HSBC MUTUAL FUNDS TRUST
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HSBC FUND GROUP
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HSBC Asset Management [GRAPHIC OMITTED]
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Small Cap Fund
Growth & Income 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
SUB-ADVISER TO SMALL CAP FUND
Investment Concepts, Inc.
One Williams Center
P.O. Box 2300
Tulsa, Oklahoma 74192
DISTRIBUTOR, ADMINISTRATOR, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
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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EQUITY FUNDS
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HSBC Asset Management [GRAPHIC OMITTED]
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SMALL CAP FUND
January 17, 1997
Dear Shareholder:
1996 was a very tough year for small-cap growth investors. Small-cap stocks
began 1996 on a very good note in the first half of the year, only to stumble
during the summer sell-off that occurred in July. The ensuing recovery has been
largely confined to the large-cap names, with very little attention paid to
small-cap stocks. As a result, small cap investors have suffered through a
period of significant underperformance. As can be seen below, using the Russell
2000 Index as a benchmark for small cap stocks, this index underperformed the
other major indices.
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RETURNS
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RUSSELL NASDAQ S&P DOW
PERIOD 2000 COMPOSITE 500 JONES
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1st Quarter 1996 5.1% 4.7% 5.4% 9.8%
2nd Quarter 1996 5.0 7.6 4.4 1.8
1st Half 1996 10.4 12.7 10.0 11.8
3rd Quarter 1996 0.3 3.5 3.1 4.6
4th Quarter 1996 5.2 5.2 8.4 10.2
2nd Half 1996 5.6 9.0 11.7 15.3
Year 1996 16.5 22.7 22.9 28.8
Looking at the market by size of company and whether the stock was a growth or
value stock also reveals some informative insights into what kinds of stocks
performed best in 1996. As you can see below, large-cap growth stocks performed
the best in 1996, with small-cap growth underperforming by almost 50%. Even
small-cap value stocks posted a better return.
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GROWTH VS. VALUE STOCKS
RUSSELL LARGE CAP RUSSELL SMALL CAP
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PERIOD GROWTH VALUE GROWTH VALUE
- --------------------------------------------------------------------------------
1st Quarter 1996 5.0% 4.9% 5.6% 3.8%
2nd Quarter 1996 6.0 1.0 5.7 3.5
3rd Quarter 1996 3.2 2.1 (1.0) 0.8
4th Quarter 1996 5.7 9.2 0.1 9.3
Year 1996 21.5 18.2 10.7 18.4
SOURCE: FRANK RUSSELL COMPANY
MONTGOMERY SECURITIES
<PAGE>
There are several reasons for the underperformance of small-cap stocks since the
summer correction. Among them are:
(BULLET) The large amount of initial public offerings absorbed a lot of the cash
that would have otherwise been used to purchase small-cap stocks.
(BULLET) The growing size of all the small-cap mutual fund portfolios has forced
many fund managers to increase the average market cap of their stock
holdings. This is because of the relative difficulty of acquiring a
meaningful position in the less liquid small-cap companies.
(BULLET) The general shift in the market toward the larger and more liquid
stocks since the summer correction.
The best performing sectors of the small-cap market as measured by the Russell
2000 Index in 1996 were other energy (up 71.4%), real estate (mainly REITS, up
32.3%), integrated oils (up 29.2%) and financial services (up 25.4%). The worst
performing sectors were health care (down 3.4%), utilities (down .4%),
technology (up 10.3%) and producer durables (up 11.0%).
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YEAR 1996
RUSSELL 2000 INDEX
BEST AND WORST PERFORMING SECTORS
- --------------------------------------------------------------------------------
BEST WORST
- ----------------------------------------- ------------------------------------
SECTOR RETURN WEIGHTING SECTOR RETURN WEIGHTING
- --------------------------------------------------------------------------------
Other Energy 71.4% 4.1% Health Care (3.4)% 10.3%
Real Estate 32.3 8.4 Utilities (0.4) 6.0
Integrated Oils 29.2 0.7 Technology 10.3 11.8
Financial Services 25.4 17.0 Producer Durables 11.0 6.8
It is interesting to note that two of the three sectors that most small-cap
growth portfolios usually concentrate on did not perform well in 1996. The
health-care sector and the technology sector significantly underperformed, and
the consumer discretionary sector had a return of 16.3% (about equaling the
return of the Russell 2000, but underperforming the major indices).
Looking forward, we expect the economy will be growing at a moderate pace along
with a slowdown in corporate profit growth as compared to 1996. We also expect
that inflation will remain near 3.0%. In this type of environment we expect
profit growth for smaller companies to be better than the larger companies.
Furthermore, from a valuation standpoint, small-cap stocks look attractive.
However, we are concerned that investors may continue to seek the safety and
liquidity of large-cap stocks. We suspect this may continue for a while longer.
While discouraging near term, the long-term fundamentals of small cap stocks are
attractive for those investors willing to accept more risk.
MANAGER'S DISCUSSION OF FUND PERFORMANCE
- ----------------------------------------
The HSBC Small Cap Fund posted a negative return of .65% for the quarter ending
December 31, 1996, and a positive return of 15.29% for the calendar year 1996.
The Fund underperformed the 5.20% return of the fourth quarter and the 16.49%
return posted for the year 1996 by the Russell 2000 Index. Most of the
underperformance occurred in the last half of the year.
2
<PAGE>
During the year the Fund was positively influenced by selected technology
stocks. Conversely, the fund was hindered by the relative underperformance of
the health-care sector and some of the consumer stocks.
The Fund continues to invest in quality small companies that are expected to
grow faster than the overall market. Currently the HSBC Small Cap Fund has a
higher return on equity, lower debt-to-capital ratio and a higher projected
growth rate of earnings as compared to the general market.
We thank you for your support and participation in the HSBC Small Cap Fund. Even
though 1996 was not a particularly good year for small-cap investors, we will
continue to keep working hard to maintain your confidence.
Sincerely,
/S/ JOE P. SING, JR.
Joe P.Sing, Jr.
3
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
SMALL CAP FUND VS. RUSSELL 2000
Average Annual Total Return
---------------------------------------
1 Year Inception
------ ---------
Offering Price(1) 9.53% 13.45%
NAV(2) 15.29% 14.93%
Russell
Fund(1) 2000 Fund(2)
------- ------- -------
January 1993 10,000 10,000 10,000
March 1993 9,601 10,426 10,110
June 1993 10,551 10,653 11,110
September 1993 11,444 11,585 12,050
December 1993 11,752 11,889 12,374
March 1994 11,226 11,574 11,821
June 1994 10,068 11,122 10,602
September 1994 11,140 11,894 11,790
December 1994 11,378 11,673 11,981
March 1995 11,780 12,211 12,405
June 1995 13,473 13,355 14,187
September 1995 15,739 14,675 16,573
December 1995 14,360 14,993 15,121
March 1996 16,137 15,764 17,014
June 1996 17,081 16,552 17,986
September 1996 16,662 16,610 17,546
December 1996 16,554 17,474 17,432
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE
(1) INCLUDES THE MAXIMUM SALES CHARGE
(2) EXCLUDES THE MAXIMUM SALES CHARGE
THE ABOVE ILLUSTRATION COMPARES A $10,000 INVESTMENT IN THE SMALL CAP FUND ON
JANUARY 4, 1993, TO A $10,000 INVESTMENT IN THE RUSSELL 2000 INDEX ON THAT DATE.
ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS ARE REINVESTED.
THE FUND'S PERFORMANCE TAKES INTO ACCOUNT ALL APPLICABLE FEES AND EXPENSES AND
WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED. THE RUSSELL 2000
INDEX IS A WIDELY ACCEPTED UNMANAGED INDEX OF OVERALL MARKET PERFORMANCE OF MANY
OF THE SMALLEST PUBLICLY TRADED COMPANIES IN THE U.S. AND DOES NOT TAKE INTO
ACCOUNT CHARGES, FEES AND OTHER EXPENSES.
4
<PAGE>
GROWTH & INCOME FUND
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January 17, 1997
Dear Shareholder:
1996 YEAR IN REVIEW
- -------------------
The year ended December 31, 1996, proved another remarkable year for the U.S.
equity market as stocks (S&P 500 Composite Index) returned nearly 23%. There
were several key factors present throughout the year that provided both support
and "fuel" to the market, driving it to record highs. Notable among these
factors were inflows into mutual funds, which hit an estimated $223 billion for
1996, exceeding the previous record set in 1993 by more than 70%. Further
worldwide corporate merger and acquisition activity (M&A) was robust and
increased 25% in 1996 to a record $1.04 trillion, given the record level of
equity prices and generally low interest rates. In addition, we would note that
corporate repurchases of stock remained strong, helping to offset the new supply
of equities generated by a very "hot" syndicate (initial and secondary
offerings) calendar.
Supporting equity market valuations were interest rates, notably in the second
half of the calendar year, generally declining from early July through November.
Corporate earnings were a mixed bag, as the more visible, large-capitalization
companies generated strong, albeit decelerating growth from 1995 levels, while
the smaller capitalized, less visible companies, posted far less positive
results. Further it is estimated that reported earnings were affected far more
significantly by write-offs in the prior period that in the current year,
indicating that on an operating basis earnings growth was more muted than it
appeared.
For the third year in succession, the larger capitalization indices (Dow Jones
and S&P 500) well outpaced the mid- and small-cap indices (S&P 400 Midcap and
Russell 2000, respectively). This outperformance was unsurprising given the
stage of the US business cycle -- small caps outperform coming out of
recession/depression rather than at the late stage of the cycle -- as well as
the double-digit earnings growth and liquidity of the large caps. Further, a
torrid IPO market tends to absorb capital that would otherwise be earmarked for
investment in existing small-cap companies. Growth stocks significantly
outperformed Value stocks, while sectorally, Technology, Financials, Capital
Goods and Consumer Staples led the market, all returning in excess of 26%.
Consumer Cyclicals and Utilities posted the weakest relative returns.
1997 OUTLOOK
- ------------
We are estimating a slightly below-trend return in 1997 with essentially no
multiple expansion from current levels factored in to our forecast. However, we
do not expect a contraction in P/Es either, given a benign interest-rate
forecast with a continuation of modest inflation, which should be supportive to
the market's valuation. Hence, we expect the return will be driven by a
mid-single digit gain in year-over-year operating earnings plus a slight
improvement in dividend yield. This represents a further deceleration in
earnings momentum, a pattern that has emerged throughout 1996 after a torrid
1995. However, this slowing trend has been largely ignored by investors and the
media as the blue chips, notably the consumer growth/health-care companies, have
produced strong results, masking the weakness in the broader market.
5
<PAGE>
Factors that are expected to be supportive to the U.S. market in 1997 include
continued inflows into mutual funds, in part driven by 401(K) contributions, as
well as the aforementioned stock buy-back programs, and M&A activity. However,
we do not expect interest rates to be a market catalyst as they were in 1995 and
1996, given a stated Federal Reserve Bank bias toward tightening. Further, the
most positive news on the inflation front is likely behind us, with wage- and
commodity-cost pressures likely to be evidenced in the year ahead. In summary, a
fairly neutral economic backdrop for equities.
MANAGER'S DISCUSSION OF PERFORMANCE
- -----------------------------------
Once again, 1996 proved a difficult year for active equity managers to beat the
benchmark index (S&P 500), given the strength of the blue chips versus the
broader market. This is reflected in the Lipper Growth & Income average fund net
return of 20.78% versus the 22.97% posted by the S&P 500. While the HSBC Growth
& Income Fund posted a strong absolute return of 17.90% on a net basis, this
trailed the Lipper Growth & Income average by approximately 290 basis points. On
a gross basis the Fund gained 18.88%.
While sector weighting decisions for the year were neutral-to-slightly positive
in aggregate, generally weak stock selection accounted for the lagging relative
performance. This underperformance was concentrated in two sectors in particular
- -- Technology and Consumer Staples, where a few individual stocks accounted for
the bulk of the shortfall. Areas of relative strength included Energy, where the
Fund was overweighted and outperformed, as well as Transports.
HSBC Asset Management Americas Inc.
6
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GROWTH & INCOME FUND VS. S&P 500
Average Annual Total Retrun
1 Year 5 Years Inception
------ ------- ---------
Offering Price(1) 12.03% 11.67% 11.82%
NAV(2) 17.90% 12.78% 12.37%
Lipper
Fund 1 S&P 500 Gr & Inc Fund 2
------ ------- -------- ------
June 1986 10,000 10,000 10,000 10,000
Decenber 1986 9,860 10,049 10,134 10,320
December 1987 9,780 10,578 10,400 10,300
December 1988 11,300 12,334 12,310 11,900
December 1989 14,190 16,241 15,236 14,940
December 1990 13,560 15,737 14,322 14,280
December 1991 17,890 20,532 18,277 18,840
December 1992 19,280 22,097 20,038 20,300
December 1993 21,440 24,322 22,967 22,580
December 1994 20,439 24,643 22,811 21,523
December 1995 27,696 33,901 29,882 29,165
December 1996 32,656 40,518 36,082 34,387
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE
(1) INCLUDES THE MAXIMUM SALES CHARGE
(2) EXCLUDES THE MAXIMUM SALES CHARGE
THE ABOVE ILLUSTRATION COMPARES A $10,000 INVESTMENT IN THE GROWTH &INCOME FUND
ON JUNE 2, 1986, TO A $10,000 INVESTMENT IN THE STANDARD & POOR'S 500 COMPOSITE
STOCK PRICE INDEX AND THE LIPPER GROWTH AND INCOME FUND INDEX ON THAT DATE. ALL
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS ARE REINVESTED.
THE FUND'S PERFORMANCE TAKES INTO ACCOUNT ALL APPLICABLE FEES AND EXPENSES AND
WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED. THE STANDARD &
POOR'S 500 COMPOSITE STOCK PRICE INDEX IS A WIDELY ACCEPTED UNMANAGED INDEX OF
OVERALL STOCK MARKET PERFORMANCE AND DOES NOT TAKE INTO ACCOUNT CHARGES, FEES
AND OTHER EXPENSES.
THE LIPPER GROWTH AND INCOME FUNDINDEX IS AN INDEX BASED ON THIRTY LARGEST
GROWTH AND INCOME MUTUAL FUNDS (EQUALLY WEIGHTED) TRACKED BY LIPPER ANALYTICAL
SERVICES INCORPORATED.
7
<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
8
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996
SMALL CAP FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- -------------- ------------ ------------
<S> <C> <C>
COMMON STOCKS (94.2%):
AUTO PARTS (4.3%):
59,300 Discount Auto Parts, Inc.(b) ..................................................... $ 1,386,137
123,500 Keystone Automotive Industries, Inc.(b) .......................................... 1,945,125
-----------
3,331,262
-----------
BROADCASTING (1.6%):
77,700 International Family Entertainment, Class B(b) ................................... 1,204,350
-----------
BUSINESS SERVICES (1.9%):
61,100 Imnet Systems, Inc.(b) ........................................................... 1,481,675
-----------
COMMERICAL SERVICES (3.3%):
103,900 Personnel Group of America, Inc.(b) .............................................. 2,506,587
-----------
COMPUTER SOFTWARE (4.6%):
116,800 Network General Corp.(b) ......................................................... 3,533,200
-----------
COMPUTER & PERIPHERALS (8.1%):
77,200 Cisco Systems, Inc.(b) ........................................................... 4,911,850
44,000 Verifone(b) ...................................................................... 1,298,000
-----------
6,209,850
-----------
DEPARTMENT STORES (3.2%):
65,700 Proffitts, Inc.(b) ............................................................... 2,422,688
-----------
ELECTRICAL & ELECTRONIC (6.1%):
61,445 Harman International Industries, Inc. ............................................ 3,417,878
50,100 QLogic Corp.(b) .................................................................. 1,290,075
-----------
4,707,953
-----------
ENTERTAINMENT (3.1%):
135,700 Lodgenet Entertainment Corp.(b) .................................................. 2,408,675
-----------
FINANCIAL SERVICES (6.6%):
25,600 Advanta, Class A ................................................................. 1,094,400
127,087 The Money Store, Inc. ............................................................ 3,510,778
32,635 Resource Bancshares Mortgage Group ............................................... 465,049
-----------
5,070,227
-----------
HEALTHCARE (2.1%):
61,100 Owen Healthcare, Inc.(b) ......................................................... 1,619,150
-----------
MANUFACTURING-CAPITAL GOODS (1.6%):
34,700 Wolverine Tube, Inc.(b) .......................................................... 1,223,175
-----------
</TABLE>
9
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
SMALL CAP FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- -------------- ------------ ------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MEDICAL SERVICES, HOSPITAL MANAGEMENT, NURSING HOMES (7.2%):
30,432 FPA Medical Management, Inc.(b) ................................................... $ 680,916
64,700 Inphynet Medical Management, Inc.(b) .............................................. 1,164,600
136,800 Matria Healthcare, Inc.(b) ........................................................ 649,800
68,900 Occusystems, Inc.(b) .............................................................. 1,860,300
109,000 Prime Medical Services(b) ......................................................... 1,185,375
-----------
5,540,991
-----------
MEDICAL SUPPLIES (1.5%):
45,600 Hologic, Inc.(b) .................................................................. 1,128,600
-----------
MISCELLANEOUS MANUFACTURING (1.7%):
79,400 Bacou USA, Inc.(b) ................................................................ 1,320,025
-----------
MOBILE HOMES & MANUFACTURING, HOUSING (2.0%):
131,950 Southern Energy Homes, Inc.(b) .................................................... 1,517,425
-----------
RESTAURANTS (2.1%):
81,000 Casa Ole Restaurants(b) ........................................................... 749,250
83,700 Rock Bottom Restaurants, Inc.(b) .................................................. 868,388
-----------
1,617,638
-----------
SERVICES (NON-FINANCIAL) (8.1%):
62,400 Childrens Comprehensive Services, Inc.(b) ......................................... 819,000
49,100 Envoy Corp. **(b) ................................................................. 1,841,250
68,987 Paychex, Inc. ..................................................................... 3,548,519
-----------
6,208,769
-----------
SPECIALTY STORES (7.4%):
60,000 Finish Line, Class A(b) ........................................................... 1,267,500
55,200 Men's Wearhouse(b) ................................................................ 1,352,400
92,700 Petco Animal Supplies, Inc.(b) .................................................... 1,923,525
60,200 Stage Stores, Inc.(b) ............................................................. 1,098,650
-----------
5,642,075
-----------
TELECOMMUNICATION EQUIPMENT (9.7%):
118,900 LCC International, Inc.(b) ........................................................ 2,199,650
109,000 Polycom, Inc.(b) .................................................................. 531,375
65,200 U.S. Robotics Corp.(b) ............................................................ 4,694,400
-----------
7,425,425
-----------
</TABLE>
10
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
SMALL CAP FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- -------------- ------------ ------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
VIDEO TAPE RENTAL SERVICES (1.2%):
69,000 Movie Gallery, Inc.(b) ............................................................ $ 897,000
-----------
WHOLESALE DISTRIBUTION (6.8%):
46,388 Cardinal Health, Inc. ............................................................. 2,702,072
53,600 Fisher Scientific ................................................................. 2,525,900
-----------
5,227,972
-----------
Total Common Stocks (Cost - $63,636,154) .......................................... 72,244,712
-----------
MONEY MARKET MUTUAL FUNDS (6.9%):
2,622,000 Fedfund Money Market .............................................................. 2,622,000
2,675,000 Provident Institutional Temporary Investment Fund ................................. 2,675,000
-----------
Total Money Market Mutual Funds (Cost - $5,297,000) ............................... 5,297,000
-----------
TOTAL INVESTMENTS (101.1%)
(Cost - $68,933,154)(a) ........................................................... 77,541,712
-----------
LIABILITIES, LESSOTHERASSETS (-1.1%) .............................................. (873,363)
-----------
NET ASSETS (100.0%) ............................................................... $76,668,349
===========
<FN>
- --------------
(a) Represents cost for federal income tax purposes and differs from market
value by net unrealized appreciation of securities as follows:
Unrealized appreciation ..................................................................... $14,768,579
Unrealized depreciation ..................................................................... (6,160,021)
-----------
Net unrealized appreciation ................................................................. $ 8,608,558
===========
(b) Represents non-income producing security.
** The fund is entitled to contingent value rights attached to this security.
Such value rights will allow the purchase of shares of First Data Corp.
if certain parameters are met. At December 31, 1996, these rights had no
market value.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996
GROWTH & INCOME FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- -------------- ------------- ------------
<S> <C> <C>
COMMON STOCKS (105.3%):
AEROSPACE & DEFENSE (3.3%):
36,623 Allied Signal, Inc. ............................................................... $ 2,453,741
20,300 Boeing Co. ........................................................................ 2,159,412
------------
4,613,153
------------
AUTOMOTIVE (2.0%):
49,500 General Motors Corp. .............................................................. 2,759,625
------------
BANKING (4.8%):
92,600 Bank of New York Co., Inc. ........................................................ 3,125,250
36,800 NationsBank ....................................................................... 3,597,200
------------
6,722,450
------------
CHEMICALS (3.3%):
24,600 E.I. du Pont de Nemours ........................................................... 2,321,625
42,800 PPG Industries, Inc. .............................................................. 2,402,150
------------
4,723,775
------------
COMPUTER HARDWARE (7.9%):
123,700 Bay Networks, Inc.(b) ............................................................. 2,582,237
25,000 IBM ............................................................................... 3,775,000
20,000 Intel Corp. ....................................................................... 2,618,750
81,400 Sun Microsystems, Inc.(b) ......................................................... 2,090,962
------------
11,066,949
------------
COMPUTER SOFTWARE (3.4%):
47,600 Computer Associates International, Inc. ........................................... 2,368,100
29,200 Microsoft(b) ...................................................................... 2,412,650
------------
4,780,750
------------
CONSUMER PRODUCTS (2.2%):
29,100 Proctor & Gamble Co. .............................................................. 3,128,250
------------
ELECTRICAL & ELECTRONIC (4.5%):
24,800 Emerson Electric Co. .............................................................. 2,399,400
39,200 General Electric Co. .............................................................. 3,875,900
------------
6,275,300
------------
ELECTRICAL UTILITY (3.6%):
67,800 Duke Power Co., Inc. .............................................................. 3,135,750
73,065 Wisconsin Energy Corp. ............................................................ 1,963,622
------------
5,099,372
------------
</TABLE>
12
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
GROWTH & INCOME FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- -------------- ------------- ------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ENTERTAINMENT (1.1%):
21,900 Walt Disney Co. ................................................................. $ 1,524,787
------------
FINANCIAL SERVICES (7.3%):
33,394 Chase Manhattan Corp. ........................................................... 2,980,414
94,200 Federal National Mortgage Assoc. ................................................ 3,508,950
84,698 Travelers Group, Inc. ........................................................... 3,843,172
------------
10,332,536
------------
FOOD PRODUCTS & SERVICES (7.7%):
77,200 Coca Cola ....................................................................... 4,062,650
88,400 H.J. Heinz Co. .................................................................. 3,160,300
98,100 Sara Lee Corp. .................................................................. 3,654,225
------------
10,877,175
------------
HEALTHCARE (7.7%):
38,700 American Home Products .......................................................... 2,268,787
24,000 Bristol Myers Squibb Co. ........................................................ 2,610,000
74,850 Columbia/HCA Healthcare Corp. ................................................... 3,050,137
59,000 Johnson & Johnson ............................................................... 2,935,250
------------
10,864,174
------------
INSURANCE (4.3%):
53,000 Allstate Corp. .................................................................. 3,067,375
28,000 American International Group .................................................... 3,031,000
------------
6,098,375
------------
MACHINERY & EQUIPMENT (2.1%):
66,600 Ingersoll Rand Co. .............................................................. 2,963,700
------------
OFFICE EQUIPMENT & SERVICES (2.7%):
76,200 Hewlett Packard ................................................................. 3,829,050
------------
OIL & GAS EXPLORATION PRODUCTS & SERVICES (13.1%):
18,179 Atlantic Richfield Co. .......................................................... 2,408,718
46,500 Burlington Resources ............................................................ 2,342,438
43,000 Chevron Corp. ................................................................... 2,795,000
34,707 Consolidated Natural Gas Co. .................................................... 1,917,562
33,944 Exxon Corp. ..................................................................... 3,326,512
10,100 Royal Dutch Petroleum Co. ....................................................... 1,724,575
19,506 Schlumberger Ltd. ............................................................... 1,948,162
65,900 Union Pacific Resources Group ................................................... 1,927,575
------------
18,390,542
------------
</TABLE>
13
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
GROWTH & INCOME FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- -------------- ------------- ------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PAPER PRODUCTS (1.8%):
62,300 International Paper ............................................................... $ 2,515,363
------------
PHARMACEUTICALS (1.1%):
39,800 Pharmacia & Upjohn, Inc. .......................................................... 1,577,075
------------
PIPELINES (0.1%):
2,256 El Paso Natural Gas Co. ........................................................... 113,928
------------
PRINTING & PUBLISHING (2.5%):
39,900 Time Warner, Inc. ................................................................. 1,496,250
25,600 Tribune Co. ....................................................................... 2,019,200
------------
3,515,450
------------
RAILROADS (1.7%):
40,015 Union Pacific Corp. ............................................................... 2,405,902
------------
RETAIL - GENERAL MERCHANDISE (7.9%):
46,200 Albertson's Inc. .................................................................. 1,645,875
57,100 Dillard Department Stores ......................................................... 1,762,963
31,143 Home Depot, Inc. .................................................................. 1,561,043
55,000 May Department Stores ............................................................. 2,571,250
89,600 Rite Aid Corp. .................................................................... 3,561,600
------------
11,102,731
------------
SHIPBUILDING (0.1%):
4,853 Newport News Shipbuilding Inc.(b) ................................................. 72,795
------------
STEEL (2.1%)
58,480 Nucor Corp. ....................................................................... 2,982,480
------------
TELECOMMUNICATIONS (5.9%):
72,518 BellSouth ......................................................................... 2,927,914
69,276 GTE Corp. ......................................................................... 3,152,058
35,800 Northern Telecom Ltd. ............................................................. 2,215,125
------------
8,295,097
------------
TIRE & RUBBER (1.1%):
28,972 Goodyear Tire & Rubber Co. ........................................................ 1,488,437
------------
Total Common Stocks (Cost - $127,808,737) ......................................... 148,119,221
------------
</TABLE>
14
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1996 (CONTINUED)
GROWTH & INCOME FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
- -------------- ------------- ------------
<S> <C> <C>
MONEY MARKET MUTUAL FUNDS (1.2%):
1,740,000 Provident Institutional Temporary Investment Fund .............................. $ 1,740,000
------------
Total Money Market Mutual Funds (Cost - $1,740,000) ............................ 1,740,000
------------
TOTAL INVESTMENTS (106.5%)
(Cost - $129,548,737)(a) ....................................................... 149,859,221
------------
LIABILITIES, LESS OTHER ASSETS (-6.5%) ......................................... (9,171,482)
------------
NET ASSETS (100.0%) ............................................................ $140,687,739
============
<FN>
- --------------
(a) Represents cost for federal income tax purposes and differs from market
value by net unrealized appreciation of securities as follows:
Unrealized appreciation .................................................................. $22,901,757
Unrealized depreciation .................................................................. (2,591,273)
-----------
Net unrealized appreciation .............................................................. $20,310,484
===========
(b) Represents non-income producing security.
</FN>
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
SMALL CAP GROWTH &
FUND INCOME FUND
------------- -----------------
<S> <C> <C>
ASSETS:
Investment in securities, at value (cost $68,933,154 and
$129,548,737, respectively) ............................................ $77,541,712 $149,859,221
Cash ..................................................................... 428 519
Dividend receivable ...................................................... 32,462 191,700
Deferred organization costs .............................................. 8,595 --
Prepaid expenses and other assets ........................................ 1,209 5,120
----------- ------------
Total Assets ............................................................. 77,584,406 150,056,560
----------- ------------
LIABILITIES:
Payable to brokers for investments purchased ............................. 404,238 --
Dividends payable ........................................................ -- 1,012,947
Capital gains payable .................................................... 420,802 8,195,067
Accrued expenses and other payables:
Investment advisory fees ............................................... 46,585 72,952
Administration fees .................................................... 6,624 13,455
Fund accounting and transfer agent fees ................................ 6,523 10,148
Legal and audit fees ................................................... 17,143 35,630
Other .................................................................. 14,142 28,622
----------- ------------
Total Liabilities ...................................................... 916,057 9,368,821
----------- ------------
Net Assets .................................................................. $76,668,349 $140,687,739
=========== ============
Net Asset Value, Offering Price and Redemption Price per Share:
($.001 par value per share, unlimited number of shares authorized)
SHARES:
Net assets ............................................................... $76,668,349 $140,687,739
Shares of beneficial interest issued and outstanding ..................... 4,623,068 8,640,285
Net asset value .......................................................... $ 16.58 $ 16.28
----------- ------------
Maximum sales charge-5.00% of offering price ............................. 0.87 0.86
----------- ------------
Maximum offering price ................................................... $ 17.45 $ 17.14
=========== ============
COMPOSITION OF NET ASSETS:
Paid-in capital .......................................................... $67,889,222 $119,108,016
Accumulated undistributed net investment income .......................... 3,313 39,543
Accumulated undistributed net realized gains from
investment transactions ................................................ 167,256 1,229,696
Net unrealized appreciation from investments ............................. 8,608,558 20,310,484
----------- ------------
Net Assets, December 31, 1996 ............................................... $76,668,349 $140,687,739
=========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SMALL CAP GROWTH &
FUND INCOME FUND
------------- ---------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends .............................................................. $ 269,472 $ 2,474,748
Interest ............................................................... 86,054 --
---------- -----------
Total Investment Income .............................................. 355,526 2,474,748
---------- -----------
EXPENSES:
Advisory ............................................................... 362,401 597,585
Administration ......................................................... 77,596 163,122
Co-administration ...................................................... 21,368 46,555
Distribution ........................................................... 306 2,583
Shareholder servicing .................................................. 15,537 31,371
Audit .................................................................. 13,884 29,233
Accounting and transfer agent .......................................... 29,154 52,984
Custodian .............................................................. 10,658 14,270
Printing ............................................................... 17,433 29,060
Registration ........................................................... 8,114 8,541
Amortization of organization costs ..................................... 9,215 --
Legal .................................................................. 15,044 37,285
Trustees ............................................................... 7,095 16,389
Miscellaneous .......................................................... 8,040 11,509
---------- -----------
Total Expenses ....................................................... 595,845 1,040,487
---------- -----------
Less: Fee waivers and reimbursements ................................... (58,364) (121,228)
---------- -----------
Net Expenses ........................................................... 537,481 919,259
---------- -----------
Net Investment Income (Loss) ........................................... (181,955) 1,555,489
---------- -----------
REALIZED AND UNREALIZED GAINS FROM INVESTMENTS:
Net realized gains from investment transactions ........................... 902,064 9,426,589
Net change in unrealized appreciation from investments .................... 907,431 6,757,934
---------- -----------
Net Realized and Unrealized Gains from Investments ........................ 1,809,495 16,184,523
---------- -----------
Net Increase in Net Assets Resulting from Operations ..................... $1,627,540 $17,740,012
========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP GROWTH &
FUND INCOME FUND
----------------------------------- ------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
From Investment Activities:
OPERATIONS:
Net investment income (loss) ............... $ (181,955) $ (216,911) $ 1,555,489 $ 1,376,693
Net realized gains from
investment transactions .................. 902,064 2,920,761 9,426,589 4,058,707
Net change in unrealized appreciation
from investments ......................... 907,431 2,875,059 6,757,934 13,600,231
----------- ----------- ------------ ------------
Change in net assets
resulting from operations ............. 1,627,540 5,578,909 17,740,012 19,035,631
----------- ----------- ------------ ------------
DIVIDENDS TO SHAREHOLDERS:
From net investment income ................. -- -- (1,555,489) (1,372,062)
In excess of net investment income ......... -- -- (2,224) --
From net realized gains .................... (420,802) (1,004,447) (8,195,067) (3,645,492)
----------- ----------- ------------ ------------
Change in net assets from
shareholder distributions ............. (420,802) (1,004,447) (9,752,780) (5,017,554)
----------- ----------- ------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued ................ 54,095,662 3,111,609 87,476,893 4,889,068
Dividends reinvested ....................... 45,253 -- 304,665 50,736
Cost of shares redeemed .................... (4,714,996) (5,957,958) (21,143,109) (17,894,688)
----------- ----------- ------------ ------------
Change in net assets
from share transactions ............... 49,425,919 (2,846,349) 66,638,449 (12,954,884)
----------- ----------- ------------ ------------
Change in net assets ..................... 50,632,657 1,728,113 74,625,681 1,063,193
----------- ----------- ------------ ------------
NET ASSETS:
Beginning of period ........................ 26,035,692 24,307,579 66,062,058 64,998,865
----------- ----------- ------------ ------------
End of period .............................. $76,668,349 $26,035,692 $140,687,739 $ 66,062,058
=========== =========== ============ ============
Accumulated net investment income
included in net assets,
End of period .............................. $ 3,313 $ -- $ 39,543 $ 5,770
=========== =========== ============ ============
SHARE TRANSACTIONS:
Issued ..................................... 3,115,471 208,197 5,433,181 357,298
Reinvested ................................. 3,130 -- 20,597 3,538
Redeemed ................................... (296,513) (450,720) (1,287,720) (1,332,928)
----------- ----------- ------------ ------------
Change in shares ........................... 2,822,088 (242,523) 4,166,058 (972,092)
=========== =========== ============ ============
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
HSBC Mutual Funds Trust, formerly known as Mariner Mutual Funds Trust, (the
"Trust") was organized 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 Small Cap Fund and the Growth & Income
Fund (formerly known as the Total Return Equity Fund) (herein referred to
individually as a "Fund" and collectively as the "Funds").
The Small Cap Fund seeks as its investment objective to provide investors
with long-term capital appreciation and, secondarily, income by investing,
under ordinary market conditions, at least 70% of its total assets in a
diversified portfolio of common stocks and securities convertible into
common stocks of small to medium-size companies. The Growth & Income Fund
seeks as its investment objective to provide investors with long-term
growth of capital and current income by investing, under ordinary market
conditions, at least 65% of its total assets in common stocks, preferred
stocks and securities convertible into or with rights to purchase common
stocks. The balance of each Fund's assets may be invested in various types
of fixed income securities (and preferred stocks with respect to the Small
Cap Fund) and in money market instruments.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Trust 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 traded on an exchange are
valued at the last quoted sales price on a given day, or if a sale is not
reported for that day, at the mean between the most recent bid and asked
prices. The bid price is used when no asked price is available. Investments
in mutual funds are valued at their net asset value as reported by such
investment companies. Short-term obligations having maturities of 60 days
or less are valued at amortized cost which approximates market value.
TAXES: It is the Funds' policy to comply with the provisions 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 for each taxable year.
Therefore, no provision is required for Federal income tax.
For the years ended December 31, 1996 and 1995, the SmallCap Fund
reclassified $181,955 and $216,911 from accumulated net investment loss to
paid-in capital, respectively. Net assets were not affected by this change.
DIVIDENDS AND DISTRIBUTIONS: The Funds intend to pay, as a semi-annual
dividend, substantially all of their net investment income. Net capital
gains, if any, are distributed at least annually.
Distributions to shareholders in excess of net realized gains on
investments in a given year result primarily from losses on security
transactions during that year which are treated for Federal income tax
purposes as arising in the following year. The Funds distinguish between
distributions on a tax basis and a financial reporting basis and require
that only distributions in excess of tax basis earning and profits are
reported in the financial
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
statement purposes, are classified as distributions in excess of net
investment income or accumulated undistributed net realized gains.
SECURITY TRANSACTIONS AND RELATED INCOME: Security transactions are
recorded on trade date. Identified cost of investments sold is used for
both financial statements 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.
3. PORTFOLIO SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
year ended December 31, 1996 were as follows:
PURCHASES SALES
------------ ------------
Small Cap Fund ................. $ 61,598,512 $16,337,350
Growth & Income Fund ........... $124,848,663 $63,924,691
4. RELATED PARTY TRANSACTIONS
The Trust retains HSBC Asset Management Americas Inc. ("HSBC Americas") to
act as Investment Adviser for the Funds. 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 portfolios of the Funds, subject to policies established by the
Board of Trustees.
As compensation for its services, HSBC Americas is paid monthly advisory
fees at the following annual rates:
ADVISORY FEE RATE
--------------------
GROWTH &
SMALL CAP INCOME
PORTION OF EACH FUNDS' AVERAGE DAILY NET ASSETS FUND FUND
- -------------------------------------------------------- --------- --------
Not exceeding $400 million ............................. 0.700% 0.550%
In excess of $400 million but not exceeding $800 million 0.645% 0.505%
In excess of $800 million but not exceeding $1.2 billion 0.590% 0.460%
In excess of $1.2 billion but not exceeding $1.6 billion 0.535% 0.415%
In excess of $1.6 billion but not exceeding $2.0 billion 0.480% 0.370%
In excess of $2.0 billion .............................. 0.415% 0.315%
As of December 31, 1996, HSBC Americas earned approximately $362,401 from
the Small Cap Fund and $597,497 from the Growth & Income Fund in advisory
fees, net of fee waivers of approximately $0 and $88, respectively.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), an Ohio limited partnership is a subsidiary of The BISYS Group,
Inc. BISYS, with whom certain officers and a trustee of the Trust are
affiliated, serves the Trust as distributor, administrator, transfer agent
and fund accountant. Such officers and trustee are not paid any fees
directly by the Funds for serving as officers and trustee of the Trust.
In accordance with the terms of the Administration and Accounting Service
agreement, BISYS is paid a monthly asset based fee of 0.15% of each Fund's
first $200 million of average net assets; 0.125% of each Fund's next $200
million of average net assets; 0.10% of each Fund's next $200 million of
average net assets; and 0.08% of each Fund's average net assets in excess
of $600 million; exclusive of out-of-pocket expenses. For the period
commencing March 1, 1996 to December 31, 1996, BISYS earned $48,208 from
the Small Cap Fund and $99,227 from the Growth & Income Fund in
administrative services fees, net of fee waivers of $25,136 and $52,606,
respectively.
As previous Administrator through February 29, 1996, PFPC was paid a
monthly asset based fee of 0.10% of each Fund's first $200 million of
average net assets; 0.075% of each Fund's next $200 million of average net
assets; 0.05% of each Fund's next $200 million of average net assets; and
0.03% of each 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 $4,039 from the Small Cap Fund and $10,725 from the
Growth & Income Fund in administrative services fees, net of fee waivers of
$213 and $564, respectively.
HSBC Americas earned co-administration/shareholder servicing fees of 0.07%
of each Fund's average net assets totaling $3,890 from the Small Cap Fund
and $9,956 from the Growth & Income Fund, net of fee waivers of $33,015 and
$67,970, respectively.
The Funds have adopted a Distribution Plan and Agreement (the "Plan")
pursuant to Rule 12b-1 of the Investment Company Act of 1940, as amended.
The Plan provides for a monthly payment by the Funds to BISYS Fund Services
for expenses incurred in connection with distribution services provided to
the Funds not to exceed an annual rate of 0.35% and 0.50% of each Fund's
average net assets during the preceding month for the Small Cap Fund and
Growth & Income Fund, respectively. The expenses incurred as a result of
these agreements totaled approximately $306 for the Small Cap Fund and
$2,583 for the Growth & Income Fund.
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 each Fund 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, also serves as
Secretary of the Trust. For the year ended December 31, 1996, the Funds
incurred legal fees of approximately $14,638 for the Small Cap Fund and
$36,288 for the Growth & Income Fund to counsel.
21
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
SMALL CAP FUND
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, JANUARY 4, 1993(a)
------------------------------------------- TO
1996 1995 1994 DECEMBER 31, 1993
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............... $ 14.46 $ 11.90 $ 12.29 $ 10.00
------- ------- ------- -------
Investment Activities
Net investment loss ............................. (0.04) (0.12) (0.07) (0.05)
Net realized and unrealized
gain (loss) from investments .................. 2.25 3.24 (0.32) 2.42
------- ------- ------- -------
Total from Investment Activities ................ 2.21 3.12 (0.39) 2.37
------- ------- ------- -------
Distributions
From net realized gain .......................... (0.09) (0.56) -- (0.08)
------- ------- ------- -------
Net Asset Value, End of Period ..................... $ 16.58 $ 14.46 $ 11.90 $ 12.29
======= ======= ======= =======
Total Return(b) .................................... 15.29% 26.20% (3.17)% 23.74%(d)
Ratios/Supplemental Data:
Net Assets at end of period (000) ............... $76,668 $26,036 $24,308 $17,659
Ratio of expenses to average net assets ......... 1.04% 1.33% 1.23% 1.12%(c)
Ratio of net investment loss to
average net assets ............................ (0.35)% (0.85)% (0.68)% (0.51)%(c)
Ratio of expenses to average net assets* ........ 1.15% 1.35% 1.38% 1.58%(c)
Ratio of net investment loss to
average net assets* ........................... (0.46)% (0.87)% (0.73)% (0.97)%(c)
Portfolio Turnover Rate ............................ 35.73% 29.86% 20.17% 5.96%
Average Commission Rate Paid(e) .................... $0.0635 N/A N/A N/A
<FN>
- ------------
* 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.
(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 twelve months 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.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
GROWTH & INCOME FUND
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............... $ 14.77 $ 11.93 $ 12.87 $ 12.02 $ 13.12
-------- ------- ------- ------- -------
Investment Activities
Net investment income ........................... 0.18 0.30 0.29 0.33 0.15
Net realized and unrealized
gain (loss) from investments .................. 2.46 3.64 (0.67) 1.00 0.80
-------- ------- ------- ------- -------
Total from Investment Activities ................ 2.64 3.94 (0.38) 1.33 0.95
-------- ------- ------- ------- -------
Distributions
From net investment income ...................... (0.18) (0.30) (0.29) (0.33) (0.15)
From net realized gain .......................... (0.95) (0.80) (0.15) (0.15) (1.90)
From excess of current year realized
gain on investments ........................... -- -- (0.12) -- --
-------- ------- ------- ------- -------
Total distributions ............................. (1.13) (1.10) (0.56) (0.48) (2.05)
-------- ------- ------- ------- -------
Net Asset Value, End of Period ..................... $ 16.28 $ 14.77 $ 11.93 $ 12.87 $ 12.02
======== ======= ======= ======= =======
Total Return(a) .................................... 17.90% 33.11% (2.97)% 11.23% 7.74%
Ratios/Supplemental Data:
Net Assets at end of period (000) ............... $140,688 $66,062 $64,999 $77,718 $ 3,609
Ratio of expenses to average net assets ......... 0.85% 0.94% 0.78% 0.23% 1.68%
Ratio of net investment income to
average net assets ............................ 1.43% 2.06% 2.25% 2.95% 1.12%
Ratio of expenses to average
net assets* ................................... 0.96% 0.97% 0.86% 0.88% 2.29%
Ratio of net investment income to
average net assets* ........................... 1.32% 2.03% 2.17% 2.30% 0.51%
Portfolio Turnover Rate ............................ 61.68% 52.77% 23.31% 14.25% 54.99%
Average Commission Rate Paid(b) .................... $ 0.0572 N/A N/A N/A N/A
<FN>
- -----------
* 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.
(a) Excludes sales charge.
(b) Represents the total dollar amount of commissions paid on portfolio
transactions for the twelve months 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.
</FN>
</TABLE>
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 statements of assets and liabilities, including
the schedules of portfolio investments, of the Small Cap Fund and the Growth
&Income Fund (two of the portfolios comprising HSBC Mutual Funds Trust) as of
December 31, 1996, the related statements of operations for the year then ended,
the statements 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 statement 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
SmallCap Fund and the Growth &Income 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/ ERNST & YOUNG LLP
New York, New York
February 10, 1997
24
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