Part II-46
it is the buyer of CDS. In
cases where a Fund is a seller of a CDS contract, the Fund will earmark and reserve assets, in cash or liquid securities, to cover its
obligation.
If a Fund is a seller of a CDS
contract, the Fund 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 or other credit event by the reference issuer, such as a U.S. or foreign corporate issuer, with respect to such debt obligations. In return, a
Fund 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, a Fund would keep the stream of payments and would have no payment obligations. As the seller, a Fund would be subject to investment
exposure on the notional amount of the swap.
If a Fund is a buyer of a CDS
contract, the Fund would have the right to deliver a referenced debt obligation and receive the par (or other agreed-upon) value of such debt
obligation from the counterparty in the event of a default or other credit event (such as a credit downgrade) by the reference issuer, such as a U.S.
or foreign corporation, with respect to its debt obligations. In return, the Fund would pay 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 counterparty would keep the stream of payments and would
have no further obligations to the Fund.
The use of CDSs, like all swap
agreements, is subject to certain risks. If a counterpartys creditworthiness declines, the value of the swap would likely decline. Moreover,
there is no guarantee that a Fund could eliminate its exposure under an outstanding swap agreement by entering into an offsetting swap agreement with
the same or another party. In addition to general market risks, CDSs involve liquidity, credit and counterparty risks. As an unregulated instrument,
CDSs are difficult to value and therefore susceptible to liquidity and credit risks. The recent increase in corporate defaults further raises these
liquidity and credit risks, increasing the possibility that sellers will not have sufficient funds to make payments. Counterparty risks also stem from
the lack of regulation of CDSs. Because they are unregulated, there is no requirement that parties to a contract be informed when a CDS is sold. As a
result, investors may have difficulty identifying the party responsible for payment of their claims.
Synthetic Variable Rate Instruments
Synthetic variable rate
instruments generally involve the deposit of a long-term tax exempt bond in a custody or trust arrangement and the creation of a mechanism to adjust
the long-term interest rate on the bond to a variable short-term rate and a right (subject to certain conditions) on the part of the purchaser to
tender it periodically to a third party at par. A Funds Adviser reviews the structure of synthetic variable rate instruments to identify credit
and liquidity risks (including the conditions under which the right to tender the instrument would no longer be available) and will monitor those
risks. In the event that the right to tender the instrument is no longer available, the risk to the Fund will be that of holding the long-term bond. In
the case of some types of instruments credit enhancement is not provided, and if certain events occur, which may include (a) default in the payment of
principal or interest on the underlying bond, (b) downgrading of the bond below investment grade or (c) a loss of the bonds tax exempt status,
then the put will terminate and the risk to the Fund will be that of holding a long-term bond.
Total Annual Operating Expenses
set forth in the fee table and Financial Highlights section of each Funds Prospectuses do not include any expenses associated with investments in
certain structured or synthetic products that may rely on the exception for the definition of investment company provided by section
3(c)(1) or 3(c)(7) of the 1940 Act.
Treasury Receipts
A Fund may purchase interests in
separately traded interest and principal component parts of U.S. Treasury obligations that are issued by banks or brokerage firms and are created by
depositing U.S. Treasury notes and U.S. Treasury bonds into a special account at a custodian bank. Receipts include Treasury Receipts
(TRs), Treasury Investment Growth Receipts (TIGRs), and Certificates of Accrual on Treasury Securities (CATS).
Receipts in which an entity other than the government separates the
Part II-47
interest and principal
components are not considered government securities unless such securities are issued through the Treasury Separate Trading of Registered Interest and
Principal of Securities (STRIPS) program.
Trust Preferred Securities
Certain Funds may purchase trust
preferred securities, also known as trust preferreds, which are preferred stocks issued by a special purpose trust subsidiary backed by
subordinated debt of the corporate parent. An issuer creates trust preferred securities by creating a trust and issuing debt to the trust. The trust in
turn issues trust preferred securities. Trust preferred securities are hybrid securities with characteristics of both subordinated debt and preferred
stock. Such characteristics include long maturities (typically 30 years or more), early redemption by the issuer, periodic fixed or variable interest
payments, and maturities at face value. In addition, trust preferred securities issued by a bank holding company may allow deferral of interest
payments for up to 5 years. Holders of trust preferred securities have limited voting rights to control the activities of the trust and no
voting rights with respect to the parent company.
U.S. Government Obligations
U.S. government obligations may
include direct obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all of which are backed as to principal and interest
payments by the full faith and credit of the U.S., and separately traded principal and interest component parts of such obligations that are
transferable through the Federal book-entry system known as STRIPS and Coupon Under Book Entry Safekeeping (CUBES). The Funds may also
invest in TIPS.
The principal and interest
components of U.S. Treasury bonds with remaining maturities of longer than ten years are eligible to be traded independently under the STRIPS program.
Under the STRIPS program, the principal and interest components are separately issued by the U.S. Treasury at the request of depository financial
institutions, which then trade the component parts separately. The interest component of STRIPS may be more volatile than that of U.S. Treasury bills
with comparable maturities.
Other obligations include those
issued or guaranteed by U.S. government agencies or instrumentalities. These obligations may or may not be backed by the full faith and
credit of the U.S.. Securities which are backed by the full faith and credit of the U.S. include obligations of the Government National Mortgage
Association, the Farmers Home Administration, and the Export-Import Bank. In the case of securities not backed by the full faith and credit of the
U.S., the Funds must look principally to the federal agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the U.S. itself in the event the agency or instrumentality does not meet its commitments. Securities in which the Funds may invest that
are not backed by the full faith and credit of the U.S. include, but are not limited to: (i) obligations of the Tennessee Valley Authority, the Federal
Home Loan Banks and the U.S. Postal Service, each of which has the right to borrow from the U.S. Treasury to meet its obligations; (ii) securities
issued by Freddie Mac and Fannie Mae, which are supported only by the credit of such securities, but for which the Secretary of the Treasury has
discretionary authority to purchase limited amounts of the agencys obligations; and (iii) obligations of the Federal Farm Credit System and the
Student Loan Marketing Association, each of whose obligations may be satisfied only by the individual credits of the issuing agency.
When-Issued Securities, Delayed Delivery Securities and
Forward Commitments
Securities may be purchased on a
when-issued or delayed delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the
purchase commitment. The purchase price and the interest rate payable, if any, on the securities are fixed on the purchase commitment date or at the
time the settlement date is fixed. The value of such securities is subject to market fluctuation and for money market instruments and other fixed
income securities, no interest accrues to a Fund until settlement takes place. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction, reflect the value each day of such securities in determining its NAV and, if
applicable, calculate the maturity for the purposes of average
Part II-48
maturity from that date. At
the time of settlement a when-issued security may be valued at less than the purchase price. To facilitate such acquisitions, each Fund will earmark
and reserve Fund assets, in cash or liquid securities, in an amount at least equal to such commitments. On delivery dates for such transactions, each
Fund will meet its obligations from maturities or sales of the securities earmarked and reserved for such purpose and/or from cash flow. If a Fund
chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. Also, a Fund may be disadvantaged if the other party to the transaction
defaults.
Forward
Commitments. Securities may be purchased for delivery at a future date, which may increase their overall investment exposure and
involves a risk of loss if the value of the securities declines prior to the settlement date. In order to invest a Funds assets immediately,
while awaiting delivery of securities purchased on a forward commitment basis, short-term obligations that offer same-day settlement and earnings will
normally be purchased. When a Fund makes a commitment to purchase a security on a forward commitment basis, cash or liquid securities equal to the
amount of such Funds commitments will be reserved for payment of the commitment. For the purpose of determining the adequacy of the securities
reserved for payment of commitments, the reserved securities will be valued at market value. If the market value of such securities declines,
additional cash, cash equivalents or highly liquid securities will be reserved for payment of the commitment so that the value of the Funds
assets reserved for payment of the commitments will equal the amount of such commitments purchased by the respective Fund.
Purchases of securities on a
forward commitment basis may involve more risk than other types of purchases. Securities purchased on a forward commitment basis and the securities
held in the respective Funds portfolio are subject to changes in value based upon the publics perception of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing securities on a forward commitment basis can involve the risk that the yields available in the
market when the delivery takes place may actually be higher or lower than those obtained in the transaction itself. On the settlement date of the
forward commitment transaction, the respective Fund will meet its obligations from then-available cash flow, sale of securities reserved for payment of
the commitment, sale of other securities or, although it would not normally expect to do so, from sale of the forward commitment securities themselves
(which may have a value greater or lesser than such Funds payment obligations). The sale of securities to meet such obligations may result in the
realization of capital gains or losses. Purchasing securities on a forward commitment basis can also involve the risk of default by the other party on
its obligation, delaying or preventing the Fund from recovering the collateral or completing the transaction.
To the extent a Fund engages in
forward commitment transactions, it will do so for the purpose of acquiring securities consistent with its investment objective and policies and not
for the purpose of investment leverage.
RISK MANAGEMENT
Each Fund may employ non-hedging
risk management techniques. Risk management strategies are used to keep the Funds fully invested and to reduce the transaction costs associated with
cash flows into and out of a Fund. The Funds use a wide variety of instruments and strategies for risk management and the examples below are not meant
to be exhaustive.
Examples of risk management
strategies include synthetically altering the duration of a portfolio or the mix of securities in a portfolio. For example, if the Adviser wishes to
extend maturities in a fixed income portfolio in order to take advantage of an anticipated decline in interest rates, but does not wish to purchase the
underlying long-term securities, it might cause a Fund to purchase futures contracts on long term debt securities. Likewise, if the Adviser wishes to
gain exposure to an instrument but does not wish to purchase the instrument it may use swaps and related instruments. Similarly, if the Adviser wishes
to decrease exposure to fixed income securities or purchase equities, it could cause the Fund to sell futures contracts on debt securities and purchase
futures contracts on a stock index. Such non-hedging risk management techniques involve leverage, and thus, present ,
as do all leveraged transactions, the possibility of losses as well as gains that are
Part II-49
greater than if these
techniques involved the purchase and sale of the securities themselves rather than their synthetic derivatives.
SPECIAL FACTORS AFFECTING CERTAIN
FUNDS
In addition to the investment
strategies and policies described above, certain Funds may employ other investment strategies and policies, or similar strategies and policies to a
greater extent, and, therefore, may be subject to additional risks or similar risks to a greater extent. For instance, certain Funds which invest in
certain state specific securities may be subject to special considerations regarding such investments. For a description of such additional investment
strategies and policies as well as corresponding risks for such Funds, see Part I of this SAI.
DIVERSIFICATION
Certain Funds are diversified
funds and as such intend to meet the diversification requirements of the 1940 Act. Please refer to the Funds Prospectuses for information about
whether the Fund is a diversified or non-diversified Fund. Current 1940 Act diversification requirements require that with respect to 75% of the assets
of the Fund, the Fund may not invest more than 5% of its total assets in the securities of any one issuer or own more than 10% of the outstanding
voting securities of any one issuer, except cash or cash items, obligations of the U.S. government, its agencies and instrumentalities, and securities
of other investment companies. As for the other 25% of a Funds assets not subject to the limitation described above, there is no limitation on
investment of these assets under the 1940 Act, so that all of such assets may be invested in securities of any one issuer. Investments not subject to
the limitations described above could involve an increased risk to a Fund should an issuer be unable to make interest or principal payments or should
the market value of such securities decline.
Each of the Money Market Funds
intends to comply with the diversification requirements imposed by Rule 2a-7 of the 1940 Act.
Certain other Funds are
registered as non-diversified investment companies. A Fund is considered non-diversified because a relatively high percentage of the
Funds assets may be invested in the securities of a single issuer or a limited number of issuers, primarily within the same economic sector. A
non-diversified Funds portfolio securities, therefore, may be more susceptible to any single economic, political, or regulatory occurrence than
the portfolio securities of a more diversified investment company.
Regardless of whether a Fund is
diversified under the 1940 Act, all of the Funds will comply with the diversification requirements imposed by the Code for qualification as a regulated
investment company. See Distributions and Tax Matters.
DISTRIBUTIONS AND TAX MATTERS
The following discussion is a
brief summary of some of the important federal (and, where noted, state) income tax consequences affecting each Fund and its shareholders. There may be
other tax considerations applicable to particular shareholders. Except as otherwise noted in a Funds Prospectus, the Funds are not intended for
foreign shareholders. As a result, this section does not address the tax consequences affecting any shareholder who, as to the U.S., is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign partnership. This section is based on the Code, the regulations thereunder,
published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. The following tax
discussion is very general; therefore, prospective investors are urged to consult their tax advisors about the impact an investment in a Fund may have
on their own tax situations and the possible application of foreign, state and local law.
Each Fund generally will be
treated as a separate entity for federal income tax purposes, and thus the provisions of the Code generally will be applied to each Fund separately.
Net long-term and short-term capital gain, net income and operating expenses therefore will be determined separately for each Fund.
Part II-50
Qualification as a Regulated Investment
Company.
Each Fund intends to elect to be
treated and qualify each year as a regulated investment company under Subchapter M of the Code. In order to qualify for the special tax treatment
accorded regulated investment companies and their shareholders, each Fund must, among other things:
(a) |
|
derive at least 90% of its gross income for each taxable year
from (i) dividends, interest, payments with respect to certain securities loans, and gain from the sale or other disposition of stock, securities, or
foreign currencies, or other income (including, but not limited to, gain from options, swaps, futures, or forward contracts) derived with respect to
its business of investing in such stock, securities, or currencies and (ii) net income derived from interests in qualified publicly traded
partnerships (QPTPs, defined below); |
(b) |
|
diversify its holdings so that, at the end of each quarter of
the Funds taxable year, (i) at least 50% of the market value of the Funds total assets is represented by cash and cash items, U.S.
government securities, securities of other regulated investment companies, and other securities, limited in respect of any one issuer to an amount not
greater than 5% of the value of the Funds total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the Funds total assets is invested (x) in the securities (other than cash or cash items, or securities issued by
the U.S. government or other regulated investment companies) of any one issuer or of two or more issuers that the Fund controls and that are engaged in
the same, similar, or related trades or businesses, or (y) in the securities of one or more QPTPs. In the case of a Funds investments in loan
participations, the Fund shall treat both the financial intermediary and the issuer of the underlying loan as an issuer for the purposes of meeting
this diversification requirement; and |
(c) |
|
distribute with respect to each taxable year at least 90% of the
sum of its investment company taxable income (as that term is defined in the Code, without regard to the deduction for dividends paidgenerally,
taxable ordinary income and any excess of net short-term capital gain over net long-term capital loss) and net tax-exempt interest income, for such
year. |
In general, for purposes of the
90% gross income requirement described in paragraph (a) above, income derived from a partnership will be treated as qualifying income only to the
extent such income is attributable to items of income of the partnership which would be qualifying income if realized by the regulated investment
company. However, 100% of the net income derived from an interest in a qualified publicly traded partnership: (defined as a partnership (x)
interests in which are traded on an established securities markets or readily tradable on a secondary market as the substantial equivalents thereof,
(y) that derives at least 90% of its income from passive income sources defined in Code section 7704(d), and (z) that derives less than 90% of its
income from the qualifying income described in (a)(i) above) will be treated as qualifying income. Although income from a QPTP is qualifying income, as
discussed above, investments in QPTPs cannot exceed 25% of the Funds assets. In addition, although in general the passive loss rules of the Code
do not apply to regulated investment companies, such rules do apply to a regulated investment company with respect to items attributable to an interest
in a QPTP. Finally, for purposes of paragraph (b) above, the term outstanding voting securities of such issuer will include the equity
securities of a QPTP. A Funds investment in MLPs may qualify as an investment in (1) a QPTP, (2) a regular partnership, (3) a
passive foreign investment company (a PFIC) or (4) a corporation for U.S. federal income tax purposes. The treatment of
particular MLPs for U.S. federal income tax purposes will affect the extent to which a Fund can invest in MLPs. The U.S. federal income tax
consequences of a Funds investments in PFICs and regular partnerships are discussed in greater detail
below.
Gains from foreign currencies
(including foreign currency options, foreign currency swaps, foreign currency futures and foreign currency forward contracts) currently constitute
qualifying income for purposes of the 90% test, described in paragraph (a) above. However, the Treasury Department has the authority to issue
regulations (possibly with retroactive effect) excluding from the definition of qualifying income a funds foreign currency gains to
the extent that such income is not directly related to the funds principal business of investing in stock or securities.
Part II-51
If a Fund qualifies for a taxable
year as a regulated investment company that is accorded special tax treatment, the Fund will not be subject to federal income tax on income distributed
in a timely manner to its shareholders in the form of dividends (including Capital Gain Dividends, defined below). If a Fund were to fail to qualify as
a regulated investment company accorded special tax treatment in any taxable year, the Fund would be subject to taxation on its taxable income at
corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gain,
would be taxable to shareholders as ordinary income. Some portions of such distributions may be eligible for the dividends-received deduction in the
case of corporate shareholders. In addition, the Fund could be required to recognize unrealized gain, pay substantial taxes and interest, and make
substantial distributions before re-qualifying as a regulated investment company that is accorded special tax treatment.
Each Fund intends to distribute
at least annually to its shareholders all or substantially all of its investment company taxable income (computed without regard to the dividends-paid
deduction) and may distribute its net capital gain (that is the excess of net long-term capital gain over net short-term capital loss). Investment
company taxable income which is retained by a Fund will be subject to tax at regular corporate tax rates. A Fund might also retain for investment its
net capital gain. If a Fund does retain such net capital gain, such gain will be subject to tax at regular corporate rates on the amount retained, but
the Fund may designate the retained amount as undistributed capital gain in a notice to its shareholders who (i) will be required to include in income
for federal income tax purposes, as long-term capital gain, their respective shares of the undistributed amount, and (ii) will be entitled to credit
their respective shares of the tax paid by the Fund on such undistributed amount against their federal income tax liabilities, if any, and to claim
refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of a Fund
will be increased by an amount equal under current law to the difference between the amount of undistributed capital gain included in the
shareholders gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence.
Treasury regulations permit a
regulated investment company, in determining its investment company taxable income and net capital gain, to elect to treat all of part of any net
capital loss, any net long-term capital loss or any net foreign currency loss incurred after October 31 as if it had been incurred in the succeeding
year.
Excise Tax on Regulated Investment
Companies.
If a Fund fails to distribute in
a calendar year an amount equal to the sum of 98% of its ordinary income for such year and 98% of its capital gain net income for the one-year period
ending October 31 (or later if the Fund is permitted to elect and so elects), plus any retained amount from the prior year, the Fund will be subject to
a nondeductible 4% excise tax on the undistributed amounts. The Funds intend to make distributions sufficient to avoid imposition of the 4% excise tax,
although each Fund reserves the right to pay an excise tax rather than make an additional distribution when circumstances warrant (e.g., the excise tax
amount is deemed by a Fund to be de minimis). Certain derivative instruments give rise to ordinary income and loss. If a Fund has a taxable year
that begins in one calendar year and ends in the next calendar year, the Fund will be required to make this excise tax distribution during its taxable
year. There is a risk that a Fund could recognize income prior to making this excise tax distribution and could recognize losses after making this
distribution. As a result, an excise tax distribution could constitute a return of capital (see discussion below).
Fund Distributions.
The Funds anticipate distributing
substantially all of their net investment income for each taxable year. Distributions are taxable to shareholders even if they are paid from income or
gain earned by the Fund before a shareholders investment (and thus were included in the price the shareholder paid). Distributions are taxable
whether shareholders receive them in cash or reinvest them in additional shares. A shareholder whose distributions are reinvested in shares will be
treated as having received a dividend equal to the fair market value of the new shares issued. For federal income tax purposes, distributions of net
investment income generally are taxable as ordinary income. Taxes on distributions of capital gain are
Part II-52
determined by how long a Fund
owned the investment that generated it, rather than how long a shareholder may have owned shares in the Fund. Distributions of net capital gain from
the sale of investments that a Fund owned for more than one year and that are properly designated by the Fund as capital gain dividends (Capital
Gain Dividends) will be taxable as long-term capital gain. Distributions of capital gain generally are made after applying any available capital
loss carryovers. For taxable years beginning before January 1, 2011, the long-term capital gain tax rate applicable to most individuals is 15% (with
lower rates applying to taxpayers in the 10% and 15% rate brackets). A distribution of gain from the sale of investments that a Fund owned for one year
or less will be taxable as ordinary income. Distributions attributable to gain from the sale of MLPs that is characterized as ordinary income under the
Codes recapture provisions will be taxable as ordinary income.
For taxable years beginning
before January 1, 2011, distributions of investment income designated by a Fund as derived from qualified dividend income will be taxed in
the hands of individuals at the rates applicable to long-term capital gain. In order for some portion of the dividends received by a Fund shareholder
to be qualified dividend income, the Fund must meet certain holding-period and other requirements with respect to some portion of the dividend-paying
stocks in its portfolio, and the shareholder must meet certain holding-period and other requirements with respect to the Funds shares. A dividend
will not be treated as qualified dividend income (at either the Fund or shareholder level) (i) if the dividend is received with respect to any share of
stock 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 (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90 days before such
date), (ii) 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, (iii) if the recipient elects to have the dividend income treated as investment
interest for purposes of the limitation on deductibility of investment interest, or (iv) if the dividend is received from a foreign corporation that is
(a) not eligible for the benefits of a comprehensive income tax treaty with the U.S. (with the exception of dividends paid on stock of such a foreign
corporation readily tradable on an established securities market in the U.S.) or (b) treated as a PFIC.
In general, distributions of
investment income designated by a Fund as derived from qualified dividend income will be treated as qualified dividend income by a non-corporate
taxable shareholder so long as the shareholder meets the holding period and other requirements described above with respect to the Funds shares.
In any event, if the qualified dividend income received by each Fund during any taxable year is equal to or greater than 95% of its gross
income, then 100% of the Funds dividends (other than dividends that are properly designated as Capital Gain Dividends) will be eligible to
be treated as qualified dividend income. For this purpose, the only gain included in the term gross income is the excess of net short-term
capital gain over net long-term capital loss.
If a Fund receives dividends from
an underlying fund, and the underlying fund designates such dividends as qualified dividend income, then the Fund may, in turn, designate a
portion of its distributions as qualified dividend income as well, provided the Fund meets the holding-period and other requirements with
respect to shares of the underlying fund.
Any loss realized upon a taxable
disposition of shares held for six months or less will be treated as long-term capital loss to the extent of any Capital Gain Dividends received by the
shareholder with respect to those shares. All or a portion of any loss realized upon a taxable disposition of Fund shares will be disallowed if other
shares of such Fund are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.
A distribution paid to
shareholders by a Fund in January of a year generally is deemed to have been received by shareholders on December 31 of the preceding year, if the
distribution was declared and payable to shareholders of record on a date in October, November, or December of that preceding year. The Funds will
provide federal tax information annually, including information about dividends and distributions paid during the preceding year to taxable investors
and others requesting such information.
Part II-53
If a Fund makes a distribution to
its shareholders in excess of its current and accumulated earnings and profits in any taxable year, the excess distribution will be treated
as a return of capital to the extent of each shareholders basis (for tax purposes) in its shares, and any distribution in excess of basis will be
treated as capital gain. A return of capital is not taxable, but it does reduce the shareholders basis in its shares, which reduces the loss (or
increases the gain) on a subsequent taxable disposition by such shareholder of the shares.
Dividends and distributions on a
Funds shares generally are subject to federal income tax as described herein to the extent they do not exceed the Funds realized income and
gains, even though such dividends and distributions may represent economically a return of a particular shareholders investment. Such dividends
and distributions are likely to occur in respect of shares purchased at a time when the Funds net asset value reflects gains that are either (i)
unrealized, or (ii) realized but not distributed.
For corporate shareholders (other
than shareholders that are S corporations), the dividends-received deduction generally will apply (subject to a holding period requirement imposed by
the Code) to a Funds dividends paid from investment income to the extent derived from dividends received from U.S. corporations. However, any
distributions received by a Fund from real estate investment trusts (REITs) and PFICs will not qualify for the corporate dividends-received
deduction.
Special tax rules apply to
investments held through defined contribution plans and other tax-qualified plans. Shareholders should consult their tax advisors to determine the
suitability of shares of the Fund as an investment through such plans.
Sale or Redemption of Shares.
The sale, exchange, or redemption
of Fund shares may give rise to a gain or loss. In general, any gain or loss arising from (or treated as arising from) the sale or redemption of shares
of the Fund will be considered capital gain or loss and will be long-term capital gain or loss if the shares were held for more than one year. However,
any capital loss arising from the sale or redemption of shares held for six months or less will be treated as a long-term capital loss to the extent of
the amount of capital gain dividends received on (or undistributed capital gains credited with respect to) such shares. Capital gain of a non-corporate
U.S. shareholder that is recognized in a taxable year beginning on or before December 31, 2010 generally is taxed at a maximum rate of 15% where the
property is held by the shareholder for more than one year. Capital gain of a corporate shareholder is taxed at the same rate as ordinary income.
Depending on a shareholders percentage ownership in the Fund, a partial redemption of Fund shares could cause the shareholder to be treated as
receiving a dividend, taxable as ordinary income in an amount equal to the full amount of the distribution, rather than capital gain
income.
Fund Investments.
Certain investment and hedging
activities of the Funds, including transactions in options, swaptions, futures contracts, hedging transactions, forward contracts, straddles, swaps,
short sales, foreign currencies, inflation-linked securities and foreign securities will be subject to special tax rules (including mark-to-market,
constructive sale, straddle, wash sale and short sale rules). In a given case, these rules may accelerate income to a Fund, defer losses to a Fund,
cause adjustments in the holding periods of a Funds securities, convert long-term capital gain into short-term capital gain, convert short-term
capital losses into long-term capital loss, or otherwise affect the character of a Funds income. These rules could therefore affect the amount,
timing and character of distributions to shareholders and cause differences between a Funds book income and its taxable income. If a Funds
book income exceeds its taxable income, the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of the
Funds remaining earnings and profits (including earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to
the extent of the recipients basis in its shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset. If a Funds
book income is less than taxable income, the Fund could be required to make distributions exceeding book income to qualify as a regulated investment
company that is accorded special tax treatment. Income earned as a result of these transactions would, in general, not be eligible for the
dividends-received deduction or for treatment as exempt-interest dividends
Part II-54
when distributed to
shareholders. The Funds will endeavor to make any available elections pertaining to such transactions in a manner believed to be in the best interest
of each Fund and its shareholders.
The Funds participation in
loans of securities may affect the amount, timing, and character of distributions to shareholders. With respect to any security subject to
a securities loan, any (i) amounts received by the Fund in place of dividends earned on the security during the period that such security was
not directly held by the Fund will not give rise to qualified dividend income and (ii) withholding taxes accrued on dividends during the period that
such security was not directly held by the Fund will not qualify as a foreign tax paid by the Fund and therefore cannot be passed through to
shareholders even if the Fund meets the requirements described in Foreign Taxes, below.
Certain debt securities purchased
by the Funds are sold at an original issue discount and thus do not make periodic cash interest payments. Similarly, zero-coupon bonds do not make
periodic interest payments. Generally, the amount of the original issue discount is treated as interest income and is included in taxable income (and
required to be distributed) over the term of the debt security even though payment of that amount is not received until a later time, usually when the
debt security matures. In addition, payment-in-kind securities will give rise to income that is required to be distributed and is taxable even though
the Fund holding the security receives no interest payment in cash on the security during the year. Because each Fund distributes substantially all of
its net investment income to its shareholders (including such imputed interest), a Fund may have to sell portfolio securities in order to generate the
cash necessary for the required distributions. Such sales may occur at a time when the Adviser would not otherwise have chosen to sell such securities
and may result in a taxable gain or loss. Some of the Funds may invest in inflation-linked debt securities. Any increase in the principal amount of an
inflation-linked debt security will be original issue discount, which is taxable as ordinary income and is required to be distributed, even though the
Fund will not receive the principal, including any increase thereto, until maturity. A Fund investing in such securities may be required to liquidate
other investments, including at times when it is not advantageous to do so, in order to satisfy its distribution requirements and to eliminate any
possible taxation at the Fund level.
A Fund may invest to a
significant extent in debt obligations that are in the lowest rated categories (or are unrated), including debt obligations of issuers that are not
currently paying interest or that are in default. Investments in debt obligations that are at risk of being in default (or are presently in default)
present special tax issues for a Fund. Tax rules are not entirely clear about issues such as when a Fund may cease to accrue interest, original issue
discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities and how payments received on
obligations in default should be allocated between principal and income. These and other related issues will be addressed by each Fund when, as and if
it invests in such securities, in order to seek to ensure that it distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to U.S. federal income taxation or any excise tax.
Transactions of certain Funds in
foreign currencies, foreign currency denominated debt securities and certain foreign currency options, future contracts and forward contracts (and
similar instruments) may accelerate income recognition and result in ordinary income or loss to a Fund for federal income tax purposes which will be
taxable to the shareholders as such when it is distributed to them.
Special tax considerations apply
if a Fund invests in investment companies that are taxable as partnerships for federal income tax purposes. In general, the Fund will not recognize
income earned by such an investment company until the close of the investment companys taxable year. But the Fund will recognize such income as
it is earned by the investment company for purposes of determining whether it is subject to the 4% excise tax. Therefore, if the Fund and such an
investment company have different taxable years, the Fund may be compelled to make distributions in excess of the income recognized from such an
investment company in order to avoid the imposition of the 4% excise tax. A Funds receipt of a non-liquidating cash distribution from an
investment company taxable as a partnership generally will result in recognized gain (but not loss) only to the extent that the amount of the
distribution exceeds the Funds adjusted basis in shares of such investment company before the distribution. A Fund that receives a liquidating
cash distribution from an investment company taxable as a partnership will recognize capital
Part II-55
gain or loss to the extent of
the difference between the proceeds received by the Fund and the Funds adjusted tax basis in shares of such investment company; however, the Fund
will recognize ordinary income, rather than capital gain, to the extent that the Funds allocable share of unrealized receivables
(including any accrued but untaxed market discount) exceeds the shareholders share of the basis in those unrealized receivables.
Some amounts received by each
Fund with respect to its investments in MLPs will likely be treated as a return of capital because of accelerated deductions available with respect to
the activities of such MLPs. On the disposition of an investment in such an MLP, the Fund will likely realize taxable income in excess of economic gain
with respect to that asset (or, if the Fund does not dispose of the MLP, the Fund likely will realize taxable income in excess of cash flow with
respect to the MLP in a later period), and the Fund must take such income into account in determining whether the Fund has satisfied its distribution
requirements. The Fund may have to borrow or liquidate securities to satisfy its distribution requirements and to meet its redemption requests, even
though investment considerations might otherwise make it undesirable for the Fund to sell securities or borrow money at such time.
Some of the Funds may invest in
REITs. Such investments in REIT equity securities may require a Fund to accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, the Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so)
that it otherwise would have continued to hold. A Funds investments in REIT equity securities may at other times result in the Funds
receipt of cash in excess of the REITs earnings; if the Fund distributes such amounts, such distribution could constitute a return of capital to
Fund shareholders for federal income tax purposes. Dividends received by a Fund from a REIT generally will not constitute qualified dividend
income.
Some of the Funds may
invest in REITs, including REITs that hold residual interests in real estate mortgage investment conduits (REMICs) are themselves
taxable mortgage pools (TMPs), or invest in TMPs. Under a notice recently issued by the IRS and Treasury regulations that have
not yet been issued (but may apply with retroactive effect) a portion of a Funds income from a REIT that is attributable to the REITs
residual interest in a REMIC or a TMP (referred to in the Code as an excess inclusion) will be subject to federal income taxation in
all events. This notice also provides, and the regulations are expected to provide, that excess inclusion income of a regulated
investment company, such as each of the Funds, will generally be allocated to shareholders of the regulated investment company in proportion to
the dividends received by such shareholders, with the same consequences as if the shareholders held the related REMIC or TMP residual interest
directly.
In general, excess inclusion
income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions) and (ii)
will constitute unrelated business taxable income (UBTI) to entities (including a qualified pension plan, an individual retirement account,
a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess
inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income. In addition, because
the Code provides that excess inclusion income is ineligible for treaty benefits, a regulated investment company must withhold tax on
excess inclusions attributable to its foreign shareholders at a 30% rate of withholding, regardless of any treaty benefits for which a shareholder is
otherwise eligible.
Any investment in residual
interests of a Collateralized Mortgage Obligation (a CMO) that has elected to be treated as a REMIC can create complex tax problems,
especially if the Fund has state or local governments or other tax-exempt organizations as shareholders. Under current law, the Fund serves to block
unrelated business taxable income (UBTI) from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt
shareholder will recognize UBTI by virtue of its investment in the Fund if shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of Code Section 514(b). Furthermore, a tax-exempt shareholder may recognize UBTI if the Fund recognizes
excess inclusion income derived from direct or indirect investments in REMIC residual interests or TMPs if the amount of such income
recognized by the Fund exceeds the Funds investment company taxable income (after taking into account deductions for dividends paid by the
Fund).
Part II-56
In addition, special tax
consequences apply to charitable remainder trusts (CRTs) that invest in regulated investment companies that invest directly or indirectly
in residual interests in REMICs or in TMPs . Under legislation enacted in December 2006, a CRT, as defined in section 664 of the Code, that realizes
UBTI for a taxable year must pay an excise tax annually of an amount equal to such UBTI. Under IRS guidance issued in November 2006, a CRT will not
recognize UBTI solely as a result of investing in a Fund that recognizes excess inclusion income. Rather, if at any time during any taxable
year a CRT (or one of certain other tax-exempt shareholders, such as the U.S., a state or political subdivision, or an agency or instrumentality
thereof, and certain energy cooperatives) is a record holder of a share in a Fund that recognizes excess inclusion income, then the Fund
will be subject to a tax on that portion of its excess inclusion income for the taxable year that is allocable to such shareholders at the
highest federal corporate income tax rate. The extent to which this IRS guidance remains applicable in light of the December 2006 legislation is
unclear. To the extent permitted under the 1940 Act, each Fund may elect to specially allocate any such tax to the applicable CRT, or other
shareholder, and thus reduce such shareholders distributions for the year by the amount of the tax that relates to such shareholders
interest in the Fund. The Funds have not yet determined whether such an election will be made. CRTs are urged to consult their tax advisors concerning
the consequences of investing in a Fund.
A Funds investments in
certain PFICs could subject the Fund to a U.S. federal income tax (including interest charges) on distributions received from the company or on
proceeds received from the disposition of shares in the company. This tax cannot be eliminated by making distributions to Fund shareholders. In
addition, certain interest charges may be imposed on the Fund as a result of such distributions.
A PFIC is any foreign corporation
in which (i) 75% or more of the gross income for the taxable year is passive income, or (ii) the average percentage of the assets (generally by value,
but by adjusted tax basis in certain cases) that produce or are held for the production of passive income is at least 50%. Generally, passive income
for this purpose means dividends, interest (including income equivalent to interest), royalties, rents, annuities, the excess of gains over losses from
certain property transactions and commodities transactions, and foreign currency gains. Passive income for this purpose does not include rents and
royalties received by the foreign corporation from active business and certain income received from related persons. If a Fund is in a position to
treat a PFIC as a qualified electing fund (QEF), the Fund will be required to include its share of the companys income
and net capital gain annually, regardless of whether it receives any distributions from the company. Alternately, a Fund may make an election to mark
the gains (and to a limited extent losses) in such holdings to the market as though it had sold and repurchased its holdings in those PFICs
on the last day of the Funds taxable year. Such gain and loss are treated as ordinary income and loss. The QEF and mark-to-market elections may
have the effect of accelerating the recognition of income (without the receipt of cash) and increasing the amount required to be distributed by the
Fund to avoid taxation. Making either of these elections, therefore, may require the Fund to liquidate other investments (including at times when it is
not advantageous to do so) to meet its distribution requirement, which also may accelerate the recognition of gain and affect the Funds total
return. A fund that invests indirectly in PFICs by virtue of the funds investment in other investment companies that qualify as U.S.
persons within the meaning of the Code may not make such elections; rather, such underlying investment companies investing directly in the PFICs
would decide whether to make such elections. Dividends paid by PFICs will not be eligible to be treated as qualified dividend
income.
Investment in Other Funds.
If a Fund invests in shares of
other mutual funds, ETFs or other companies that are taxable as regulated investment companies, as well as certain investments in REITs (collectively,
underlying funds), its distributable income and gains will normally consist, in part, of distributions from the underlying funds and gains
and losses on the disposition of shares of the underlying funds. To the extent that an underlying fund realizes net losses on its investments for a
given taxable year, the Fund will not be able to recognize its share of those losses (so as to offset distributions of net income or capital gains from
other underlying funds) until it disposes of shares of the underlying fund. Moreover, even when the Fund does make such a
Part II-57
disposition, a portion of its
loss may be recognized as a long-term capital loss, which will not be treated as favorably for federal income tax purposes as a short-term capital loss
or an ordinary deduction. In particular, the Fund will not be able to offset any capital losses from its dispositions of underlying fund shares against
its ordinary income (including distributions of any net short-term capital gain realized by an underlying fund).
In addition, in certain
circumstances, the wash sale rules under Section 1091 of the Code may apply to a Funds sales of underlying fund shares that have
generated losses. A wash sale occurs if shares of an underlying fund are sold by the Fund at a loss and the Fund acquires substantially identical
shares of that same underlying fund 30 days before or after the date of the sale. The wash-sale rules could defer losses in the Funds hands on
sales of underlying fund shares (to the extent such sales are wash sales) for extended (and, in certain cases, potentially indefinite) periods of time.
As a result of the foregoing rules, and certain other special rules, the amount of net investment income and net capital gain that each Fund will be
required to distribute to shareholders may be greater than what such amounts would have been had the Fund directly invested in the securities held by
the underlying funds, rather than investing in shares of the underlying funds. For similar reasons, the character of distributions from the Fund (e.g.,
long-term capital gain, exempt interest, eligibility for dividends-received deduction, etc.) will not necessarily be the same as it would have been had
the Fund invested directly in the securities held by the underlying funds.
Depending on a Funds
percentage ownership in an underlying fund, both before and after a redemption, a redemption of shares of an underlying fund by a Fund may cause the
Fund to be treated as not receiving capital gain income on the amount by which the distribution exceeds the tax basis of the Fund in the shares of the
underlying fund, but instead to be treated as receiving a dividend. Such a distribution may be treated as qualified dividend income and thus eligible
to be taxed at the rates applicable to long-term capital gain. If qualified dividend income treatment is not available, the distribution may be taxed
as ordinary income. This could cause shareholders of the Fund to recognize higher amounts of ordinary income than if the shareholders had held the
shares of the underlying funds directly.
Under current law, a Fund cannot
pass through to shareholders foreign tax credits borne in respect of foreign securities income earned by an underlying fund. Each Fund is permitted to
elect to pass through to its shareholders foreign income taxes it pays only if it directly holds more than 50% of its assets in foreign stock and
securities at the close of its taxable year. The Fund may not include in its calculations the value of foreign securities held indirectly through an
underlying fund to reach this 50% threshold.
Backup Withholding.
Each Fund generally is required
to backup withhold and remit to the U.S. Treasury a percentage of the taxable dividends and other distributions paid to, and the proceeds of share
sales, exchanges, or redemptions made by, any individual shareholder who fails to properly furnish the Fund with a correct taxpayer identification
number (TIN), who has under-reported dividend or interest income, or who fails to certify to the Fund that he or she is not subject to
backup withholding. Pursuant to recently enacted tax legislation, the backup withholding rules may also apply to distributions that are properly
designated as exempt-interest dividends. The backup withholding tax rate is 28% for amounts paid through 2010. The backup withholding rate will be 31%
for amounts paid after December 31, 2010, unless Congress enacts tax legislation providing otherwise.
Foreign Shareholders.
The Funds are not intended for
foreign shareholders, except for shareholders of Class M Shares. If a beneficial holder who is a foreign shareholder (i.e., not a U.S.
person within the meaning of the Code) has a trade or business in the U.S., and the dividends are effectively connected with the conduct by the
beneficial holder of a trade or business in the U.S., the dividend will be subject to U.S. federal net income taxation at ordinary income tax
rates.
Special rules apply to
distributions to foreign shareholders from a Fund that is either a U.S. real property holding corporation (USRPHC) or would be
a USRPHC but for the operation of certain
Part II-58
exceptions to the definition
thereof. Additionally, special rules apply to the sale of shares in a Fund that is a USRPHC. Very generally, a USRPHC is a domestic corporation that
holds U.S. real property interests (USRPIs) USRPIs are defined very generally as any interest in U.S. real property or any equity
interest in a USRPHC the fair market value of which equals or exceeds 50% of the sum of the fair market values of the corporations USRPIs,
interests in real property located outside the United States and other assets. A Fund that holds (directly or indirectly) significant interests in
REITs may be a USRPHC. The special rules discussed below will also apply to distributions from a Fund that would be a USRPHC absent exclusions from
USRPI treatment for interests in domestically controlled REITs and not-greater-than-5% interests in publicly traded classes of stock in
REITs.
In the case of Funds that would
be USRPHCs but for the above-mentioned exceptions from the definition of USRPIs, amounts the Fund receives from REITs derived from gains realized from
USRPIs will retain the character as such in the hands of the Funds foreign shareholders, (under current law any direct USRPI gain the Fund
recognizes does not retain its character as USRPI gain in the hands of foreign shareholders of the Fund, although this may change if certain
proposed legislation is enacted) . In the hands of a foreign shareholder that holds (or has held in the prior year) more than a 5% interest in the
Fund, such amounts will be treated as gains effectively connected with the conduct of a U.S. trade or business, and subject to
tax at graduated rates, thus requiring the filing of a U.S. income tax return for the year recognized; the Fund must withhold 35% of the amount of the
such distribution. In the case of all other foreign shareholders (i.e., those with a 5%-or-smaller interest in the Fund), the USRPI distribution will
be treated as ordinary income (regardless of any designation by the Fund that such distribution is a Capital Gain Dividend), and the Fund must withhold
30% (or possibly a lower applicable treaty rate) of the amount of the distribution paid to such foreign shareholder. Foreign shareholders of such Funds
are also subject to wash sale rules to prevent the avoidance of the tax-filing and -payment obligations discussed in the above paragraphs
through the sale and repurchase of Fund shares.
In addition, a Fund that is a
USRPHC must withhold 10% of the amount realized in a redemption by a greater-than-5% foreign shareholder, and that shareholder must file a U.S. income
tax return for the year of the disposition of the USRPI and pay any additional tax due on the gain. Prior to January 1, 2008, no withholding generally
was required with respect to amounts paid in redemption of shares of a Fund that is a USRPHC and is also domestically controlled. It is possible that
Congress will extend this exemption from withholding to the current or future year, but no such legislation has been enacted as of the date of this
SAI.
Under U.S. federal tax law, a
beneficial holder of shares who is a foreign shareholder is not, in general, subject to U.S. federal income tax on gain (and is not allowed a deduction
for loss) realized on the sale of shares of the Fund or on Capital Gain Dividends unless (i) such gain or dividend is effectively connected with the
conduct of a trade or business carried on by such holder within the U.S., (ii) in the case of an individual holder, the holder is present in the U.S.
for a period or periods aggregating 183 days or more during the year of the sale or Capital Gain Dividend (provided that certain other conditions also
are met), or (iii) the shares are USRPIs or the Capital Gain Dividends are attributable to the gain recognized on the disposition of a
USRPI.
Foreign shareholders in the Fund
should consult their tax advisors with respect to the potential application of the above rules.
Foreign Taxes.
Certain Funds may be subject to
foreign withholding taxes or other foreign taxes with respect to income (possibly including, in some cases, capital gain) received from sources within
foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. If more than 50% of a Funds assets
at year end consists of the securities of foreign corporations, the Fund may elect to permit shareholders to claim a credit or deduction on their
income tax returns for their pro rata portion of qualified taxes paid by the Fund to foreign countries in respect of foreign securities the Fund has
held for at least the minimum period specified in the Code. In such a case, shareholders will include in gross income from foreign sources their pro
rata shares of such taxes. A shareholders ability to claim a foreign tax credit
Part II-59
or deduction in respect of
foreign taxes paid by a Fund may be subject to certain limitations imposed by the Code and the Treasury Regulations issued thereunder, as a result of
which a shareholder may not get a full credit or deduction for the amount of such taxes. In particular, shareholders must hold their Fund shares
(without protection from risk of loss) on the ex-dividend date and for at least 15 additional days during the 30-day period surrounding the ex-dividend
date to be eligible to claim a foreign tax credit with respect to a given dividend. Shareholders who do not itemize on their federal income tax returns
may claim a credit (but no deduction) for such foreign taxes.
If a Fund does not make the above
election or if more than 50% of its assets at the end of the year do not consist of securities of foreign corporations, the Funds net income will
be reduced by the foreign taxes paid or withheld. In such cases, shareholders will not be entitled to claim a credit or deduction with respect to
foreign taxes.
The foregoing is only a general
description of the treatment of foreign source income or foreign taxes under the U.S. federal income tax laws. Because the availability of a credit or
deduction depends on the particular circumstances of each shareholder, shareholders are advised to consult their own tax advisors.
Withholding Taxes.
Capital Gain Dividends and
exempt-interest dividends generally will not be subject to withholding of federal income tax. However, distributions that are properly designated as
exempt-interest dividends may be subject to backup withholding, as discussed above. In general, dividends other than Capital Gain Dividends and
exempt-interest dividends paid by a Fund to a shareholder that is not a U.S. person within the meaning of the Code (such shareholder, a
foreign person) are subject to withholding of U.S. federal income taxation at a rate of 30% (or, subject to certain limitations, possibly a
lower applicable treaty rate) even if they are funded by income or gain (such as portfolio interest, short-term capital gain, or foreign-source
dividend and interest income) that, if paid to a foreign person directly, would not be subject to withholding. However, effective for taxable years of
a Fund beginning before January 1, 2008, each Fund was not be required to withhold any amounts (i) with respect to distributions (other than
distributions to a foreign person (w) that has not provided a satisfactory statement that the beneficial owner is not a U.S. person, (x) to the extent
that the dividend is attributable to certain interest on an obligation if the foreign person is the issuer or is a 10% shareholder of the issuer, (y)
that is within certain foreign countries that have inadequate information exchange with the U.S., or (z) to the extent the dividend is attributable to
interest paid by a person that is a related person of the foreign person and the foreign person is a controlled foreign corporation) of U.S.-source
interest income that, in general, would not be subject to U.S. federal income tax if earned directly by an individual foreign person, to the extent
such distributions are properly designated by the Fund, and (ii) with respect to distributions (other than distributions to an individual foreign
person who is present in the U.S. for a period or periods aggregating 183 days or more during the year of the distribution) of net short-term capital
gain in excess of net long-term capital loss, to the extent such distributions are properly designated by the Fund. Pending legislation could reinstate
the exemption from withholding for interest-related distributions and short-term capital gain distributions for one year. However, it is unclear at
this time whether the legislation will be enacted. Short-term gain will not include gain from the sale of MLPs to the extent such gain is characterized
as ordinary income under the Codes recapture provisions. The Funds have not determined whether to make such designations. Depending on the
circumstances, the Funds may make such designations with respect to all, some or none of its potentially eligible dividends and/or treat such
dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a foreign
person will need to comply with applicable certification requirements relating to its non-US status (including, in general, furnishing an IRS Form
W-8BEN or substitute form). There is no guarantee that the exemption from withholding will apply to taxable years of the Funds beginning on or after
January 1, 2008. In the case of shares held through an intermediary, the intermediary may withhold even if a Fund makes a designation with respect to a
payment. Foreign persons should contact their intermediaries with respect to the application of these rules to their accounts.
If a beneficial holder who is a
foreign person carries on a trade or business within the U.S., and the dividends are effectively connected with the conduct by the beneficial holder of
such trade or business, the
Part II-60
dividends will be subject to
U.S. federal net income taxation at the marginal income tax rates applicable to U.S. citizens and residents.
Exempt-Interest Dividends.
Some of the Funds intend to
qualify to pay exempt-interest dividends to their respective shareholders. In order to qualify to pay exempt-interest dividends, at least 50% of the
value of a Funds total assets must consist of tax-exempt municipal bonds at the close of each quarter of the Funds taxable year. An
exempt-interest dividend is that part of a dividend that is properly designated as an exempt-interest dividend and that consists of interest received
by a Fund on such tax-exempt securities. Shareholders of Funds that pay exempt-interest dividends would not incur any regular federal income tax on the
amount of exempt-interest dividends received by them from a Fund, but an investment in such a Fund may result in liability for federal and state
alternative minimum taxation and may be subject to state and local taxes.
Interest on indebtedness incurred
or continued by a shareholder, whether a corporation or an individual, to purchase or carry shares of a Fund is not deductible to the extent it relates
to exempt-interest dividends received by the shareholder from that Fund. Any loss incurred on the sale or redemption of a Funds shares held for
six months or less will be disallowed to the extent of exempt-interest dividends received with respect to such shares.
Interest on certain tax-exempt
bonds that are private activity bonds within the meaning of the Code is treated as a tax preference item for purposes of the alternative minimum tax,
and any such interest received by a Fund and distributed to shareholders will be so treated for purposes of any alternative minimum tax liability of
shareholders to the extent of the dividends proportionate share of a Funds income consisting of such interest. All exempt-interest
dividends are subject to the corporate alternative minimum tax.
The exemption from federal income
tax for exempt-interest dividends does not necessarily result in exemption for such dividends under the income or other tax laws of any state or local
authority. Shareholders that receive social security or railroad retirement benefits should consult their tax advisors to determine what effect, if
any, an investment in a Fund may have on the federal taxation of their benefits. Shareholders are also advised to consult with their own tax advisors
about state and local tax matters. The U.S. Supreme Court heard an appeal of a state-court decision that might significantly affect how states tax
in-state and out-of-state municipal bonds. A Kentucky state court held that a Kentucky law violates the U.S. Constitution by treating, for Kentucky
state tax purposes, the interest income on in-state municipal bonds differently from the income on out-of-state municipal bonds. If the Supreme Court
affirms this holding, most states likely will revisit the way in which they treat the interest on municipal bonds, and this has the potential to
increase significantly the amount of state tax paid by shareholders on exempt-interest dividends. The U.S. Supreme Court will issue a decision sometime
before the summer of 2008. You should consult your tax advisor to discuss the tax consequences of your investment in the Fund.
State and Local Tax Matters.
Depending on the residence of the
shareholders for tax purposes, distributions may also be subject to state and local taxation. Rules of state and local taxation regarding qualified
dividend income, ordinary income dividends and capital gain dividends from regulated investment companies may differ from the rules of U.S. federal
income tax in many respects. Shareholders are urged to consult their tax advisors as to the consequences of these and other state and local tax rules
affecting investment in the Funds.
Most states provide that a
regulated investment company may pass through (without restriction) to its shareholders state and local income tax exemptions available to direct
owners of certain types of U.S. government securities (such as U.S. Treasury obligations). Thus, for residents of these states, distributions derived
from a Funds investment in certain types of U.S. government securities should be free from state and local income taxation to the extent that the
interest income from such investments would have been exempt from state and local taxes if such securities had been held directly by the respective
shareholders.
Part II-61
Certain states, however, do
not allow a regulated investment company to pass through to its shareholders the state and local income tax exemptions available to direct owners of
certain types of U.S. government securities unless a Fund holds at least a required amount of U.S. government securities. Accordingly, for residents of
these states, distributions derived from a Funds investment in certain types of U.S. government securities may not be entitled to the exemptions
from state and local income taxes that would be available if the shareholders had purchased U.S. government securities directly. The exemption from
state and local income taxes does not preclude states from asserting other taxes on the ownership of U.S. government securities. To the extent that a
Fund invests to a substantial degree in U.S. government securities which are subject to favorable state and local tax treatment, shareholders of the
Fund will be notified as to the extent to which distributions from the Fund are attributable to interest on such securities.
Tax Shelter Reporting Regulations
If a shareholder realizes a loss
on disposition of a Funds shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the
shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many
cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. Future
guidance may extend the current exception from this reporting requirement to shareholders of most or all regulated investment
companies.
General Considerations.
The federal income tax discussion
set forth above is for general information only. Prospective investors should consult their tax advisers regarding the specific federal tax
consequences of purchasing, holding, and disposing of shares of each of the Funds, as well as the effects of state, local and foreign tax law and any
proposed tax law changes.
TRUSTEES
The names of the Trustees of the
Trusts, together with information regarding their year of birth, the year each Trustee became a Board member of the Trusts, the year each Trustee first
became a Board member of any of the heritage JPMorgan Funds or heritage One Group Mutual Funds, principal occupations and other board memberships,
including those in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
Securities Exchange Act) or subject to the requirements of Section 15(d) of the Securities Exchange Act or any company registered as an
investment company under the 1940 Act, are shown below. The contact address for each of the Trustees is 245 Park Avenue, New York, NY
10167.
Name (Year of Birth); Positions With the Funds
(Since)
|
|
|
|
Principal Occupations During Past 5
Years
|
|
Number of Portfolios in Fund Complex Overseen
by Trustee(1)
|
|
Other Directorships Held Outside Fund
Complex
|
Independent
Trustees |
|
|
|
|
|
|
|
|
|
|
|
|
|
William J.
Armstrong (1941); Trustee of Trusts since 2005; Trustee of heritage JPMorgan Funds since 1987. |
|
|
|
Retired; CFO and Consultant, EduNeering, Inc. (internet business education supplier) (2000 2001); Vice President and
Treasurer, Ingersoll-Rand Company (manufacturer of industrial equipment) (19722000). |
|
145 |
|
None. |
Part II-62
Name (Year of Birth); Positions With the Funds
(Since)
|
|
|
|
Principal Occupations During Past 5
Years
|
|
Number of Portfolios in Fund Complex Overseen
by Trustee(1)
|
|
Other Directorships Held Outside Fund
Complex
|
John F.
Finn (1947); Trustee of Trusts since 2005; Trustee of heritage One Group Mutual Funds since 1998. |
|
|
|
President and Chief Executive Officer, Gardner, Inc. (wholesale distributor to outdoor power equipment industry)
(1979present). |
|
145 |
|
Director, Cardinal Health, Inc (CAH) (1994present); Chairman, The Columbus Association of the Performing Arts (CAPA) (2003
present). |
|
Dr. Matthew
Goldstein (1941); Trustee of Trusts since 2005; Trustee of heritage JPMorgan Funds since 2003. |
|
|
|
Chancellor, City University of New York (1999present); President, Adelphi University (New York) (19981999). |
|
145 |
|
Director, Albert Einstein School of Medicine (1998 present); Director, New Plan Excel Realty Trust, Inc. (real estate investment trust)
(2000present); Director, Lincoln Center Institute for the Arts in Education (1999present). |
|
Robert J.
Higgins (1945); Trustee of Trusts since 2005; Trustee of heritage JPMorgan Funds since 2002. |
|
|
|
Retired; Director of Administration of the State of Rhode Island (20032004); PresidentConsumer Banking and Investment Services,
Fleet Boston Financial (19712001). |
|
145 |
|
None. |
|
Peter C.
Marshall (1942); Trustee of Trusts since 2005; Trustee of heritage One Group Mutual Funds since 1994. |
|
|
|
Self-employed business consultant (2001present); Senior Vice President, W.D. Hoard, Inc. (corporate parent of DCI Marketing, Inc.)
(20002002); President, DCI Marketing, Inc. (19922000). |
|
145 |
|
None. |
|
Marilyn
McCoy (1948); Trustee of Trusts since 2005; Trustee of heritage One Group Mutual Funds since 1999. |
|
|
|
Vice
President of Administration and Planning, Northwestern University (1985present). |
|
145 |
|
Trustee, Carleton College (2003present). |
|
William G.
Morton, Jr. (1937); Trustee of Trusts since 2005; Trustee of heritage JPMorgan Funds since 2003. |
|
|
|
Retired; Chairman Emeritus (20012002), and Chairman and Chief Executive Officer, Boston Stock Exchange (1985
2001). |
|
145 |
|
Director, Radio Shack Corporation (electronics) (1987present); Director, The National Football Foundation and College Hall of Fame
(1994present); Trustee, Stratton Mountain School (2001present). |
|
Robert A.
Oden, Jr. (1946); Trustee of Trusts since 2005; Trustee of heritage One Group Mutual Funds since 1997. |
|
|
|
President, Carleton College (2002present); President, Kenyon College (19952002). |
|
145 |
|
Director, American University in Cairo. |
Part II-63
Name (Year of Birth); Positions With the Funds
(Since)
|
|
|
|
Principal Occupations During Past 5
Years
|
|
Number of Portfolios in Fund Complex Overseen
by Trustee(1)
|
|
Other Directorships Held Outside Fund
Complex
|
Fergus Reid,
III (1932); Trustee of Trusts (Chairman) since 2005; Trustee (Chairman) of heritage JPMorgan Funds since 1987. |
|
|
|
Chairman, Lumelite Corporation (plastics manufacturing) (2003present); Chairman and Chief Executive Officer, Lumelite Corporation
(19852002). |
|
145 |
|
Trustee, Morgan Stanley Funds (196 portfolios) (1995present). |
|
Frederick W.
Ruebeck (1939); Trustee of Trusts since 2005; Trustee of heritage One Group Mutual Funds since 1994. |
|
|
|
Advisor, Jerome P. Green & Associates, LLC (broker-dealer) (2000present); Chief Investment Officer, Wabash College
(2004present); self-employed consultant (2000present); Director of Investments, Eli Lilly and Company (19881999). |
|
145 |
|
Trustee, Wabash College (1988present); Chairman, Indianapolis Symphony Orchestra Foundation (1994present). |
|
James J.
Schonbachler (1943); Trustee of Trusts since 2005; Trustee of heritage JPMorgan Funds since 2001. |
|
|
|
Retired; Managing Director of Bankers Trust Company (financial services) (19681998). |
|
145 |
|
None. |
|
Interested
Trustee |
|
|
|
|
|
|
|
|
|
|
|
|
|
Leonard M.
Spalding, Jr.** (1935); Trustee of Trusts since 2005; Trustee of heritage JPMorgan Funds since 1998. |
|
|
|
Retired; Chief Executive Officer, Chase Mutual Funds (investment company) (19891998); President and Chief Executive Officer, Vista
Capital Management (investment management) (19901998); Chief Investment Executive, Chase Manhattan Private Bank (investment management)
(19901998). |
|
145 |
|
Director, Glenview Trust Company, LLC (2001present); Trustee, St. Catherine College (1998present); Trustee, Bellarmine University
(2000present); Director, Springfield-Washington County Economic Development Authority (1997present); Trustee, Marion and Washington County,
Kentucky Airport Board (1998present); Trustee, Catholic Education Foundation (2005present). |
(1) |
|
A Fund Complex means two or more registered investment companies
that hold themselves out to investors as related companies for purposes of investment and investor services or have a common investment adviser or have
an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. The JPMorgan Funds
Complex for which the Board of Trustees serves currently includes eight registered investment companies ( 145 funds). |
** |
|
Mr. Spalding is deemed to be an interested person due
to his ownership of JPMorgan Chase stock. |
Each Trustee serves for an
indefinite term, subject to the Trusts current retirement policy, which is age 75 for all Trustees, except for Mr. Reid for whom it is age 78.
The Board of Trustees decides upon general policies and is responsible for overseeing the business affairs of the Trusts.
Part II-64
Standing Committees
The Board of Trustees has four
standing committees: the Audit Committee, the Compliance Committee, the Governance Committee, and the Investments Committee.
The members of the Audit
Committee are Messrs. Armstrong (Chair), Finn, Higgins and Ruebeck. The purposes of the Audit Committee are to: (i) appoint and determine compensation
of the Funds independent accountants; (ii) evaluate the independence of the Funds independent accountants; (iii) oversee of the performance
of the Funds audit, accounting and financial reporting policies, practices and internal controls; (iv) approve non-audit services, as required by
the statutes and regulations administered by the SEC, including the 1940 Act and the Sarbanes-Oxley Act of 2002; (v) assist the Board in its oversight
of the valuation of the Funds securities by the Adviser, as well as any sub-adviser; (vi) oversee the quality and objectivity of the Funds
independent audit and the financial statements of the Funds; and (vii) act as a liaison between the Funds independent registered public
accounting firm and the full Board. At a meeting of the Board of Trustees, the Board approved the reorganization of the Audit and Valuation and
Compliance Committee responsibilities, and transferred responsibility for oversight of the valuation of portfolio securities from the Valuation and
Compliance Committee to the Audit Committee effective August 10, 2005. The Audit Committee has delegated the valuation responsibilities to the
Valuation Sub-Committee, comprised of Messrs. Higgins and Ruebeck. When the Funds valuation procedures require Board action, but it is
impracticable or impossible to hold a meeting of the entire Board, the Valuation Sub-Committee acts in lieu of the full Board.
As discussed above, the Valuation
and Compliance Committee was reorganized and is now known as the Compliance Committee. The members of the Compliance Committee are Ms. McCoy (Chair)
and Messrs. Oden, Schonbachler and Spalding. The primary purposes of the Compliance Committee are to (i) oversee the Funds compliance with legal
and regulatory and contractual requirements and the Funds compliance policies and procedures; and (ii) consider the appointment, compensation and
removal of the Funds Chief Compliance Officer.
The members of the Governance
Committee are Messrs, Reid (Chair), Goldstein, Marshall and Morton, who are each Independent Trustees of the JPMorgan Funds. The duties of the
Governance Committee include, but are not limited to, (i) selection and nomination of persons for election or appointment as Trustees; (ii) periodic
review of the compensation payable to the non-interested Trustees; (iii) establishment of non-interested Trustee expense policies; (iv) periodic review
and evaluation of the functioning of the Board and its committees; (v) with respect to the JPMT II Funds, appointment and removal of the Funds
Senior Officer, and approval of compensation for the Funds Senior Officer and retention and compensation of the Senior Officers staff and
consultants; (vi) selection of independent legal counsel to the non-interested Trustees and legal counsel to the Funds; (vii) oversight of ongoing
litigation affecting the Funds, the Adviser or the non-interested Trustees; (viii) oversight of regulatory issues or deficiencies affecting the Fund
(except financial matters considered by the Audit Committee); and (ix) oversight and review of matters with respect to service providers to the Funds
(except the Funds independent registered public accounting firm). When evaluating a person as a potential nominee to serve as an Independent
Trustee, the Governance Committee may consider, among other factors, (i) whether or not the person is independent and whether the person is
otherwise qualified under applicable laws and regulations to serve as a Trustee; (ii) whether or not the person is willing to serve, and willing and
able to commit the time necessary for the performance of the duties of an Independent Trustee; (iii) the contribution that the person can make to the
Board and the JPMorgan Funds, with consideration being given to the persons business experience, education and such other factors as the
Committee may consider relevant; (iv) the character and integrity of the person; (v) the desirable personality traits, including independence,
leadership and the ability to work with the other members of the Board; and (vi) to the extent consistent with the 1940 Act, such recommendations from
management as are deemed appropriate. The process of identifying nominees involves the consideration of candidates recommended by one or more of the
following: current Independent Trustees, officers, shareholders and other sources that the Governance Committee deems appropriate. The Governance
Committee will review nominees recommended to the Board by shareholders and will evaluate such nominees in the same manner as it
Part II-65
evaluate nominees identified
by the Governance Committee. Nominee recommendations may be submitted to the Secretary of the Trusts at each Trusts principal business
address.
Each member of the Board, except
Mr. Reid, serves on the Investments Committee and Mr. Spalding acts as Chairperson. The Investments Committee has three sub-committees divided by asset
type and different members of the Investments Committee serve on the sub-committee with respect to each asset type. For the Equity Funds, the
sub-committee members are Messrs. Higgins (Chair), Finn and Morton and Ms. McCoy. For the Fixed Income Funds, the sub-committee members are Messrs.
Ruebeck (Chair), Oden and Schonbachler. For the Money Market Funds and Alternative Products, the sub-committee members are Messrs. Goldstein
(Chair), Armstrong and Marshall. The function of the Investments Committee and its sub-committees is to assist the Board in the oversight of the
investment management services provided by the Adviser to the Funds, as well as any sub-adviser to the Funds. The primary purpose of each sub-committee
is to (i) assist the Board in its oversight of the investment management services provided by the Adviser to the Funds designated for review by each
sub-committee; and (ii) review and make recommendations to the Investments Committee and/or the Board, concerning the approval of proposed new or
continued advisory and distribution arrangements for the Funds or for new funds. The full Board may delegate to the Investments Committee from time to
time the authority to make Board level decisions on an interim basis when it is impractical to convene a meeting of the full Board. Each of the
sub-committees receives reports concerning investment management topics, concerns or exceptions with respect to particular Funds that the sub-committee
is assigned to oversee, and work to facilitate the understanding by the Investments Committee and the Board of particular issues related to investment
management of Funds reviewed by the sub-committee.
For details of the number of times each of the four
standing committees met during the most recent fiscal year, see TRUSTEES Standing Committees in Part I of this
SAI.
For details of the dollar range of equity securities
owned by each Trustee in the Funds, see TRUSTEES Ownership of Securities in Part I of this SAI.
Trustee Compensation
The Trustees instituted a
Deferred Compensation Plan for Eligible Trustees (the Deferred Compensation Plan) pursuant to which the Trustees are permitted to defer
part or all of their compensation. Amounts deferred are deemed invested in shares of one or more series of JPMT I, JPMT II, Undiscovered Managers
Funds, JPMMFG, JPMFMFG. and JPMMFIT, as selected by the Trustee from time to time, to be used to measure the performance of a Trustees deferred
compensation account. Amounts deferred under the Deferred Compensation Plan will be deemed to be invested in Select Class Shares of the identified
funds, unless Select Class Shares are not available, in which case the amounts will be deemed to be invested in Class A Shares. A Trustees
deferred compensation account will be paid at such times as elected by the Trustee, subject to certain mandatory payment provisions in the Deferred
Compensation Plan (e.g., death of a Trustee). Deferral and payment elections under the Deferred Compensation Plan are subject to strict requirements
for modification.
Each Declaration of Trust
provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Trust, unless, as to liability to the Trust or its shareholders, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices or with respect to any matter
unless it is finally adjudicated that they did not act in good faith in the reasonable belief that their actions were in the best interest of the
Trust. In the case of settlement, such indemnification will not be provided unless it has been determined by a court or other body approving the
settlement or disposition, or by a reasonable determination based upon a review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
Part II-66
For details of Trustee compensation paid by the Funds,
including deferred compensation, see TRUSTEES Trustee Compensation in Part I of this SAI.
OFFICERS
The Trusts executive
officers (listed below) generally are employees of the Adviser or one of its affiliates. The officers conduct and supervise the business operations of
the Trusts. The officers hold office until a successor has been elected and duly qualified. The Trusts have no employees. The names of the officers of
the Funds, together with their year of birth, information regarding their positions held with the Trusts and principal occupations are shown below. The
contact address for each of the officers, unless otherwise noted, is 245 Park Avenue, New York, NY 10167.
Name (Year of Birth), Positions Held with the
Trusts (Since)
|
|
|
|
Principal Occupations During Past 5 Years
|
George C.W. Gatch
(1962), President (2005) |
|
|
|
Managing Director, J.P. Morgan Investment Management Inc.; Director and President, JPMorgan Distribution Services, Inc. and JPMorgan Funds
Management, Inc. since 2005. Mr. Gatch is CEO and President of the JPMorgan Funds. Mr. Gatch has been an employee of JPMorgan since 1986 and has held
positions such as President and CEO of DKB Morgan, a Japanese mutual fund company, which was a joint venture between J.P. Morgan and Dai-Ichi Kangyo
Bank, as well as positions in business management, marketing, and sales. |
|
Robert L. Young
(1963), Senior Vice President (2005)* |
|
|
|
Director and Vice President, JPMorgan Distribution Services, Inc. and JPMorgan Funds Management, Inc.; Chief Operating Officer, JPMorgan Funds
since 2005, and One Group Mutual Funds from 2001 until 2005. Mr. Young was Vice President and Treasurer, JPMorgan Funds Management, Inc. (formerly One
Group Administrative Services), and Vice President and Treasurer, JPMorgan Distribution Services, Inc. (formerly One Group Dealer Services, Inc.) from
1999 to 2005. |
|
Patricia A.
Maleski (1960), Vice President and Chief Administrative Officer (2005) |
|
|
|
Managing Director, JPMorgan Funds Management, Inc.; Head of Funds Administration and Board Liaison; previously, Treasurer, JPMorgan Funds. Ms.
Maleski has been with JPMorgan Chase & Co. since 2001. |
|
Elizabeth A.
Davin (1964), Secretary (2008)* |
|
|
|
Vice
President and Assistant General Counsel, JPMorgan Chase & Co. since 2005; Senior Counsel, JPMorgan Chase & Co. (formerly Bank One Corporation)
from 2004 to 2005; Assistant General Counsel and Associate General Counsel and Vice President, Gartmore Global Investments, Inc. from 1999 to
2004. |
|
Stephanie J.
Dorsey (1969), Treasurer (2005)* |
|
|
|
Vice
President, JPMorgan Funds Management, Inc.; Director of Mutual Fund Administration, JPMorgan Funds Management, Inc. (formerly One Group Administrative
Services), from 2004 to 2005; Ms. Dorsey worked for JPMorgan Chase & Co. (formerly Bank One Corporation) from 2003 to 2004; prior to joining Bank
One Corporation, she was a Senior Manager specializing in Financial Services audits at PricewaterhouseCoopers LLP from 1992 through
2002. |
|
Stephen M.
Ungerman (1953), Chief Compliance Officer (2005) |
|
|
|
Managing Director, JPMorgan Chase & Co.; Mr. Ungerman was head of Fund Administration Pooled Vehicles from 2000 to 2004. Mr.
Ungerman has been with JPMorgan Chase & Co. since 2000. |
Part II-67
Name (Year of Birth), Positions Held with the
Trusts (Since)
|
|
|
|
Principal Occupations During Past 5 Years
|
Paul L. Gulinello
(1950), AML Compliance Officer (2005) |
|
|
|
Vice
President and Anti Money Laundering Compliance Officer for JPMorgan Asset Management Americas, additionally responsible for personal trading and
compliance testing since 2004; Treasury Services Operating Risk Management and Compliance Executive supporting all JPMorgan Treasury Services business
units from July 2000 to 2004. |
|
Jessica K.
Ditullio (1962), Assistant Secretary (2005)* |
|
|
|
Vice
President and Assistant General Counsel, JPMorgan Chase & Co. since 2005; Ms. Ditullio has served as an attorney with various titles for JPMorgan
Chase & Co. (formerly Bank One Corporation) since 1990. |
|
Nancy E. Fields
(1949), Assistant Secretary (2005)* |
|
|
|
Vice
President, JPMorgan Funds Management, Inc. and JPMorgan Distribution Services, Inc.; from 1999 to 2005, Director, Mutual Fund Administration, JPMorgan
Funds Management, Inc. (formerly One Group Administrative Services) and Senior Project Manager, Mutual Funds, JPMorgan Distribution Services, Inc.
(formerly One Group Dealer Services, Inc.). |
|
Jeffrey D. House
(1972), Assistant Treasurer (2006)* |
|
|
|
Vice
President, JPMorgan Funds Management, Inc. since July 2006; formerly, Senior Manager of Financial Services of BISYS Fund Services, Inc. from December
1995 until July 2006. |
|
Arthur A. Jensen
(1966), Assistant Treasurer (2005)* |
|
|
|
Vice
President, JPMorgan Funds Management, Inc. since April 2005; formerly, Vice President of Financial Services of BISYS Fund Services, Inc. from 2001
until 2005. |
|
Laura S. Melman
(1966), Assistant Treasurer (2006) |
|
|
|
Vice
President, JPMorgan Funds Management, Inc. since August, 2006, responsible for Taxation; Vice President of Structured Products at The Bank of New York
Co., Inc. from 2001 until 2006. |
|
Francesco Tango
(1971) Assistant Treasurer (2007) |
|
|
|
Vice
President, JPMorgan Funds Management, Inc. since January 2003: Associate, JPMorgan Funds Management, Inc. since 1999. |
* |
|
The contact address for the officer is 1111 Polaris Parkway,
Columbus, OH 43240. |
** |
|
The contact address for the officer is 73 Tremont Street, Floor
1, Boston, MA 02108. |
For details of the percentage of shares of any class of
each Fund owned by the officers and Trustees, as a group, see SHARE OWNERSHIP Trustees and Officers in Part I of this
SAI.
INVESTMENT ADVISERS AND SUB-ADVISERS
Pursuant to investment advisory
agreements, JPMIM or JPMIA serves as investment adviser to the Funds, except for the U.S. Real Estate Fund. SC-R&M serves as investment adviser for
the U.S. Real Estate Fund pursuant to an agreement with JPMT II. HCM serves as investment sub-adviser to the Highbridge Statistical Market Neutral Fund
pursuant to an investment sub-advisory agreement with JPMIM. JFIMI serves as sub-adviser to certain funds pursuant to an investment sub-advisory
agreement with JPMIM.
The Trusts Shares are not
sponsored, endorsed or guaranteed by, and do not constitute obligations or deposits of JPMorgan Chase, any bank affiliate of JPMIA or any other bank,
and are not insured by the FDIC or issued or guaranteed by the U.S. government or any of its agencies.
Part II-68
For details of the investment advisory fees paid under
an applicable advisory agreement, see INVESTMENT ADVISERSInvestment Advisory Fees in Part I of the SAI for the respective
Fund.
For details of the dollar range of shares of each Fund
(excluding Money Market Funds) beneficially owned by the portfolio managers who serve on a team that manages such Fund, see PORTFOLIO MANAGERS
Portfolio Managers Other Accounts Managed in Part I of this SAI.
J.P. Morgan Investment
Management Inc. JPMIM serves as investment adviser to certain Funds pursuant to the investment advisory agreements between
JPMIM and certain of the Trusts (the JPMIM Advisory Agreements). Effective October 1, 2003, JPMIM became a wholly-owned subsidiary of
JPMorgan Asset Management Holdings Inc., which is a wholly-owned subsidiary of JPMorgan Chase & Co. (JPMorgan Chase). Prior to October
1, 2003, JPMIM was a wholly-owned subsidiary of JPMorgan Chase, a bank holding company organized under the laws of the State of Delaware which was
formed from the merger of J.P. Morgan & Co. Incorporated with and into The Chase Manhattan Corporation.
JPMIM is a registered investment
adviser under the Investment Advisers Act of 1940, as amended. JPMIM is located at 245 Park Avenue, New York, NY 10167.
Under the JPMIM Advisory
Agreements, JPMIM provides investment advisory services to certain Funds, which include managing the purchase, retention and disposition of such
Funds investments. JPMIM may delegate its responsibilities to a sub-adviser. Any subadvisory agreements must be approved by the applicable
Trusts Board of Trustees and the applicable Funds shareholders, as required by the 1940 Act.
Under separate agreements,
JPMorgan Chase Bank, JPMorgan Funds Management, Inc. (formerly One Group Administrative Services, Inc.) (JPMFM), and JPMDS provide certain
custodial, fund accounting, recordkeeping and administrative services to the Trusts and the Funds and shareholder services for the Trusts. JPMDS is the
shareholder servicing agent and the distributor for certain Funds. JPMorgan Chase Bank, JPMFM and JPMDS are each affiliates of JPMIM. See the
Custodian, Administrator, Shareholder Servicing and Distributor sections.
Under the terms of the JPMIM
Advisory Agreements, the investment advisory services JPMIM provides to certain Funds are not exclusive. JPMIM is free to and does render similar
investment advisory services to others. JPMIM serves as investment adviser to personal investors and other investment companies and acts as fiduciary
for trusts, estates and employee benefit plans. Certain of the assets of trusts and estates under management are invested in common trust funds for
which JPMIM serves as trustee. The accounts which are managed or advised by JPMIM have varying investment objectives, and JPMIM invests assets of such
accounts in investments substantially similar to, or the same as, those which are expected to constitute the principal investments of certain Funds.
Such accounts are supervised by employees of JPMIM who may also be acting in similar capacities for the Funds. See Portfolio
Transactions.
The Funds are managed by
employees of JPMIM who, in acting for their customers, including the Funds, do not discuss their investment decisions with any personnel of JPMorgan
Chase or any personnel of other divisions of JPMIM or with any of their affiliated persons, with the exception of certain other investment management
affiliates of JPMorgan Chase which execute transactions on behalf of the Funds.
As compensation for the services
rendered and related expenses, such as salaries of advisory personnel borne by JPMIM or a predecessor, under the JPMIM Advisory Agreements, the
applicable Trusts, on behalf of the Funds, have agreed to pay JPMIM a fee, which is computed daily and may be paid monthly, equal to the annual rate of
each Funds average daily net assets as described in the applicable Prospectuses.
Part II-69
The JPMIM Advisory Agreements
continue in effect for annual periods beyond October 31 of each year only if specifically approved thereafter annually in the same manner as the
Distribution Agreement; except that for new funds, the initial approval will continue for up to two years, after which annual approvals are required.
See the Distributor section. The JPMIM Advisory Agreements will terminate automatically if assigned and are terminable at any time without
penalty by a vote of a majority of the Trustees, or by a vote of the holders of a majority of a Funds outstanding voting securities (as defined
in the 1940 Act), on 60 days written notice to JPMIM and by JPMIM on 90 days written notice to the Trusts (60 days with respect to the
International Equity Index Fund, Mid Cap Value Fund, Short Term Bond Fund II and Growth Advantage Fund). The renewal of the JPMIM Advisory Agreements
was last approved by the Board of Trustees at its meeting in August 2006.
The JPMIM Advisory Agreements
provide that the Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the
performance of the respective investment advisory agreement, except a loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of the Adviser in the performance of its duties, or from reckless disregard by it of its duties and obligations thereunder, or, with respect to
all such Funds except the Mid Cap Value Fund, a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for
services.
JPMorgan Investment Advisors
Inc. JPMIA serves as investment adviser to certain JPMT II Funds pursuant to the Amended and Restated Investment Advisory
Agreement between JPMIA and JPMT II dated August 12, 2004 (the JPMIA Advisory Agreement). On July 1, 2004, Bank One Corporation, the former
indirect corporate parent of JPMIA, merged into J.P. Morgan Chase & Co. (now officially known as JPMorgan Chase & Co.). On that date, JPMIA
became an indirect, wholly-owned subsidiary of JPMorgan Chase.
JPMIA is a registered investment
adviser under the Investment Advisers Act of 1940, as amended. JPMIA is located at 1111 Polaris Parkway, Columbus, OH 43240.
JPMIA represents a consolidation
of the investment advisory staffs of a number of bank affiliates of the former Bank One Corporation, which have considerable experience in the
management of open-end management investment company portfolios, including the applicable Trusts (formerly, The One Group and the Helmsman Funds) since
1985.
Subject to the supervision of a
Trusts Board of Trustees, JPMIA provides or will cause to be provided a continuous investment program for certain Funds, including investment
research and management with respect to all securities and investments and cash equivalents in those Funds. JPMIA may delegate its responsibilities to
a sub-adviser. Any subadvisory agreements must be approved by the Trusts Board of Trustees and the applicable Funds shareholders, as
required by the 1940 Act.
The JPMIA Advisory Agreement
continues in effect for annual periods beyond October 31 of each year, if such continuance is approved at least annually by the Trusts Board of
Trustees or by vote of a majority of the outstanding Shares of such Fund (as defined under Additional Information in this SAI), and a
majority of the Trustees who are not parties to the respective investment advisory agreements or interested persons (as defined in the 1940 Act) of any
party to the respective investment advisory agreements by votes cast in person at a meeting called for such purpose. The JPMIA Advisory Agreement was
approved by the Trusts Board of Trustees at their quarterly meeting held in August 2006.
The JPMIA Advisory Agreement may
be terminated as to a particular Fund at any time on 60 days written notice without penalty by the Trustees, by vote of a majority of the
outstanding Shares of that Fund, or by the Funds Adviser as the case may be. The JPMIA Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.
As compensation for the services
rendered and related expenses, such as salaries of advisory personnel borne by JPMIA, under the JPMIA Advisory Agreement, the applicable Trusts, on
behalf of the Funds, have agreed to pay JPMIA a fee, which is computed daily and may be paid monthly, equal to the annual rate of each Funds
average daily net assets as described in the applicable Prospectuses.
Part II-70
The JPMIA Advisory Agreement
provides that the Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the
performance of the respective investment advisory agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad faith, or gross negligence on the part of the Adviser in the performance of
its duties, or from reckless disregard by it of its duties and obligations thereunder.
JPMorgan Chase Bank, JPMFM and
JPMDS are each subsidiaries of JPMorgan Chase and affiliates of JPMIA. See the Custodian, Administrator, Shareholder
Servicing and Distributor sections.
Security Capital Research
& Management Incorporated (SC-R&M). Security Capital Research & Management Incorporated (SC-R&M)
serves as investment adviser to the U.S. Real Estate Fund pursuant to an agreement with JPMT II, on behalf of the U.S. Real Estate Fund (the Real
Estate Fund Investment Advisory Agreement). SC-R&M was formed in January 1995 to provide investment advisory services related to real estate
assets to various clients, including the Predecessor U.S. Real Estate Fund. SC-R&M is a direct, wholly-owned subsidiary of JPMorgan Asset
Management Holdings Inc.
SC-R&M makes the investment
decisions for the assets of the U.S. Real Estate Fund. SC-R&M also reviews, supervises and administers the Funds investment program, subject
to the supervision of, and policies established by, the Trustees.
The Real Estate Fund Investment
Advisory Agreement provides that it will continue in effect until October 31, 2006 and thereafter will continue for successive twelve month periods if
not terminated or approved at least annually by the Board. The Real Estate Fund Investment Advisory Agreement was initially approved by the
Trusts Board of Trustees at their quarterly meeting on September 30, 2004 and may be terminated as to the U.S. Real Estate Fund at any time on 60
days written notice without penalty by the Trustees, by vote of a majority of the outstanding Shares of that Fund, or by the Funds Adviser.
The Real Estate Fund Investment Advisory Agreement also terminates automatically in the event of any assignment, as defined in the 1940 Act. The
renewal of the Real Estate Fund Investment Advisory Agreement was approved by the Board of Trustees at its meeting in August 2006.
The Real Estate Fund Investment
Advisory Agreement provides that the Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance under the agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad faith, or gross negligence on the part of the Adviser in the performance of
its duties, or from reckless disregard by it of its duties and obligations thereunder.
JF International Management
Inc. JPMIM has entered into two investment sub-advisory agreements with JFIMI, one agreement with respect to the Asia Equity Fund and
one agreement with respect to the China Region Fund and India Fund (the JFIMI Sub-Advisory Agreements ) pursuant to which
JFIMI serves as investment sub-adviser to such Funds. JFIMI is registered as a registered investment adviser under the Investment Advisers Act and the
Hong Kong Securities and Futures Commission. JFIMI is a wholly- owned subsidiary of J.P. Morgan Asset Management (Asia) Inc., which is wholly-owned by
JPMAMH. JFIMI is located at 21F, Charter House, 8 Connaught Road, Central Hong Kong.
JFIMI may, in its discretion,
provide such services through its own employees or the employees of one or more affiliated companies that are qualified to act as an investment adviser
to a Fund under applicable laws and that are under the common control of JPMIM; provided that (i) all persons, when providing services under the JFIMI
Sub-Advisory Agreements, are functioning as part of an organized group of persons, and (ii) such organized group of persons is managed at all times by
authorized officers of JFIMI. This arrangement will not result in the payment of additional fees by a Fund.
Part II-71
Pursuant to the terms of the
applicable JPMIM Advisory Agreement and the JFIMI Sub-Advisory Agreements, the Adviser and Sub-Adviser are permitted to render services to others. Each
such agreement is terminable without penalty by the applicable Trusts, on behalf of the Funds, on not more than 60 days, nor less than 30
days, written notice when authorized either by a majority vote of a Funds shareholders or by a vote of a majority of the Boards of Trustees
of the Trusts, or by JPMIM or JFIMI on not more than 60 days, nor less than 30 days, written notice, and will automatically terminate in
the event of its assignment (as defined in the 1940 Act). The applicable JPMIM Advisory Agreement provides that JPMIM or JFIMI shall not be
liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of
portfolio transactions for a Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of
reckless disregard of its obligations and duties thereunder.
As compensation for the services
rendered and related expenses borne by JFIMI, under the applicable JFIMI Sub-Advisory Agreement, JPMIM has agreed to pay JFIMI a fee, which is computed
daily and may be paid monthly, at the rate of 0.50% per annum, on the average daily net assets value of the assets of the Asia Equity Fund, and at the
rate of 0.60% per annum on the average daily net asset value of the assets of the China Region Fund and the India Fund.
The JFIMI Sub-Advisory Agreement
applicable to the Asia Equity Fund provides that it will continue in effect until October 31, 2005 and thereafter, if not terminated, from year to
year, if such continuance is approved at least annually by the Trusts Board of Trustees or by vote of a majority of the outstanding Shares of
such Fund (as defined under Additional Information in this SAI), and a majority of the Trustees who are not parties to the respective
investment advisory agreements or interested persons (as defined in the 1940 Act) of any party to the respective investment advisory agreements by
votes cast in person at a meeting called for such purpose. The JFIMI Sub-Advisory Agreement applicable to the Asia Equity Fund was approved by the
Trusts Board of Trustees at their quarterly meeting held in August 2007 .
The JFIMI Sub-Advisory Agreement
applicable to the China Region Fund and India Fund provides that it will continue in effect for an initial two-year period and thereafter, if not
terminated, from year to year, if such continuance is approved at least annually by the Trusts Board of Trustees or by vote of a majority of the
outstanding Shares of such Fund (as defined under Additional Information in this SAI), and a majority of the Trustees who are not parties
to the respective investment advisory agreements or interested persons (as defined in the 1940 Act) of any party to the respective investment advisory
agreements by votes cast in person at a meeting called for such purpose. The JFIMI Sub-Advisory Agreement applicable to the China Region Fund and India
Fund was initially approved by the Trusts Board of Trustees at its quarterly meeting held in November 2006.
Each JFIMI Sub-Advisory Agreement
provides that the Sub-Adviser shall not be liable for any error of judgment or for any loss suffered by the Trust in connection with the performance
under the agreement, except a loss resulting from a willful misfeasance, bad faith, or gross negligence on the part of the Sub-Adviser in the
performance of its duties, or from reckless disregard by it of its duties and obligations thereunder.
Highbridge Capital Management,
LLC. Highbridge Capital Management, LLC. (HCM) has been engaged by JPMIM to serve as investment sub-adviser to the
Highbridge Statistical Market Neutral Fund (the HCM Sub-Advisory Agreement). HCM is majority owned by J.P. Morgan Asset Management Holdings
Inc.
HCM is an international asset
management firm specializing in non-traditional investment management strategies. HCM was founded by Henry Swieca and Glen Dubin. HCM has over 160
staff members including 62 investment and trading professionals in offices in New York, London and Hong Kong.
HCM is paid monthly by JPMIM a
fee equal to a percentage of the average daily net assets of the Highbridge Statistical Market Neutral Fund. The aggregate annual rate of the fees
payable by JPMIM to HCM is 1.25% of the Highbridge Statistical Market Neutral Funds average daily net assets.
Part II-72
The HCM Sub-Advisory Agreement
will continue in effect for a period of two years from the date of its execution, unless terminated sooner. It may be renewed from year to year
thereafter, so long as continuance is specifically approved at least annually in accordance with the requirements of the 1940 Act. The HCM Sub-Advisory
Agreement provides that it will terminate in the event of an assignment (as defined in the 1940 Act), and may be terminated without penalty
at any time by either party upon 60 days written notice, or upon termination of the JPMIM Advisory Agreement. Under the terms of the HCM Sub-Advisory
Agreement, HCM is not liable to JPMIM, the Highbridge Statistical Market Neutral Fund, or its shareholders, for any error of judgment or mistake of law
or for any losses sustained by JPMIM, the Highbridge Statistical Market Neutral Fund or its shareholders, except in the case of HCMs willful
misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties under the HCM Sub-Advisory Agreement. The HCM Sub-Advisory
Agreement was approved by the Trusts Board of Trustees at their quarterly meeting held in August 2007.
POTENTIAL CONFLICTS OF INTEREST
The chart in Part I of this SAI
entitled Portfolio Managers Other Accounts Managed shows the number, type and market value as of a specified date of the accounts
other than the Funds that are managed by the Funds portfolio managers. The potential for conflicts of interest exists when portfolio managers
manage other accounts with similar investment objectives and strategies as the Funds (Similar Accounts). Potential conflicts may include,
for example, conflicts between investment strategies and conflicts in the allocation of investment opportunities.
Responsibility for managing the
Advisers and its affiliates clients portfolios is organized according to investment strategies within asset classes. Generally,
client portfolios with similar strategies are managed by portfolio managers in the same portfolio management group using the same objectives, approach
and philosophy. Underlying sectors or strategy allocations within a larger portfolio are likewise managed by portfolio managers who use the same
approach and philosophy as similarly managed portfolios. Therefore, portfolio holdings, relative position sizes and industry and sector exposures tend
to be similar across similar portfolios and strategies, which minimizes the potential for conflicts of interest.
The Adviser and/or its affiliates
may receive more compensation with respect to certain Similar Accounts than that received with respect to the Funds or may receive compensation based
in part on the performance of certain Similar Accounts. This may create a potential conflict of interest for the Adviser and its affiliates or the
portfolio managers by providing an incentive to favor these Similar Accounts when, for example, placing securities transactions. In addition, the
Adviser or its affiliates could be viewed as having a conflict of interest to the extent that the Adviser or an affiliate has a proprietary investment
in Similar Accounts, the portfolio managers have personal investments in Similar Accounts or the Similar Accounts are investment options in the
Advisers or its affiliates employee benefit plans. Potential conflicts of interest may arise with both the aggregation and allocation of
securities transactions and allocation of investment opportunities because of market factors or investment restrictions imposed upon the Adviser and
its affiliates by law, regulation, contract or internal policies. Allocations of aggregated trades, particularly trade orders that were only partially
completed due to limited availability and allocation of investment opportunities generally, could raise a potential conflict of interest, as the
Adviser or its affiliates may have an incentive to allocate securities that are expected to increase in value to favored accounts. Initial public
offerings, in particular, are frequently of very limited availability. The Adviser and its affiliates may be perceived as causing accounts they manage
to participate in an offering to increase the Advisers and its affiliates overall allocation of securities in that offering. A potential
conflict of interest also may be perceived to arise if transactions in one account closely follow related transactions in a different account, such as
when a purchase increases the value of securities previously purchased by another account, or when a sale in one account lowers the sale price received
in a sale by a second account. If the Adviser or its affiliates manage accounts that engage in short sales of securities of the type in which the Fund
invests, the Adviser or its affiliates could be seen as harming the performance of the Fund for the benefit of the accounts engaging in short sales if
the short sales cause the market value of the securities to fall.
Part II-73
As an internal policy matter, the
Adviser or its affiliates may from time to time maintain certain overall investment limitations on the securities positions or positions in other
financial instruments the Adviser or its affiliates will take on behalf of its various clients due to, among other things, liquidity concerns and
regulatory restrictions. Such policies may preclude a Fund from purchasing particular securities or financial instruments, even if such securities or
financial instruments would otherwise meet the Funds objectives.
The Adviser and/or its affiliates
serve as adviser to the Funds, to the JPMorgan SmartRetirement Funds (the JPMorgan SmartRetirement Funds) and to the Investor Funds. The
JPMorgan SmartRetirement Funds and the Investor Funds and certain other Funds (Investing Funds) may invest in shares of the Funds (other
than the Investing Funds). Because the Adviser and/or its affiliates is the adviser to the Funds and it or its affiliates is adviser to the Investing
Funds, it may be subject to certain potential conflicts of interest when allocating the assets of the Investing Funds among the Funds. Purchases and
redemptions of Fund shares by an Investing Fund due to reallocations or rebalancings may result in a Fund having to sell securities or invest cash when
it otherwise would not do so. Such transactions could accelerate the realization of taxable income if sales of securities resulted in gains and could
also increase a Funds transaction costs. Large redemptions by an Investing Fund may cause a Funds expense ratio to increase due to a
resulting smaller asset base. In addition, the portfolio managers of the Investing Funds may have access to the holdings of some of the Funds as well
as knowledge of and a potential impact on investment strategies and techniques of the Funds.
The goal of the Adviser and its
affiliates is to meet their fiduciary obligation with respect to all clients. The Adviser and its affiliates have policies and procedures that seek to
manage conflicts. The Adviser and its affiliates monitor a variety of areas, including compliance with fund guidelines, review of allocation decisions
and compliance with the Advisers Codes of Ethics and JPMCs Code of Conduct. With respect to the allocation of investment opportunities, the
Adviser and its affiliates also have certain policies designed to achieve fair and equitable allocation of investment opportunities among its clients
over time. For example:
Orders for the same equity
security traded through a single trading desk or system are aggregated on a continual basis throughout each trading day consistent with the
Advisers and its affiliates duty of best execution for its clients. If aggregated trades are fully executed, accounts participating in the
trade will be allocated their pro rata share on an average price basis. Partially completed orders generally will be allocated among the participating
accounts on a pro-rata average price basis, subject to certain limited exceptions. For example, accounts that would receive a de minimis
allocation relative to their size may be excluded from the order. Another exception may occur when thin markets or price volatility require that an
aggregated order be completed in multiple executions over several days. If partial completion of the order would result in an uneconomic allocation to
an account due to fixed transaction or custody costs, the Adviser and its affiliates may exclude small orders until 50% of the total order is
completed. Then the small orders will be executed. Following this procedure, small orders will lag in the early execution of the order, but will be
completed before completion of the total order.
Purchases of money market
instruments and fixed income securities cannot always be allocated pro-rata across the accounts with the same investment strategy and objective.
However, the Adviser and its affiliates attempt to mitigate any potential unfairness by basing non-pro rata allocations traded through a single trading
desk or system upon an objective predetermined criteria for the selection of investments and a disciplined process for allocating securities with
similar duration, credit quality and liquidity in the good faith judgment of the Adviser or its affiliates so that fair and equitable allocation will
occur over time.
Fees earned by HCM for managing
certain accounts may vary, particularly because for at least two accounts, HCM is paid based upon the performance results for those accounts. This
could create a conflict of interest because the portfolio managers could have an incentive to favor certain accounts over others, resulting in other
accounts outperforming the Fund. However, HCM believes that this risk is mitigated by the fact that investment decisions for each of the accounts
advised by HCM are made through an automated system, and not by any one individual, which processes each accounts transactions independent of
those for the other accounts.
Part II-74
For details of the dollar range of shares of each Fund
(excluding the Money Market Funds) beneficially owned by the portfolio managers, see PORTFOLIO MANAGERS Ownership of Securities in
Part I of this SAI.
PORTFOLIO MANAGER COMPENSATION
Each Advisers portfolio
managers participate in a competitive compensation program that is designed to attract and retain outstanding people and closely link the performance
of investment professionals to client investment objectives. The total compensation program includes a base salary fixed from year to year and a
variable performance bonus consisting of cash incentives and restricted stock and may include mandatory notional investments (as described below) in
selected mutual funds advised by the Adviser or its affiliates. These elements reflect individual performance and the performance of the Advisers
business as a whole.
Each portfolio managers
performance is formally evaluated annually based on a variety of factors including the aggregate size and blended performance of the portfolios such
portfolio manager manages. Individual contribution relative to client goals carries the highest impact. Portfolio manager compensation is primarily
driven by meeting or exceeding clients risk and return objectives, relative performance to competitors or competitive indices and compliance with
firm policies and regulatory requirements. In evaluating each portfolio managers performance with respect to the mutual funds he or she manages,
the Funds pre-tax performance is compared to the appropriate market peer group and to each Funds benchmark index listed in the Funds
prospectuses over one, three and five year periods (or such shorter time as the portfolio manager has managed the Fund). Investment performance is
generally more heavily weighted to the long-term.
Awards of restricted stock are
granted as part of an employees annual performance bonus and comprise from 0% to 35% of a portfolio managers total bonus. As the level of
incentive compensation increases, the percentage of compensation awarded in restricted stock also increases. Up to 50% of the restricted stock portion
of a portfolio managers bonus may instead be subject to mandatory notional investment in selected mutual funds advised by the Adviser or its
affiliates. When these awards vest over time, the portfolio manager receives cash equal to the market value of the notional investment in the selected
mutual funds.
CODES OF ETHICS
The Trusts, the Advisers and
JPMDS have each adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act (and pursuant to Rule 204A-1 under the Advisers Act with respect to
the Advisers).
The Trusts code of ethics
includes policies which require access persons (as defined in Rule 17j-1) to: (i) place the interest of Trust shareholders first; (ii)
conduct personal securities transactions in a manner that avoids any actual or potential conflict of interest or any abuse of a position of trust and
responsibility; and (iii) refrain from taking inappropriate advantage of his or her position with the Trusts or a Fund. The Trusts code of ethics
prohibits any access person from: (i) employing any device, scheme or artifice to defraud the Trusts or a Fund; (ii) making to the Trusts or a Fund any
untrue statement of a material fact or omit to state to the Trusts or a Fund a material fact necessary in order to make the statements made, in light
of the circumstances under which they are made, not misleading; (iii) engaging in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon the Trusts or a Fund; or (iv) engaging in any manipulative practice with respect to the Trusts or a Fund. The
Trusts code of ethics permits personnel subject to the code to invest in securities, including securities that may be purchased or held by a Fund
so long as such investment transactions are not in contravention of the above noted policies and prohibitions.
The code of ethics adopted by the
Advisers requires that all employees must: (i) place the interest of the accounts which are managed by the Adviser first; (ii) conduct all personal
securities transactions in a manner that is consistent with the code of ethics and the individual employees position of trust
and
Part II-75
responsibility; and (iii)
refrain from taking inappropriate advantage of their position. Employees of each Adviser are also prohibited from certain mutual fund trading activity
including excessive trading of shares of a mutual fund as described in the applicable Funds Prospectuses or SAI and effecting or facilitating a
mutual fund transaction to engage in market timing. The Advisers code of ethics permits personnel subject to the code to invest in securities
including securities that may be purchased or held by a Fund subject to certain restrictions. However, all employees are required to preclear
securities trades (except for certain types of securities such as non-proprietary mutual fund shares and U.S. government securities). Each of the
Advisers affiliated sub-advisers has also adopted the code of ethics described above.
JPMDSs code of ethics
requires that all employees of JPMDS must: (i) place the interest of the accounts which are managed by affiliates of JPMDS first; (ii) conduct all
personal securities transactions in a manner that is consistent with the code of ethics and the individual employees position of trust and
responsibility; and (iii) refrain from taking inappropriate advantage of their positions. Employees of JPMDS are also prohibited from certain mutual
fund trading activity, including excessive trading of shares of a mutual fund as such term is defined in the applicable Funds Prospectuses or
SAI, or effecting or facilitating a mutual fund transaction to engage in market timing. JPMDSs code of ethics permits personnel subject to the
code to invest in securities including securities that may be purchased or held by the Funds subject to the policies and restrictions in such code of
ethics.
PORTFOLIO TRANSACTIONS
Investment Decisions and
Portfolio Transactions. Pursuant to the Advisory and sub-advisory Agreements, the Advisers determine, subject to the general supervision
of the Board of Trustees of the Trusts and in accordance with each Funds investment objective and restrictions, which securities are to be
purchased and sold by each such Fund and which brokers are to be eligible to execute its portfolio transactions. The Advisers operate independently in
providing services to their respective clients. Investment decisions are the product of many factors in addition to basic suitability for the
particular client involved. Thus, for example, a particular security may be bought or sold for certain clients even though it could have been bought or
sold for other clients at the same time. Likewise, a particular security may be bought for one or more clients when one or more other clients are
selling the security. In some instances, one client may sell a particular security to another client. It also happens that two or more clients may
simultaneously buy or sell the same security, in which event each days transactions in such security are, insofar as possible, averaged as to
price and allocated between such clients in a manner which in the opinion of the Adviser is equitable to each and in accordance with the amount being
purchased or sold by each. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse
effect on other clients.
Brokerage and Research
Services. On behalf of the Funds, a Funds Adviser places orders for all purchases and sales of portfolio securities, enters into
repurchase agreements, and may enter into reverse repurchase agreements and execute loans of portfolio securities on behalf of a Fund unless otherwise
prohibited. See Investment Strategies and Policies.
Fixed income and debt securities
and municipal bonds and notes are generally traded at a net price with dealers acting as principal for their own accounts without a stated commission.
The price of the security usually includes profit to the dealers. In underwritten offerings, securities are purchased at a fixed price, which includes
an amount of compensation to the underwriter, generally referred to as the underwriters concession or discount. Transactions on stock exchanges
(other than foreign stock exchanges) involve the payment of negotiated brokerage commissions. Such commissions vary among different brokers. Also, a
particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign
securities generally involve payment of fixed brokerage commissions, which are generally higher than those in the U.S. On occasion, certain securities
may be purchased directly from an issuer, in which case no commissions or discounts are paid.
In connection with portfolio
transactions, the overriding objective is to obtain the best execution of purchase and sales orders. As permitted by Section 28(e) of the Securities
Exchange Act,
Part II-76
the Adviser may cause the
Funds to pay a broker-dealer which provides brokerage and research services to the Adviser, or the Funds and/or other accounts for which the Adviser
exercises investment discretion an amount of commission for effecting a securities transaction for a Fund in excess of the amount other broker-dealers
would have charged for the transaction if the Adviser determines in good faith that the greater commission is reasonable in relation to the value of
the brokerage and research services provided by the executing broker-dealer viewed in terms of either a particular transaction or the Advisers
overall responsibilities to accounts over which it exercises investment discretion. Not all of such services are useful or of value in advising the
Funds. The Adviser reports to the Board of Trustees regarding overall commissions paid by the Funds and their reasonableness in relation to the
benefits to the Funds. In accordance with Section 28(e) of the Securities Exchange Act and consistent with applicable SEC guidance and interpretation,
the term brokerage and research services includes (i) advice as to the value of securities; (ii) the advisability of investing in,
purchasing or selling securities; (iii) the availability of securities or of purchasers or sellers of securities; (iv) furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; and (v) effecting
securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody) or required by rule or regulation in
connection with such transactions.
Brokerage and research services
received from such broker-dealers will be in addition to, and not in lieu of, the services required to be performed by an Adviser under the Advisory
Agreement (or with respect to a Sub-Adviser, under the sub-advisory agreement). The fees that the Funds pay to the Adviser are not reduced as a
consequence of the Advisers receipt of brokerage and research services. To the extent the Funds portfolio transactions are used to obtain
such services, the brokerage commissions paid by the Funds will exceed those that might otherwise be paid by an amount that cannot be presently
determined. Such services generally would be useful and of value to the Adviser in serving one or more of its other clients and, conversely, such
services obtained by the placement of brokerage business of other clients generally would be useful to the Adviser in carrying out its obligations to
the Funds. While such services are not expected to reduce the expenses of the Adviser, the Adviser would, through use of the services, avoid the
additional expenses that would be incurred if it should attempt to develop comparable information through its own staff.
Subject to the overriding
objective of obtaining the best execution of orders, the Adviser may allocate a portion of a Funds brokerage transactions to affiliates of the
Adviser. Under the 1940 Act, persons affiliated with a Fund and persons who are affiliated with such persons are prohibited from dealing with the Fund
as principal in the purchase and sale of securities unless an exemptive order allowing such transactions is obtained from the SEC. The SEC has granted
exemptive orders permitting each Fund to engage in principal transactions with J.P. Morgan Securities Inc., an affiliated broker, involving taxable and
tax exempt money market instruments (including commercial paper, banker acceptances and medium term notes) and repurchase agreements. The orders are
subject to certain conditions. An affiliated person of a Fund may serve as its broker in listed or over-the-counter transactions conducted on an agency
basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable transactions.
In addition, a Fund may not
purchase securities during the existence of any underwriting syndicate for such securities of which JPMorgan Chase Bank or an affiliate is a member or
in a private placement in which JPMorgan Chase Bank or an affiliate serves as placement agent, except pursuant to procedures adopted by the Board of
Trustees that either comply with rules adopted by the SEC or with interpretations of the SECs staff. Each Fund expects to purchase securities
from underwriting syndicates of which certain affiliates of JPMorgan Chase act as a member or manager. Such purchases will be effected in accordance
with the conditions set forth in Rule 10f-3 under the 1940 Act and related procedures adopted by the Trustees, including a majority of the Trustees who
are not interested persons of a Fund. Among the conditions are that the issuer of any purchased securities will have been in operation for
at least three years, that not more than 25% of the underwriting will be purchased by a Fund and all other accounts over which the same investment
adviser has discretion, and that no shares will be purchased from JPMDS or any of its affiliates.
Part II-77
On those occasions when the
Adviser deems the purchase or sale of a security to be in the best interests of a Fund as well as other customers, including other Funds, the Adviser,
to the extent permitted by applicable laws and regulations, may, but is not obligated to, aggregate the securities to be sold or purchased for a Fund
with those to be sold or purchased for other customers in order to obtain best execution, including lower brokerage commissions if appropriate. In such
event, allocation of the securities so purchased or sold as well as any expenses incurred in the transaction will be made by the Adviser in the manner
it considers to be most equitable and consistent with its fiduciary obligations to a Fund. In some instances, this procedure might adversely affect a
Fund.
If a Fund that writes options
effects a closing purchase transaction with respect to an option written by it, normally such transaction will be executed by the same broker-dealer
who executed the sale of the option. The writing of options by a Fund will be subject to limitations established by each of the exchanges governing the
maximum number of options in each class which may be written by a single investor or group of investors acting in concert, regardless of whether the
options are written on the same or different exchanges or are held or written in one or more accounts or through one or more brokers. The number of
options that a Fund may write may be affected by options written by the Adviser for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions.
Allocation of transactions,
including their frequency, to various broker-dealers is determined by a Funds Adviser based on its best judgment and in a manner deemed fair and
reasonable to Shareholders. The primary consideration is prompt execution of orders in an effective manner at the most favorable price. Subject to this
consideration, in selecting broker-dealers to execute a particular transaction, and in evaluating the best overall terms available, a Funds
Adviser is authorized to consider the brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act)
provided to the Funds and/or other accounts over which a Funds Adviser exercises investment discretion. A Funds Adviser may cause a Fund to
pay a broker-dealer that furnishes brokerage and research services a higher commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that a Funds Adviser determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer, viewed in terms of either the particular transaction or the overall
responsibilities of a Funds Adviser to the Funds. Such brokerage and research services might consist of reports and statistics on specific
companies or industries, general summaries of groups of bonds and their comparative earnings and yields, or broad overviews of the securities markets
and the economy, to the extent such services are permissible under the safe harbor requirements of Section 28(e) of the Securities Exchange Act and
consistent with applicable SEC guidance and interpretation. Shareholders of the Funds should understand that the services provided by such brokers may
be useful to a Funds Adviser in connection with its services to other clients and not all the services may be used by the Adviser in connection
with the Fund.
Under the policy for JPMIM and
JPMIA, soft dollar services refer to arrangements that fall within the safe harbor requirements of Section 28(e) of the Securities Exchange
Act, as amended, which allow JPMIM and JPMIA to allocate client brokerage transactions to a broker-dealer in exchange for products or services
that are research and brokerage-related and enhance the investment decision-making process. These services include third party research, market data
services, and proprietary broker-dealer research. The Funds have stopped participating in soft dollar arrangements for market data services and
third-party research. However, the Funds continue to receive proprietary research where broker-dealers typically incorporate the cost of such research
into their commission structure. Many brokers do not assign a hard dollar value to the research they provide, but rather bundle the cost of such
research into their commission structure. It is noted in this regard that some research that is available only under a bundled commission structure is
particularly important to the investment process.
SC-R&M does not enter into
soft dollar arrangements whereby a broker pays for research services such as Bloomberg, Reuters or Factset. From time to time, SC-R&M may receive
or have access to research generally provided by a broker to the brokers institutional clients that trade with the broker in the sector of the
securities markets in which SC-R&M is active, namely in the case of real estate securities. In
Part II-78
addition, SC-R&M may
consider the value-added quality of proprietary broker research received from brokers in allocating trades to brokers subject always to the objective
of obtaining best execution.
Investment decisions for each
Fund are made independently from those for the other Funds or any other investment company or account managed by an Adviser. Any such other investment
company or account may also invest in the same securities as the Trusts. When a purchase or sale of the same security is made at substantially the same
time on behalf of a given Fund and another Fund, investment company or account, the transaction will be averaged as to price, and available investments
allocated as to amount, in a manner which the Adviser of the given Fund believes to be equitable to the Fund(s) and such other investment company or
account. In some instances, this procedure may adversely affect the price paid or received by a Fund or the size of the position obtained by a Fund. To
the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased by it for a Fund with those to be sold or purchased by it
for other Funds or for other investment companies or accounts in order to obtain best execution. In making investment recommendations for the Trusts,
the Adviser will not inquire or take into consideration whether an issuer of securities proposed for purchase or sale by the Trusts is a customer of
the Adviser or their parents or subsidiaries or affiliates and in dealing with its commercial customers, the Adviser and their respective parent,
subsidiaries, and affiliates will not inquire or take into consideration whether securities of such customers are held by the Trusts.
Under HCMs policy, HCM has
the power and authority to establish and maintain accounts on behalf of its clients with, and issue orders for the purchase or sale of securities for
its clients directly to, a broker, dealer or other person, as well as to exercise or abstain from exercising any option, privilege or right held by its
clients. In selecting a broker with respect to effecting any securities transaction on behalf of its clients, HCM may pay a broker a commission in
excess of the amount another broker would have charged for effect in such transaction, so long as, in HCMs good faith judgment, the amount of the
commission is reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of that particular
transaction or HCMs overall investment management business. HCM intends to comply with Section 28(e) of the Securities Exchange Act, under which
HCMs use of its clients commission dollars to acquire research products and services is not a breach of its fiduciary duty to its clients
even if the brokerage commissions paid are higher than the lowest available as long as (among certain other requirements) HCM determines
that the commissions are reasonable compensation for both the brokerage services and the research acquired.
For details of brokerage commissions paid by the Funds,
see BROKERAGE AND RESEARCH SERVICES Brokerage Commissions in Part I of this SAI.
For details of the Funds ownership of securities
of the Funds regular broker dealers, see BROKERAGE AND RESEARCH SERVICES Securities of Regular Broker-Dealers in Part I of
this SAI.
ADMINISTRATOR
JPMorgan Funds Management, Inc.
(JPMFM or the Administrator) serves as the administrator to the Funds, pursuant to an Administration Agreement dated February
19, 2005 (the Administration Agreement), between the Trusts, on behalf of the Funds, and JPMFM. Additionally, JPMFM serves as the
administrator to the JPMorgan SmartRetirement Funds pursuant to an agreement effective May 5, 2006 (the SmartRetirement Administration
Agreement), between JPMT I, on behalf of the JPMorgan SmartRetirement Funds, and JPMFM. JPMFM is an affiliate of JPMorgan Chase Bank and an
indirect, wholly-owned subsidiary of JPMorgan Chase; it has its principal place of business at 1111 Polaris Parkway, Suite 2-J, Columbus, OH
43240.
Pursuant to the Administration
Agreement and the SmartRetirement Administration Agreement, JPMFM performs or supervises all operations of each Fund for which it serves (other than
those performed under the advisory agreement, any sub-advisory agreements, the custodian and fund accounting agreement, and the transfer agency
agreement for that Fund). Under the Administration Agreement and the SmartRetirement Administration Agreement, JPMFM has agreed to maintain the
necessary office space for
Part II-79
the Funds, and to furnish
certain other services required by the Funds with respect to each Fund. The Administrator prepares annual and semi-annual reports to the SEC, prepares
federal and state tax returns and generally assists in all aspects of the Funds operations other than those performed under the advisory
agreement, any sub-advisory agreements, the custodian and fund accounting agreement, and the transfer agency agreement. JPMFM may, at its expense,
subcontract with any entity or person concerning the provision of services under the Administration Agreement and the SmartRetirement Administration
Agreement. Through June 30, 2005, the Administrator paid a portion of the fees it received to BISYS Fund Services, L.P. for its services as each
Funds sub-administrator. Effective July 1, 2005, J.P. Morgan Investor Services, Co. (JPMIS), an indirect, wholly-owned subsidiary of
JPMorgan Chase, began serving as the Funds sub-administrator (the Sub-administrator). The Administrator pays JPMIS a fee for its
services as the Funds Sub-administrator.
Unless sooner terminated, the
Administration Agreement will continue in effect through October 31, 2006 and the SmartRetirement Administration Agreement will continue in effect
through October 31, 2007. If not terminated, the Administration Agreement and the SmartRetirement Administration Agreement will continue thereafter
automatically for successive one year terms, provided that such continuance is specifically approved at least annually by the vote of a majority of
those members of the Board of Trustees who are not parties to the Administration Agreement or SmartRetirement Administration Agreement or interested
persons of any such party. The Administration Agreement and the SmartRetirement Administration Agreement may be terminated without penalty, on not less
than 60 days prior written notice, by the Board of Trustees of each Trust or by JPMFM. The termination of the Administration Agreement or the
SmartRetirement Administration Agreement with respect to one Fund will not result in the termination of the Administration Agreement with respect to
any other Fund.
The Administration Agreement and
the SmartRetirement Administration Agreement provide that JPMFM shall not be liable for any error of judgment or mistake of law or any loss suffered by
the Funds in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or
negligence in the performance of its duties, or from the reckless disregard by it of its obligations and duties thereunder.
In consideration of the services
to be provided by JPMFM pursuant to the Administration Agreement, JPMFM receives from each Fund a pro rata portion of a fee computed daily and paid
monthly at an annual rate equal to 0.15% of the first $25 billion of average daily net assets of all funds in the JPMorgan Funds Complex (excluding the
Investor Funds, the JPMorgan SmartRetirement Funds and the series of JPMorgan Funds Complex that operate as money market funds (each a Money
Market Fund)) and 0.075% of average daily net assets of all funds in the JPMorgan Funds Complex (excluding the Investor Funds, the JPMorgan
SmartRetirement Funds and the Money Market Funds) over $25 billion of such assets. For purposes of this paragraph, the JPMorgan Funds
Complex includes most of the open-end investment companies in the JPMorgan Funds Complex, including the series of the former One Group Mutual
Funds.
With respect to the Money Market
Funds, in consideration of the services provided by JPMFM pursuant to the Administration Agreement, JPMFM will receive from each Fund a pro-rata
portion of a fee computed daily and paid monthly at an annual rate of 0.10% on the first $100 billion of the average daily net assets of all the money
market funds in the JPMorgan Funds Complex and 0.05% of the average daily net assets of the money market funds in the JPMorgan Funds Complex over $100
billion. For purposes of this paragraph, the JPMorgan Funds Complex includes most of the open-end investment companies in the JPMorgan
Funds Complex including the series of the former One Group Mutual Funds.
With respect to the Investor
Funds, in consideration of the services provided by JPMFM pursuant to the Administration Agreement, JPMFM will receive from each Fund a pro rata
portion of a fee computed daily and paid monthly at an annual rate of 0.10% of the first $500 million of average daily net assets of all the Investor
Funds in the JPMorgan Funds Complex, 0.075% of the Investor Funds average daily net assets between $500 million and $1 billion and 0.05% of the
Investor Funds average daily net assets in excess of $1 billion.
Part II-80
JPMFM does not charge a fee for
providing administrative services to the JPMorgan SmartRetirement Funds under the SmartRetirement Administration Agreement, but does receive fees for
its services to the underlying funds.
For details of the administration and administrative
services fees paid or accrued, see ADMINISTRATOR Administration Fees in Part I of this SAI.
DISTRIBUTOR
Since February 19, 2005, JPMDS
has served as the distributor for all the Trusts and holds itself available to receive purchase orders for each of the Funds shares. In that
capacity, JPMDS has been granted the right, as agent of each Trust, to solicit and accept orders for the purchase of shares of each of the Funds in
accordance with the terms of the Distribution Agreement between each Trust and JPMDS. JPMDS began serving as JPMT IIs distributor pursuant to a
Distribution Agreement dated as of April 1, 2002. JPMDS is an affiliate of JPMIM, JPMorgan Investment Advisors and JPMorgan Chase Bank and is a direct,
wholly-owned subsidiary of JPMorgan Chase. The principal offices of JPMDS are located at 1111 Polaris Parkway, Suite 2-J, Columbus, OH
43240.
Unless otherwise terminated, the
Distribution Agreement with JPMDS will continue in effect for annual periods beyond October 31 of each year, and will continue thereafter for
successive one-year terms if approved at least annually by: (a) the vote of a majority of those members of the Board of Trustees who are not parties to
the Distribution Agreement or interested persons of any such party, cast in person at a meeting for the purpose of voting on such approval, and (b) the
vote of the Board of Trustees or the vote of a majority of the outstanding voting securities of the Fund. The Distribution Agreement may be terminated
without penalty on not less than 60 days prior written notice by the Board of Trustees, by vote of majority of the outstanding voting securities
of the Fund or by JPMDS. The termination of the Distribution Agreement with respect to one Fund will not result in the termination of the Distribution
Agreement with respect to any other Fund. The Distribution Agreement may also be terminated in the event of its assignment, as defined in the 1940 Act.
JPMDS is a broker-dealer registered with the SEC and is a member of the National Association of Securities Dealers, Inc.
For details of the compensation paid to the principal
underwriter, JPMDS, see DISTRIBUTOR Compensation paid to JPMDS in Part I of this SAI.
DISTRIBUTION PLAN
Certain Funds have adopted a plan
of distribution pursuant to Rule 12b-1 under the 1940 Act (the Distribution Plan) on behalf of the Class A Shares, Class B Shares, Class C
Shares, Class M Shares, Cash Management Shares, Morgan Shares, Reserve Shares, Service Shares and E*TRADE Class Shares of the applicable Funds, which
provides that each of such classes shall pay for distribution services a distribution fee (the Distribution Fee) to JPMDS, at annual rates
not to exceed the amounts set forth in each applicable Funds prospectuses.
JPMDS may use the Rule 12b-1 fees
payable under the Distribution Plan to finance any activity that is primarily intended to result in the sale of Shares, including, but not limited to,
(i) the development, formulation and implementation of marketing and promotional activities, including direct mail promotions and television, radio,
magazine, newspaper, electronic and media advertising; (ii) the preparation, printing and distribution of prospectuses, statements of additional
information and reports and any supplements thereto (other than prospectuses, statements of additional information and reports and any supplements
thereto used for regulatory purposes or distributed to existing shareholders of each Fund); (iii) the preparation, printing and distribution of sales
and promotional materials and sales literature which is provided to various entities and individuals, including brokers, dealers, financial
institutions, financial intermediaries, shareholders, and prospective investors in each Fund; (iv) expenditures for sales or distribution support
services, including meetings with and assistance to brokers, dealers, financial institutions, and financial intermediaries and in-house telemarketing
support services and expenses; (v)
Part II-81
preparation of information,
analyses, surveys, and opinions with respect to marketing and promotional activities, including those based on meetings with and feedback from
JPMDSs sales force and others including potential investors, shareholders and financial intermediaries; (vi) commissions, incentive compensation,
finders fees, or other compensation paid to, and expenses of employees of JPMDS, brokers, dealers, and other financial institutions and financial
intermediaries that are attributable to any distribution and/or sales support activities, including interest expenses and other costs associated with
financing of such commissions, incentive compensation, other compensation, fees, and expenses; (vii) travel, promotional materials, equipment,
printing, delivery and mailing costs, overhead and other office expenses of JPMDS and its sales force attributable to any distribution and/or sales
support activities, including meetings with brokers, dealers, financial institutions and financial intermediaries in order to provide them with
information regarding the Funds and their investment process and management; (viii) the costs of administering the Distribution Plan; (ix) expenses of
organizing and conducting sales seminars; and (x) any other costs and expenses relating to any distribution and/or sales support activities. Activities
intended to promote one class of shares of a Fund may also benefit the Funds other shares and other Funds. Anticipated benefits to the Funds that
may result from the adoption of the Distribution Plan are economic advantages achieved through economies of scale and enhanced viability if the Funds
accumulate a critical mass.
Class A, Class B and Class C
Shares. Class A Shares of the Funds pay a Distribution Fee of 0.25% of average daily net assets and Class B and Class C Shares of the
Funds pay a Distribution Fee of 0.75% of average daily net assets. JPMDS currently expects to pay sales commissions to a dealer at the time of sale of
Class B and Class C Shares of the Funds of up to 4.00% (2.75% for Class B Shares of the Short Duration Bond Fund, Short Term Municipal Bond Fund, Ultra
Short Duration Bond Fund and Treasury & Agency Fund) and 1.00% respectively of the purchase price of the shares sold by such dealer. JPMDS will use
its own funds (which may be borrowed or otherwise financed) to pay such amounts. Because JPMDS will receive a maximum Distribution Fee of 0.75% of
average daily net assets with respect to Class B and Class C Shares of the Funds, it will take JPMDS several years to recoup the sales commissions paid
to dealers and other sales expenses. Some payments under the Distribution Plan may be used to compensate broker-dealers with trail or maintenance
commissions in an amount not to exceed 0.25% annualized of the average daily net asset value of the Class A Shares or 0.75% annualized of the average
daily net asset value of the Class B and Class C Shares maintained in a Fund by such broker-dealers customers. Such payments on Class A Shares
will be paid to broker-dealers immediately. Such payments on Class B and Class C Shares will be paid to broker-dealers beginning in the 13th month
following the purchase of such shares, except certain broker-dealers who have sold Class C Shares to certain defined contribution plans and who have
waived the 1.00% sales commission shall be paid trail or maintenance commissions immediately.
Class M
Shares. Short Term Bond Fund II Class M Shares pay a Distribution Fee of up to 0.35% of average daily net assets. JPMDS currently
expects to pay sales commissions to a dealer at the time of sale of Class M Shares of the Short Term Bond Fund II of up to 3.00% of the purchase price
of the shares sold by such dealer. JPMDS will use its own funds (which may be borrowed or otherwise financed) to pay such amounts. Some payments under
the Distribution Plan may be used to compensate broker-dealers with trail or maintenance commissions in an amount not to exceed 0.30% annualized of the
average daily net asset value of Class M Shares maintained in the Short Term Bond Fund II by such broker-dealers customers up to $1 billion, and
0.35% of the daily net asset value excess of $1 billion.
Money Market
Funds. Some payments under the Distribution Plan may be used to compensate broker-dealers with trail or maintenance commissions in an
amount not to exceed 0.75% annualized of the average daily net asset value of Class B Shares or Class C Shares maintained in a Fund by such
broker-dealers customers. With respect to Cash Management Shares, broker-dealers will be compensated with trail or maintenance commissions of
0.50% annualized of the average daily net asset value. With respect to Reserve Shares, broker-dealers will be compensated with trail or maintenance
commissions of 0.25% annualized of the average daily net asset value. For Class B, Class C and Morgan Shares, trail or maintenance commissions will be
paid to broker-dealers beginning in the 13th month following the purchase of such shares. Since the distribution fees are not directly tied to
expenses, the amount of distribution fees paid by a class of a Fund during any year may be more or less than actual expenses
Part II-82
incurred pursuant to the
Distribution Plan. JPMDS will use its own funds (which may be borrowed or otherwise financed) to pay such amounts. Because JPMDS will receive 0.75% on
Class B and C Shares, 0.50% on Cash Management Shares, 0.10% on Morgan Shares (except for Morgan Shares of the Prime Money Market Fund), 0.25% on
Reserve Shares and 0.60% on E*TRADE Class and Service Shares of average daily net assets, the fee will take JPMDS several years to recoup the sales
commissions paid to dealers and other sales expenses. For this reason, this type of distribution fee arrangement is characterized by the staff of the
SEC as being of the compensation variety (in contrast to reimbursement arrangements by which a distributors payments are
directly linked to its expenses).
The Institutional Class Shares,
Select Class Shares, Class R5 Shares, Ultra Shares, Premier Shares, Capital Shares and Agency Shares of the Funds have no Distribution
Plan.
No class of shares of a Fund will
make payments or be liable for any distribution expenses incurred by other classes of shares of any Fund.
Since the Distribution Fee is not
directly tied to expenses, the amount of Distribution Fees paid by a class of a Fund during any year may be more or less than actual expenses incurred
pursuant to the Distribution Plan. For this reason, this type of distribution fee arrangement is characterized by the staff of the SEC as being of the
compensation variety (in contrast to reimbursement arrangements by which a distributors payments are directly linked to
its expenses). With respect to Class B and Class C Shares of the Funds, because of the 0.75% annual limitation on the compensation paid to JPMDS during
a fiscal year, compensation relating to a large portion of the commissions attributable to sales of Class B or Class C Shares in any one year will be
accrued and paid by a Fund to JPMDS in fiscal years subsequent thereto. However, the shares are not liable for any distribution expenses incurred in
excess of the Distribution Fee paid.
The Distribution Plan provides
that it will continue in effect indefinitely if such continuance is specifically approved at least annually by a vote of both a majority of the
Trustees and a majority of the Trustees who are not interested persons (as defined in the 1940 Act) of the Trusts and who have no direct or
indirect financial interest in the operation of the Distribution Plan or in any agreement related to such plan (Qualified
Trustees).
The Distribution Plan may be
terminated, with respect to any class of a Fund, at any time by a vote of a majority of the Qualified Trustees or by vote of a majority of the
outstanding voting shares of the class of such Fund to which it applies (as defined in the 1940 Act and the rules thereunder). The Distribution Plan
may not be amended to increase materially the amount of permitted expenses thereunder without the approval of the affected shareholders and may not be
materially amended in any case without a vote of the majority of both the Trustees and the Qualified Trustees. Each of the Funds will preserve copies
of any plan, agreement or report made pursuant to the Distribution Plan for a period of not less than six years from the date of the Distribution Plan,
and for the first two years such copies will be preserved in an easily accessible place. The Board of Trustees will review at least on a quarterly
basis written reports of the amounts expended under the Distribution Plan indicating the purposes for which such expenditures were made. The selection
and nomination of Qualified Trustees shall be committed to the discretion of the disinterested Trustees (as defined in the 1940 Act) then in
office.
The Distribution Plan, which was
approved by the Board of Trustees on August 19, 2004, represents the combination, amendment and restatement of the existing distribution plans adopted
under Rule 12b-1 under the 1940 Act by JPMMFG, JPMMFS and each Predecessor Trust with respect to the classes of Shares specified
above.
Prior to February 19, 2005, the
JPMT II Funds had adopted a Predecessor Distribution and Shareholder Services Plan with respect to Class A and the former Service Class (which were
subsequently discontinued) Shares and a Predecessor Distribution and Shareholder Services Plan with respect to Class B shares and Class C Shares
(collectively, the Predecessor Plans). These Predecessor Plans were terminated effective February 19, 2005. During the fiscal year ended
June 30, 2005, payments made for distribution
Part II-83
and shareholder services
under Rule 12b-1 up until February 18, 2005 were made under these Predecessor Plans.
For details of the Distribution fees that the Funds paid
to or that were accrued by J.P. Morgan Fund Distributors, Inc., see DISTRIBUTOR Distribution Fees in Part I of this
SAI.
SECURITIES LENDING AGENT
To generate additional income,
certain Funds may lend up to 33-1/3% of their total assets pursuant to agreements (borrower agreements) requiring that the loan be
continuously secured by cash or securities issued by the U.S. government or its agencies or its instrumentalities (U.S. government
securities). JPMorgan Chase Bank, an affiliate of the Funds, serves as lending agent pursuant to a securities lending agreement approved by the
Board of Trustees (the Securities Lending Agreement).
Under the Securities Lending
Agreement, JPMorgan Chase Bank acting as agent for the Funds, loans securities to approved borrowers pursuant to approved Borrower Agreements in
exchange for collateral equal to at least 100% of the market value of the loaned securities plus accrued interest. During the term of the loan, the
Funds receive payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously
seeking to earn income on the investment of cash collateral in accordance with investment guidelines contained in the Securities Lending Agreement. For
loans secured by cash, the Funds retain the interest on cash collateral investments but are required to pay the borrower a rebate for the use of cash
collateral. For loans secured by U.S. government securities, the borrower pays a borrower fee to the lending agent on behalf of the Funds. The net
income earned on the securities lending (after payment of rebates and the lending agents fee) is included in the Statement of Operations as
income from securities lending (net in the Funds financial statements). Information on the investment of cash collateral is shown in the Schedule
of Portfolio Investments (in the Funds financial statements).
Under the Securities Lending
Agreement, JPMorgan Chase Bank is entitled to a fee equal to (i) 0.06% calculated on an annualized basis and accrued daily, based upon the value of
collateral received from borrowers for each loan of U.S. government securities outstanding during a given month; and (ii) 0.1142% calculated on an
annualized basis and accrued daily, based upon the value of collateral received from borrowers for each loan of non-U.S. securities outstanding during
a given month. JPMorgan Chase Bank has voluntarily reduced its fees to (i) 0.05% for each loan of U.S. government securities and (ii) 0.10% for each
loan of the non-U.S. government securities, respectively. The purpose of these fees is to cover the custodial, administrative and related costs of
securities lending including securities movement, settlement of trades involving cash received as collateral, custody of collateral and marking to
market loans.
CUSTODIAN
Pursuant to the Global Custody
and Fund Accounting Agreement with JPMorgan Chase Bank, 270 Park Avenue, New York, New York 10167, (the JPMorgan Custody Agreement)
JPMorgan Chase Bank serves as the custodian and fund accounting agent for each of the Funds, other than the JPMorgan SmartRetirement Funds and the
Highbridge Statistical Market Neutral Fund. Pursuant to the JPMorgan Custody Agreement, JPMorgan Chase Bank is responsible for holding portfolio
securities and cash and maintaining the books of account and records of portfolio transactions. JPMorgan Chase Bank is an affiliate of the
Advisers .
With respect to the JPMorgan
SmartRetirement Funds, pursuant to the Global Custody and Fund Accounting Agreement between JPMFM, JPMT I on behalf of the JPMorgan SmartRetirement
Funds, and JPMorgan Chase Bank, 3 Chase MetroTech Center, Brooklyn, NY 11245, effective May 5, 2006 (the SmartRetirement Custody
Agreement), JPMorgan Chase Bank serves as the custodian and funds accounting agent for the JPMorgan SmartRetirement Funds and is responsible for
holding portfolio securities and cash and maintaining the books of account and records of portfolio transactions. The fees and
Part II-84
expenses under the
SmartRetirement Custody Agreement for custody and fund accounting are paid by JPMFM.
Pursuant to the Custody
Agreement with Custodial Trust Company (CTC), 101 Carnegie Center, Princeton, NJ 08540, dated November 21, 2005, CTC serves as the
Highbridge Statistical Market Neutral Funds custodian and is responsible for holding portfolio securities and cash.
Pursuant to the Fund Accounting
Services Agreement with JPMIS, 73 Tremont St., Boston, MA 02108, dated November 30, 2005, JPMIS serves as the Highbridge Statistical Market Neutral
Funds accounting agent and is responsible for maintaining the books of account and records of portfolio transactions. JPMIS is an affiliate of
JPMIM.
CUSTODY AND FUND ACCOUNTING FEES AND
EXPENSES
For custodian services, each Fund
(other than the JPMorgan SmartRetirement Funds and the Highbridge Statistical Market Neutral Fund) pays to JPMorgan Chase Bank annual safekeeping fees
of between 0.001% and 0.60% of assets held by JPMorgan Chase Bank (depending on the foreign domicile in which the asset is held), calculated monthly in
arrears and fees between $4.50 and $150 for securities trades (depending on the domicile in which the trade is settled) and $5 for cash transactions.
JPMorgan Chase Bank is also reimbursed for its reasonable out-of-pocket or incidental expenses, including, but not limited to, legal
fees.
For custodian services for the
JPMorgan SmartRetirement Funds, JPMFM pays to JPMorgan Chase Bank annual safekeeping fees of between 0.001% and 0.60% of assets held by JPMorgan Chase
Bank (depending on the foreign domicile in which the asset is held to the extent a JPMorgan SmartRetirement Funds subsequently invest in foreign
securities) calculated monthly in arrears. JPMFM also pays JPMorgan Chase Bank fees between $4.50 and $150 for securities trades (depending on the
foreign domicile in which the trade is settled to the extent a JPMorgan SmartRetirement Fund subsequently invests in foreign securities) and $5.00 for
cash transactions. JPMFM shall also pay JPMorgan Chase Banks ordinary, reasonable out-of-pocked or incidental expenses other than legal fees and
tax or related fees incidental to processing by governmental authorities, issuers or their agents.
JPMorgan Chase Bank also is paid
$15, $35 or $60 per proxy (depending on the country where the issuer is located) for its service which helps facilitate the voting of proxies
throughout the world.
In addition, JPMorgan Chase Bank
provides derivative servicing with respect to swaps, swaptions and bond and currency options. The fees for these services include a transaction fee of
up to $40 per new contract, a fee of up to $10 per contract amendment (including transactions such as trade amendments, cancellations, terminations,
novations, option exercises, option expiries, maturities or credit events) and a daily fee of up to $0.40 per contract per day for position management
services.
For custodian services, the
Highbridge Statistical Market Neutral Fund pays to CTC the higher of (a) a fee calculated at an annual rate of 0.04% of the first $50 million of the
Funds average daily net assets, 0.02% of the next $150 million of the Funds average daily net assets, 0.01% of the next $800 million of the
Funds average daily net assets and 0.005% of the Funds average daily net assets over $1 billion, or (b) the applicable per account minimum
charge, $5,000. CTC is also reimbursed for its reasonable out-of-pocket or incidental expenses.
With respect to fund accounting
services, the following schedule shall be employed in the calculation of the fees payable for the services provided under the JPMorgan Custody
Agreement, the SmartRetirement Custody Agreement and the Fund Accounting Services Agreement for the Highbridge Statistical Market Neutral Fund. For
purposes of determining the asset levels at which a Tier applies, assets for that fund type across the entire JPMorgan Funds Complex (which shall be
defined to include any 1940 Act fund, commingled funds or Rule 3c-7 fund which is advised or subadvised by an entity which is a wholly-owned subsidiary
of JPMorgan Chase & Co.) shall be used.
Part II-85
Money Market Funds:
Tier
One |
|
|
|
First $5
billion |
|
|
0.0075 |
|
Tier
Two |
|
|
|
Next $7.5
billion |
|
|
0.0060 |
|
Tier
Three |
|
|
|
Next $22.5
billion |
|
|
0.0030 |
|
Tier
Four |
|
|
|
Over $35
billion |
|
|
0.0010 |
|
U.S. Fixed Income Funds:
Tier
One |
|
|
|
First
$12.5 billion |
|
|
0.0090 |
|
Tier
Two |
|
|
|
Next $7.5
billion |
|
|
0.0050 |
|
Tier
Three |
|
|
|
Next $10
billion |
|
|
0.0035 |
|
Tier
Four |
|
|
|
Over $30
billion |
|
|
0.0020 |
|
U.S. Equity Funds:
Tier
One |
|
|
|
First
$12.5 billion |
|
|
0.0085 |
|
Tier
Two |
|
|
|
Next $7.5
billion |
|
|
0.0050 |
|
Tier
Three |
|
|
|
Next $10
billion |
|
|
0.0035 |
|
Tier
Four |
|
|
|
Over $30
billion |
|
|
0.0025 |
|
International Funds:
Tier
One |
|
|
|
First
$12.5 billion |
|
|
0.02 00 |
|
Tier
Two |
|
|
|
Over $12.5
billion |
|
|
0.0 175 |
|
Emerging Markets Funds:
Tier
One |
|
|
|
First
$12.5 billion |
|
|
0.0 300 |
|
Tier
Two |
|
|
|
Over $12.5
billion |
|
|
0.0 200 |
|
Other Fees:
Minimums:
(except for Fund of
Funds)
U.S. Equity
Funds |
|
|
|
$ |
20,000 |
|
U.S. Fixed
Income Funds |
|
|
|
$ |
20,000 |
|
Money Markets
Funds |
|
|
|
$ |
10,000 |
|
International
Funds |
|
|
|
$ |
25,000 |
|
Emerging Markets
Funds |
|
|
|
$ |
40,000 |
|
Highbridge
Statistical Market Neutral Fund |
|
|
|
$ |
30,000 |
|
Additional Share
Classes |
|
|
|
$ |
2,000 |
|
Multi-Managed
Funds (per manager) |
|
|
|
$ |
6,000 |
|
Fund of
Funds |
|
|
|
$ |
15,000 |
|
TRANSFER AGENT
Boston Financial Data Services,
Inc. (BFDS or Transfer Agent), 2 Heritage Drive, North Quincy, MA 02171, serves as each Funds transfer and dividend
disbursing agent. As transfer agent and dividend disbursing agent, BFDS is responsible for maintaining account records, detailing the ownership of Fund
shares and for crediting income, capital gains and other changes in share ownership to shareholder accounts.
SHAREHOLDER SERVICING
The Trusts, on behalf of the
Funds have entered into a shareholder servicing agreement, effective February 19, 2005, with JPMDS (Shareholder Servicing Agreement). The
Shareholder Servicing Agreement for Institutional Class Shares of JPMT II became effective on August 12, 2004. Under the Shareholder Servicing
Agreement, JPMDS will provide, or cause its agents to provide, any combination of the (i) personal shareholder liaison services and shareholder account
information
Part II-86
services (Shareholder
Services) described below and/or (ii) other related services (Other Related Services) as also described below.
Shareholder Services
include (a) answering shareholder inquiries (through electronic and other means) regarding account status and history, the manner in which purchases
and redemptions of Fund shares may be effected, and certain other matters pertaining to the Funds; (b) providing shareholders with information through
electronic means; (c) assisting shareholders in completing application forms, designating and changing dividend options, account designations and
addresses; (d) arranging for or assisting shareholders with respect to the wiring of the funds to and from shareholder accounts in connection with
shareholder orders to purchase, redeem or exchange shares; (e) verifying shareholder requests for changes to account information; (f) handling
correspondence from shareholders about their accounts; (g) assisting in establishing and maintaining shareholder accounts with the Trusts; and (h)
providing other shareholder services as the Trusts or a shareholder may reasonably request, to the extent permitted by applicable law.
Other Related
Services include (a) aggregating and processing purchase and redemption orders for shares; (b) providing shareholders with account statements
showing their purchases, sales, and positions in the applicable Fund; (c) processing dividend payments for the applicable Fund; (d) providing
sub-accounting services to the Trusts for shares held for the benefit of shareholders; (e) forwarding communications from the Trusts to shareholders,
including proxy statements and proxy solicitation materials, shareholder reports, dividend and tax notices, and updated Prospectuses and SAIs; (f)
receiving, tabulating and transmitting proxies executed by shareholders; (g) facilitating the transmission and receipt of funds in connection with
shareholder orders to purchase, redeem or exchange shares; (h) developing and maintaining Trusts website; (i) developing and maintaining
facilities to enable transmission of share transactions by electronic and non-electronic means; (j) providing support and related services to Financial
Intermediaries in order to facilitate their processing of orders and communications with shareholders; (k) providing transmission and other
functionalities for shares included in investment, retirement, asset allocation, cash management or sweep programs or similar programs or services; and
(l) developing and maintaining check writing functionality.
For details of fees paid by the Funds to JPMDS for
Shareholder Services and Other Related Services under the Shareholder Servicing Agreement, see SHAREHOLDER SERVICING Shareholder Services
Fees in Part I of this SAI.
To the extent it is not otherwise
required by its contractual agreement to limit a Funds expenses as described in the Prospectuses for the Funds, JPMDS may voluntarily agree from
time to time to waive a portion of the fees payable to it under the Shareholder Servicing Agreement with respect to each Fund on a month-to-month
basis.
JPMDS may enter into service
agreements with Financial Intermediaries under which it will pay all or a portion of such fees received from the Funds to such entities for performing
Shareholder Services and/or Other Related Services, as described above, for shareholders. Such Financial Intermediaries may include, without
limitation, any person who is an affiliate of JPMDS.
The initial term of the
Shareholder Servicing Agreement was until October 31, 2006. Thereafter, if not terminated, the Shareholder Servicing Agreement will continue
automatically for successive one year terms, provided that such continuance is specifically approved at least annually by the vote of a majority of
those members of the Board of Trustees of the Trusts who are not parties to the Shareholder Servicing Agreement or interested persons (as defined in
the 1940 Act) of any such party. The Shareholder Servicing Agreement may be terminated without penalty, on not less than 60 days prior written
notice, by the Board of Trustees of the Trusts or by JPMDS. The Shareholder Servicing Agreement will also terminate automatically in the event of its
assignment.
Financial Intermediaries may
offer additional services to their customers, including specialized procedures and payment for the purchase and redemption of Fund shares, such as
pre-authorized or systematic purchase and redemption programs, sweep programs, cash advances and redemption checks.
Part II-87
Each Financial Intermediary
may establish its own terms and conditions, including limitations on the amounts of subsequent transactions, with respect to such services. Certain
Financial Intermediaries may (although they are not required by the Trusts to do so) credit to the accounts of their customers from whom they are
already receiving other fees amounts not exceeding such other fees or the fees for their services as Financial Intermediaries.
For shareholders that bank with
JPMorgan Chase Bank, JPMDS may aggregate investments in the Funds with balances held in JPMorgan Chase Bank accounts for purposes of determining
eligibility for certain bank privileges that are based on specified minimum balance requirements, such as reduced or no fees for certain banking
services or preferred rates on loans and deposits. JPMorgan Chase Bank and certain broker-dealers and other Financial Intermediaries may, at their own
expense, provide gifts such as computer software packages, guides and books related to investments or additional Fund shares valued up to $250 to their
customers that invest in the JPMorgan Funds.
JPMDS or its affiliates may from
time to time, at its or their own expense, out of compensation retained by them from the Funds or from other sources available to them, make additional
payments to certain selected dealers or other Financial Intermediaries for performing administrative services for their customers. These services
include maintaining account records, processing orders to purchase, redeem and exchange Fund shares and responding to certain customer inquiries. The
amount of such compensation may be up to an additional 0.10% annually of the average net assets of the Funds attributable to shares of the Funds held
by the customer of such Financial Intermediaries. Such compensation does not represent an additional expense to the Funds or to their shareholders,
since it will be paid by JPMDS.
JPMDS, the Funds and their
affiliates, agents and subagents may share certain information about shareholders and their accounts, as permitted by law and as described in the
JPMorgan Funds Privacy Policy provided with your Prospectus, and also available on the JPMorgan Funds website at
www.jpmorganfunds.com.
EXPENSES
Except for the JPMorgan
SmartRetirement Funds, the Funds pay the expenses incurred in their operations, including their pro-rata share of expenses of the Trusts. These
expenses include: investment advisory and administrative fees; the compensation of the Trustees; registration fees; interest charges; taxes; expenses
connected with the execution, recording and settlement of security transactions; fees and expenses of the Funds custodian for all services to the
Funds, including safekeeping of funds and securities and maintaining required books and accounts; expenses of preparing and mailing reports to
investors and to government offices and commissions; expenses of meetings of investors; fees and expenses of independent accountants, legal counsel and
any transfer agent, registrar or dividend disbursing agent of the Trusts; insurance premiums; and expenses of calculating the NAV of, and the net
income on, shares of the Funds. Shareholder servicing and distribution fees are all allocated to specific classes of the Funds. In addition, the Funds
may allocate transfer agency and certain other expenses by class. Service providers to a Fund may, from time to time, voluntarily waive all or a
portion of any fees to which they are entitled.
With respect to the JPMorgan
SmartRetirement Funds, the Administrator pays many of the ordinary expenses incurred by the Funds in their operations including organization costs,
taxes, ordinary fees and expenses for legal and auditing services, fees and expenses of pricing services, the expenses of preparing (including
typesetting), printing and mailing reports, prospectuses, statements of additional information, proxy solicitation material and notices to existing
shareholders, all expenses incurred in connection with issuing and redeeming shares, the cost of custodial and fund accounting services, and the cost
of initial and ongoing registration of the shares under Federal and state securities laws. The Funds pay the following fees and expenses, including
their pro-rata share of the following fees and expenses of the Trust: (1) transfer agency, (2) shareholder servicing, (3) distribution fees, (4)
brokerage costs, (5) all fees and expenses of Trustees, (6) the portion of the compensation of the Trusts Chief Compliance Officer (CCO)
attributable to the Funds on the basis of relative net assets, (7) costs of the Trusts CCO Program, (8) insurance, including fidelity bond and
D&O insurance, (9) interest, (10) litigation and (11) other extraordinary or nonrecurring expenses. Shareholder servicing and distribution fees are
allocated to specific
Part II-88
classes of the Funds. Service
providers to the Funds may, from time to time, voluntarily waive all or a portion of any fees to which they are entitled.
JPMIM, JPMIA, SC-R&M, JPMFM
and JPMDS have agreed that they will waive fees or reimburse the Funds as described in the Prospectuses.
FINANCIAL INTERMEDIARIES
The services provided by
Financial Intermediaries may include establishing and maintaining shareholder accounts, processing purchase and redemption transactions, arranging for
bank wires, performing shareholder subaccounting, answering client inquiries regarding the Funds, assisting clients in changing dividend options,
account designations and addresses, providing periodic statements showing the clients account balance and integrating these statements with those
of other transactions and balances in the clients other accounts serviced by the Financial Intermediary, transmitting proxy statements, periodic
reports, updated prospectuses and other communications to shareholders and, with respect to meetings of shareholders, collecting, tabulating and
forwarding executed proxies and obtaining such other information and performing such other services as JPMDS or clients of the Financial Intermediary
may reasonably request and agree upon with the Financial Intermediary.
Financial Intermediaries may
establish their own terms and conditions for providing their services and may charge investors a transaction-based or other fee for their services.
Such charges may vary among Financial Intermediaries, but in all cases will be retained by the Financial Intermediary and will not be remitted to a
Fund or JPMDS.
Each Fund has authorized one or
more Financial Intermediaries to accept purchase and redemption orders on its behalf. Such Financial Intermediaries are authorized to designate other
intermediaries to accept purchase and redemption orders on a Funds behalf. A Fund will be deemed to have received a purchase or redemption order
when a Financial Intermediary or, if applicable, that Financial Intermediarys authorized designee, accepts the order. These orders will be priced
at the Funds NAV next calculated after they are so accepted.
The Funds may also enter into
agreements with Financial Intermediaries pursuant to which the Funds will pay the Financial Intermediary for services such as networking, sub-transfer
agency and/or omnibus accounting. Payments made pursuant to such agreements are generally based on either (1) a percentage of the average daily net
assets of clients serviced by such Financial Intermediary up to a set maximum dollar amount per shareholder account serviced, or (2) the number of
accounts serviced by such Financial Intermediary. Any payments made pursuant to such agreements are in addition to, rather than in lieu of, Rule 12b-1
fees and shareholder servicing fees the Financial Intermediary may also be receiving pursuant to agreements with the Distributor and shareholder
servicing agent, respectively. From time to time, JPMDS, JPMIA, JPMIM or their affiliates may pay a portion of the fees for networking, sub-transfer
agency and/or omnibus accounting at its or their own expense and out of its or their legitimate profits.
ADDITIONAL COMPENSATION TO FINANCIAL
INTERMEDIARIES
JPMDS, JPMIA and JPMIM, at their
own expense and out of their legitimate profits, may provide cash incentives (sometimes referred to as other cash compensation) to
Financial Intermediaries. Additional cash incentives may also be paid by other affiliates of JPMDS, JPMIA and JPMIM from time to time. Those additional
cash incentives are payments over and above any sales charges (including 12b-1 fees), shareholder servicing, sub-transfer agency or networking fees
which are disclosed elsewhere in the Funds prospectuses or in this SAI. These additional cash payments are generally made to Financial
Intermediaries that provide shareholder, sub-transfer agency or administrative services or marketing support. Marketing support may include access to
sales meetings, sales representatives and Financial Intermediary management representatives and/or for training and educating a Financial
Intermediarys employees. Cash compensation may also be paid to Financial Intermediaries for inclusion of the Funds on a
Part II-89
sales list including a
preferred or select sales list, in other sales programs or as an expense reimbursement in cases where the Financial Intermediary provides shareholder
services to Fund shareholders. JPMIM, JPMIA and JPMDS may also pay cash compensation in the form of finders fees that vary depending on the Fund
and the dollar amount of shares sold. In addition, JPMDS may pay Financial Intermediaries an additional commission on the sale of Fund shares subject
to a contingent deferred sales charge (CDSC). JPMIM, JPMIA and their affiliates may pay any ticket charges applied to Fund
shares.
Other cash compensation payments
made by JPMDS, JPMIA, JPMIM and/or their affiliates may be different for different Financial Intermediaries and may vary with respect to the type of
fund (e.g., equity fund or fixed income fund) sold by the Financial Intermediary. Other cash compensation payments are usually structured in one of
three ways: (i) basis point payments on gross sales; (ii) basis point payments on net assets; and/or (iii) fixed dollar amount payments. Other cash
compensation payments are always made only to the firm, never to individuals.
For details of the amounts paid by the Funds
Adviser and Distributor for all of the Funds pursuant to their other cash compensation arrangements, see FINANCIAL INTERMEDIARIES
Other Cash Compensation in Part I of this SAI.
To the extent permitted by the
Financial Industry Regulatory Authority (FINRA) regulations, JPMIM, JPMIA, JPMDS and their affiliates may also pay non-cash compensation to
sales representatives of Financial Intermediaries in the form of: (i) occasional gifts; (ii) occasional meals, tickets or other entertainment; and/or
(iii) sponsorship support of regional or national events of Financial Intermediaries or due diligence meetings.
If investment advisers,
distributors or affiliates of mutual funds pay bonuses and incentives in differing amounts, Financial Intermediaries and their financial consultants
may have financial incentives for recommending a particular mutual fund over other mutual funds. In addition, depending on the arrangements in place at
any particular time, a Financial Intermediary and its financial consultants may also have a financial incentive for recommending a particular share
class over the other share classes.
Finders
Fees. JPMDS may pay Financial Intermediaries who sell over $1 million of Class A Shares of certain Funds a finders fee. JPMDS
reserves the right to alter or change the finders fee policy at any time at its own discretion. If a plan redeems all of the shares for which a
finders fee has been paid within 12 months of the purchase date, JPMDS will reclaim the finders fee paid to the Financial Intermediary
rather than charge a CDSC to the plan.
For details of finders fee commissions paid to
Financial Intermediaries, see FINANCIAL INTERMEDIARIES Finders Fee Commissions in Part I of this SAI.
For details of the finders fee amounts paid by the
Adviser and Distributor for the Funds most recent fiscal year, see FINANCIAL INTERMEDIARIES Finders Fee Commissions in
Part I of this SAI.
TRUST COUNSEL
The law firm of Ropes & Gray
LLP, One Metro Center, 700 12th Street, N.W., Suite 900, Washington, D.C. 20005-3948, is
counsel to the Trusts.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The independent registered public
accounting firm for the Trusts and the Funds is PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, NY 10017. PricewaterhouseCoopers LLP conducts
an annual audit of the financial statements of each of the Funds and assists in the preparation and/or review of each Funds federal and state
income tax returns.
Part II-90
PURCHASES, REDEMPTIONS AND EXCHANGES
The Funds have established
certain procedures and restrictions, subject to change from time to time, for purchase, redemption, and exchange orders, including procedures for
accepting telephone instructions and effecting automatic investments and redemptions. The Funds may defer acting on a shareholders instructions
until it has received them in proper form and in accordance with the requirements described in the Prospectuses.
An investor may buy (or redeem)
shares in certain Funds: (i) through a Financial Intermediary; or (ii) through JPMDS by calling JPMorgan Funds Services. Financial Intermediaries may
include financial advisors, investment advisers, brokers, financial planners, banks, insurance companies, retirement or 401(k) plan administrators and
others, including affiliates of JPMorgan Chase that have entered into an agreement with the Distributor, or, if applicable, an authorized designee of a
Financial Intermediary. Upon receipt of any instructions or inquiries by telephone from a shareholder or, if held in a joint account, from either
party, or from any person claiming to be the shareholder, and confirmation that the account registration and address given by such person match those
on record, a Fund or its agent is authorized, without notifying the shareholder or joint account parties, to carry out the instructions or to respond
to the inquiries, consistent with the service options chosen by the shareholder or joint shareholders in his or their latest account application or
other written request for services, including purchasing, exchanging, or redeeming shares of such Fund and depositing and withdrawing monies from the
bank account specified in the Bank Account Registration section of the shareholders latest account application or as otherwise
properly specified to such Fund in writing. Investors may incur a fee if they effect transactions through a Financial Intermediary.
The Funds may, at their own
option, accept securities in payment for shares. The securities delivered in such a transaction are valued in the same manner as they would be valued
for purposes of computing a Funds NAV, as described in the section entitled Net Asset Value. This is a taxable transaction to the
shareholder. Purchases by means of in-kind contributions of securities will only be accepted if a variety of conditions are satisfied, in accordance
with polices and procedures approved by the Board of Trustees.
Except as provided in a
Funds prospectus, and subject to compliance with applicable regulations, each Fund has reserved the right to pay the redemption price of its
shares, either totally or partially, by a distribution in-kind of readily marketable portfolio securities (instead of cash). The securities so
distributed would be valued at the same amount as that assigned to them in calculating the NAV of the shares being sold. If a shareholder received a
distribution in-kind, the shareholder could incur brokerage or other charges in converting the securities to cash. JPMFMFG has filed an election under
18f-1 under the 1940 Act. The other Trusts have not filed an election under Rule 18f-1. However, the following Funds have previously filed Rule 18f-1
elections: (i) JPMorgan Value Opportunities Fund (formerly, The Growth Fund of Washington, Inc.), (ii) JPMorgan California Tax Free Bond Fund
(formerly, J.P. Morgan California Bond Fund), (iii) JPMorgan Tax Aware Enhanced Income Fund, (iv) JPMorgan Tax Aware Disciplined Equity Fund, (v)
JPMorgan Tax Aware U.S. Equity Fund, (vi) JPMorgan Intermediate Tax Free Bond Fund and JPMorgan New York Tax Free Bond Fund (as former series of Mutual
Fund Select Trust), and (ix) JPMorgan International Equity Fund, JPMorgan Tax Aware Large Cap Value Fund and JPMorgan Tax Aware Large Cap Growth Fund
(as former series of Mutual Fund Select Group). These elections carry over and commit these Funds to paying redemptions by a shareholder of record in
cash, limited during any 90 day period to the lesser of: (i) $250,000 or (ii) one percent of the net asset value of the Fund at the beginning of such
period.
Each investor may add to or
reduce its investment in a Fund on each day that the New York Stock Exchange (the Exchange) is open for business. An investor in a Money
Market Fund may add to or reduce its investment in a Money Market Fund on each day that the Exchange is open for business or when a Money Market Fund
elects to remain open when the Exchange is closed but the Federal Reserve Bank of New York is open. The investors percentage of the aggregate
beneficial interests in a Fund will then be recomputed as the percentage equal to the fraction (i) the numerator of which is the value of such
investors investment in a Fund as of such time on such day plus or minus, as the case may be, the amount of net
Part II-91
additions to or reductions in
the investors investment in a Fund effected on such day and (ii) the denominator of which is the aggregate NAV of a Fund as of such time on such
day plus or minus, as the case may be, the amount of net additions to or reductions in the aggregate investments in a Fund. The percentage so
determined will then be applied to determine the value of the investors interest in a Fund as of such time on the following day the Exchange is
open for trading or, for a Money Market Fund, the following day the Money Market Fund is open.
The Money Market Funds reserve
the right to waive any investment minimum. With respect to Agency, Capital, Institutional Class and Premier Shares, examples of when, in the Money
Market Funds discretion, exceptions to the minimum requirements may be made include, but are not limited to, the following: (1) accounts of a
parent corporation and its wholly-owned subsidiaries may be aggregated together to meet the minimum requirement; (2) accounts held by an institutional
investor in any of the Money Market Funds in JPMT I or JPMT II may be aggregated together to meet the minimum requirement; and (3) an institutional
investor may be given a reasonable amount of time to reach the investment minimum for a class. For Agency, Institutional Class and Premier Shares,
investors must purchase the Shares directly from the JPMorgan Funds through JPMDS to potentially be eligible. In each case, the investors must inform
the JPMorgan Funds (or their Financial Intermediary in the case of Capital Shares) that they have accounts that they may be eligible for an exception
to the investment minimum.
Exchange
Privilege. Shareholders may exchange their shares in a Fund for shares of any other JPMorgan Fund as indicated in the Prospectuses that
offers such share class. The shareholder will not pay a sales charge for such exchange. The Funds reserve the right to limit the number of exchanges or
to refuse an exchange. The Funds may discontinue this exchange privilege at any time.
Shares of a Fund may only be
exchanged into another Fund if the account registrations are identical. All exchanges are subject to meeting any investment minimum or eligibility
requirements. With respect to exchanges from any Money Market Fund, shareholders must have acquired their shares in such money market fund by exchange
from one of the JPMorgan non-money market funds or the exchange will be done at relative NAV plus the appropriate sales charge. Any such exchange may
create a gain or loss to be recognized for federal income tax purposes. Normally, shares of the Fund to be acquired are purchased on the redemption
date, but such purchase may be delayed by either Fund for up to five business days if a Fund determines that it would be disadvantaged by an immediate
transfer of the proceeds.
Redemptions. In
general, shares of a Fund may be exchanged or redeemed at net asset value, less any applicable CDSC. The Trust may suspend the right of redemption or
postpone the date of payment for Shares for more than seven days (more than one day for the Liquid Assets Money Market Fund) when:
(a) |
|
trading on the Exchange is broadly restricted by the applicable
rules and regulations of the SEC; |
(b) |
|
the Exchange is closed for other than customary weekend and
holiday closing; |
(c) |
|
the SEC has by order permitted such suspension; or |
(d) |
|
the SEC has declared a market emergency. |
Redemption
Fees. In general, shares of a Fund may be exchanged or redeemed at net asset value, less any applicable CDSC. However, shares of certain
Funds identified as charging redemption fees in their Prospectuses and held for less than 60 days are redeemable (or exchangeable) at a price equal to
98% of the then-current NAV per share, less any applicable CDSC.
The day after your purchase order
is accepted (i.e., trade date plus 1) is considered the first day for purposes of calculating the 60 day holding period.
Shares acquired in conjunction
with a Fund merger, the transfer of substantially all of the assets of a common or collective trust fund, or the substitution of a Fund for an existing
investment alternative by an
Part II-92
employee benefit plan shall
be deemed to be held for 60 days for purposes of calculating the 60 day holding period.
This 2% discount, referred to in
the above listed Funds Prospectuses and this SAI as a redemption fee, directly affects the amount a Shareholder who is subject to the discount
receives upon redemption or exchange. It is intended to offset the brokerage commissions, capital gains impact and administrative and other costs
associated with fluctuations in fund asset levels and cash flow caused by short-term shareholder trading. The fee is not a deferred sales charge, is
not a commission paid to the Adviser or its affiliates and does not economically benefit a Funds Adviser in any way. The above listed Funds
reserve the right to modify the terms of or terminate this fee at any time.
The redemption fee does not apply
to:
1. |
|
Shares acquired through reinvested distributions (dividends and
capital gains), |
2. |
|
Shares purchased by mutual fund wrap fee programs, |
3. |
|
Shares redeemed in connection with death or disability (as
defined in Section 72(m)(7) of the Internal Revenue Code) within one year of such death or disability, |
4. |
|
Shares redeemed as part of a termination of certain
employer-sponsored retirement plans, |
5. |
|
Redemption of an employer-sponsored retirement plans
entire share position with the Fund. Partial redemptions will still be subject to a redemption fee, |
6. |
|
Involuntary redemptions resulting from a failure to maintain the
required minimum balance in an account or involuntary forfeiture of shares by a participant of an employee benefit plan, |
7. |
|
Shares redeemed by balance forward qualified retirement
plans, |
8. |
|
Shares redeemed by a fund of funds such as the
Investor Funds or JPMorgan SmartRetirement Funds provided the fund of funds is registered under the Investment Company Act of
1940, |
9. |
|
Shares redeemed on a systematic basis, including shares redeemed
as a result of required minimum distributions under certain employer-sponsored retirement plans or IRAs or as part of a rebalancing
program, |
10. |
|
Shares obtained through operation of the conversion feature
applicable to Class B Shares, |
11. |
|
Shares redeemed by 529 Plans including shares redeemed as the
result of rebalancing or as a result of participant direction, and |
12. |
|
Shares redeemed as part of a bona fide asset allocation
program. |
Notwithstanding the foregoing, a
redemption fee may be charged in the event that the Distributor determines that any redemptions potentially falling into one of the categories listed
above are being used as a market timing strategy. A Financial Intermediary may not recognize the same exceptions to the imposition of a redemption
fee.
The redemption fee does not apply
when a Fund exercises its right to liquidate accounts falling below the minimum account size or when a Fund redeems shares to collect an applicable
subminimum account fee. The redemption fee will not apply to shares obtained through operation of the conversion feature applicable to the Class B
shares even if they are redeemed within 60 days of conversion. The Funds do not impose a redemption fee if the amount of such fee would be less than
$50. Financial Intermediaries may have a lower minimum or no minimum for charging redemption fees.
Part II-93
Market timers may disrupt
portfolio management and harm Fund performance. To the extent that a Fund is unable to effectively identify market timers or a Fund does not seek to
identify market times, long-term investors may be adversely affected. The Funds do not authorize market timing and, except for the Funds identified in
the Prospectuses, use reasonable efforts to identify market timers and apply any applicable redemption fee. There is no assurance, however, that the
Funds will be able to identify and eliminate all market timers. For example, certain accounts include multiple investors and such accounts typically
provide the Funds with a net purchase or redemption request on any given day where purchasers of Fund shares and redeemers of Fund shares are netted
against one another and the identity of individual purchasers and redeemers whose orders are aggregated are not known by the Funds. The netting effect
often makes it more difficult to identify accounts that should be charged a redemption fee and to collect any redemption fees owed to the
Funds.
For purposes of calculating the
redemption fee, shares purchased through the reinvestment of dividends or capital gain distributions paid by a Fund (free shares) will be
treated as redeemed first. After a Shareholders free shares have been used up, shares will be redeemed on a first-in, first-out
basis.
Applicability of Excessive
Trading Limits and Redemption Fees to Investor Fund, JPMorgan Insurance Trust Balanced Portfolio, JPMorgan Diversified Fund, and JPMorgan
SmartRetirement Fund Transactions. For purposes of the application of the excessive trading limitations and the redemption fees, the JPMorgan
Investor Balanced Fund, JPMorgan Investor Conservative Growth Fund, JPMorgan Investor Growth Fund, JPMorgan Investor Growth & Income Fund, JPMorgan
Insurance Trust Balanced Portfolio, JPMorgan Diversified Fund, JPMorgan SmartRetirement Income Fund, JPMorgan SmartRetirement 2010 Fund, JPMorgan
SmartRetirement 2015 Fund, JPMorgan SmartRetirement 2020 Fund, JPMorgan SmartRetirement 2025 Fund, JPMorgan SmartRetirement 2030 Fund, JPMorgan
SmartRetirement 2035 Fund, JPMorgan SmartRetirement 2040 Fund, JPMorgan SmartRetirement 2045 Fund, JPMorgan SmartRetirement 2050 Fund, and any future
series designated as a JPMorgan SmartRetirement Fund will be considered asset allocation programs within the stated exceptions to the excessive trading
limits and the redemption fees.
Additional Information About
Class B and Class C Shares. The Distributor pays broker-dealers a commission of 4.00% of the offering price on sales of Class B Shares
of the Funds (excluding Class B Shares of the Short Duration Bond Fund, the Short Term Municipal Bond Fund, the Ultra Short Duration Bond Fund and the
Treasury & Agency Fund, for which the applicable commission is 2.75%) and a commission of 1.00% of the offering price on sales of Class C Shares
other than the Short Duration Bond Fund, the Short Term Municipal Bond Fund, and the Ultra Short Duration Bond Fund). The Distributor keeps the entire
amount of any CDSC the investor pays.
If an investor redeems Class C
Shares then uses that money to buy Class C Shares of a JPMorgan Fund within 90 days of that redemption, the second purchase will be free of a CDSC.
Also, the 12b-1 aging will include the investors prior months holdings, so that the Financial Intermediary will receive the trail
sooner.
The CDSC, however, will not be
waived if a defined contribution plan redeems all of the shares that it owns on behalf of participants prior to the CDSC Period defined
below.
Growth Advantage
Fund. Holders of Class B Shares in the former JPMorgan H&Q IPO & Emerging Company Fund, the predecessor of the Growth Advantage
Fund, who received Class B Shares in the Growth Advantage Fund as part of the reorganization of the Growth Advantage Fund and the predecessor fund on
March 23, 2001 will generally pay a lower deferred sales charge on the shares received in the reorganization than on shares subsequently purchased.
Class B Shares received in the reorganization will have the CDSC set forth in Column 3 below, while shares purchased after the reorganization or
acquired in a subsequent purchase will have the CDSC set forth in Column 2 below. The Class B Shares purchased after the reorganization will cease to
have a CDSC six years after a purchase (as opposed to five years for Class B Shares acquired in the reorganization). Those shares will convert to Class
A Shares nine years after a purchase (as opposed to six years for Class B Shares acquired in the reorganization). In
Part II-94
determining the sales charge
on Class B Shares received as part of the reorganization, the holding period will refer back to when the Class B Shares of the predecessor fund were
purchased, not when the Class B Shares of Growth Advantage Fund were received in the reorganization.
Contingent Deferred Sales
Charge*
Years Held
|
|
|
|
Shares Received After Reorganization
|
|
Shares Received in Reorganization
|
1 |
|
|
|
5% |
|
5% |
2 |
|
|
|
4% |
|
4% |
3 |
|
|
|
3% |
|
3% |
4 |
|
|
|
3% |
|
3% |
5 |
|
|
|
2% |
|
1% |
6 |
|
|
|
1% |
|
Convert to
Class A shares |
7 |
|
|
|
None |
|
|
8 |
|
|
|
None |
|
|
9 |
|
|
|
Convert to
Class A shares |
|
|
Purchasers acquiring Class B Shares of the Growth Advantage
Fund after the reorganization between the Fund and the predecessor fund will pay a CDSC as described in Column 2.
Class B Shares of the Funds
(excluding the Money Market Funds) automatically convert to Class A Shares (and thus are then subject to the lower expenses borne by Class A Shares)
after the period of time specified in the applicable Prospectuses has elapsed since the date of purchase (the CDSC Period), together with
the pro rata portion of all Class B Shares representing dividends and other distributions paid in additional Class B Shares attributable to the Class B
Shares then converting. The conversion of Class B Shares will be effected at the relative net asset value per share of the two classes on the first
business day of the month following the eighth anniversary of the original purchase. If any exchanges of Class B Shares during the CDSC Period
occurred, the holding period for the shares exchanged will be counted toward the CDSC Period. At the time of the conversion, the net asset value per
share of the Class A Shares may be higher or lower than the net asset value per share of the Class B Shares; as a result, depending on the relative net
asset value per share, a shareholder may receive fewer or more Class A Shares than the number of Class B Shares converted.
Class B Shares of the Money
Market Funds automatically convert to Morgan Shares (and thus are then subject to the lower expenses borne by Morgan Shares) after the CDSC Period,
together with the pro-rata portion of all Class B Shares representing dividends and other distributions paid in additional Class B Shares attributable
to the Class B Shares then converting. The conversion of Class B Shares will be effected at the relative net asset value per share of the two classes.
If any exchanges of Class B Shares during the CDSC Period occurred, the holding period for the shares exchanged will be counted toward the CDSC Period.
At the time of the conversion, the net asset value per share of the Morgan Shares may be higher or lower than the net asset value per share of the
Class B Shares; as a result, depending on the relative net asset value per share, a shareholder may receive fewer or more Morgan Shares than the number
of Class B Shares converted.
A Fund may require medallion
signature guarantees for changes that shareholders request be made in Fund records with respect to their accounts, including but not limited to,
changes in bank accounts, for any written requests for additional account services made after a shareholder has submitted an initial account
application to a Fund, and in certain other circumstances described in the Prospectuses. A Fund may also refuse to accept or carry out any transaction
that does not satisfy any restrictions then in effect. A medallion signature guarantee may be obtained from an approved bank, broker, savings and loan
association or credit union under Rule 17Ad-15 of the Securities Exchange Act.
Part II-95
The Funds reserve the right to
change any of these policies at any time and may reject any request to purchase shares at a reduced sales charge.
Investors may incur a fee if they
effect transactions through a Financial Intermediary.
Systematic Withdrawal
Plan. Systematic withdrawals may be made on a monthly, quarterly or annual basis. The applicable Class B or Class C CDSC will be
deducted from those payments unless such payments are made:
(i) monthly and
constitute no more than 1/12 of 10% of your then-current balance in a Fund each month; or
(ii) quarterly and
constitute no more than 1/4 of 10% of your then-current balance in a Fund each quarter.
If you withdraw more than the
limits stated above in any given systematic withdrawal payment, you will be charged a CDSC for the amount of the withdrawal over the limit for that
month or quarter.
For accounts that allow
systematic withdrawals only as a fixed dollar amount per month or quarter, the applicable Class B or Class C CDSC is waived provided that, on the date
of the systematic withdrawal, the fixed dollar amount to be withdrawn, when multiplied by 12 in the case of monthly payments or by four in the case of
quarterly payments, does not exceed 10% of your then-current balance in the Fund. If on any given systematic withdrawal date that amount would exceed
10%, you will be charged a CDSC on the entire amount of that systematic withdrawal payment. This calculation is repeated on each systematic withdrawal
date.
For accounts that allow
systematic withdrawals on a percentage basis, a Class B or Class C CDSC will be charged only on that amount of a systematic payment that exceeds the
limits set forth above for that month or quarter.
Your current balance in a Fund
for purposes of these calculations will be determined by multiplying the number of shares held by the then-current net asset value for shares of the
applicable class.
Cut-Off Times for Purchase,
Redemption and Exchange Orders. Orders to purchase, exchange or redeem shares accepted by the Funds, or by a Financial Intermediary
authorized to accept such orders, by the cut-off times indicated in the Funds Prospectuses will be processed at the NAV next calculated after the
order is accepted by the Fund or the Financial Intermediary. Under a variety of different types of servicing agreements, Financial Intermediaries that
are authorized to accept purchase, exchange and/or redemption orders from investors are permitted to transmit those orders that are accepted by the
Financial Intermediary before the cut-off times in the various Prospectuses to the Funds by the cut-off times stated in those agreements, which are
generally later than the cut-off times stated in the Prospectuses.
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays
dividends and distributions as described under Distribution and Tax Matters in the Prospectuses. Dividends may differ between classes as a
result of differences in distribution expenses or other class-specific expenses.
Dividends and capital gains
distributions paid by a Fund are automatically reinvested in additional shares of the Fund unless the shareholder has elected to have them paid in
cash. Dividends and distributions to be paid in cash are credited to the shareholders pre-assigned bank account or are mailed by check in
accordance with the customers instructions. The Funds reserve the right to discontinue, alter or limit the automatic reinvestment privilege at
any time.
Part II-96
If a shareholder has elected to
receive dividends and/or capital gain distributions in cash and the postal or other delivery service is unable to deliver checks to the
shareholders address of record, such shareholders distribution option will automatically be converted to having all dividend and other
distributions reinvested in additional shares. No interest will accrue on amounts represented by uncashed distribution or redemption
checks.
NET ASSET VALUE
The NAV of a class of a Fund is
equal to the value of all the assets attributable to that class, minus the liabilities attributable to such class, divided by the number of outstanding
shares of such class. The following is a discussion of the procedures used by the Funds in valuing their assets.
Equity securities listed on a
North American, Central American, South American or Caribbean securities exchange shall generally be valued at the last sale price on the exchange on
which the security is principally traded that is reported before the time when the net assets of the Funds are valued. The value of securities listed
on the NASDAQ Stock Market, Inc. shall generally be the NASDAQ Official Closing Price.
Generally, trading of foreign
securities on most foreign markets is completed before the close in trading in U.S. markets. Additionally, trading on foreign markets may also take
place on days on which the U.S. markets and the Funds are closed. The Funds have implemented fair value pricing on a daily basis for all equity
securities, except for North American, Central American, South American and Caribbean equity securities, held by the Funds. The fair value pricing
utilizes the quotations of an independent pricing service, unless the Adviser determines in accordance with procedures adopted by the Board that use of
another fair valuation methodology is appropriate. To the extent that foreign equity securities are not fair valued utilizing quotations of an
independent pricing service, such securities shall generally be valued using the price of the last sale or official close of the primary exchange on
which the security is purchased that is reported before the time when the net assets of the Funds are valued.
For purposes of calculating NAV,
all assets and liabilities initially expressed in foreign currencies will be converted into U.S. dollars at the prevailing market rates from an
approved independent pricing service as of 4:00 PM EST.
Securities of open-end investment
companies are valued at their respective NAVs.
Fixed income securities with a
remaining maturity of 61 days or more are valued using market quotations available from and supplied daily by a Board approved independent or
affiliated third party pricing services or broker/dealers of comparable securities. It is anticipated that such pricing services and broker/dealers
will generally provide bid-side quotations.
Certain fixed income
securities, in accordance with the Funds pricing procedures, may be valued by Bear Stearns PricingDirect Inc. (Bear Stearns), an
affiliate of the Funds Adviser. Bear Stearns provides these prices to other affiliated and non-affiliated entities for pricing purposes and the
Funds are charged rates that are comparable to those charged to other affiliated or non-affiliated entities. The fixed income valuation prices provided
by Bear Stearns to the Funds are the same prices that are provided to other affiliated and non-affiliated entities.
Emerging market debt securities,
in accordance with the Funds pricing procedures, may be valued using market quotations provided by Emerging Markets Research, a pricing product
supplied by JPMorgan Securities, Inc., an affiliate of the Funds Adviser. This product is supplied to other affiliated and non-affiliated
entities for pricing purposes. All parties, including the Funds, are provided access to this product at no charge and the prices reflected are the same
prices used to price the securities that comprise the JPMorgan Emerging Markets Bond Indices.
Part II-97
Generally, short-term investments
which mature in 60 days or less are valued at amortized cost if their original maturity was 60 days or less, or by amortizing their value on the 61st
day prior to maturity, if their original maturity when acquired by the Fund was more than 60 days.
Swaps shall generally be
valued by a Board approved independent or affiliated pricing service or at an evaluated price provided by a counterparty or third-party broker. Certain
swaps, in accordance with the Funds pricing procedures, may be valued by JPMorgan Worldwide Securities Services Global Derivatives Services
(GDS), a service offering within JPMorgan Chase Bank, N.A., an affiliate of the Funds Adviser and by Bear Stearns. This product is
supplied to other affiliated and non-affiliated entities for pricing purposes and the Funds are charged rates that are comparable to those charged to
other affiliated or non-affiliated entities. The swap valuation prices provided by GDS and Bear Stearns to the Funds are the same prices that are
provided to other affiliated and non-affiliated entities. Futures, options and other derivatives are valued on the basis of available market
quotations.
The Money Market Funds
portfolio securities are valued by the amortized cost method. The purpose of this method of calculation is to attempt to maintain a constant net asset
value per share of each Fund of $1.00. No assurances can be given that this goal can be attained. The amortized cost method of valuation values a
security at its cost at the time of purchase and thereafter assumes a constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. If a difference of more than 1/2 of 1% occurs between valuation based on
the amortized cost method and valuation based on market value, the Board of Trustees will take steps necessary to reduce such deviation, such as
changing a Funds dividend policy, shortening the average portfolio maturity, realizing gains or losses, or reducing the number of outstanding
Fund shares. Any reduction of outstanding shares will be effected by having each shareholder contribute to a Funds capital the necessary shares
on a pro rata basis. Each shareholder will be deemed to have agreed to such contribution in these circumstances by his or her investment in the
Funds.
With respect to all Funds,
securities or other assets for which market quotations are not readily available or for which market quotations do not represent the value at the time
of pricing (including certain illiquid securities) are fair valued in accordance with procedures established by and under the general supervision and
responsibility of the Trustees. The Board of Trustees has established a Valuation Committee to assist the Board in its oversight of the valuation of
the Funds securities. The Funds Administrator has established a Fair Valuation Committee (FVC) to (1) make fair value
determinations in certain pre-determined situations as outlined in the procedures approved by the Board and (2) provide recommendations to the
Boards Valuation Committee in other situations. This FVC includes senior representatives from Funds management as well as the Funds
investment adviser. Fair value situations could include, but are not limited to: (1) a significant event that affects the value of a Funds
securities (e.g., news relating to natural disasters affecting an issuers operations or earnings announcements); (2) illiquid securities; (3)
securities that may be defaulted or de-listed from an exchange and are no longer trading; or (4) any other circumstance in which the FVC believes that
market quotations do not accurately reflect the value of a security.
DELAWARE TRUSTS
JPMT I and JPMT II. JPMT I
and JPMT II were each formed as Delaware statutory trusts on November 12, 2004 pursuant to separate Declarations of Trust dated November 5, 2004. JPMT
I assumed JPMMFS registration pursuant to the 1933 Act and the 1940 Act effective after the close of business on February 18, 2005, and JPMT II
assumed One Group Mutual Funds registration pursuant to the 1933 Act and the 1940 Act effective after the close of business on February 18,
2005.
Under Delaware law, shareholders
of a statutory trust shall have the same limitation of personal liability that is extended to stockholders of private corporations for profit organized
under Delaware law, unless otherwise provided in the trusts governing trust instrument. JPMT Is and JPMT IIs Declarations of Trust
each provides that shareholders of JPMT I and JPMT II shall not be personally liable for the debts, liabilities, obligations and expenses incurred by,
contracted for, or otherwise existing with respect to JPMT I or JPMT II or any series or class thereof. In addition, the
Part II-98
Declarations of Trust each
provides that neither JPMT I or JPMT II, nor the Trustees, officers, employees, nor agents thereof shall have any power to bind personally any
shareholders nor to call upon any shareholder for payment of any sum of money or assessment other than such as the shareholder may personally agree to
pay. Moreover, Declarations of Trust for JPMT I and JPMT II each expressly provide that the shareholders shall have the same limitation of personal
liability that is extended to shareholders of a private corporation for profit incorporated in the State of Delaware.
The Declarations of Trust of JPMT
I and JPMT II each provides for the indemnification out of the assets held with respect to a particular series of shares of any shareholder or former
shareholder held personally liable solely by reason of a claim or demand relating to the person being or having been a shareholder and not because of
the shareholders acts or omissions. The Declarations of Trust of JPMT I and JPMT II each also provide that JPMT I and JPMT II, on behalf of the
applicable series, may, at its option with prior written notice, assume the defense of any claim made against a shareholder.
JPMT Is and JPMT IIs
Declarations of Trust each provides that JPMT I and JPMT II will indemnify their respective Trustees and officers against liabilities and expenses
incurred in connection with any proceeding in which they may be involved because of their offices with JPMT I or JPMT II, unless, as to liability to
JPMT I or JPMT II or the shareholders thereof, the Trustees engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of their offices. In addition, the Declarations of Trust each provides that any Trustee who has been determined to be an
audit committee financial expert shall not be subject to a greater liability or duty of care because of such
determination.
JPMT I and JPMT II shall continue
without limitation of time subject to the provisions in the Declarations of Trust concerning termination by action of the shareholders or by action of
the Trustees upon written notice to the shareholders.
JPMT I is party to an Agreement
and Plan of Investment and Transfer of Assets dated January 17, 2006 pursuant to which it has agreed, out of the assets and property of certain Funds,
to indemnify and hold harmless JPMorgan Chase Bank, in its corporate capacity and as trustee of certain common trust funds, and each of its directors
and officers, for any breach by JPMT I of its representations, warranties, covenants or agreements under such Agreement or any act, error, omission,
neglect, misstatement, materially misleading statement, breach of duty or other act wrongfully done or attempted to be committed by JPMT I or its Board
of Trustees or officers, related to the transfer of assets from certain common trust funds to the respective Funds and other related
transactions.
MASSACHUSETTS TRUSTS
JPMMFG and
JPMMFIT. JPMMFG and JPMMFIT are each organized as a Massachusetts business trust. Short Term Bond Fund II is a separate and distinct
series of JPMMFG, and the Growth Advantage Fund is a separate and distinct series of JPMMFIT. Copies of the Declarations of Trust of each of JPMMFG and
JPMMFIT are on file in the office of the Secretary of The Commonwealth of Massachusetts. The Declarations of Trust and By-laws of JPMMFG and JPMMFIT
are designed to make JPMMFG and JPMMFIT similar in most respects to a Massachusetts business corporation. The principal distinction between the two
forms concerns shareholder liability as described below.
Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held personally liable as partners for the obligations of the trust which is not the
case for a corporation. However, JPMMFGs and JPMMFITs Declarations of Trust provide that the shareholders shall not be subject to any
personal liability for the acts or obligations of the Funds and that every written agreement, obligation, instrument or undertaking made on behalf of
the Funds shall contain a provision to the effect that the shareholders are not personally liable thereunder.
No personal liability will attach
to the shareholders under any undertaking containing such provision when adequate notice of such provision is given, except possibly in a few
jurisdictions. With
Part II-99
respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where the provision referred to is omitted from the undertaking, (iii) claims
for taxes, and (iv) certain statutory liabilities in other jurisdictions, a shareholder may be held personally liable to the extent that claims are not
satisfied by the Funds. However, upon payment of such liability, the shareholder will be entitled to reimbursement from the general assets of the
Funds. The Boards of Trustees intend to conduct the operations of JPMMFG and JPMMFIT in such a way so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Funds.
JPMMFGs and JPMMITs
Declarations of Trust each provides that JPMMFG and JPMMFIT will each indemnify their respective Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of their offices with JPMMFG or JPMMFIT, unless, as to liability to JPMMFG
or JPMMFIT or their shareholders, it is finally adjudicated that the Trustees engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices or with respect to any matter unless it is finally adjudicated that they did not act in good faith in
the reasonable belief that their actions were in the best interests of JPMMFG or JPMMFIT. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving the settlement or other disposition, or by a reasonable determination based
upon a review of readily available facts, by vote of a majority of disinterested Trustees or in a written opinion of independent counsel, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of their duties.
JPMMFG and JPMMFIT shall continue
without limitation of time subject to the provisions in the Declarations of Trust concerning termination by action of the shareholders or by action of
the Trustees upon notice to the shareholders.
MARYLAND CORPORATION
JPMFMFG. JPMFMFG is a diversified open-end management investment company which was organized as a Maryland corporation, on
August 19, 1997. Effective April 30, 2003, the name of JPMFMFG was changed from Fleming Mutual Fund Group, Inc. to J.P. Morgan Fleming Mutual Fund
Group, Inc.
The Articles of Incorporation of
JPMFMFG provide that a Director shall be liable only for his own willful defaults and, if reasonable care has been exercised in the selection of
officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Articles of Incorporation
also provide that JPMFMFG will indemnify its Directors and officers against liabilities and expenses incurred in connection with actual or threatened
litigation in which they may be involved because of their offices with JPMFMFG to the fullest extent permitted by law. However, nothing in the Articles
of Incorporation shall protect or indemnify a Director against any liability for his willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
DESCRIPTION OF SHARES
Shares of JPMT I and JPMT
II. JPMT I and JPMT II are open-end, management investment companies organized as Delaware statutory trusts. Each Fund represents a
separate series of shares of beneficial interest. See Delaware Trusts.
The Declarations of Trust of JPMT
I and JPMT II each permits the Trustees to issue an unlimited number of full and fractional shares ($0.0001 par value) of one or more series and
classes within any series and to divide or combine the shares of any series or class without materially changing the proportionate beneficial interest
of such shares of such series or class in the assets held with respect to that series. Each share represents an equal beneficial interest in the net
assets of a Fund with each other share of that Fund. The Trustees of JPMT I and JPMT II may authorize the issuance of shares of additional series and
the creation of classes of shares within any series with such preferences, voting powers, rights, duties and privileges as the Trustees may determine,
however the Trustees may not classify or change outstanding shares in a manner materially adverse to shareholders of each share. Upon liquidation of a
Fund,
Part II-100
shareholders are entitled to
share pro rata in the net assets of a Fund available for distribution to such shareholders. The rights of redemption and exchange are described in the
Prospectuses and elsewhere in this SAI.
The shareholders of each Fund are
entitled to one vote for each dollar of NAV (or a proportionate fractional vote with respect to the remainder of the NAV of shares, if any), on matters
on which shares of a Fund shall be entitled to vote. Subject to the 1940 Act, the Trustees themselves have the power to alter the number and the terms
of office of the Trustees, to lengthen their own terms, or to make their terms of unlimited duration subject to certain removal procedures, and appoint
their own successors, provided, however, that immediately after such appointment the requisite majority of the Trustees have been elected by the
shareholders of JPMT I or JPMT II, respectively. The voting rights of shareholders are not cumulative with respect to the election of Trustees. It is
the intention of JPMT I and JPMT II not to hold meetings of shareholders annually. The Trustees may call meetings of shareholders for action by
shareholder vote as may be required by either the 1940 Act or the Declarations of Trust of JPMT I and JPMT II.
Each share of a series or class
represents an equal proportionate interest in the assets in that series or class with each other share of that series or class. The shares of each
series or class participate equally in the earnings, dividends and assets of the particular series or class. Expenses of JPMTI and JPMT II which are
not attributable to a specific series or class are allocated among all of their series in a manner deemed by the Trustees to be fair and equitable.
Shares have no pre-emptive or conversion rights, and when issued, are fully paid and non-assessable. Shares of each series or class generally vote
together, except when required under federal securities laws to vote separately on matters that may affect a particular class, such as the approval of
distribution plans for a particular class.
The Trustees of JPMT I and JPMT
II may, without shareholder approval (unless otherwise required by applicable law): (i) cause JPMT I or JPMT II to merge or consolidate with or into
one or more trusts (or series thereof to the extent permitted by law, partnerships, associations, corporations or other business entities (including
trusts, partnerships, associations, corporations, or other business entities created by the Trustees to accomplish such merger or consolidation) so
long as the surviving or resulting entity is an investment company as defined in the 1940 Act, or is a series thereof, that will succeed to or assume
JPMT I or JPMT IIs registration under the 1940 Act and that is formed, organized, or existing under the laws of the U.S. or of a state,
commonwealth, possession or territory of the U.S., unless otherwise permitted under the 1940 Act; (ii) cause any one or more series or classes of JPMT
I or JPMT II to merge or consolidate with or into any one or more other series or classes of JPMT I or JPMT II, one or more trusts (or series or
classes thereof to the extent permitted by law), partnerships, associations, corporations; (iii) cause the shares to be exchanged under or pursuant to
any state or federal statute to the extent permitted by law; or (iv) cause JPMT I or JPMT II to reorganize as a corporation, limited liability company
or limited liability partnership under the laws of Delaware or any other state or jurisdiction. However, the exercise of such authority may be subject
to certain restrictions under the 1940 Act.
The Trustees may, without
shareholder vote, generally restate, amend or otherwise supplement JPMT I or JPMT IIs governing instruments, including the Declarations of Trust
and the By-Laws, without the approval of shareholders, subject to limited exceptions, such as the right to elect Trustees.
The Trustees, without obtaining
any authorization or vote of shareholders, may change the name of any series or class or dissolve or terminate any series or class of
shares.
Part II-101
Shares have no subscription or
preemptive rights and only such conversion or exchange rights as the Board may grant in its discretion. When issued for payment as described in the
Prospectus and this SAI, JPMT Is and JPMT IIs Shares will be fully paid and non-assessable. In the event of a liquidation or dissolution of
JPMT I or JPMT II, Shares of a Fund are entitled to receive the assets available for distribution belonging to the Fund, and a proportionate
distribution, based upon the relative asset values of the respective Funds, of any general assets not belonging to any particular Fund which are
available for distribution.
Rule 18f-2 under the 1940 Act
provides that any matter required to be submitted to the holders of the outstanding voting securities of an investment company such as JPMT I or JPMT
II shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding Shares of each Fund affected
by the matter. For purposes of determining whether the approval of a majority of the outstanding Shares of a Fund will be required in connection with a
matter, a Fund will be deemed to be affected by a matter unless it is clear that the interests of each Fund in the matter are identical, or that the
matter does not affect any interest of the Fund. Under Rule 18f-2, the approval of an investment advisory agreement or any change in investment policy
would be effectively acted upon with respect to a Fund only if approved by a majority of the outstanding Shares of such Fund. However, Rule 18f-2 also
provides that the ratification of independent public accountants, the approval of principal underwriting contracts, and the election of Trustees may be
effectively acted upon by Shareholders of the Trust voting without regard to series.
Each share class of a Fund has
exclusive voting rights with respect to matters pertaining to the Funds Distribution and Shareholder Services Plans, Distribution Plans or
Shareholder Services Plan applicable to those classes.
Shares of JPMMFG and
JPMMFIT. JPMMFG and JPMMFIT are open-end, management investment companies organized as a Massachusetts business trust. The Short Term
Bond Fund II represents a separate series of shares of beneficial interest of JPMMFG and the Growth Advantage Fund represents a separate series of
shares of beneficial interest of JPMMFIT. See Massachusetts Trust.
The Declarations of Trust of
JPMMFG and JPMMFIT permit the Trustees to issue an unlimited number of full and fractional shares ($0.001 par value) of one or more series and classes
within any series and to divide or combine the shares (of any series, if applicable) without changing the proportionate beneficial interest of each
shareholder in the Fund (or in the assets of other series, if applicable). Each share represents an equal proportional interest in the Fund with each
other share. Upon liquidation of the Fund, holders are entitled to share pro-rata in the net assets of the Fund available for distribution to such
shareholders. See Massachusetts Trusts. The rights of redemption and exchange are described in the Prospectuses and elsewhere in this
SAI.
The shareholders of the Funds are
entitled to one vote for each whole share (with fractional shares entitled to a proportionate fractional vote) on matters on which shares of the Funds
shall be entitled to vote. Subject to the 1940 Act, the Trustees themselves have the power to alter the number and the terms of office of the Trustees,
to lengthen their own terms, or to make their terms of unlimited duration subject to certain removal procedures, and appoint their own successors,
provided, however, that immediately after such appointment the requisite majority of the Trustees have been elected by the shareholders of JPMMFG and
JPMMFIT. The voting rights of shareholders are not cumulative so that holders of more than 50% of the shares voting can, if they choose, elect all
Trustees being selected while the shareholders of the remaining shares would be unable to elect any Trustees. It is the intention of JPMMFG and JPMMFIT
not to hold meetings of shareholders annually. The Trustees may call meetings of shareholders for action by shareholder vote as may be required by
either the 1940 Act or the Declarations of Trust.
Each share of a series or class
represents an equal proportionate interest in that series or class with each other share of that series or class. The shares of each series or class
participate equally in the earnings, dividends and assets of the particular series or class. Expenses of JPMMFG and
Part II-102
JPMMFIT which are not
attributable to a specific series or class are allocated among all of its series in a manner believed by management of JPMMFG and JPMMFIT to be fair
and equitable. Shares have no pre-emptive or conversion rights. Shares when issued are fully paid and non-assessable, except as set forth below. Shares
of each series or class generally vote together, except when required under federal securities laws to vote separately on matters that may affect a
particular class, such as the approval of distribution plans for a particular class.
The Trustees may, however,
authorize the issuance of shares of additional series and the creation of classes of shares within any series with such preferences, privileges,
limitations and voting and dividend rights as the Trustees may determine. The proceeds from the issuance of any additional series would be invested in
separate, independently managed Funds with distinct investment objectives, policies and restrictions, and share purchase, redemption and net asset
valuation procedures. Any additional classes would be used to distinguish among the rights of different categories of shareholders, as might be
required by future regulations or other unforeseen circumstances. All consideration received by the Funds for shares of any additional series or class,
and all assets in which such consideration is invested, would belong to that series or class, subject only to the rights of creditors of the Funds and
would be subject to the liabilities related thereto. Shareholders of any additional series or class will approve the adoption of any management
contract or distribution plan relating to such series or class and of any changes in the investment policies related thereto, to the extent required by
the 1940 Act.
Shareholders of the Fund have the
right, upon the declaration in writing or vote of more than two-thirds of its outstanding shares, to remove a Trustee. The Trustees will call a meeting
of shareholders to vote on removal of a Trustee upon the written request of the record holders of 10% of the Funds shares. In addition, whenever
ten or more shareholders of record who have been such for at least six months preceding the date of application, and who hold in the aggregate either
shares having a NAV of at least $25,000 or at least 1% of JPMMFGs or JPMMFITs outstanding shares, whichever is less, shall apply to the
Trustees in writing, stating that they wish to communicate with other shareholders with a view to obtaining signatures to request a meeting for the
purpose of voting upon the question of removal of the Trustee or Trustees and accompanied by a form of communication and request which they wish to
transmit, the Trustees shall within five business days after receipt of such application either: (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust; or (2) inform such applicants as to the approximate number of
shareholders of record, and the approximate cost of mailing to them the proposed communication and form of request. If the Trustees elect to follow the
latter course, the Trustees, upon the written request of such applicants, accompanied by a tender of the material to be mailed and of the reasonable
expenses of mailing, shall, with reasonable promptness, mail such material to all shareholders of record at their addresses as recorded on the books,
unless within five business days after such tender the Trustees shall mail to such applicants and file with the SEC, together with a copy of the
material to be mailed, a written statement signed by at least a majority of the Trustees to the effect that in their opinion either such material
contains untrue statements of fact or omits to state facts necessary to make the statements contained therein not misleading, or would be in violation
of applicable law, and specifying the basis of such opinion. After opportunity for hearing upon the objections specified in the written statements
filed, the SEC may, and if demanded by the Trustees or by such applicants shall, enter an order either sustaining one or more of such objections or
refusing to sustain any of them. If the SEC shall enter an order refusing to sustain any of such objections, or if, after the entry of an order
sustaining one or more of such objections, the SEC shall find, after notice and opportunity for hearing, that all objections so sustained have been
met, and shall enter an order so declaring, the Trustees shall mail copies of such material to all shareholders with reasonable promptness after the
entry of such order and the renewal of such tender.
For information relating to
mandatory redemption of Fund shares or their redemption at the option of JPMMFG and JPMMFIT under certain circumstances, see Purchases,
Redemptions and Exchanges.
Part II-103
Shares of
JPMFMFG. The Articles of Incorporation of JPMFMFG permit the classes of JPMFMFG to offer 612,500,000 shares of common stock, with $.001
par value per share. Pursuant to JPMFMFGs Articles of Incorporation, the Board may increase the number of shares that the classes of JPMFMFG are
authorized to issue without the approval of the shareholders of each class of JPMFMFG. The Board of Directors has the power to designate and
redesignate any authorized but unissued shares of capital stock into one or more classes of shares and separate series within each such class, to fix
the number of shares in any such class or series and to classify or reclassify any unissued shares with respect to such class or
series.
Each share of a series in JPMFMFG
represents an equal proportionate interest in that series with each other share. Shares are entitled upon liquidation to a pro rata share in the net
assets of the series. Shareholders have no preemptive rights. All consideration received by JPMFMFG for shares of any series and all assets in which
such consideration is invested would belong to that series and would be subject to the liabilities related thereto. Share certificates representing
shares will not be issued.
Under Maryland law, JPMFMFG is
not required to hold an annual meeting of its shareholders unless required to do so under the 1940 Act.
Each share in each series of the
Fund represents an equal proportionate interest in that series of the Fund with each other share of that series of the Fund. The shares of each series
and class participate equally in the earnings, dividends and assets of the particular series or class. Expenses of JPMFMFG which are not attributable
to a specific series or class are allocated among all the series and classes in a manner believed by management of JPMFMFG to be fair and equitable.
Shares of each series or class generally vote together, except when required by federal securities laws to vote separately on matters that may affect a
particular series or class differently, such as approval of a distribution plan.
PORTFOLIO HOLDINGS DISCLOSURE
As described in the Prospectuses
and pursuant to the procedures approved by the Trustees, each business day, a Fund will make available to the public upon request to JPMorgan Funds
Services or the JPMorgan Institutional Funds Service Center (1-800-480-4111 or 1-800-766-7722, as applicable) a complete, uncertified schedule of its
portfolio holdings as of the prior business day for the Money Market Funds and as of the last day of that prior month for all other
Funds.
The Funds publicly
available uncertified, complete list of portfolio holdings information, as described above, may also be provided regularly pursuant to a standing
request, such as on a monthly or quarterly basis, to (i) third party service providers, rating and ranking agencies, financial intermediaries, and
affiliated persons of the Funds and (ii) clients of the Funds Adviser or its affiliates that invest in the Funds or such clients
consultants. No compensation or other consideration is received by a Fund or the Funds Adviser, or any other person for these
disclosures.
For a list of the entities that receive the Funds
portfolio holdings information, the frequency with which it is provided and the length of the lag between the date of the information and the date it
is disclosed, see PORTFOLIO HOLDINGS DISCLOSURE in Part I of this SAI.
In addition, certain service
providers to the Funds or the Adviser, Administrator, Shareholder Servicing Agent or Distributor may for legitimate business purposes receive the
Funds portfolio holdings information earlier than 30 days after month end, such as sub-advisers, rating and ranking agencies, pricing services,
proxy voting service providers, accountants, attorneys, custodians, securities lending agents, brokers in connection with Fund transactions and in
providing pricing quotations, transfer agents and entities providing CDSC financing (released weekly one day after trade date). When a Fund redeems a
shareholder in kind, the shareholder generally receives its proportionate share of the Funds portfolio holdings and therefore, the shareholder
and its agent may receive such information earlier than the time period specified in the Prospectuses. Such holdings are released on conditions of
confidentiality, which include appropriate trading prohibitions. Conditions of confidentiality include confidentiality
terms
Part II-104
included in written
agreements, implied by the nature of the relationship (e.g., attorneyclient relationship), or required by fiduciary or regulatory principles
(e.g., custody services provided by financial institutions).
Disclosure of a Funds
portfolio securities as an exception to the Funds normal business practice requires the business unit proposing such exception to identify a
legitimate business purpose for the disclosure and submit the proposal to the Funds Treasurer for approval following business and compliance
review. Additionally, no compensation or other consideration is received by a Fund or the Funds Adviser, or any other person for these
disclosures. The Funds Trustees will review annually a list of such entities that have received such information, the frequency of such
disclosures and the business purpose therefor. These procedures are designed to address conflicts of interest between the Funds shareholders on
the one hand and the Funds Adviser or any affiliated person of the Fund or such entities on the other hand by creating a structured review and
approval process which seeks to ensure that disclosure of information about the Funds portfolio securities is in the best interests of the
Funds shareholders. There can be no assurance, however, that a Funds policies and procedures with respect to the disclosure of portfolio
holdings information will prevent the misuse of such information by individuals or firms in possession of such information.
Finally, the Funds release
information concerning any and all portfolio holdings when required by law. Such releases may include providing information concerning holdings of a
specific security to the issuer of such security. In addition to information on portfolio holdings, other fund statistical information may be found on
the JPMorgan Funds website at www.jpmorganfunds.com.
PROXY VOTING PROCEDURES AND
GUIDELINES
The Board of Trustees has
delegated to the Advisers and their affiliated advisers, proxy voting authority with respect to the Funds portfolio securities. To ensure that
the proxies of portfolio companies are voted in the best interests of the Funds, the Funds Board of Trustees has adopted the Advisers
detailed proxy voting procedures (the Procedures) that incorporate guidelines (Guidelines) for voting proxies on specific types
of issues.
The Adviser and its affiliated
advisers are part of a global asset management organization with the capability to invest in securities of issuers located around the globe. Because
the regulatory framework and the business cultures and practices vary from region to region, the Guidelines are customized for each region to take into
account such variations. Separate Guidelines cover the regions of (1) North America, (2) Europe, Middle East, Africa, Central America and South
America, (3) Asia (ex-Japan) and (4) Japan, respectively.
Notwithstanding the variations
among the Guidelines, all of the Guidelines have been designed with the uniform objective of encouraging corporate action that enhances shareholder
value. As a general rule, in voting proxies of a particular security, the Adviser and its affiliated advisers will apply the Guidelines of the region
in which the issuer of such security is organized. Except as noted below, proxy voting decisions will be made in accordance with the Guidelines
covering a multitude of both routine and non-routine matters that the Adviser and its affiliated advisers have encountered globally, based on many
years of collective investment management experience.
To oversee and monitor the
proxy-voting process, the Adviser has established a proxy committee and appointed a proxy administrator in each global location where proxies are
voted. The primary function of each proxy committee is to review periodically general proxy-voting matters, review and approve the Guidelines annually,
and provide advice and recommendations on general proxy-voting matters as well as on specific voting issues. The procedures permit an independent
voting service, currently Institutional Shareholder Services, Inc. (ISS) in the U.S., to perform certain services otherwise carried out or
coordinated by the proxy administrator.
Although for many matters the
Guidelines specify the votes to be cast, for many others, the Guidelines contemplate case-by-case determinations. In addition, there will undoubtedly
be proxy matters that are not contemplated by the Guidelines. For both of these categories of matters and to override the
Part II-105
Guidelines, the Procedures
require a certification and review process to be completed before the vote is cast. That process is designed to identify actual or potential material
conflicts of interest (between the Fund on the one hand, and the Funds investment adviser, principal underwriter or an affiliate of any of the
foregoing, on the other hand) and ensure that the proxy vote is cast in the best interests of the Fund. When a potential material conflict of interest
has been identified, the proxy administrator and a subgroup of proxy committee members (composed of a member from the Investment Department and one or
more members from the Legal, Compliance , Operations or Risk Management Departments) will evaluate the potential conflict of interest and determine whether such
conflict actually exists, and if so, will recommend how the Adviser will vote the proxy. In addressing any material conflict, the Adviser may take one
or more of the following measures (or other appropriate action): removing or walling off from the proxy voting process certain Adviser
personnel with knowledge of the conflict, voting in accordance with any applicable Guideline if the application of the Guideline would objectively
result in the casting of a proxy vote in a predetermined manner, or deferring the vote to ISS, which will vote in accordance with its own
recommendation.
The following summarizes some of
the more noteworthy types of proxy voting policies of the non-U.S. Guidelines:
|
|
Corporate governance procedures differ among the countries.
Because of time constraints and local customs, it is not always possible for the Adviser to receive and review all proxy materials in connection with
each item submitted for a vote. Many proxy statements are in foreign languages. Proxy materials are generally mailed by the issuer to the sub-custodian
which holds the securities for the client in the country where the portfolio company is organized, and there may not be sufficient time for such
materials to be transmitted to the Adviser in time for a vote to be cast. In some countries, proxy statements are not mailed at all, and in some
locations, the deadline for voting is two to four days after the initial announcement that a vote is to be solicited. JPMIA, JPMIM and SC-R&M also
considers the cost of voting in light of the expected benefit of the vote. |
|
|
Where proxy issues concern corporate governance, takeover
defense measures, compensation plans, capital structure changes and so forth, the Adviser pays particular attention to managements arguments for
promoting the prospective change . T he Advisers sole criterion in determining its voting stance is whether such changes will be to the
economic benefit of the beneficial owners of the shares. |
|
|
The Adviser is in favor of a unitary board structure of the type
found in the United Kingdom as opposed to tiered board structures. Thus, the Adviser will generally vote to encourage the gradual phasing out of tiered
board structures, in favor of unitary boards. However, since tiered boards are still very prevalent in markets outside of the United Kingdom, local
market practice will always be taken into account. |
|
|
The Adviser will use its voting powers to encourage appropriate
levels of board independence, taking into account local market practice. |
|
|
The Adviser will usually vote against discharging the board from
responsibility in cases of pending litigation, or if there is evidence of wrongdoing for which the board must be held accountable. |
|
|
The Adviser will vote in favor of increases in capital which
enhance a companys long-term prospects. The Adviser will also vote in favor of the partial suspension of preemptive rights if they are for purely
technical reasons (e.g., rights offers which may not be legally offered to shareholders in certain jurisdictions). However, the Adviser will vote
against increases in capital which would allow the company to adopt poison pill takeover defense tactics, or where the increase in
authorized capital would dilute shareholder value in the long term. |
|
|
The Adviser will vote in favor of proposals which will enhance a
companys long-term prospects. The Adviser will vote against an increase in bank borrowing powers which would result in the |
Part II-106
|
|
company reaching an unacceptable level of financial leverage,
where such borrowing is expressly intended as part of a takeover defense, or where there is a material reduction in shareholder value. |
|
|
The Adviser reviews shareholder rights plans and poison pill
proposals on a case-by-case basis; however, the Adviser will generally vote against such proposals and vote for revoking existing plans. |
|
|
Where social or environmental issues are the subject of a proxy
vote, the Adviser will consider the issue on a case-by-case basis, keeping in mind at all times the best economic interests of its clients. |
|
|
With respect to Asia, for routine proxies (e.g., in respect of
voting at the Annual General Meeting of Shareholders) the Advisers position is to neither vote in favor or against. For Extraordinary General
Meetings of Shareholders, however, where specific issues are put to a shareholder vote, these issues are analyzed by the respective country specialist
concerned. A decision is then made based on his or her judgment. |
The following summarizes some of
the more noteworthy types of proxy voting policies of the U.S. Guidelines:
|
|
The Adviser considers votes on director nominees on a
case-by-case basis. Votes generally will be withheld from directors who: (a) attend less than 75% of board and committee meetings without a valid
excuse; (b) implement or renew a dead-hand poison pill; (c) are affiliated directors who serve on audit, compensation or nominating committees or are
affiliated directors and the full board serves on such committees or the company does not have such committees; or (d) ignore a shareholder proposal
that is approved for two consecutive years by a majority of either the shares outstanding or the votes cast. |
|
|
The Adviser votes proposals to classify boards on a case-by-case
basis, but will vote in favor of such proposal if the issuers governing documents contain each of eight enumerated safeguards (for example, a
majority of the board is composed of independent directors and the nominating committee is composed solely of such directors). |
|
|
The Adviser also considers management poison pill proposals on a
case-by-case basis, looking for shareholder-friendly provisions before voting in favor. |
|
|
The Adviser votes against proposals for a super-majority vote to
approve a merger. |
|
|
The Adviser considers proposals to increase common and/or
preferred shares and to issue shares as part of a debt restructuring plan on a case-by-case basis, taking into account the extent of dilution and
whether the transaction will result in a change in control. |
|
|
The Adviser votes proposals on a stock option plan based
primarily on a detailed, quantitative analysis that takes into account factors such as estimated dilution to shareholders equity and dilution to
voting power. The Adviser generally considers other management compensation proposals on a case-by-case basis. |
|
|
The Adviser also considers on a case-by-case basis proposals to
change an issuers state of incorporation, mergers and acquisitions and other corporate restructuring proposals and certain social and
environmental issue proposals. |
HCM. The Board
of Trustees has delegated to HCM proxy voting authority with respect to Highbridge Statistical Market Neutral Funds portfolio securities.
HCMs proxy voting policy is as follows (HCM being referred to as the Firm):
Part II-107
Introduction/General
Principles. The Firm exercises voting authority over Client proxies with one important consideration in mind: to ensure that the Firm
votes proxies in the best interests of Clients. The Firm will make copies of these proxy voting policies and procedures available upon request to
Clients and, when the Client is a Fund, to the investors in that Fund. The Firm has engaged ISS to review and vote proxies on behalf of the Firm and
its Clients. The Firm has instructed its prime brokers and custodians of Firm or Client securities to forward to ISS all proxies received in connection
with securities of the Firm or its Clients held by such prime brokers or custodians. Firm personnel who receive a proxy statement will forward it to
the Compliance Officer or her designee, who will forward it on to ISS. ISS is responsible for making sure proxies are voted in a timely manner. Any
question with respect to voting in such situations should be referred to the Compliance Officer, or her designee. ISS determines how to vote proxies on
behalf of the Firm and its Clients pursuant to predetermined guidelines and will post its proposed vote on its website. The firm has access to the ISS
website and will be able to regularly review a record of the proxies and votes cast.
Voting by the
Firm. The Head of Operations, together with the appropriate Portfolio Manager or Trader, may determine to vote a particular proxy in a
manner differing from the proposed vote of ISS as displayed on the ISS website. Notice shall be given to the Compliance Officer, or her designee should
the Head of Operations, together with the appropriate Portfolio Manager determine to vote a particular proxy in a manner different from the proposed
vote of ISS. Neither the Compliance Officer nor the Head of Operations may alter an ISS proposed vote should the Portfolio Manager or the Firm have a
material conflict of interest with the Client whose securities are the subject of the vote.
Resolving Conflicts of
Interest. A material conflict of interest may arise if the Firm, the Portfolio Manager or a Supervised Person has a substantial business
or personal relationship with the company that is the subject of the proxy or a proponent of a proxy proposal and the failure to vote in favor of
management or the proponent could harm the Firms relationship with such persons. Should a Portfolio Manager or any other Supervised Person have a
question as to whether a particular proxy vote would give rise to a material conflict of interest, the Portfolio Manager or Supervised Person should
contact the Compliance Officer. The Compliance Officer will consult with the CFO, Head of Operations, Portfolio Managers and the other Firm personnel
with knowledge of the potential conflict and determine whether a material conflict exists and resolve the conflict in the best interest of the Client.
Material conflicts of interest between the Firm, its personnel and its Clients will be resolved as follows:
1. Where the conflict
of interest is a conflict involving the Firm, the firm will abstain from changing the ISS vote determination on the website;
2. Where the conflict
of interest is a personal conflict involving the Portfolio Manger, the Portfolio Manger will abstain from the voting decision, and the HCM Compliance
Officer, after consultation with the HCM CFO, will determine whether to vote the proxy or allow ISS to vote the proxy.
Confirming Independence of
ISS. The Firm has confirmed that ISS has the experience, capacity and competence to vote proxies. ISS has represented that it will not
provide this service in connection with any proxy concerning a company for which it provides substantial services, or it otherwise has a relationship
which would preclude it from making recommendations in an impartial manner and in the best interests of the Firms Clients. The Firm has no
affiliation or material business, professional or other relationship with ISS. ISS has also undertaken to inform the Compliance Officer, or her
designee, or any relationship it has or may have in the future with any company for which ISS proposes to provide proxy voting recommendations
(including any compensation received or to be received from such company).
Part II-108
Recordkeeping. The Firm must retain copies of (i) its proxy voting policies and procedures and all amendments thereto; (ii)
a list of the proxy statements received and forwarded to ISS regarding Client securities; (iii) records of votes cast by ISS and the Firm on behalf of
Clients; (iv) records of Client requests for proxy voting information; (vii) any records relating to the qualifications of ISS and how it addresses
material conflicts of interest; and (vii) records relating to how the Firm addressed material conflicts of interest. The information should be retained
by the HCMs Head of Operations and copies should be sent to the HCMs Compliance Officer, or her designee.
In accordance with regulations of
the SEC, the Funds proxy voting records for the most recent 12-month period ended June 30 are on file with the SEC and are available on the
JPMorgan Funds website at www.jpmorganfunds.com and are on the SECs website at www.sec.gov.
ADDITIONAL INFORMATION
A Trust is not required to hold a
meeting of Shareholders for the purpose of electing Trustees except that (i) a Trust is required to hold a Shareholders meeting for the election
of Trustees at such time as less than a majority of the Trustees holding office have been elected by Shareholders and (ii) if, as a result of a vacancy
on the Board of Trustees, less than two-thirds of the Trustees holding office have been elected by the Shareholders, that vacancy may only be filled by
a vote of the Shareholders. In addition, Trustees may be removed from office by a written consent signed by the holders of Shares representing
two-thirds of the outstanding Shares of a Trust at a meeting duly called for the purpose, which meeting shall be called and held in accordance with the
bylaws of the applicable Trust. Except as set forth above, the Trustees may continue to hold office and may appoint successor
Trustees.
As used in a Trusts
Prospectuses and in this SAI, assets belonging to a Fund means the consideration received by a Trust upon the issuance or sale of Shares in
that Fund, together with all income, earnings, profits, and proceeds derived from the investment thereof, including any proceeds from the sale,
exchange, or liquidation of such investments, and any funds or payments derived from any reinvestment of such proceeds, and any general assets of a
Trust not readily identified as belonging to a particular Fund that are allocated to that Fund by a Trusts Board of Trustees. The Board of
Trustees may allocate such general assets in any manner it deems fair and equitable. It is anticipated that the factor that will be used by the Board
of Trustees in making allocations of general assets to particular Funds will be the relative net asset values of the respective Funds at the time of
allocation. Assets belonging to a particular Fund are charged with the direct liabilities and expenses in respect of that Fund, and with a share of the
general liabilities and expenses of a Trust not readily identified as belonging to a particular Fund that are allocated to that Fund in proportion to
the relative net asset values of the respective Funds at the time of allocation. The timing of allocations of general assets and general liabilities
and expenses of a Trust to particular Funds will be determined by the Board of Trustees of a Trust and will be in accordance with generally accepted
accounting principles. Determinations by the Board of Trustees of a Trust as to the timing of the allocation of general liabilities and expenses and as
to the timing and allocable portion of any general assets with respect to a particular Fund are conclusive.
As used in this SAI and the
Prospectuses, the term majority of the outstanding voting securities of the Trust, a particular Fund or a particular class of a Fund means
the following when the 1940 Act governs the required approval: the affirmative vote of the lesser of (a) more than 50% of the outstanding shares of the
Trust, such Fund or such class of such Fund, or (b) 67% or more of the shares of the Trust, such Fund or such class of such Fund present at a meeting
at which the holders of more than 50% of the outstanding shares of the Trust, such Fund or such class of such Fund are represented in person or by
proxy. Otherwise, the declaration of trust, articles of incorporation or by-laws usually govern the needed approval and generally require that if a
quorum is present at a meeting, the vote of a majority of the shares of the Trust, such Fund or such class of such Fund, as applicable, shall decide
the question.
Telephone calls to the Funds, the
Funds service providers or a Financial Intermediary as Financial Intermediary may be tape-recorded. With respect to the securities offered
hereby, this SAI and the Prospectuses do not contain all the information included in the Registration Statements of the Trusts filed with the SEC under
the 1933 Act and the 1940 Act. Pursuant to the rules and regulations of the SEC,
Part II-109
certain portions have been
omitted. The Registration Statement including the exhibits filed therewith may be examined at the office of the SEC in Washington,
D.C.
Statements contained in this SAI
and the Prospectuses concerning the contents of any contract or other document are not necessarily complete, and in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to the Registration Statements of the Trusts. Each such statement is qualified in all
respects by such reference.
No dealer, salesman or any other
person has been authorized to give any information or to make any representations, other than those contained in the Prospectuses and this SAI, in
connection with the offer contained therein and, if given or made, such other information or representations must not be relied upon as having been
authorized by any of the Trusts, the Funds or JPMDS. The Prospectuses and this SAI do not constitute an offer by any Fund or by JPMDS to sell or
solicit any offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful for the Funds or JPMDS to make
such offer in such jurisdictions.
Part II-110
APPENDIX ADESCRIPTION OF
RATINGS
The following is a summary of
published ratings by major credit rating agencies. Credit ratings evaluate only the safety of principal and interest payments, not the market value
risk of lower quality securities. Credit rating agencies may fail to change credit ratings to reflect subsequent events on a timely basis. Although the
investment adviser considers security ratings when making investment decisions, it also performs its own investment analysis and does not rely solely
on the ratings assigned by credit agencies.
Unrated securities will be
treated as non-investment grade securities unless the investment adviser determines that such securities are the equivalent of investment grade
securities. Securities that have received different ratings from more than one agency are considered investment grade if at least one agency has rated
the security investment grade.
DESCRIPTION OF COMMERCIAL PAPER
RATINGS
Standard & Poors Rating Service
(S&P)
|
A-1 |
|
|
|
Highest category of commercial paper. Capacity to meet financial commitment is strong. Obligations designated with a plus sign (+) indicate
that capacity to meet financial commitment is extremely strong. |
|
A-2 |
|
|
|
Issues somewhat more susceptible to adverse effects of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the capacity to meet financial commitments is satisfactory. |
|
A-3 |
|
|
|
Exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation. |
|
B |
|
|
|
Regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitment
on the obligation. |
|
C |
|
|
|
Currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation. |
|
D |
|
|
|
In
payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. |
Fitch Ratings (Fitch)
F1 |
|
|
|
HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely payment of financial commitments; may have an added + to
denote any exceptionally strong credit feature. |
|
F2 |
|
|
|
GOOD
CREDIT QUALITY. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the
higher ratings. |
|
F3 |
|
|
|
FAIR
CREDIT QUALITY. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade. |
|
B |
|
|
|
SPECULATIVE. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions. |
C |
|
|
|
HIGH
DEFAULT RISK. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and
economic environment. |
|
RD |
|
|
|
Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other
obligations. |
|
D |
|
|
|
Indicates an entity or sovereign that has defaulted on all of its financial obligations. |
+ or
- |
|
may be appended to a rating to denote relative status within
major rating categories. |
‘PIF |
|
|
|
denotes a security that is paid-in-full, matured, called, or refinanced. |
|
‘NR |
|
|
|
indicates that Fitch Ratings does not rate the issuer or issue in question. |
|
‘Withdrawn |
|
|
|
A
rating is withdrawn when Fitch Ratings deems the amount of information available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced, or for any other reason Fitch Ratings deems sufficient. |
Moodys Investors Service, Inc.
(Moodys)
Prime-1 |
|
|
|
Superior ability for repayment, often evidenced by such characteristics as: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in
earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured
sources of alternate liquidity. |
|
Prime-2 |
|
|
|
Strong capacity for repayment. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained. |
|
Prime-3 |
|
|
|
Acceptable capacity for repayment. The effect of industry characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained. |
|
Not
Prime |
|
|
|
Does
not fall within any of the Prime rating categories. |
Dominion Bond Rating Service
(DBRS)
R-1 |
|
|
|
Prime Credit Quality |
|
R-2 |
|
|
|
Adequate Credit Quality |
|
R-3 |
|
|
|
Speculative |
|
D |
|
|
|
Default |
All three DBRS rating categories for short term debt use
high, middle or low as subset grades to designate the relative standing of the credit within a particular rating
category. The following comments provide separate definitions for the three grades in the Prime Credit Quality area.
A-2
R-1
(high) |
|
|
|
Short term debt rated R-1 (high) is of the highest credit quality, and indicates an entity which possesses unquestioned ability to
repay current liabilities as they fall due. Entities rated in this category normally maintain strong liquidity positions, conservative debt levels and
profitability which is both stable and above average. Companies achieving an R-1 (high) rating are normally leaders in structurally sound
industry segments with proven track records, sustainable positive future results and no substantial qualifying negative factors. Given the extremely
tough definition which DBRS has established for an R-1 (high), few entities are strong enough to achieve this rating. |
|
R-1
(middle) |
|
|
|
Short term debt rated R-1 (middle) is of superior credit quality and, in most cases, ratings in this category differ from
R-1 (high) credits to only a small degree. Given the extremely tough definition which DBRS has for the R-1 (high) category
(which few companies are able to achieve), entities rated R-1 (middle) are also considered strong credits which typically exemplify above
average strength in key areas of consideration for debt protection. |
|
R-1
(low) |
|
|
|
Short term debt rated R-1 (low) is of satisfactory credit quality. The overall strength and outlook for key liquidity, debt and
profitability ratios is not normally as favorable as with higher rating categories, but these considerations are still respectable. Any qualifying
negative factors which exist are considered manageable, and the entity is normally of sufficient size to have some influence in its
industry. |
|
R-2
(high); R-2 (middle); R-2 (low) |
|
|
|
Short term debt rated R-2 is of adequate credit quality and within the three subset grades, debt protection ranges from having
reasonable ability for timely repayment to a level which is considered only just adequate. The liquidity and debt ratios of entities in the
R-2 classification are not as strong as those in the R-1 category, and the past and future trend may suggest some risk of
maintaining the strength of key ratios in these areas. Alternative sources of liquidity support are considered satisfactory; however, even the
strongest liquidity support will not improve the commercial paper rating of the issuer. The size of the entity may restrict its flexibility, and its
relative position in the industry is not typically as strong as an R-1 credit. Profitability trends, past and future, may be less
favorable, earnings not as stabled, and there are often negative qualifying factors present which could also make the entity more vulnerable to adverse
changes in financial and economic conditions. |
|
R-3
(high); R-3 (middle); R-3 (low) |
|
|
|
Short term debt rated R-3 is speculative, and within the three subset grades, the capacity for timely payment ranges from mildly
speculative to doubtful. R-3 credits tend to have weak liquidity and debt ratios, and the future trend of these ratios is also unclear. Due
to its speculative nature, companies with R-3 ratings would normally have very limited access to alternative sources of liquidity. Earnings
would typically be very unstable, and the level of overall profitability of the entity is also likely to be low. The industry environment may be weak,
and strong negative qualifying factors are also likely to be present. |
|
D |
|
|
|
A
security rated D implies the issuer has either not met a scheduled payment or the issuer has made it clear that it will be missing such a payment in
the near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may exist in
the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and until such
time as the rating is suspended, discontinued, or reinstated by DBRS. |
A-3
DESCRIPTION OF BANK RATINGS
Moodys
Moodys Bank Financial Strength Ratings (BFSRs)
represent Moodys opinion of a banks intrinsic safety and soundness and, as such, exclude certain external credit risks and credit support
elements that are addressed by Moodys Bank Deposit Ratings. In addition to commercial banks, Moodys BFSRs may also be assigned to other
types of financial institutions such as multilateral development banks, government-sponsored financial institutions and national development financial
institutions.
A |
|
|
|
These banks possess superior intrinsic financial strength. Typically they will be institutions with highly valuable and defensible business
franchises, strong financial fundamentals, and a very predictable and stable operating environment. |
|
B |
|
|
|
These banks possess strong intrinsic financial strength. Typically, they will be institutions with valuable and defensible business
franchises, good financial fundamentals, and a predictable and stable operating environment. |
|
C |
|
|
|
These banks possess adequate intrinsic financial strength. Typically, they will be institutions with more limited but still valuable and
defensible business franchises. These banks will display either acceptable financial fundamentals within a predictable and stable operating
environment, or good financial fundamentals within a less predictable and stable operating environment. |
|
D |
|
|
|
Banks rated D display modest intrinsic financial strength, potentially requiring some outside support at times. Such institutions may be
limited by one or more of the following factors; a weak business franchise; financial fundamentals that are deficient in one or more respects; or an
unpredictable and unstable operating environment. |
|
E |
|
|
|
Banks rated E display very modest intrinsic financial strength, with a higher likelihood of periodic outside support or an eventual need for
outside assistance. Such institutions may be limited by one or more of the following factors: a weak and limited business franchise; financial
fundamentals that are materially deficient in one or more respects; or a highly unpredictable or unstable operating environment. |
Where appropriate, a + modifier will be
appended to ratings below the A category and a - modifier will be appended to ratings above the E category to
distinguish those banks that fall in intermediate categories.
DESCRIPTION OF BOND RATINGS
S&P
Corporate and Municipal Bond
Ratings
Investment
Grade
AAA |
|
|
|
Debt
rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. |
|
AA |
|
|
|
Debt
rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only to a small
degree. |
|
A |
|
|
|
Debt
rated A has a strong capacity to pay interest and repay principal; it is somewhat more susceptible, however, to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories. |
A-4
BBB |
|
|
|
Debt
rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions, or changing circumstances are more likely to impair the obligors capacity to pay interest and repay principal for
debt in this category in higher-rated categories. |
Speculative Grade
Debt rated BB, CCC, CC, and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation
and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
BB |
|
|
|
Debt
rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB-rating. |
|
B |
|
|
|
Debt
rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. |
|
|
|
|
The
B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB-rating. |
|
CCC |
|
|
|
Debt
rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B-rating. |
|
CC |
|
|
|
The
rating CC is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. |
|
C |
|
|
|
The
rating C is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. |
|
C1 |
|
|
|
The
rating C1 is reserved for income bonds on which no interest is being paid. |
|
D |
|
|
|
Debt
rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating will also be
used upon the filing of bankruptcy petition if debt service payments are jeopardized. |
Plus(+) or Minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
c: The ‘c subscript is used to provide
additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer
is below an investment-grade level and/or the issuers bonds are deemed taxable.
A-5
p: The letter p indicates that the rating is
provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with respect to such likelihood and risk.
*: Continuance of the ratings is contingent upon Standard
& Poors receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.
r: The r is attached to highlight derivative,
hybrid, and certain other obligations that S&P believes may experience high volatility or high variability in expected returns due to non-credit
risks. Examples of such obligations are: securities whose principal or interest return is indexed to equities, commodities, or currencies; certain
swaps and options; and interest only and principal only mortgage securities. The absence of an r symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the U.S. and its
territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Moodys
Long-Term Ratings: Bonds and
Preferred Stock
Investment
Grade
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 that make the long-term risks appear somewhat larger than with
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 that suggest a susceptibility to impairment sometime in
the future. |
|
Baa |
|
|
|
Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as
well. |
A-6
Non-Investment
Grade
Ba |
|
|
|
Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. The protection of
interest and principal payments may be no more than 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 a desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be small. |
|
Caa |
|
|
|
Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to
principal or interest. |
|
Ca |
|
|
|
Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked
shortcomings. |
|
C |
|
|
|
Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. |
Moodys applies numerical modifiers, 1, 2, and 3 in
each generic rating classified from Aa through Caa in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Corporate Short-Term Debt
Ratings
Moodys short-term debt ratings are opinions of the
ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly
noted.
Moodys employs the following three designations, all
judged to be investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 |
|
|
|
Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates
of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources
of alternate liquidity. |
|
PRIME-2 |
|
|
|
Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity
is maintained. |
|
PRIME-3 |
|
|
|
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. |
|
NOT
PRIME: |
|
|
|
Issuers rated Not Prime do not fall within any of the Prime rating categories. |
A-7
Fitch
Investment
Grade
AAA |
|
|
|
HIGHEST CREDIT QUALITY. ‘AAA ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally
strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable
events. |
|
AA |
|
|
|
VERY
HIGH CREDIT QUALITY. ‘AA ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable events. |
|
A |
|
|
|
HIGH
CREDIT QUALITY. ‘A ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher
ratings. |
|
BBB |
|
|
|
GOOD
CREDIT QUALITY. ‘BBB ratings indicate that there is currently expectations of low credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is
the lowest investment-grade category. |
Speculative
Grade
BB |
|
|
|
SPECULATIVE. ‘BB ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse
economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade. |
|
B |
|
|
|
HIGHLY SPECULATIVE. ‘B ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial
commitments are currently being met: however, capacity for continued payment is contingent upon a sustained, favorable business and economic
environment. |
|
CCC,
CC, C |
|
|
|
HIGH
DEFAULT RISK. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or
economic developments. A ‘CC rating indicates that default of some kind appears probable. ‘C ratings signal imminent
default. |
|
RD |
|
|
|
Indicates an entity that has failed to make due payments (within the applicable grace period) on some but not all material financial
obligations, but continues to honor other classes of obligations. |
|
D |
|
|
|
Indicates an entity or sovereign that has defaulted on all of its financial obligations. |
DBRS
Bond and Long-Term Debt Rating
Scale
The DBRS long-term debt rating scale is meant to give an
indication of the risk that a borrower will not fulfill its full obligations in a timely manner, with respect to both interest and principal
commitments. Every DBRS rating is based on quantitative and qualitative considerations relevant to the borrowing entity. Each rating category is
denoted by the subcategories high and low. The absence of either a high or low designation indicates
the rating is in the middle of the category. The AAA and D categories do not utilize high, middle, and
low as differential grades.
AAA |
|
|
|
Bonds rated AAA are of the highest credit quality, with exceptionally strong protection for the |
A-8
|
|
|
|
timely repayment of principal and interest. Earnings are considered stable, the structure of the industry in which the entity operates is
strong, and the outlook for future profitability is favorable. There are few qualifying factors present which would detract from the performance of the
entity, the strength of liquidity and coverage ratios is unquestioned and the entity has established a creditable track record of superior performance.
Given the extremely tough definition which DBRS has established for this category, few entities are able to achieve a AAA rating. |
|
AA |
|
|
|
Bonds rate AA are of superior credit quality, and protection of interest and principal is considered high. In many cases, they
differ from bonds rated AAA only to a small degree. Given the extremely tough definition which DBRS has for the AAA category (which few companies are
able to achieve), entities rated AA are also considered to be strong credits which typically exemplify above-average strength in key areas of
consideration and are unlikely to be significantly affected by reasonably foreseeable events. |
|
A |
|
|
|
Bonds rated A are of satisfactory credit quality. Protection of interest and principal is still substantial, but the degree of
strength is less than with AA rated entities. While a respectable rating, entities in the A category are considered to be more susceptible
to adverse economic conditions and have greater cyclical tendencies than higher rated companies. |
|
BBB |
|
|
|
Bonds rated BBB are of adequate credit quality. Protection of interest and principal is considered adequate, but the entity is
more susceptible to adverse changes in financial and economic conditions, or there may be other adversities present which reduce the strength of the
entity and its rated securities. |
|
BB |
|
|
|
Bonds rated BB are defined to be speculative, where the degree of protection afforded interest and principal is uncertain,
particularly during periods of economic recession. Entities in the BB area typically have limited access to capital markets and additional liquidity
support and, in many cases, small size or lack of competitive strength may be additional negative considerations. |
|
B |
|
|
|
Bonds rated B are highly speculative and there is a reasonably high level of uncertainty which exists as to the ability of the
entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry
adversity. |
|
CCC/
CC/C |
|
|
|
Bonds rated in any of these categories are very highly speculative and are in danger of default of interest and principal. The degree of
adverse elements present is more severe than bonds rated B, Bonds rated below B often have characteristics which, if not
remedied, may lead to default. In practice, there is little difference between the C to CCC categories, with CC and
C normally used to lower ranking debt of companies where the senior debt is rated in the CCC to B
range. |
|
D |
|
|
|
A
security rated D implies the issuer has either not met a scheduled payment of interest or principal or that the issuer has made it clear that it will
miss such a payment in the near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace
periods may exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in
arrears, and until such time as the rating is suspended, discontinued, or reinstated by DBRS. |
A-9
DESCRIPTION OF INSURANCE RATINGS
Moodys
Insurance Financial Strength
Ratings
Moodys Insurance Financial Strength Ratings are
opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. Specific obligations are considered
unrated unless they are individually rated because the standing of a particular insurance obligation would depend on an assessment of its relative
standing under those laws governing both the obligation and the insurance company.
Moodys rating symbols for Insurance Financial
Strength Ratings are identical to those used to indicate the credit quality of long-term obligations. These rating gradations provide investors with a
system for measuring an insurance companys ability to meet its senior policyholder claims and obligations.
Aaa |
|
|
|
Insurance companies rated in this category offer exceptional financial security. While the credit profile of these companies is likely to
change, such changes as can be visualized are most unlikely to impair their fundamentally strong position. |
|
Aa |
|
|
|
These insurance companies offer excellent financial security. Together with the Aaa group, they constitute what are generally known as high
grade companies. They are rated lower than Aaa companies because long-term risks appear somewhat larger. |
|
A |
|
|
|
Insurance companies rated in this category offer good financial security. However, elements may be present which suggest a susceptibility to
impairment sometime in the future. |
|
Baa |
|
|
|
Insurance companies rated in this category offer adequate financial security. However, certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. |
|
Ba |
|
|
|
Insurance companies rated in this category offer questionable financial security. Often the ability of these companies to meet policyholder
obligations may be very moderate and thereby not well safeguarded in the future. |
B |
|
|
|
Insurance companies rated in this category offer poor financial security. Assurance of punctual payment of policyholder obligations over any
long period of time is small. |
|
Caa |
|
|
|
Insurance companies rated in this category offer very poor financial security. They may be in default on their policyholder obligations or
there may be present elements of danger with respect to punctual payment of policyholder obligations and claims. |
|
Ca |
|
|
|
Insurance companies rated in this category offer extremely poor financial security. Such companies are often in default on their policyholder
obligations or have other marked shortcomings. |
|
C |
|
|
|
Insurance companies rated in this category are the lowest rated class of insurance company and can be regarded as having extremely poor
prospects of ever offering financial security. |
Moodys appends numerical modifiers 1, 2, and 3 to
each generic rating classification from Aa through Caa. Numeric modifiers are used to refer to the ranking within a group with 1 being the
highest and 3 being the lowest. However, the financial strength of companies within a generic rating symbol (Aa, for example) is broadly the
same.
A-10
Short-Term Insurance Financial
Strength Ratings
These ratings represent Moodys opinions of the
ability of the insurance company to repay punctually its short-term senior policyholder claims and obligations. The ratings apply to senior
policyholder obligations that mature or are payable within one year or less.
Specific obligations are considered unrated unless
individually rated because the standing of a particular insurance obligation would depend on an assessment of its relative standing under those laws
governing both the obligation and the insurance company.
P-1 |
|
|
|
Insurers (or supporting institutions) rated Prime-1 have a superior ability for repayment of senior short-term policyholder claims and
obligations. |
|
P-2 |
|
|
|
Insurers (or supporting institutions) rated Prime-2 have a strong ability for repayment of senior short-term policyholder claims and
obligations. |
|
P-3 |
|
|
|
Insurers (or supporting institutions) rated Prime-3 have an acceptable ability for repayment of senior short-term policyholder claims and
obligations. |
|
NP |
|
|
|
Insurers (or supporting institutions) rated Not Prime (NP) do not fall within any of the Prime rating categories. |
S&P
An insurer rated BBB or higher is regarded as
having financial security characteristics that outweigh any vulnerabilities, and is highly likely to have the ability to meet financial
commitments.
AAA |
|
|
|
Extremely Strong financial security characteristics. AAA is the highest Insurer Financial Strength Rating assigned by Standard
& Poors. |
|
AA |
|
|
|
Very
Strong financial security characteristics, differing only slightly from those rated higher. |
|
A |
|
|
|
Strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with
higher ratings. |
|
BBB |
|
|
|
Good
financial security characteristics, but is more likely to be affected by adverse business conditions than are higher rated insurers. |
An insurer rated BB or lower is regarded as
having vulnerable characteristics that may outweigh its strengths. BB indicates the least degree of vulnerability within the range;
CC the highest.
BB |
|
|
|
Marginal financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to
meet financial commitments. |
|
B |
|
|
|
Weak
financial security characteristics. Adverse business conditions will likely impair its ability to meet financial commitments. |
|
CCC |
|
|
|
Very
Weak financial security characteristics, and is dependent on favorable business conditions to meet financial commitments. |
A-11
CC |
|
|
|
Extremely Weak financial security characteristics and is likely not to meet some of its financial commitments. |
R |
|
|
|
An
insurer rated R is under regulatory supervision owing to its financial condition. During the pendency of the regulatory supervision, the regulators may
have the power to favor one class of obligations over others or pay some obligations and not others. The rating does not apply to insurers subject only
to nonfinancial actions such as market conduct violations. |
NR |
|
|
|
Not
Rated, which implies no opinion about the insurers financial security. |
Plus (+) or minus (-) Following ratings from AA
to CCC show relative standing within the major rating categories.
Fitch
Insurer Financial Strength Ratings
A Fitch insurer financial strength rating (IFS
rating) provides an assessment of the financial strength of an insurance organization, and its capacity to meet senior obligations to
policyholders and contract holders on a timely basis. The IFS rating is assigned to the insurance organization itself, and no liabilities or
obligations of the insurer are specifically rated unless otherwise stated (for example, Fitch Ratings may separately rate the debt obligations of an
insurer). The IFS rating can be assigned to insurance and reinsurance companies in all insurance sectors, including the life & health, property
& casualty, mortgage, financial guaranty and title insurance sectors, as well as managed care companies such as health maintenance
organizations.
The IFS rating uses the same ratings scale and symbols used
by Fitch for its international ratings of long-term debt obligations and issuers. However, the definitions associated with the ratings reflect the
unique aspects of the IFS rating within an insurance industry context. Ratings in the ‘AA through ‘CCC categories may be
amended with a plus or minus sign to show relative standing within the major rating category. Ratings of ‘BBB- and higher are considered to
be Secure, and those of ‘BB+ and lower are considered to be Vulnerable.
AAA |
|
|
|
EXCEPTIONALLY STRONG. Insurers assigned this highest rating are viewed as possessing exceptionally strong capacity to meet policyholder and
contract obligations. For such companies, risk factors are minimal and the impact of any adverse business and economic factors is expected to be
extremely small. |
|
AA |
|
|
|
VERY
STRONG. Insurers are viewed as possessing very strong capacity to meet policyholder and contract obligations. Risk factors are modest, and the impact
of any adverse business and economic factors is expected to be very small. |
|
A |
|
|
|
STRONG. Insurers are viewed as possessing strong capacity to meet policyholder and contract obligations. Risk factors are moderate, and the
impact of any adverse business and economic factors is expected to be small. |
|
BBB |
|
|
|
GOOD. Insurers are viewed as possessing good capacity to meet policyholder and contract obligations. Risk factors are somewhat high, and the
impact of any adverse business and economic factors is expected to be material, yet manageable. |
A-12
BB |
|
|
|
Moderately Weak. Insurers are viewed as moderately weak with an uncertain capacity to meet policyholder and contract obligations. Though
positive factors are present, overall risk factors are high, and the impact of any adverse business and economic factors is expected to be
significant. |
|
B |
|
|
|
Weak. Insurers are viewed as weak with a poor capacity to meet policyholder and contract obligations. Risk factors are very high, and the
impact of any adverse business and economic factors is expected to be very significant. |
|
CCC,
CC, C |
|
|
|
Very
Weak. Insurers rated in any of these three categories are viewed as very weak with a very poor capacity to meet policyholder and contract obligations.
Risk factors are extremely high, and the impact of any adverse business and economic factors is expected to be insurmountable. A ‘CC rating
indicates that some form of insolvency or liquidity impairment appears probable. A ‘C rating signals that insolvency or a liquidity
impairment appears imminent. |
|
DDD,
DD, D |
|
|
|
Distressed. These ratings are assigned to insurers that have either failed to make payments on their obligations in a timely manner, are
deemed to be insolvent, or have been subjected to some form of regulatory intervention. Within the ‘DDD-D range, those
companies rated ‘DDD have the highest prospects for resumption of business operations or, if liquidated or wound down, of having a vast
majority of their obligations to policyholders and contract holders ultimately paid off, though on a delayed basis (with recoveries expected in the
range of 90-100%). Those rated ‘DD show a much lower likelihood of ultimately paying off material amounts of their obligations in a
liquidation or wind down scenario (in a range of 50-90%). Those rated ‘D are ultimately expected to have very limited liquid assets
available to fund obligations, and therefore any ultimate payoffs would be quite modest (at under 50%). |
+ or
- |
|
may be appended to a rating to indicate the relative position of
a credit within the rating category. Such suffixes are not added to ratings in the ‘AAA category or to ratings below the ‘CCC
category. |
Short-Term Insurer Financial Strength
Ratings
A Fitch Short-Term Insurer Financial Strength Rating
(ST-IFS Rating) provides an assessment of the near-term financial health of an insurance organization, and its capacity to meet senior obligations to
policyholders and contractholders that would be expected to be due within one year. The analysis supporting the ST-IFS Rating encompasses all of the
factors considered within the context of the IFS Rating, but with greater weighting given to an insurers near-term liquidity, financial
flexibility and regulatory solvency characteristics, and less weight given to longer-term issues such as competitiveness and earnings
trends.
Fitch will only assign a ST-IFS rating to insurers that
also have been assigned an IFS rating. Currently, ST-IFS ratings are used primarily by U.S. life insurance companies that sell short-term funding
agreements.
The ST-IFS rating uses the same international ratings scale
used by Fitch for short-term debt and issuer ratings. Ratings of ‘F1, ‘F2 and ‘F3 are considered to be
Secure, while those of ‘B and below are viewed as Vulnerable.
F1 |
|
|
|
STRONG. Insurers are viewed as having a strong capacity to meet their near-term obligations. When an insurer rated in this rating category is
designated with a (+) sign, it is viewed as having a very strong capacity to meet near-term obligations. |
A-13
F2 |
|
|
|
MODERATELY STRONG. Insurers are viewed as having a moderately strong capacity to meet their near-term obligations. |
|
F3 |
|
|
|
MODERATE. Insurers are viewed as having a moderate capacity to meet their near-term obligations, and a near-term adverse change in business or
economic factors would likely move the insurer to a ‘vulnerable rating category. |
|
B |
|
|
|
WEAK. Insurers are viewed as having a weak capacity to meet their near-term obligations. |
|
C |
|
|
|
VERY
WEAK. Insurers are viewed as having a very weak capacity to meet their near-term obligations. |
|
D |
|
|
|
DISTRESSED. Insurers have either been unable to meet near-term obligations, or the failure to meet such obligations is
imminent. |
DESCRIPTION OF SHORT-TERM MUNICIPAL BOND
RATINGS
Moodys
Moodys ratings for short-term municipal obligations
are designated Moodys Investment Grade (MIG) or Variable Moodys Investment Grade (VMIG), in the
case of variable rate demand obligations (VRDOs). For VRDOs, a two-component rating is assigned. The first element represents an evaluation of the
degree of risk associated with scheduled principal and interest payments, and the other represents an evaluation of the degree of risk associated with
the demand feature. The short-term rating assigned to the demand feature of VRDOs is designated as VMIG. When either the long- or short-term aspect of
a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1. MIG ratings terminate at the retirement of the obligation while VMIG
rating expiration will be a function of each issues specific structural or credit features. Those short-term obligations that are of speculative
quality are designated SG.
MIG1/VMIG1 |
|
|
|
Superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support or demonstrated
broad-based access to the market for refinancing. |
|
MIG2/VMIG2 |
|
|
|
Strong credit quality. Margins of protection are ample although not so large as in the preceding group. |
|
MIG3/VMIG3 |
|
|
|
Acceptable credit quality. Liquidity and cash flow protection may be narrow and marketing access for refinancing is likely to be less well
established. |
|
SG |
|
|
|
Speculative quality. Debt instruments in this category lack margins of protection. |
S&P
An S&P note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating.
SP-1 |
|
|
|
Strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+)
designation. |
|
SP-2 |
|
|
|
Satisfactory capacity to pay principal and interest. |
|
SP-3 |
|
|
|
Speculative capacity to pay principal and interest. |
A-14
DESCRIPTION OF PREFERRED STOCK
RATINGS
Moodys
Because of the fundamental differences between preferred
stocks and bonds, a variation of our familiar bond rating symbols is used in the quality ranking of preferred stock. The symbols, presented below, are
designed to avoid comparison with bond quality in absolute terms. It should always be borne in mind that preferred stock occupies a junior position to
bonds within a particular capital structure and that these securities are rated within the universe of preferred stocks.
aaa |
|
|
|
Top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of
preferred stocks. |
|
aa |
|
|
|
High-grade preferred stock. This rating indicates that there is a reasonable assurance the earnings and asset protection will remain
relatively well maintained in the foreseeable future. |
|
a |
|
|
|
Upper-medium grade preferred stock. While risks are judged to be somewhat greater than in the aaa and aa
classifications, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels. |
|
baa |
|
|
|
Medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be
questionable over any great length of time. |
|
ba |
|
|
|
Considered to have speculative elements and its future cannot be considered well assured. Earnings and asset protection may be very moderate
and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class. |
|
b |
|
|
|
Lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long
period of time may be small. |
|
caa |
|
|
|
Likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of
payments. |
|
ca |
|
|
|
Speculative in a high degree and is likely to be in arrears on dividends with little likelihood of eventual payments. |
|
c |
|
|
|
Lowest rated class of preferred or preference stock. Issues so rated can thus be regarded as having extremely poor prospects of ever attaining
any real investment standing. |
Note: Moodys applies numerical modifiers 1, 2, and 3
in each rating classification; the modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
DBRS
Preferred Share Rating
Scale
The DBRS preferred share rating scale is used in the
Canadian securities market and is meant to give an indication of the risk that a borrower will not fulfill its full obligations in a timely manner,
with respect to both dividend and principal commitments. Every DBRS rating is based on quantitative and qualitative considerations relevant to the
borrowing entity. Each rating category is denoted by the subcategories high
A-15
and low. The absence of either a
high or low designation indicates the rating is in the middle of the category.
Pfd-1 |
|
|
|
Preferred shares rated Pfd-1 are of superior credit quality, and are supported by entities with strong earnings and balance sheet
characteristics. Pfd-1 generally corresponds with companies whose senior bonds are rated in the AAA or AA
categories. As is the case with all rating categories, the relationship between senior debt ratings and preferred share ratings should be understood as
one where the senior debt rating effectively sets a ceiling for the preferred shares issued by the entity. However, there are cases where the preferred
share rating could be lower than the normal relationship with the issuers senior debt rating. |
|
Pfd-2 |
|
|
|
Preferred shares rated Pfd-2 are of satisfactory credit quality. Protection of dividends and principal is still substantial, but
earnings, the balance sheet, and coverage ratios are not as strong as Pfd-1 rated companies. Generally, Pfd-2 ratings correspond with
companies whose senior bonds are rated in the A category. |
|
Pfd-3 |
|
|
|
Preferred shares rated Pfd-3 are of adequate credit quality. While protection of dividends and principal is still considered
acceptable, the issuing entity is more susceptible to adverse changes in financial and economic conditions, and there may be other adversities present
which detract from debt protection. Pfd-3 ratings generally correspond with companies whose senior bonds are rated in the higher end of the
BBB category. |
|
Pfd-4 |
|
|
|
Preferred shares rated Pfd-4 are speculative, where the degree of protection afforded to dividends and principal is uncertain,
particularly during periods of economic adversity. Companies with preferred shares rated Pfd-4 generally coincide with entities that have
senior bond ratings ranging from the lower end of the BBB category through the BB category. |
|
Pfd-5 |
|
|
|
Preferred shares rated Pfd-5 are highly speculative and the ability of the entity to maintain timely dividend and principal
payments in the future is highly uncertain. The Pfd-5 rating generally coincides with companies with senior bond ratings of B
or lower. Preferred shares rated Pfd-5 often have characteristics which, if not remedied, may lead to default. |
|
D |
|
|
|
A
security rated D implies the issuer has either not met a scheduled dividend or principal payment or the issuer has made it clear it will miss such a
payment in the near future. In some cases, DBRS may not assign a D rating under a bankruptcy announcement scenario, as allowances for grace periods may
exist in the underlying legal documentation. Once assigned, the D rating will continue as long as the missed payment continues to be in arrears, and
until such time as the rating is suspended, discontinued, or reinstated by DBRS. |
A-16
PART C
Item 23. Exhibits
(a)(1) |
|
Certificate
of Trust dated November 12, 2004. Incorporated by reference to the Registrants Registration Statement filed
with the Securities and Exchange Commission in Post-Effective Amendment No. 69 as filed on February 18, 2005 (Accession Number 0001193125-05-032909). |
(a)(2) |
|
Declaration
of Trust dated November 5, 2004. Incorporated by reference to the Registrants Registration Statement filed
with the Securities and Exchange Commission in Post-Effective Amendment No. 69 as filed on February 18, 2005 (Accession Number 0001193125-05-032909). |
(a)(3) |
|
Amended
Schedule B, dated May 13, 2005, to the Declaration of Trust dated November 5, 2004. Incorporated by reference to the Registrants Registration Statement filed with
the Securities and Exchange Commission in Post-Effective Amendment No. 72 as filed on May 16, 2005 (Accession Number 0001193125-05-108865). |
(a)(4) |
|
Amended
Schedule B, dated February 14, 2008, to the Declaration of Trust dated November 5,
2004. Incorporated herein by reference to the Registrants Registration Stated as
filed with the Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(b)(1) |
|
Amended and Restated By-Laws
dated January 16, 2007. Incorporated herein by reference to the Registrants Registration Statement filed with the Securities
and Exchange Commission in
Post-Effective Amendment No. 86 as filed on February 27, 2007 (Accession Number 0001145443-07-000492). |
(c) |
|
Instrument
defining rights of shareholders incorporated by reference to Exhibits (a)(2) and (b). |
(d)(1) |
|
Amended
and Restated Investment Advisory Agreement dated as of August 12, 2004 between
Registrant and Banc One Investment Advisors Corporation (renamed JPMorgan
Investment Advisors Inc. as of February 19, 2005). Incorporated by reference
to the Registrants
Registration Statement filed with the Securities and Exchange Commission in Post-Effective Amendment No. 68 as filed on October 27, 2004
(Accession Number 0001193125-04-179370). |
(d)(2) |
|
Revised
Schedule A dated as of September 30, 2004 to the Amended and Restated Investment
Advisory Agreement between Registrant and Banc One Investment Advisors
Corporation (renamed JPMorgan Investment Advisors Inc. as of February 19, 2005).
Incorporated by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in Post-Effective Amendment No. 68 as filed on October 27, 2004
(Accession Number 0001193125-04-179370). |
(d)(5) |
|
Investment
Advisory Agreement dated as of September 30, 2004 by and between Registrant and
Security Capital Research and Management Incorporated with respect to the U. S.
Real Estate Fund. Incorporated by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in Post-Effective Amendment No. 68 as filed on October 27, 2004
(Accession Number 0001193125-04-179370). |
(d)(6) |
|
Investment
Advisory Agreement made as of August 12, 2004 between Registrant and J.P. Morgan
Investment Management Inc. with respect to International Equity Index Fund. Incorporated by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in Post-Effective Amendment No. 68 as filed on October 27, 2004
(Accession Number 0001193125-04-179370). |
(d)(7) |
|
Amended
and Restated Schedule A to the Investment Advisory Agreement between JPMorgan Trust II
and JPMorgan Investment Advisors Inc. (amended as of June 26, 2006). Incorporated
herein by reference to the Registrants Registration Statement filed with the Securities
and Exchange Commission in Post-Effective Amendment No. 84 as filed on August 30, 2006 (Accession
Number 0001145443-06-002835). |
(e)(1) |
|
Distribution
Agreement between Registrant and JPMorgan Distribution Services, Inc., effective
February 19, 2005. Incorporated herein by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in
Post-Effective Amendment No. 71 to the Registration Statement on April 27, 2005
(Accession Number 0001193125-05-086890). |
(e)(2) |
|
Amendment
to the Distribution Agreement, including Schedule A, dated May 1, 2005. Incorporated
herein by reference to the Registrants Registration Statement filed with the Securities
and Exchange Commission in Post-Effective Amendment No. 84 as filed on August 30, 2006 (Accession
Number 0001145443-06-002835). |
(e)(3) |
|
Form of Amended
Schedule B to the Distribution Agreement, amended as of February 14, 2008.
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(e)(4) |
|
Form of Amended
Schedule C to the Distribution Agreement, amended as of February 14, 2008.
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(e)(5) |
|
Form of Amended
Schedule D to the Distribution Agreement, amended as of February 14, 2008.
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(e)(6) |
|
Amended
Schedule E to the Distribution Agreement, amended as of August 23, 2006. Incorporated herein by reference to the
Registrants Registration statement as filed with the Securities and Exchange Commission on October 26, 2007
(Accession Number 0001145443-07-003340). |
(e)(7) |
|
Form of Amended
Schedule F to the Distribution Agreement, amended as of February 14, 2008.
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
1
Table of Contents
(f) |
|
Amended
and Restated Deferred Compensation Plan for Trustees of One Group Mutual Funds and One
Group Investment Trust. Incorporated by reference to the Registrants Registration Statement
filed with the Securities and Exchange Commission in Post-Effective Amendment No. 57 as filed on October 30, 2002 (Accession Number 0000950109-02-005385). |
(g)(1)(a) |
|
Global
Custody and Fund Accounting Agreement dated February 19, 2005. Incorporated herein by
reference to the Registrants Registration Statement filed with the Securities
and Exchange Commission in Post-Effective Amendment No. 71 to the Registration
Statement on April 27, 2005 (Accession Number 0001193125-05-086890). |
(g)(1)(b) |
|
Amendment
to Global Custody and Fund Accounting dated
May 1, 2006. Incorporated
herein by reference to the Registrants Registration Statement filed with the Securities
and Exchange Commission in Post-Effective Amendment No. 84 as filed on August 30, 2006 (Accession
Number 0001145443-06-002835). |
(g)(1)(c) |
|
Amendment to Global Custody and Fund
Accounting Agreement including Schedules C and D, dated as of September 1, 2007. Incorporated by reference
to the Registrant’s Registration Statement filed with the Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(g)(1)(d) |
|
Amendment to Global Custody and Fund
Accounting Agreement including Schedules A and C, dated as of April 21, 2008. Filed herewith. |
(h)(1)(a) |
|
Administration
Agreement between Registrant and JPMorgan Funds Management, Inc., effective
February 19, 2005. Incorporated herein by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in
Post-Effective Amendment No. 71 to the Registration Statement on April 27, 2005
(Accession Number 0001193125-05-086890). |
(h)(1)(b) |
|
Amendment,
including amended Schedule A, dated May 1, 2006, to the Administration Agreement. Incorporated
herein by reference to the Registrants Registration Statement filed with the Securities
and Exchange Commission in Post-Effective Amendment No. 84 as filed on August 30, 2006 (Accession
Number 0001145443-06-002835). |
(h)(1)(c) |
|
Form of Amended
Schedule B to the Administration Agreement (amended as of February 14, 2008).
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(h)(2)(a) |
|
Transfer
Agency Agreement between Registrant and Boston Financial Data Services, Inc. (BFDS), effective
February 19, 2005. Incorporated herein by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in
Post-Effective Amendment No. 71 to the Registration Statement on April 27, 2005
(Accession Number 0001193125-05-086890). |
(h)(2)(b) |
|
Amendment as of January 31, 2007 to the
Transfer Agency Agreement between JP Morgan Funds and BFDS dated February 19, 2005. Incorporated herein by reference to the
Registrants Registration Statement filed with the Securities and Exchange Commission in
Post-Effective Amendment No. 86 as filed on February 27, 2007 (Accession Number 0001145443-07-000492). |
(h)(2)(c) |
|
Form of Appendix
A to the Transfer Agency Agreement (amended as of February 14, 2008).
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(h)(3)(a) |
|
Shareholder
Servicing Agreement, effective February 19, 2005, between Registrant and JPMorgan
Distribution Services, Inc. Incorporated herein by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in
Post-Effective Amendment No. 71 to the Registration Statement on April 27, 2005
(Accession Number 0001193125-05-086890). |
(h)(3)(b) |
|
Form of Amended
Schedule B to the Shareholder Servicing Agreement (amended as of February 14, 2008).
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(h)(4) |
|
Securities
Lending Agreement, Amended and Restated as of August 11, 2005, between the Registrant
and JPMorgan Chase Bank. Incorporated herein by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in
Post-Effective Amendment No. 73 to the Registration Statement on September 23,
2005 (Accession Number 0001145443-05-002331). |
(h)(5) |
|
Indemnification
Agreement dated August 10, 2004. Incorporated herein by reference to the
Registrants Registration Statement filed with the Securities and Exchange
Commission in Post-Effective Amendment No. 71 to the Registration Statement on
April 27, 2005 (Accession Number 0001193125-05-086890). |
(h)(6) |
|
Form
of Trust Fund/SERV Agreement used by JPMorgan Distribution Services,
Inc. Incorporated herein by reference to the Registrants Registration
statement as filed with the Securities and Exchange Commission on October 26, 2007
(Accession Number 0001145443-07-003340). |
(h)(7) |
|
Form
of Sub Transfer Agency Agreement between the Record keeper and the Registrant.
Incorporated herein by reference to the Registrants Registration
statement as filed with the Securities and Exchange Commission on October 26, 2007
(Accession Number 0001145443-07-003340). |
(h)(8) |
|
Form
of Service Agreement between the Financial Intermediary and JPMorgan Distribution
Services, Inc. Incorporated herein by reference to the Registrants Registration
statement as filed with the Securities and Exchange Commission on October 26, 2007
(Accession Number 0001145443-07-003340). |
(h)(9) |
|
Form
of Mutual Fund Sales Agreement between the Financial Intermediary and JPMorgan
Distribution Services, Inc. Incorporated herein by reference to the Registrants Registration
statement as filed with the Securities and Exchange Commission on October 26, 2007
(Accession Number 0001145443-07-003340). |
(h)(10) |
|
Form
of Bilateral Networking Agreement among Registrant, JPMorgan Distribution Services,
Inc. and the Financial Intermediary. Incorporated herein by reference to the Registrants Registration
statement as filed with the Securities and Exchange Commission on October 26, 2007
(Accession Number 0001145443-07-003340). |
(h)(11) |
|
Fee Waiver Agreement for the R Class shares of the JPMorgan
Trust II funds listed on Schedule A. Incorporated herein by reference to the Registrant's Registration Statement filed with the
Securities and
Exchange Commission in Post-Effective Amendment No. 85 as filed on October 27, 2006 (Accession Number 0001145443-06-003260).
|
(h)(12) |
|
Fee Waiver Agreement for the JPMorgan
Trust II funds listed on Schedule A. Incorporated herein by reference to the Registrant's Registration Statement filed with the
Securities and
Exchange Commission in Post-Effective Amendment No. 85 as filed on October 27, 2006 (Accession Number 0001145443-06-003260).
|
(h)(13) |
|
Form of Fee Waiver Agreement for the JPMorgan
U.S. Real Estate Fund. Filed herewith.
|
(h)(14) |
|
Form of Fee Waiver Agreement for the JPMorgan
International Equity Index Fund.
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(h)(15) |
|
Form of Amendment to the JPMorgan Trust II Funds Fee Waiver
Agreement. Incorporated herein by reference to the Registrants Registration Statement filed with the Securities and Exchange
Commission in
Post-Effective Amendment No. 86 as filed on February 27, 2007 (Accession Number 0001145443-07-000492). |
(h)(16) |
|
Form of Fee Waiver Agreement for the JPMorgan U.S. Real Estate Fund.
Incorporated herein by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in Post-Effective Amendment No. 87 as filed on April 27,
2007. (Accession Number 0001145443-07-001241) |
(h)(17) |
|
Form of Fee Waiver Agreement, dated July 1, 2007, for the Funds listed on
Schedule A thereto. Incorporated herein by reference to the Registrants
Registration Statement filed with the Securities and Exchange Commission in
Post-Effective Amendment No. 89 as filed on June 27, 2007 (Accession Number
0001145443-07-001923). |
(h)(18) |
|
Fee Waiver Agreement for the Funds listed on
Schedule A, thereto, dated November 1, 2007. Incorporated herein by reference to the Registrants Registration
statement as filed with the Securities and Exchange Commission on October 26, 2007
(Accession Number 0001145443-07-003340). |
(i) |
|
Opinion
and consent of counsel. Filed herewith. |
(j)(1) |
|
Consent
of counsel. Filed herewith. |
(j)(2) |
|
Consent of independent registered public accounting firm for the JPMorgan U.S. Real Estate Fund. Filed herewith. |
2
Table of Contents
(l) |
|
Purchase
Agreement dated July 18, 1985, between Registrant and Physicians Insurance Company of
Ohio is incorporated by reference to Exhibit (13) to Post Effective Amendment
No. 45 (filed August 26, 1998) to Registrants Registration Statement on Form
N-1A. |
(m)(1) |
|
Combined
Amended and Restated Distribution Plan. Incorporated herein by reference to the
Registrants Registration Statement filed with the Securities and Exchange
Commission in Post-Effective Amendment No. 73 to the Registration Statement on
September 23, 2005 (Accession Number 0001193125-05-190523). |
(m)(2) |
|
Schedule
B to the Combined Amended and Restated Distribution Plan, amended as of February 14, 2008.
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(n)(1) |
|
Combined
Amended and Restated 18f-3 Multi-Class Plan, including Exhibit B, amended as of February 14, 2008.
Incorporated herein by reference to the Registrants Registration Stated as filed with the
Securities and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(p)(1) |
|
Code
of Ethics for the One Group Mutual Funds and other related funds is incorporated by
reference to Exhibit (p)(1) to Post-Effective Amendment No. 68 (filed December
16, 2004) to the Registrants Registration Statement on Form N-1A. |
(p)(2) |
|
Code
of Ethics of JPMorgan Investment
Advisors Inc., J.P. Morgan
Investment Management Inc. and Security Capital Research and Management Incorporated, effective February 1, 2005,
revised September 18, 2007. Incorporated herein by reference to the Registrants Registration Stated as filed with the Securities
and Exchange Commission on February 27, 2008 (Accession Number 0001145443-07-000476). |
(p)(3) |
|
Code
of Ethics for One Group Dealer Services (renamed JPMorgan Distribution Services, Inc. as
of February 19, 2005) is incorporated by reference to Exhibit (p)(3) to
Post-Effective Amendment No. 68 (filed December 16, 2004) to the Registrants
Registration Statement on Form N-1A. |
(99)(a) |
|
Powers of Attorney for the Trustees. Filed herewith. |
(99)(b) |
|
Powers of Attorney for George C.W. Gatch. Filed herewith. |
(99)(c) |
|
Powers of Attorney for Stephanie J. Dorsey. Filed herewith. |
Item 24. Persons
Controlled by or under Common Control with Registrant
As of the effective date of this
Registration Statement there are no persons controlled or under common control with the
Registrant.
Item 25. Indemnification.
|
Reference is made to Section 3 and Section 5 of Registrants Declaration of Trust and Section
1.10 of Registrants Distribution Agreement. |
|
The Registrants Declaration of Trust states that every person who is, has been, or
becomes a Trustee or officer of the Trust or is or has been a trustee or director
of a Predecessor Entity shall be indemnified by the Trust to the fullest extent
permitted by law against liability and against all expenses reasonably incurred or
paid by him or her in connection with any proceeding in which he or she becomes
involved as a party or otherwise by virtue of being or having been a Trustee or officer
of the Trust or a trustee or director of a Predecessor Entity and against amounts
paid or incurred by him or her in the settlement thereof. |
|
The Trustees shall be entitled and empowered to the fullest extent permitted by law to
purchase with Trust assets insurance for liability and for all expenses reasonably
incurred or paid or expected to be paid by a Trustee, officer or agent of the Trust
or a trustee or director of a predecessor entity in connection with any proceeding
in which he or she may become involved by virtue of his or her capacity or former
capacity as a Trustee, officer or agent of the Trust or a trustee or director of a
Predecessor Entity. |
|
The Trust agrees to indemnify, defend and hold the Distributor, its several directors,
officers and employees, and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, 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 reasonable counsel fees
incurred in connection therewith) which the Distributor, its directors, officers
and employees, or any such controlling person may incur under the Securities Act or
under common law or otherwise arising out of or based upon |
3
Table of Contents
|
(i)
any untrue statement, or alleged untrue statement, of a material fact contained in any
registration statement or any prospectus, (ii) any omission, or alleged omission,
to state a material fact, required to be stated in either any registration
statement or any prospectus, or necessary to make the statements in either thereof
not misleading, or (iii) any Trust advertisement or sales literature that is not in
compliance with applicable laws, rules or regulations (including, but not limited
to the Conduct Rules of the National Association of Securities Dealers, Inc.). However,
the Trusts agreement to indemnify the Distributor, its directors, officers or
employees, and any such controlling person, shall not be deemed to cover any
claims, demands, liabilities or expenses arising out of any statements or representations
as are contained in any prospectus, advertisement or sales literature and in such
financial and other statements as are furnished in writing to the Trust by the
Distributor and used in the answers to the registration statement or in the corresponding
statements made in the prospectus, advertisement or sales literature, or arising
out of or based upon any omission or alleged omission to state a material fact in
connection with the giving of such information required to be stated in such answers or
necessary to make the answers not misleading. Further, the Trusts agreement
to indemnify Distributor and the Trusts representations and warranties set
forth in the Distribution Agreement shall not be deemed to cover any liability to the
Trust or its Shareholders to which Distributor would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of Distributors reckless disregard of its obligations and
duties under the Distribution Agreement. |
Item 26. Business and
Other Connections of Investment Advisers
|
See Management of the Trust in Part B. The business or other connections of each
director and officer of JPMorgan Investment Advisors Inc. is currently listed in the
investment advisor registration on Form ADV for JPMorgan Investment Advisors Inc. (File
No. 801-40060) and is incorporated herein by reference. |
|
See Management of the Trust in Part B. The business or other connections of each
director and officer of Security Capital Research & Management Incorporated is
currently listed in the investment advisor registration on Form ADV for Security Capital
Research & Management Incorporated (File No. 801-53815) and is incorporated herein by
reference. |
4
Table of Contents
See "Management of the Trust" in Part B. The business and other connections
of each directors of J.P. Morgan Investment Management Inc. is currently listed in the
investment adviser registration on Form ADV for J.P. Morgan investment Management Inc.
(File No. 801-21011) and is incorporated by reference herein.
Item 27. Principal
Underwriters
|
(a) JPMorgan Distribution Services, Inc. is the principal underwriter of the
Registrants shares. JPMorgan Distribution Services, Inc. is registered with the Securities and Exchange Commission as a
broker-dealer and is a
member of the National Association of Securities Dealers. JPMorgan Distribution Services, Inc. is located at 1111 Polaris Parkway,
Columbus, Ohio
43240. JPMorgan Distribution Services, Inc. acts as the principal underwriter for the following additional investment companies:
|
J.P. Morgan Fleming
Mutual Fund Group,
Inc.
J.P. Morgan Mutual Fund Group
J.P. Morgan Mutual Fund Investment Trust
J.P. Morgan Series Trust
II
JPMorgan Trust I
JPMorgan Trust II
JPMorgan Value Opportunities Fund Inc.
Undiscovered Managers Funds
JPMorgan Insurance
Trust
|
(b) The directors and officers of JPMorgan Distribution Services, Inc. are set forth below.
The business address of each director or officer is 1111 Polaris Parkway, Columbus,
Ohio 43240. |
Name
|
Positions and Offices With JPMorgan
Distribution Services, Inc.
|
Positions With Registrant
|
George C.W. Gatch |
|
Director and President |
|
President |
|
Michael R. Machulski |
|
Director, Vice President & Treasurer |
|
None |
|
Robert L. Young |
|
Director, Vice President |
|
Senior Vice President |
|
David J. Thorp, Jr |
|
Vice President |
|
None |
|
James C. Berry |
|
Vice President & Secretary |
|
None |
|
Nancy E. Fields |
|
Vice President |
|
Assistant Secretary |
|
Jessica K. Ditullio |
|
Assistant Secretary |
|
Assistant Secretary |
|
Anthony J. Horan |
|
Assistant Secretary |
|
None |
|
Frank J. Drozek |
|
Assistant Treasurer |
|
None |
|
Christopher J. Mohr |
|
Assistant Treasurer |
|
None |
|
5
Table of Contents
Item 28. Location of
Accounts and Records
|
(1) |
|
JPMorgan
Investment Advisors Inc., 1111 Polaris Parkway, Columbus, Ohio
43240 (records relating to its functions as Investment Adviser). |
|
(2) |
|
Security
Capital Research & Management Incorporated, 10 South Dearborn, Chicago, Illinois
60603 (records relating to its functions as Investment Adviser to the U. S. Real
Estate Fund). |
|
(3) |
|
J.P.
Morgan Investment Management Inc., 245 Park Avenue, New York, New York 10167 (records
relating to its functions as Investment Adviser to the JPMorgan International
Equity Index Fund). |
|
(4) |
|
JPMorgan
Distribution Services, Inc., 1111 Polaris Parkway, Columbus, Ohio 43240 (records
relating to its functions as Distributor for all Funds). |
|
(5) |
|
JPMorgan
Funds Management, Inc., 1111 Polaris Parkway, Columbus, Ohio 43240 (records
relating to its functions as Administrator for all Funds). |
|
(6) |
|
Boston
Financial Data Services, Inc., 2 Heritage Drive, North Quincy, Massachusetts 02171
(records relating to its functions as transfer agent to the Funds). |
|
(7) |
|
JPMorgan
Chase Bank, N.A. Three Chase Metro Tech Center, Brooklyn, New York 11245 (records
relating to its functions as custodian). |
|
(8) |
|
Ropes
& Gray LLP, One Metro Center, 700 12th Street, N.W., Suite 900, Washington, D.C.
20005 (Minute Books). |
Item 29. Management
Services
N/A
Item 30. Undertakings
|
The Registrant undertakes to call a meeting of Shareholders, at the request of at least 10%
of the Registrants outstanding shares, for the purpose of voting upon the
question of removal of a trustee or trustees and to assist in communications with
other shareholders as required by Section 16(c) of the Investment Company Act of
1940. |
|
The Registrant undertakes to furnish to each person to whom a prospectus for a particular
fund is delivered a copy of the Registrants latest annual report to
shareholders relating to that fund upon request and without charge. |
6
Table of Contents
SIGNATURE
Pursuant to the requirements of the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant, JPMorgan
Trust II certifies that it meets all the requirements for effectiveness of this registration statement under Rule 485(b) under
the Securities Act and, has duly caused this registration statement to be signed on its behalf by the undersigned,
duly authorized, in the City of New York and State of New York on the 24th day of April, 2008.
|
|
JPMORGAN TRUST II
By: GEORGE C.W. GATCH*
George C.W. Gatch
President |
|
Pursuant to the requirements of the
Securities Act of 1933, this registration statement has been signed below by the
following persons in the capacities indicated on April 24, 2008.
WILLIAM J. ARMSTRONG*
|
|
WILLIAM G. MORTON, JR.*
|
|
William J. Armstrong |
|
William G. Morton, Jr. |
|
Trustee |
|
Trustee |
|
|
JOHN F. FINN*
| |
ROBERT A. ODEN, JR.*
| |
John F. Finn |
|
Robert A. Oden, Jr. |
|
Trustee |
|
Trustee |
|
|
DR. MATTHEW GOLDSTEIN*
| |
FERGUS REID, III*
| |
Dr. Matthew Goldstein |
|
Fergus Reid, III |
|
Trustee |
|
Trustee and Chairman |
|
|
ROBERT J. HIGGINS*
| |
FREDERICK W. RUEBECK*
| |
Robert J. Higgins* |
|
Frederick W. Ruebeck |
|
Trustee |
|
Trustee |
|
|
PETER C. MARSHALL*
| |
JAMES J. SCHONBACHLER*
| |
Peter C. Marshall |
|
James J. Schonbachler |
|
Trustee |
|
Trustee |
|
|
MARILYN MCCOY*
| |
LEONARD M. SPALDING, JR.*
| |
Marilyn McCoy |
|
Leonard M. Spalding, Jr. |
|
Trustee |
|
Trustee |
|
|
By STEPHANIE J. DORSEY*
| |
By GEORGE C.W. GATCH*
| |
Stephanie J. Dorsey |
|
George C.W. Gatch |
|
Treasurer |
|
President |
|
|
*By /s/ Elizabeth A. Davin
| |
Elizabeth A. Davin |
|
Attorney-in-Fact |
|
7
Exhibit Index
(g)(1)(d) |
Amendment to Global Custody and Fund Accounting Agreement including Schedule A and C, dated April 21, 2008 |
(h)(13) |
Form of Fee Waiver Agreement for the JPMorgan U.S. Real Estate Fund |
(i) |
Opinion and consent of counsel for the JPMorgan U.S. Real Estate Fund |
(j)(1) |
Consent of counsel |
(j)(2) |
Consent of independent registered public account firm for the JPMorgan U.S. Real Estate Fund |
(99)(a) |
Powers of Attorney for the Trustees |
(99)(b) |
Power of Attorney for George C.W. Gatch |
(99)(c) |
Power of Attorney for Stephanie J. Dorsey |
GRAPHIC
2
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