HSBC MUTUAL FUNDS TRUST
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HSBC FUND GROUP
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HSBC Asset Management [GRAPHIC OMITTED]
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International Equity Fund
HSBC SM MUTUAL FUNDS TRUST
3435 Stelzer Road
Columbus, Ohio 43219
INFORMATION:
(800) 634-2536
INVESTMENT ADVISER AND CO-ADMINISTRATOR
HSBC Asset Management Americas Inc.
250 Park Avenue
New York, New York 10177
DISTRIBUTOR, ADMINISTRATOR, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT AUDITORS
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
LEGAL COUNSEL
Baker & McKenzie
805 Third Avenue
New York, New York 10022
This report is for the information of the shareholders of HSBC Mutual Funds
Trust. Its use in connection with any offering of the Trust's shares is
authorized only in the case of a concurrent or prior delivery of the Trust's
current prospectus.
ANNUAL REPORT
December 31, 1996
Managed by:
HSBC ASSET MANAGEMENT AMERICAS INC.
Sponsored and distributed by:
BISYS FUND SERVICES
<PAGE>
HSBC MUTUAL FUNDS TRUST
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International Equity Fund
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HSBC Asset Management [GRAPHIC OMITTED]
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International Equity Fund
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January 17, 1997
Dear Shareholder:
The HSBC International Equity Fund service class shares gained 1.92%, and the
institutional shares gained 2.02%, for the six months ended December 31, 1996.
For the full year 1996, the service class shares gained 6.32%, and the
institutional shares gained 6.31%. This compares to the return on the Morgan
Stanley Capital International (MSCI) EAFE Index, which gained 1.60% for the six
months ended December 31, 1996, and 6.34% for the full year.
The Fund benefited from its country allocation during the second half of 1996.
We reduced the Fund's exposure to Japan. That proved to be beneficial, as Japan
declined 16.39% during the second half of 1996, as measured by the MSCI Japan
Index. The Fund was also helped by an overweighted position in Hong Kong. The
MSCI Hong Kong Index returned 15.96% during the second half of 1996.
Two factors detracted from Fund performance. The first was an underweight in
U.K. equities as the MSCI UK Index returned 24.13% for the six months ended
December 31, 1996. The second factor was the strength of the U.S. dollar. The
dollar rallied against the following major currencies:
Deutsche Mark 1.3%
French Franc 0.6
Swiss Franc 7.2
Japanese Yen 5.5
Australian Dollar 1.3
This dollar strength negatively impacted the portfolio, as the Fund was unhedged
over the second half of 1996.
MARKET REVIEW AND OUTLOOK
- -------------------------
UNITED KINGDOM
- --------------
The U.K. equity market was one of the strongest markets in Europe over the
second half of 1996. Over that period, the MSCI UK Index returned 24.13% in U.S.
dollar terms. Strong consumer spending in addition to a pickup in manufacturing
activity supported corporate earnings. Further, an unanticipated easing of
short-term interest rates improved equity valuations. Continued consumer
strength is expected to support earnings growth in 1997. However, it is also
expected to result in cyclical pressures on interest rates. As such, we will
maintain our underweight exposure to U.K. equities.
<PAGE>
CONTINENTAL EUROPE
- ------------------
The MSCI Europe (excluding the U.K.) rose 9.27% in U.S. dollar terms over the
second half of 1996. However, the U.S. dollar returns were dampened by the
strength of the dollar, as the Index, in local currency terms, was up 11.38%.
The table below summarizes the MSCI country returns for the second half of 1996:
COUNTRY RETURN (IN US DOLLAR)
Finland 31.12%
Spain 23.52
Sweden 19.93
Denmark 16.82
Norway 16.30
Netherlands 14.83
Ireland 13.31
France 9.36
Belgium 8.97
Germany 8.89
Italy 0.22
Switzerland (1.42)
The best-performing markets experienced significant drops in interest rates.
When the Bundesbank eased monetary policy in Germany to help start economic
growth, most of Europe followed. The decline in bond yields increased the
valuation attractiveness of equities and the markets reacted.
We continue to view continental Europe positively. However, with most of the
support from interest rates already priced, earnings will be the key to further
advances in 1997. With a perceived conflict between the fiscal requirements for
EMU and the monetary stimulus required to support continued growth, European
markets are likely to see increased volatility in 1997.
JAPAN
- -----
The MSCI Japan Index declined 16.39% for the second half of 1996. Short-term
interest rates of 0.5% were not enough to generate interest in Japanese stocks.
Domestic Japanese investors preferred U.S. Treasuries, while overseas investors
continued to be net sellers. The story in Japan continues to be the need for
restructuring and deregulation. Slowing economic growth and the probability of a
value-added tax in 1997 add further evidence to the negative scenarios. A pure
contrarian would argue that most of the bad news is already priced and the
valuation of the market is attractive. We, however, continue to believe the
market needs to see concrete evidence of restructuring and deregulation. The
risk continues to outweigh the upside potential, and, given that, we remain
underweighted.
ASIA PACIFIC
- ------------
The MSCI Pacific Basin (excluding Japan) returned 8.18% for the last six months
of 1996. Hong Kong led the region with a return of 15.96%, followed by Australia
(+10.02), Malaysia (+7.60) and Singapore (-8.77). The strength in Hong Kong came
from a soft landing in China and a recovering property market. Further, a lack
of monetary tightening by the U.S. Federal Reserve added valuation support to
Hong Kong stocks.
2
<PAGE>
With much good news already priced in Hong Kong, the key decision for the region
is when to allocate away from Hong Kong and toward the other markets in the
region. We look for further strength in corporate earnings outside of Hong Kong
before we change our allocation in the region.
In summary, our goal continues to be to ensure that the HSBC International
Equity Fund is characterized by strong investment performance and solid client
service. Thank you for choosing the HSBC International Equity Fund to be a part
of your total investment program.
Sincerely,
/S/ JAMES B. MCHUGH
James B. McHugh
3
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERNATIONAL EQUITY FUND VS. MSCI-EAFE
Total Return-Service Class Shares Institutional Class Shares
--------------------------------- --------------------------
1 Year Inception 1 Year Inception
------ --------- ------ ---------
Offering Price(1) 1.05% 0.31% 6.31% 10.63%
NAV(2) 6.32% 2.25% 6.31% 10.63%
MSCI
FUND 1 EAFE FUND 2
------ ------ ------
APRIL 1994 9,467 10,000 10,000
JUNE 1994 9,554 10,088 10,050
DECEMBER 1994 9,069 9,991 9,550
JUNE 1995 8,946 10,250 9,420
DECEMBER 1995 9,478 11,111 9,970
JUNE 1996 9,893 11,605 10,417
DECEMBER 1996 10,083 11,775 10,617
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE, WITHOUT CERTAIN FEE
WAIVERS RETURN WOULD HAVE BEEN LOWER.
(1) INCLUDES THE MAXIMUM SALES CHARGE
(2) EXCLUDES THE MAXIMUM SALES CHARGE
THE ABOVE ILLUSTRATION COMPARES A $10,000 INVESTMENT IN THE SERVICE CLASS SHARES
OF THE INTERNATIONAL EQUITY FUND ON APRIL 25, 1994, TO A $10,000 INVESTMENT IN
THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND FAR EAST INDEX ON
THAT DATE. ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS ARE REINVESTED. PLEASE
REFER TO THE BOX ABOVE FOR RETURNS ON INSTITUTIONAL CLASS SHARES, WHICH HAVE
BEEN OFFERED SINCE MARCH 1, 1995.
THE FUND'S PERFORMANCE TAKES INTO ACCOUNT ALL APPLICABLE FEES AND EXPENSES. THE
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND FAR EAST INDEX IS A
WIDELY ACCEPTED UNMANAGED INDEX OF OVER 900 SECURITIES LISTED ON THE STOCK
EXCHANGES OF THE FOLLOWING COUNTRIES IN EUROPE, AUSTRALIA, AND THE FAR EAST:
AUSTRALIA, AUSTRIA, BELGIUM, DENMARK, FINLAND, FRANCE, HONG KONG, IRELAND,
ITALY, JAPAN, MALAYSIA, NETHERLANDS, NEW ZEALAND. THIS INDEX IS A WIDELY
ACCEPTED UNMANAGED INDEX OF OVERALL STOCK MARKET PERFORMANCE, AND DOES NOT TAKE
INTO ACCOUNT CHARGES, FEES AND OTHER EXPENSES.
4
<PAGE>
BOARD OF TRUSTEES
JOHN P. PFANN* CHAIRMAN OF THE BOARD; Chairman and President,
JPP Equities, Inc.
WOLFE J. FRANKL* Former Director-North America, Berlin Economic Development
Corporation
WILLIAM L. KUFTA Chief Investment Officer, Beacon Trust Company
HARALD PAUMGARTEN President, Paumgarten and Company
ROBERT A. ROBINSON* Trustee, Henrietta and B. Frederick H. Bugher Foundation
WILLIAM B. BLUNDIN Senior Vice President, BISYS Fund Services, Inc.
*Member of the Audit and Nominating Committees
- --------------------------------------------------------------------------------
OFFICERS
WILLIAM B. BLUNDIN PRESIDENT
TONY TURNER EXECUTIVE VICE PRESIDENT
KAREN DOYLE VICE PRESIDENT
KEVIN MARTIN TREASURER
STEVEN R. HOWARD SECRETARY
CURTIS BARNES ASSISTANT SECRETARY
ALAINA V. METZ ASSISTANT SECRETARY
5
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
SHARES OR
COUNTRY/ PRINCIPAL PERCENT OF
INDUSTRY AMOUNT SECURITY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS
AUSTRALIA
- ---------
BANKING 25,817 Australia & New Zealand Bank Group ................. $ 162,729 0.7%
----------- -----
BROADCASTING 38,088 News Corp. Ltd. .................................... 201,021 0.9
----------- -----
CONGLOMERATES 22,775 CSR Ltd. ........................................... 79,652 0.4
----------- -----
FOOD & BEVERAGES 32,095 SouthCorp Holdings Ltd. ............................ 102,043 0.5
----------- -----
METALS (NON-FERROUS) 12,377 WMC Holdings Ltd. .................................. 78,014 0.4
----------- -----
PETROLEUM SERVICES 22,427 Broken Hill Proprietary Co., Ltd. .................. 319,443 1.5
----------- -----
TRUCKING & FREIGHT
FORWARDING 11,300 Mayne Nickless Ltd. ................................ 77,243 0.3
----------- -----
TOTAL AUSTRALIA ................................... 1,020,145 4.7
----------- -----
(COST - $952,546)
AUSTRIA
- -------
CONGLOMERATE 1,350 Bohler Uddeholm ................................... 96,620 0.5
----------- -----
ENERGY 1,200 OMV AG ............................................ 135,310 0.6
----------- -----
TOTAL AUSTRIA ..................................... 231,930 1.1
----------- -----
(COST - $224,608)
BELGIUM
- -------
BANKING 800 Credit Communal de Belgique SA(b) ................. 72,997
355 Generale de Banque SA ............................. 114,747
----------- -----
TOTAL BELGIUM ..................................... 187,744 0.9
----------- -----
(COST - $180,315)
DENMARK
- -------
TELEPHONE 2,300 Tele Danmark, Class B A/S ......................... 126,893 0.6
----------- -----
TOTAL DENMARK ..................................... 126,893 0.6
----------- -----
(COST - $116,008)
FINLAND
- -------
CONGLOMERATES 2,250 Nokia AB, Class A ................................. 130,500 0.6
----------- -----
TOTAL FINLAND ..................................... 130,500 0.6
----------- -----
(COST - $90,518)
FRANCE
- ------
AUTO PARTS 2,200 Valeo ............................................. 135,685 0.6
----------- -----
</TABLE>
6
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES OR
COUNTRY/ PRINCIPAL PERCENT OF
INDUSTRY AMOUNT SECURITY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (continued)
FRANCE (continued)
- ------
BANKS 3,000 Credit Commercial de France(b) .................... $ 138,768 0.6%
----------- -----
BROADCASTING 760 Canal Plus ........................................ 167,864 0.8
----------- -----
BUSINESS SERVICES 1,500 Compagnie Generale des Eaux ....................... 185,892 0.9
----------- -----
CONSTRUCTION MATERIALS 2,120 Lafarge Coppee SA ................................. 127,196 0.6
----------- -----
DRUGS & HEALTH CARE 2,000 Societe Elf Sanofi SA ............................. 198,901 0.9
----------- -----
ELECTRONICS 2,000 SGS Thomson Microelectronics(b) ................... 141,467 0.7
----------- -----
FINANCIAL SERVICES 1,170 Compagnie Bancaire ................................ 138,456 0.7
----------- -----
INSURANCE 1,995 Axa SA ............................................ 126,886 0.6
----------- -----
PETROLEUM SERVICES 1,900 Total Francaise Petroleum(b) ...................... 154,534 0.7
----------- -----
RETAIL-SPECIALTY 340 Carrefour ......................................... 221,228 1.0
----------- -----
TIRES & RUBBER 2,500 Michelin .......................................... 134,962 0.6
----------- -----
TOTAL FRANCE ...................................... 1,871,839 8.7
----------- -----
(COST - $1,596,442)
GERMANY
- -------
AIRLINES 9,500 Lufthansa AG ...................................... 129,647 0.6
----------- -----
APPAREL & TEXTILES 1,100 Adidas AG ......................................... 95,074 0.4
----------- -----
AUTOMOBILES 330 Bayerische Motoren Werke AG ....................... 230,108 1.1
----------- -----
BANKING 6,000 Deutsche Bank AG .................................. 280,348 1.3
----------- -----
CHEMICALS 5,300 BASF AG ........................................... 204,175
5,000 Bayer AG .......................................... 204,055
1,275 SGL Carbon AG ..................................... 160,742
----------- -----
568,972 2.6
----------- -----
INDUSTRIAL MACHINERY 450 Mannesmann AG ..................................... 195,055 0.9
----------- -----
INSURANCE 143 Allianz AG ........................................ 260,203 1.2
----------- -----
SOFTWARE 725 SAP AG ............................................ 98,705 0.5
----------- -----
TELEPHONE 4,510 Deutsche Telekom AG(b) ............................ 95,106 0.5
----------- -----
</TABLE>
7
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES OR
COUNTRY/ PRINCIPAL PERCENT OF
INDUSTRY AMOUNT SECURITY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (continued)
GERMANY (continued)
- -------
UTILITIES-ELECTRIC & GAS 4,000 Veba AG ........................................... $ 231,349 1.1%
----------- -----
TOTAL GERMANY ..................................... 2,184,567 10.2
----------- -----
(COST - $1,874,603)
HONG KONG
- ---------
BANKING 35,120 Bank Of East Asia ................................. 156,200
32,000 Dao Heng Bank Group Ltd. .......................... 153,494
----------- -----
309,694 1.4
----------- -----
CONGLOMERATES 10,000 Citic Pacific Ltd. ................................ 58,052
21,000 Hutchison Whampoa ................................. 164,943
7,500 Swire Pacific Ltd., Class A ....................... 71,514
----------- -----
294,509 1.4
----------- -----
FINANCIAL SERVICES 16,000 Henderson Investment .............................. 19,135 0.1
----------- -----
LEISURE TIME 70,000 Guangdong Investment Ltd. ......................... 67,425 0.3
----------- -----
REAL ESTATE 16,000 Cheung Kong Holdings .............................. 142,220
500 Hysan Development ................................. 453
10,000 Hysan Development Co., Ltd. ....................... 39,822
14,000 New World Development Co. ......................... 94,576
14,000 Sun Hung Kai Properties Ltd. ...................... 171,504
15,000 Wharf Holdings .................................... 74,859
----------- -----
523,434 2.4
----------- -----
TELEPHONE 47,800 Hong Kong Telecommunications ...................... 76,942 0.4
----------- -----
UTILITIES-ELECTRIC & GAS 7,500 China Light & Power ............................... 33,357
10,500 Hong Kong Electric Holdings ....................... 34,889
----------- -----
68,246 0.3
----------- -----
TOTAL HONG KONG ................................... 1,359,385 6.3
----------- -----
(COST - $1,073,567)
IRELAND
- -------
BANKING 13,400 Bank Of Ireland ................................... 122,169 0.6
----------- -----
PAPER 6,713 Jefferson Smurfit Group PLC ....................... 20,420 0.1
----------- -----
TOTAL IRELAND ..................................... 142,589 0.7
----------- -----
(COST - $106,126)
</TABLE>
8
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES OR
COUNTRY/ PRINCIPAL PERCENT OF
INDUSTRY AMOUNT SECURITY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (continued)
ITALY
- -----
AUTOMOTIVE 45,000 Fiat SPA .......................................... $ 136,157 0.6%
----------- -----
INSURANCE 10,624 Assicurazioni Generali SPA ........................ 201,345 1.0
----------- -----
TELEPHONE 58,106 Telecom Italia SPA ................................ 150,915
58,150 Telecom Italia Mobile SPA ......................... 147,004
----------- -----
297,919 1.4
----------- -----
TOTAL ITALY ....................................... 635,421 3.0
----------- -----
(COST - $552,385)
JAPAN
- -----
APPAREL & TEXTILES 15,000 Gunze Ltd. ........................................ 77,843
16,000 Itochu Corp. ...................................... 85,934
----------- -----
163,777 0.8
----------- -----
AUTOMOBILES 1,100 Autobacs Seven Co. ................................ 77,791
12,000 Nissan Motors Co. ................................. 69,631
----------- -----
147,422 0.7
----------- -----
BANKING 5,000 Asahi Bank ........................................ 44,469
4,000 Bank Of Tokyo - Mitsubishi ........................ 74,260
15,000 Long-Term Credit Bank of Japan .................... 81,211
6,000 Sanwa Bank ........................................ 81,858
6,000 Sumitomo Bank ..................................... 86,521
11,000 Sumitomo Trust & Banking .......................... 110,180
----------- -----
478,499 2.2
----------- -----
BREWERY 9,000 Kirin Brewery Co. ................................. 88,593
9,000 Sapporo Breweries ................................. 74,605
----------- -----
163,198 0.8
----------- -----
BUILDING CONSTRUCTION 6,000 National House Industrial Co., Ltd. ............... 79,786 0.4
----------- -----
BUSINESS SERVICES 2,000 Secom ............................................. 121,060 0.6
----------- -----
CHEMICALS 11,000 Kuraray Co., Ltd. ................................. 101,632 0.5
----------- -----
COMPUTERS 7,000 Ricoh Co., Ltd. ................................... 80,390 0.4
----------- -----
</TABLE>
9
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES OR
COUNTRY/ PRINCIPAL PERCENT OF
INDUSTRY AMOUNT SECURITY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (continued)
JAPAN (continued)
- -----
CONSTRUCTION MATERIALS 3,000 Tostem Corp. ...................................... $ 82,894 0.4%
----------- -----
COSMETICS & TOILETRIES 2,000 Aderans Co., Ltd. ................................. 48,873 0.2
----------- -----
DIRECT SELLING 3,000 Amway Japan Ltd. .................................. 96,365 0.4
----------- -----
DRUGS & HEALTH CARE 9,000 KAO Corp. ......................................... 104,913
12,000 Tanabe Seiyaku Co. ................................ 93,567
----------- -----
198,480 0.9
----------- -----
ELECTRICAL EQUIPMENT 10,000 Hitachi ........................................... 93,256
5,000 Omron Corp. ....................................... 94,120
----------- -----
187,376 0.9
----------- -----
ELECTRONICS 6,000 JGC Corp. ......................................... 45,022
900 Keyence Corp. ..................................... 111,130
2,000 Rohm Co. .......................................... 131,249
2,000 TDK Corp. ......................................... 130,386
----------- -----
417,787 1.9
----------- -----
HOMEBUILDERS 13,000 Obayashi Corp. .................................... 87,782 0.4
----------- -----
HOUSEHOLD APPLIANCES
& FURNISHINGS 1,700 Sony Corp. ........................................ 111,415 0.5
----------- -----
INDUSTRIAL MACHINERY 3,000 Bandai Co. ........................................ 77,973
3,000 Fuji Machine Manufacturing ........................ 79,527
21,000 Ishikawajima-Harima Heavy Industries Co., Ltd. .... 93,386
14,000 Juken Sangyo Co. .................................. 95,501
----------- -----
346,387 1.6
----------- -----
INSURANCE 15,000 Mitsui Marine & Fire Insurance Co. ................ 80,693 0.4
----------- -----
INTERNATIONAL OIL 19,000 Cosmo Oil Co., Ltd. ............................... 91,382 0.4
----------- -----
INVESTMENT COMPANIES 7,000 Nomura Securities Co. ............................. 105,172 0.5
----------- -----
OFFICE AUTOMATION
& EQUIPMENT 700 Riso Kagaku Corp. ................................. 44,970 0.2
----------- -----
PAPER 19,000 Nippon Paper Industries ........................... 88,593 0.4
----------- -----
</TABLE>
10
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES OR
COUNTRY/ PRINCIPAL PERCENT OF
INDUSTRY AMOUNT SECURITY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (continued)
JAPAN (continued)
- -----
PHARMACEUTICALS 4,000 Sankyo Co. ........................................ $ 113,289 0.5%
----------- -----
PHOTOGRAPHY 4,000 Fuji Photo Film Co. ............................... 131,940
1,000 Noritsu Koki Co., Ltd. ............................ 47,060
----------- -----
179,000 0.8
----------- -----
REAL ESTATE 8,000 Mitsui Fudosan Co. ................................ 80,131 0.4
----------- -----
RETAIL TRADE 2,500 Familymart Co. .................................... 99,948
13,000 Mitsui and Co. .................................... 105,518
----------- -----
205,466 1.0
----------- -----
STEEL 5,000 Bridgestone Metalpha Corp. ........................ 42,742
29,000 Kawasaki Steel Corp. .............................. 83,387
32,000 Nippon Steel Corp. ................................ 94,500
----------- -----
220,629 1.0
----------- -----
TELECOMMUNICATION
SERVICES 11 Nippon Telegraph & Telephone Corp. ................ 83,395 0.4
----------- -----
TRUCK & FREIGHT
FORWARDING 13,000 Tokyu Corp. ....................................... 73,862 0.3
----------- -----
TOTAL JAPAN ....................................... 4,279,705 19.9
----------- -----
(COST - $5,042,038)
NETHERLANDS
- -----------
CHEMICALS 900 Akzo Nobel NV ..................................... 123,023 0.6
----------- -----
FINANCIAL SERVICES 8,750 Internationale Nederlanden Group NV ............... 315,233 1.5
----------- -----
PETROLEUM SERVICES 2,232 Royal Dutch Petroleum Co. NV ...................... 391,586 1.8
----------- -----
TELECOMMUNICATION
SERVICES 11,460 Elsevier NV ....................................... 193,821 0.9
----------- -----
TOTAL NETHERLANDS ................................. 1,023,663 4.8
----------- -----
(COST - $813,704)
NORWAY
- ------
PETROLEUM SERVICES 2,800 Norsk Hydro A/S ................................... 149,928 0.7
----------- -----
TOTAL NORWAY ...................................... 149,928 0.7
----------- -----
(COST - $121,650)
</TABLE>
11
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES OR
COUNTRY/ PRINCIPAL PERCENT OF
INDUSTRY AMOUNT SECURITY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (continued)
SINGAPORE
- ---------
AIRLINES 5,000 Singapore Airlines ................................ $ 45,380 0.2%
----------- -----
APPAREL & TEXTILES 14,000 Wing Tai Holdings ................................. 40,020 0.2
----------- -----
BANKING 5,500 Overseas Chinese Bank ............................. 68,391
7,000 United Overseas Bank .............................. 78,039
----------- -----
146,430 0.7
----------- -----
FOOD & BEVERAGES 2,000 Fraser & Neave .................................... 20,582 0.1
----------- -----
INDUSTRIAL MACHINERY 9,000 Keppel Corp. ...................................... 70,107 0.3
----------- -----
PUBLISHING 2,400 Singapore Press Holdings .......................... 47,338 0.2
----------- -----
REAL ESTATE 4,000 City Developments ................................. 36,018
6,000 Singapore Land .................................... 33,231
----------- -----
69,249 0.3
----------- -----
TOTAL SINGAPORE ................................... 439,106 2.0
----------- -----
(COST - $441,490)
SPAIN
- -----
BANKING 900 Banco Popular Espanol ............................. 176,776 0.8
----------- -----
PETROLEUM SERVICES 4,600 Repsol SA ......................................... 176,453 0.8
----------- -----
REAL ESTATE 5,600 Vallehermoso SA ................................... 121,425 0.6
----------- -----
UTILITIES-ELECTRIC & GAS 2,500 Empresa Nacional de Electricidad SA ............... 177,932 0.8
----------- -----
TOTAL SPAIN ....................................... 652,586 3.0
----------- -----
(COST - $534,003)
SWEDEN
- ------
BANKING 5,000 Svenska Handelsbanken ............................. 143,697 0.7
----------- -----
DRUGS & HEALTH CARE 3,500 Pharmacia & Upjohn ................................ 143,441
2,000 Pharmacia B Tia Comp(b) ........................... 81,966
----------- -----
225,407 1.0
----------- -----
FOREST PRODUCTS 10,000 Stora Kopparbergsl AB ............................. 136,366 0.6
----------- -----
RETAIL TRADE 900 Hennes & Mauritz AB ............................... 124,577 0.6
----------- -----
</TABLE>
12
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES OR
COUNTRY/ PRINCIPAL PERCENT OF
INDUSTRY AMOUNT SECURITY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (continued)
SWEDEN(continued)
- ------
TELECOMMUNICATION
SERVICES 6,100 Telelfonaktiebolaget LM Ericsson .................. $ 188,727 0.9%
----------- -----
TOTAL SWEDEN ...................................... 818,774 3.8
----------- -----
(COST - $647,371)
SWITZERLAND
- -----------
BANKING 2,750 CS Holdings ....................................... 282,499 1.3
----------- -----
DRUGS & HEALTH CARE 70 Ares-Serono Group SA .............................. 66,784
48 Roche Holdings AG Genusscheine .................... 373,493
----------- -----
440,277 2.0
----------- -----
ELECTRICAL EQUIPMENT 140 ABB AG ............................................ 174,150 0.8
----------- -----
FOOD & BEVERAGES 160 Nestle SA ......................................... 171,774 0.8
----------- -----
INSURANCE 142 Schweitzer Ruckversicher .......................... 151,601 0.7
----------- -----
MEDICAL/DRUGS 255 Novartis AG(b) .................................... 292,055 1.4
----------- -----
TOTAL SWITZERLAND ................................. 1,512,356 7.0
----------- -----
(COST - $1,406,520)
UNITED KINGDOM
- --------------
AIR TRAVEL 21,047 British Airways PLC ............................... 218,691 1.0
----------- -----
BANKING 22,000 National Westminster Bank PLC ..................... 258,558
16,000 Standard Chartered PLC ............................ 196,539
----------- -----
455,097 2.1
----------- -----
CHEMICALS 13,000 BOC Group PLC ..................................... 194,655 0.9
----------- -----
CONGLOMERATES 36,000 BTR PLC ........................................... 175,775 0.8
----------- -----
DRUGS & HEALTH CARE 26,500 SmithKline Beecham PLC ............................ 366,832 1.7
----------- -----
ELECTRICAL EQUIPMENT 25,060 General Electric Co. PLC .......................... 164,433
18,000 Yorkshire Electricity Group PLC ................... 248,244
----------- -----
412,677 1.9
----------- -----
HOTELS & RESTAURANTS 35,000 Ladbroke Group PLC ................................ 139,113 0.6
----------- -----
INDUSTRIAL MACHINERY 8,600 GKN PLC ........................................... 147,483 0.7
----------- -----
INTERNATIONAL OIL 28,500 British Petroleum Co. PLC ......................... 341,785 1.6
----------- -----
</TABLE>
13
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES OR
COUNTRY/ PRINCIPAL PERCENT OF
INDUSTRY AMOUNT SECURITY VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (continued)
UNITED KINGDOM (continued)
- -------------
METALS (NON-FERROUS) 11,504 RTZ Corp. PLC ..................................... $ 184,868 0.9%
----------- -----
MINING 30,000 Cookson Group PLC ................................. 121,809 0.6
----------- -----
PAPER 39,287 Jefferson Smurfit ................................. 113,412 0.5
----------- -----
RETAIL TRADE 30,500 Marks & Spencer PLC ............................... 257,084 1.2
----------- -----
TELEPHONE 60,000 Vodafone Group PLC ................................ 253,898 1.2
----------- -----
TOTAL UNITED KINGDOM .............................. 3,383,179 15.7
----------- -----
(COST - $2,810,977)
TOTAL COMMON STOCKS ............................... 20,150,310 93.7
----------- -----
(COST - $18,584,871)
CONVERTIBLE BONDS $100,000 MBL International Finance (Bermuda),
3.00%, 11/30/02 ................................ 106,250 0.5
----------- -----
TOTAL CONVERTIBLE BONDS ........................... 106,250 0.5
----------- -----
(COST - $114,000)
REPURCHASE AGREEMENTS
852,000 State Street Bank, 2.00%, 1/2/97
(Purchased on 12/31/96, proceeds at maturity
$852,095; Collateralized by $870,000
U.S.Treasury Notes, 5.63%, 11/30/98,
value $868,461) ................................. 852,000 3.9
----------- -----
TOTAL REPURCHASE AGREEMENT ........................ 852,000 3.9
----------- -----
(COST - $852,000)
TOTAL INVESTMENTS ................................. 21,108,560 98.1%
----------- -----
(COST - $19,550,871)(A)
OTHER ASSETS, LESS LIABILITIES .................... 400,668 1.9%
----------- -----
NET ASSETS ........................................ $21,509,228 100.0%
=========== =====
- --------------
(a) Represents cost for federal income tax purposes and differs from value by net unrealized appreciation of
securities as follows:
Unrealized appreciation ........................................................... $ 2,533,810
Unrealized depreciation ........................................................... (1,093,006)
-----------
Net unrealized appreciation ....................................................... $ 1,440,804
===========
(b) Represents non-income producing security.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investment in securities, at value (cost $19,550,871) .................................... $21,108,560
Cash ..................................................................................... 630
Foreign currency (cost $276,972) ......................................................... 280,989
Interest and dividends receivable ........................................................ 26,558
Receivable from brokers for investments sold ............................................. 58,731
Receivable for shares sold ............................................................... 65,490
Deferred organization costs .............................................................. 19,905
Foreign tax receivable ................................................................... 21,479
Prepaid expenses and other assets ........................................................ 1,634
-----------
Total Assets ........................................................................... 21,583,976
-----------
LIABILITIES:
Payable for shares repurchased ........................................................... 1,217
Foreign withholding tax payable .......................................................... 3,154
Accrued expenses and other payables:
Administration fees .................................................................... 3,101
Custodian fees ......................................................................... 43,882
Legal and Audit fees ................................................................... 7,980
Printing fees .......................................................................... 4,290
Transfer Agent fees .................................................................... 10,167
Other .................................................................................. 957
-----------
Total Liabilities ...................................................................... 74,748
-----------
Net Assets ............................................................................... $21,509,228
===========
Net Asset Value, Offering Price and Redemption Price per Share:
($.001 par value per share, unlimited number of shares authorized)
SERVICE CLASS SHARES:
Net assets ............................................................................... $ 408,999
Shares of beneficial interest issued and outstanding ..................................... 38,578
Net asset value .......................................................................... $ 10.60
-----------
Maximum sales charge-5.00% of offering price ............................................. 0.56
-----------
Maximum offering price ................................................................... $ 11.16
===========
INSTITUTIONAL CLASS SHARES:
Net assets ............................................................................... $21,100,229
Shares of beneficial interest issued and outstanding ..................................... 1,988,504
Net asset value .......................................................................... $ 10.61
-----------
COMPOSITION OF NET ASSETS:
Paid-in capital .......................................................................... $20,299,302
Accumulated net investment loss .......................................................... (6,491)
Accumulated net realized losses from investment and
foreign currency transactions .......................................................... (345,289)
Net unrealized appreciation from investments and foreign currency transactions ........... 1,561,706
-----------
Net Assets, December 31, 1996 ............................................................... $21,509,228
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $47,258) .................................... $ 324,212
Interest ................................................................................. 20,983
----------
Total Income ........................................................................... 345,195
----------
Expenses:
Advisory ................................................................................. 160,919
Administration ........................................................................... 26,807
Distribution (Service Class) ............................................................. 247
Co-administration (Service Class) ........................................................ 148
Co-administration (Institutional Class) .................................................. 5,213
Shareholder servicing (Service Class) .................................................... 1,773
Audit .................................................................................... 22,148
Transfer agent ........................................................................... 29,605
Custodian ................................................................................ 180,302
Printing ................................................................................. 23,189
Registration ............................................................................. 2,988
Amortization of organization costs ....................................................... 12,338
Legal .................................................................................... 18,712
Trustees ................................................................................. 11,245
Miscellaneous ............................................................................ 20,857
----------
Total expenses before waivers/reimbursements ........................................... 516,491
----------
Less fee waivers and reimbursements ......................................................... (152,389)
----------
Net Expenses ................................................................................ 364,102
----------
Net investment loss ......................................................................... (18,907)
----------
REALIZED AND UNREALIZED GAINS FROM INVESTMENTS:
Net realized gain on investments ............................................................ 790,989
Net realized loss on foreign currency transactions .......................................... (298,731)
----------
Net realized gains from investments and foreign currency transactions .................... 492,258
----------
Net change in unrealized appreciation on investments ........................................ 738,373
Net change in unrealized gain on other assets and liabilities denominated in
foreign currencies ....................................................................... 2,664
----------
Net change in unrealized appreciation from investments and foreign currency
transactions .......................................................................... 741,037
----------
Net Realized and Unrealized Gains from Investments .......................................... 1,233,295
----------
Net Increase in Net Assets Resulting from Operations ........................................ $1,214,388
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995
----------- -----------
<S> <C> <C>
From Investment Activities:
OPERATIONS:
Net investment loss .................................................. $ (18,907) $ (70,698)
Net realized gain (loss) from
investments and foreign currency transactions ..................... 492,258 (584,588)
Net change in unrealized appreciation
from investments and foreign currency transactions ................. 741,037 1,487,280
----------- -----------
Change in net assets
resulting from operations .......................................... 1,214,388 831,994
----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares issued .......................................... 8,010,945 18,607,331
Dividends reinvested -- 1,355
Cost of shares redeemed .............................................. (3,626,499) (20,349,310)
----------- -----------
Change in net assets
from share transactions .............................................. 4,384,446 (1,740,624)
----------- -----------
Change in net assets .................................................... 5,598,834 (908,630)
----------- -----------
NET ASSETS:
Beginning of period .................................................. 15,910,394 16,819,024
----------- -----------
End of period ........................................................ $21,509,228 $15,910,394
=========== ===========
SHARE TRANSACTIONS:
Issued ............................................................... 788,991 2,085,576
Reinvested ........................................................... -- 142
Redeemed ............................................................. (355,941) (2,252,096)
----------- -----------
Change in shares ........................................................ 433,050 (166,378)
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
HSBC Mutual Funds Trust, formerly known as Mariner Mutual Funds Trust, (the
"Trust") was organized in Massachusetts on November 1, 1989 as a
Massachusetts business trust, and is registered under the Investment
Company Act of 1940, as a diversified, open-end management investment
company with multiple investment portfolios, including the International
Equity Fund (the "Fund"). The Fund offers two classes of shares. The
Institutional Class (Class B) is available to customers of financial
institutions or corporations on behalf of their customers or employees, or
on behalf of any trust, pension, profit sharing or other benefit plan for
such customers or employees. The Service Class (Class A) is available to
all other investors. The Institutional Class and Service Class shares are
identical in all respects except that Institutional Class shares are not
subject to a sales load or the imposition of any shareholder servicing fees
or Rule 12b-1 fees.
The Fund's investment objective is to seek to provide investors with
long-term capital appreciation by investing at least 80% of its total
assets in equity securities (including American and European Depositary
Receipts) issued by companies based outside of the United States. The
balance of the Fund's assets will be invested in equity and debt securities
of companies based in the United States and outside of the United States
including bonds and money market instruments. Dividend income is expected
to be incidental to the Fund's investment objective. The Fund may also use
other investment practices to enhance return or to hedge against
fluctuations in the value of portfolio securities.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of income
and expenses for the period. Actual results could differ from those
estimates.
SECURITIES VALUATION: Investments in securities are valued at the last
quoted sale price as of the close of business on the day the valuation is
made, or if a sale is not reported for that day, at the mean between
closing bid and asked prices. Price information for listed securities is
taken from the exchange where the securities are primarily traded.
Investments in futures and related options, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such
exchanges. Other securities for which no quotations are readily available
are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees. Short-term investments having
maturities of 60 days or less are valued at amortized cost, which
approximates market value.
All assets and liabilities initially expressed in foreign currencies are
translated into U.S. dollars at the bid price of such currencies against
the U.S. dollar's last quoted price by a major bank or broker. If such
quotations are not available as of the close of the New York Stock
Exchange, the rate of exchange will be determined in accordance with
policies established in good faith by the Board of Trustees.
FOREIGN CURRENCIES: Transactions denominated in foreign currencies are
recorded at the prevailing rate of exchange as incurred or earned. Asset
and liability accounts are adjusted to reflect the current rate at the end
of each period. Such adjustments are recorded in net unrealized
appreciation of other assets and liabilities denominated in foreign
currencies. Net realized foreign currency gains or losses include exchange
rate
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
differences between trade date and settlement date for security purchases
and sales, and between the date the Fund records income, expenses and other
assets and liabilities and the date such assets and liabilities are
received or paid. The portion of both realized and unrealized gains and
losses on investments that result from fluctuations in foreign currency
exchange rates is not separately disclosed. The Fund may enter into forward
foreign currency exchange contracts for investment purposes and to hedge
its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain firm purchase and sales commitments
denominated in foreign currencies. A forward foreign currency exchange
contract is a commitment to purchase or sell a foreign currency at a future
date at a negotiated rate. The gain or loss arising from the difference
between the original contracts and the closing of such contracts is
included in realized gains or losses from foreign currency transactions.
Fluctuations in the value of forward foreign currency exchange contracts
are recorded for financial reporting purposes as unrealized gains or losses
by the Fund until settlement date.
The Fund's custodian will place and maintain cash not available for
investment or government securities in a separate account of the Fund
having a value equal to the aggregate amount of the Fund's commitments
under forward foreign currency exchange contracts entered into with respect
to position hedges.
Risks may arise from the potential inability of a counterparty to meet the
terms of a contract and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The face or contract amount,
in U.S. dollars reflects the total exposure the Fund has in that particular
currency contract. No outstanding forward foreign currency exchange
contracts existed as of December 31, 1996.
TAXES: It is the Fund's policy to comply with the requirements of the
Internal Revenue Code, as amended, applicable to regulated investment
companies, and to distribute substantially all of its taxable income, and
net realized capital gains to its shareholders. Therefore, no provision is
required for Federal income tax. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital gains
earned on foreign investments at various rates. Where available, the Fund
will file for claims on foreign taxes withheld.
The Fund has available $272,287 of capital loss carryforwards which, if not
utilized, will expire in the year 2003.
DIVIDENDS AND DISTRIBUTIONS: The Fund intends to distribute annually
substantially all of its net investment income and net realized capital
gains, if any, in the form of dividends.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earning and profits are reported in the financial statements as a tax
return of capital. Differences in the recognition or classification of
income between the financial statements and tax earnings and profits which
result in temporary over distributions for financial statements purposes,
are classified as distributions in excess of net investment income or
accumulated undistributed net realized gains. During the year ended
December 31, 1996, accumulated net investment loss was decreased by
$12,416, accumulated net realized loss on investments was increased by
$61,350, and paid-in capital was increased by $48,934, due primarily to
differences between book and tax accounting for foreign currency
transactions. This change had no effect on net assets or net asset value
per share.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITY TRANSACTIONS AND RELATED INCOME: Security transactions are
recorded on trade date. Identified cost of investments sold is used for
both financial statement and Federal income tax purposes. Dividend income
is recorded on the ex-dividend date. Interest income is recorded as earned.
EXPENSE ALLOCATION: Expenses directly attributed to each Fund in the Trust
are charged to that Fund's operations; expenses which are applicable to all
Funds are allocated among them.
ORGANIZATIONAL COSTS: Costs incurred in connection with the organization of
the Fund have been deferred and are being amortized on a straight-line
basis over a five year period beginning on the date operations commenced.
3. PORTFOLIO SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
year ended December 31, 1996 were $16,928,395 and $13,122,593,
respectively.
4. CAPITAL SHARE TRANSACTIONS:
The Fund offers Service Class (Class A) and Institutional Class (Class B)
Shares. The two classes differ in their respective shareholder servicing
agent, distribution and service fees.All shareholders bear the common
expenses of the Fund pro rata based on the average daily net assets of each
class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights:
differences in per share dividend rates are generally due to differences in
separate class expenses.
Transactions in capital shares for the Fund were as follows:
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
----------------------------------------------------------------
AMOUNT SHARES AMOUNT SHARES
-------- --------- -------- ---------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------- -----------------------------
<S> <C> <C> <C> <C>
CLASS A:
Shares issued $ 63,618 6,253 $ 478,270 52,332
Dividends reinvested -- -- 1,355 142
Shares redeemed (344,943) (33,612) (15,499,489) (1,746,947)
----------- ------- ------------ ----------
Net decrease $ (281,325) (27,359) $(15,019,864) (1,694,473)
=========== ======= ============ ==========
CLASS B:
Shares issued $ 7,947,327 782,738 $ 18,129,061 2,033,244
Dividends reinvested -- -- -- --
Shares redeemed (3,281,556) (322,329) (4,849,821) (505,149)
----------- ------- ------------ ----------
Net increase $ 4,665,771 460,409 $ 13,279,240 1,528,095
=========== ======= ============ ==========
</TABLE>
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. AGREEMENTS
The Trust retains HSBC Asset Management Americas Inc. ("HSBC Americas") to
act as Investment Adviser for the Fund. HSBC Americas is the North American
investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai Banking
Corporation). As Investment Adviser, HSBC Americas furnishes investment
guidance and policy direction in connection with the management of the
portfolio of the Funds, subject to policies established by the Board of
Trustees. As compensation for its services, HSBC Americas is paid a monthly
advisory fee at an annual rate of 0.90% of the Fund's average daily net
assets. For the year ended December 31, 1996, HSBC Americas earned
approximately $20,367 from the Fund, net of fee waivers of approximately
$140,552.
The Adviser retains HSBC Asset Management Europe Ltd.("HSBC Europe"), HSBC
Asset Management Hong Kong Ltd. ("HSBC Hong Kong"), HSBC Asset Management
(Japan) KK ("HSBC Japan") and HSBC Asset Management Australia Ltd. ("HSBC
Australia") to act as sub-advisers (the "Sub-Advisers") to the Fund. HSBC
Europe, HSBC Hong Kong, HSBC Japan and HSBC Australia are all investment
advisory affiliates of the Adviser.
Under its Sub-Advisory Contract with HSBC Americas, each Sub-Advisor will
undertake at its own expense to furnish the Fund and HSBC Americas with
micro- and macroeconomics research, advice and recommendations, and
economic and statistical data, with respect to the Fund's investments,
subject to the overall review by HSBC Americas and the Board of Trustees.
As administrator, BISYS is paid a monthly fee equal to an annual rate of
0.15% of the Fund's average daily net assets. For the year ended December
31, 1996, BISYS earned $18,016 from the Fund in administrative services
fees, net of fee waivers of $6,109.
As previous Administrator through February 29, 1996, PFPC Inc. ("PFPC") was
paid a monthly asset based fee of 0.10% of the Fund's first $200 million of
average net assets; 0.075% of the Fund's next $200 million of average net
assets; 0.05% of the Fund's next $200 million of average net assets; and
0.03% of the Fund's average net assets in excess of $600 million; exclusive
of out-of-pocket expenses. For the two months ended February 29, 1996, PFPC
earned $2,548 in administrative fees, net of fee waivers of $134.
HSBC Americas earned co-administration/shareholder servicing fees of up to
0.07% of the Fund's average net assets totaling approximately $1,720 from
the Fund net of fee waivers of $5,414, during the year ended December
31, 1996.
The Fund has adopted a Distribution Plan and Agreement (the "Plan")
pursuant to Rule 12b-1 of the Investment Company Act of 1940, as amended.
The Service Class (Class A) Plan provides for a monthly payment by the Fund
to BISYS Fund Services for expenses incurred in connection with
distribution services provided to the Fund not to exceed an annual rate of
0.35% of the Fund's average net assets during the preceding month. The
expenses incurred as a result of this agreement totaled approximately $67
for the Fund net of fee waiver of approximately $180.
PFPC Inc. acted as transfer agent and dividend disbursing agent for the
Fund until April 15, 1996. For such services, PFPC Inc. earned $2,311
during this period. BISYS acted as transfer agent and dividend disbursing
agent for the remainder of 1996. For such services, BISYS earned $27,294
for the year ended December 31, 1996.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. AGREEMENTS (CONTINUED)
State Street Bank and Trust Company acts as custodian for the Fund. For
furnishing custodian services, State Street is paid a monthly fee with
respect to the Fund safekeeping its assets plus certain transaction charges
and out-of-pocket expenses. For the Year ended December 31, 1996, the Fund
paid custody related expenses of approximately $165,302.
HSBC Americas may enter into agreements (the "Service Agreements") with
certain banks, financial institutions and corporations ("Service
Organizations") whereby each Service Organization handles record-keeping
and provides certain administration services for its customers who invest
in the Funds through accounts maintained at that Service Organization. Each
Service Organization will receive monthly payments, which are based upon
expenses that the Service Organization has incurred in the performance of
its service under the Service Agreement. The payments from the Funds on an
annual basis will not exceed 0.25% of the average value of the Funds'
shares held in the subaccounts of the Service Organizations.
A partner of Baker & McKenzie, legal counsel to the Trust, serves as
Secretary of the Trust. For the year ended December 31, 1996, the Fund
incurred legal fees of $731 (Class A) and $17,744 (Class B) to Fund
counsel.
22
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
AND PERIODS INDICATED
HSBC INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SERVICE CLASS SHARES
----------------------------------------------------------
FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED APRIL 25, 1994(a) TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- --------------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period .................. $ 9.97 $9.55 $ 10.00
------- ----- -------
Investment Operations:**
Net investment loss .................. (0.02) (0.07) --
Net realized and unrealized gain
(loss) from investments ............ 0.65 0.49 (0.43)
------- ----- -------
Total from investment operations ..... 0.63 0.42 (0.43)
------- ----- -------
Distributions
From excess of net realized
losses on investments .............. -- -- (0.02)
------- ----- -------
Total distributions .................. -- -- (0.02)
------- ----- -------
Net asset value, end of period .......... $ 10.60 $9.97 $ 9.55
======= ===== =======
Total return(b) ......................... 6.32% 4.40% (4.30)%(d)
Ratios/Supplemental Data:
Net assets at end of period (000) ....... $ 409 $ 658 $16,819
Ratio of expenses to average
net assets ......................... 2.10% 1.98% 2.16%(c)
Ratio of net investment loss
to average net assets .............. (0.19)% (1.01)% (0.04)%(c)
Ratio of expenses to average
net assets* ........................ 2.94% 3.66% 2.50%(c)
Ratio of net investment loss
to average net assets* ............. (1.03)% (2.69)% (0.39)%(c)
Portfolio turnover rate ................. 77.91% 90.31% 29.37%(d)
Average commission rate paid(e) ......... $0.0006 N/A N/A
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS SHARES
--------------------------------------
FOR THE FOR THE PERIOD
YEAR ENDED MARCH 1, 1995(a) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -------------------
<S> <C> <C>
Net Asset Value,
Beginning of Period .................. $ 9.98 $ 8.81
------- -------
Investment Operations:**
Net investment loss .................. (0.01) (0.03)
Net realized and unrealized gain
(loss) from investments ............ 0.64 1.20
------- -------
Total from investment operations ..... 0.63 1.17
------- -------
Distributions
From excess of net realized
losses on investments .............. -- --
------- -------
Total distributions .................. -- --
------- -------
Net asset value, end of period .......... $ 10.61 $ 9.98
======= =======
Total return(b) ......................... 6.31% 13.28%(d)
Ratios/Supplemental Data:
Net assets at end of period (000) ....... $21,100 $15,253
Ratio of expenses to average
net assets ......................... 2.04% 2.62%(c)
Ratio of net investment loss
to average net assets .............. (0.10)% (0.34)%(c)
Ratio of expenses to average
net assets* ........................ 2.89% 3.12%(c)
Ratio of net investment loss
to average net assets* ............. (0.95)% (0.84)%(c)
Portfolio turnover rate ................. 77.91% 90.31%(d)
Average commission rate paid(e) ......... $0.0006 N/A
</TABLE>
- ----------
* During the period certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and expense reimbursements had not occurred,
the ratios would have been as indicated.
** Based on average shares outstanding.
(a) Commencement of operations.
(b) Excludes sales charge.
(c) Annualized.
(d) Not annualized.
(e) Represents the total dollar amount of commissions paid on portfolio
transactions for the year ended December 31, 1996, divided by total number
of portfolio shares purchased and sold for which commissions were charged.
Disclosure is not required for periods prior to December 31, 1996.
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
HSBC Mutual Funds Trust
We have audited the accompanying statement of assets and liabilities, including
the schedule of portfolio investments, of the International Equity Fund (one of
the portfolios comprising HSBC Mutual Funds Trust) as of December 31, 1996, the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the years indicated therein. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
International Equity Fund at December 31, 1996, the results of their operations
for the year then ended, the changes in their net assets for each of the two
years in the period then ended and their financial highlights for each of the
indicated years, in conformity with generally accepted accounting principles.
/S/ EARNST & YOUNG LLP
New York, New York
February 10, 1997
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