HSBC MUTUAL FUNDS TRUST
- --------------------------------------------------------------------------------
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
HSBC Asset Management Americas Inc.
[LOGO OMITTED]
Fixed Income Fund
New York Tax-Free Bond Fund
ANNUAL REPORT
December 31, 1997
Managed by:
HSBC ASSET MANAGEMENT AMERICAS INC.
Sponsored and distributed by:
BISYS FUND SERVICES
<PAGE>
HSBC MUTUAL FUNDS TRUST
- --------------------------------------------------------------------------------
FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
HSBC Asset Management Americas Inc.
[LOGO OMITTED]
FIXED INCOME FUND
- --------------------------------------------------------------------------------
January 15, 1998
Dear Shareholder:
1997 turned out to be a fairly good year for the U.S. bond market. The
investment grade market as a whole finished the year slightly above it's ten
year average total return. Naturally, there was plenty of volatility. The first
half of the year was disappointing as a Fed rate hike led to higher yields. In
the second half, good news on inflation coupled with trouble in Asia produced a
one two punch that pushed interest rates lower even though economic growth
remained strong. The yield on the long bond dropped 72 basis points over the
period while the yield on the two year treasury fell only 22 basis points. This
flattening of the yield curve was in part due to yields on shorter securities
bumping up against the 5.5% Fed Funds level.
In terms of sector performance, mortgages outperformed similar duration
treasuries by 121 basis points for the year. In contrast, the corporate sector
was negatively impacted by the Asian crisis which produced a renewed
appreciation for credit risk in general while hitting any Asian related debt
directly. The corporate sector underperformed treasuries by 28 basis points on a
duration adjusted basis. This was primarily due to the Yankee sub-sector which
encompasses the affected Asian issuers which underperformed severely as many
Asian credits were downgraded to junk status.
The fund returned 8.62% for the year on a net basis compared to 9.65% for the
Lehman Aggregate Bond Index, a proxy for the investment grade market. We were
not initially positioned for the second half rally as concern with wage
inflation had our duration position shorter than benchmark, and this hurt
relative performance. As the Asian crisis unfolded, we moved to a more
constructive view on the market. We were fortunate not to have had any Asian
related debt, but we were marginally overweight on the corporate sector which
was a mild negative.
Sincerely,
/S/ SIGNATURE
James Lark
Director, Fixed Income
The views expressed in this letter reflect those of the portfolio manager
through the end of the period covered by the report as stated on the cover.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FIXED INCOME FUND VS. LEHMAN AGGREGATE BOND INDEX
- --------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
INCEPTION
1 YEAR (1/15/93)
- --------------------------------------------------
OFFERING PRICE(1) 3.49% 5.64%
NAV(2) 8.62% 6.69%
- --------------------------------------------------
[LINE GRAPH OMITTED]
FUND(1) LEHMAN AGGREGATE FUND(2)
1/93 10,000 10,000 10,000
3/93 9,788 10,315 10,277
6/93 10,053 10,589 10,555
9/93 10,343 10,865 10,860
12/93 10,340 10,870 10,857
3/94 10,164 10,558 10,672
6/94 10,073 10,450 10,576
9/94 10,112 10,514 10,618
12/94 10,145 10,554 10,651
3/95 10,580 11,086 11,108
6/95 11,218 11,761 11,778
9/95 11,374 11,993 11,941
12/95 11,842 12,504 12,433
3/96 11,548 12,281 12,123
6/96 11,579 12,351 12,158
9/96 11,768 12,578 12,356
12/96 12,093 12,956 12,698
3/97 11,995 12,883 12,595
6/97 12,419 13,356 13,040
9/97 12,795 13,801 13,435
12/97 13,136 14,206 13,793
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
(1) INCLUDES THE MAXIMUM SALES CHARGE OF 4.75%
(2) EXCLUDES THE MAXIMUM SALES CHARGE OF 4.75%
THE ABOVE ILLUSTRATION COMPARES A $10,000 INVESTMENT IN THE FIXED INCOME FUND ON
JANUARY 15, 1993 (DATE OF INCEPTION), TO A $10,000 INVESTMENT IN THE LEHMAN
AGGREGATE BOND 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 LEHMAN
AGGREGATE BOND INDEX IS A WIDELY ACCEPTED UNMANAGED INDEX OF OVERALL GOVERNMENT
CORPORATE/MORTGAGE BOND MARKET PERFORMANCE AND DOES NOT TAKE INTO ACCOUNT
CHARGES, FEES AND OTHER EXPENSES.
2
<PAGE>
NEW YORK TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
January 15, 1998
Dear Shareholder:
During 1997, municipals underperformed taxables on a pretax total return basis.
The one year total return on the Lehman Municipal Bond Index was 9.19%. By
comparison, the Lehman Aggregate Bond Index posted a one year return of 9.65%.
This reflected the fact that yields across the municipal yield curve declined by
approximately 20-40 basis points while yields along the treasury curve declined
by approximately 20-70 basis points.
The Fund's total return for the year was 8.97%. The Fund slightly underperformed
the average of Lipper's New York Municipal Debt Funds which stood at 8.99%. As
of December 31, 1997, the Fund's duration which takes into account interim
principal and income payments as well as maturity levels was 7.07 which
represented a 10% longer duration positioning than the index and an overall
constructive view of the fixed income markets. The average maturity of the Fund
was 8.98 years.
In terms of sector diversification, the largest sectors consisted of general
obligations (22.7%), higher education (14.1%), and medical revenue (11.8%).
Once again, the credit outlook continued to improve throughout the state. This
was a strong reason why the New York market outperformed the national market as
a whole for the year as measured by the returns of the Lehman New York State
Exempt Index versus the Lehman Municipal Bond Index (9.84% versus 9.19%).
Surpluses in the state's general fund led to an upgrade in the credit rating of
the state by the credit agencies of both New York State general obligation debt
as well as appropriation debt. Once again, New York City debt turned in strong
performance as its economic condition continued to improve while the city
recorded back to back years of surpluses. Going forward, the credit issue within
the state will be whether the surplus will be spent in a prudent and fiscally
conservative manner or whether the coming gubernatorial elections bring
increased spending. In terms of New York City, the issue will be sustainability
of record earnings in the financial services industry which is the source of
approximately 25% of the City's revenue.
Sincerely,
/S/ SIGNATURE
Jerry Samet
Municipal Portfolio Manager
The views expressed in this letter reflect those of the portfolio manager
through the end of the period covered by the report as stated on the cover.
3
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
NEW YORK TAX-FREE BOND FUND VS. LEHMAN MUNICIPAL
BOND INDEX
- --------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------
INCEPTION
1 YEAR 5 YEARS (3/21/89)
- --------------------------------------------------------------
OFFERING PRICE(1) 3.80% 5.46% 7.24%
NAV(2) 8.97% 6.50% 7.83%
- --------------------------------------------------------------
[LINE GRAPH OMITTED]
FUND(1) LEHMAN MUNI BOND INDEX FUND(2)
3/89 10,000 10,000 10,000
12/89 10,203 11,005 10,713
12/90 10,829 11,807 11,370
12/91 12,192 13,242 12,802
12/92 13,492 14,409 14,167
12/93 15,417 16,178 16,188
12/94 14,161 15,340 14,869
12/95 16,310 18,018 17,125
12/96 16,960 18,817 17,808
12/97 18,481 20,551 19,404
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
(1) INCLUDES THE MAXIMUM SALES CHARGE OF 4.75%
(2) EXCLUDES THE MAXIMUM SALES CHARGE OF 4.75%
THE ABOVE ILLUSTRATION COMPARES A $10,000 INVESTMENT IN THE NEW YORK TAX-FREE
BOND FUND ON MARCH 21, 1989 (DATE OF INCEPTION), TO A $10,000 INVESTMENT IN THE
LEHMAN MUNICIPAL BOND 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 LEHMAN
MUNICIPAL BOND INDEX IS A WIDELY ACCEPTED UNMANAGED INDEX OF OVERALL MUNICIPAL
BOND MARKET PERFORMANCE AND DOES NOT TAKE INTO ACCOUNT CHARGES, FEES AND OTHER
EXPENSES.
4
<PAGE>
BOARD OF TRUSTEES
JOHN P. PFANN* Chairman and President, JPP Equities, Inc.
WOLFE J. FRANKL* Former Director, North America, Berlin Economic
Development Corporation
HARALD PAUMGARTEN President, Paumgarten and Company
ROBERT A. ROBINSON* Trustee, Henrietta and B. Frederick H. Bugher Foundation
*Member of the Audit and Nominating Committees
- --------------------------------------------------------------------------------
OFFICERS
WALTER B. GRIMM PRESIDENT
ERIC F. ALMQUIST SENIOR VICE PRESIDENT
KAREN DOYLE VICE PRESIDENT
CHARLES L. BOOTH VICE PRESIDENT
THOMAS LINE TREASURER
STEVEN R. HOWARD SECRETARY
ALAINA V. METZ ASSISTANT SECRETARY
ROBERT L. TUCH ASSISTANT SECRETARY
5
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997
FIXED INCOME FUND
<TABLE>
<CAPTION>
INTEREST MATURITY PRINCIPAL VALUE
RATE DATE AMOUNT (NOTE 2)
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
CORPORATE BONDS (28.8%):
AEROSPACE & DEFENSE EQUIPMENT (4.2%):
Lockheed Martin Corp. (Guaranteed by
Lockheed Martin Tactical Systems, Inc.) ................ 6.85% 5/15/01 $2,500,000 $ 2,539,865
-----------
BANKING (13.5%):
ABN Amro Bank N.V. ........................................ 7.13 6/18/07 3,000,000 3,143,160
BankAmerica Corp. ......................................... 7.88 12/1/02 2,500,000 2,667,853
Provident Bank ............................................ 6.13 12/15/00 2,500,000 2,493,808
-----------
8,304,821
-----------
ENTERTAINMENT (0.8%):
Walt Disney Co., Series A ................................. 6.38 3/30/01 500,000 504,401
-----------
FINANCIAL SERVICES (7.0%):
American Express Credit Corp. ............................. 6.13 6/15/00 2,000,000 2,003,850
Chase Manhattan Grantor Trust, Series 1996-A,
Class A, ABS ........................................... 5.20 2/15/02 1,176,668 1,167,914
Travelers Property Casualty Corp. ......................... 7.75 4/15/26 1,000,000 1,095,898
-----------
4,267,662
-----------
TELECOMMUNICATIONS (3.3%):
Lucent Technologies, Inc. ................................. 6.90 7/15/01 2,000,000 2,046,630
-----------
Total Corporate Bonds (Cost - $17,289,662) ................................................... 17,663,379
-----------
CANADIAN GOVERNMENT AGENCY OBLIGATIONS (0.6%):
Export Development Corp., Debenture ....................... 8.13 8/10/99 380,000 392,762
-----------
Total Canadian Government Agency Obligations (Cost - $409,218) ............................... 392,762
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS (34.5%):
Federal Home Loan Mortgage Corp., Pool #220019 ............ 7.75 1/1/02 100,036 102,640
Federal Home Loan Mortgage Corp., Debenture,
(Called 1/23/98 @ 100) ................................. 6.71 1/23/01 5,000,000 5,003,790
Federal Home Loan Mortgage Corp.,
Gold Pool #D62926 ...................................... 6.50 8/1/25 2,665,653 2,633,999
Federal National Mortgage Association, Pool #250414 ....... 7.00 12/1/25 4,447,694 4,478,272
Federal National Mortgage Association, Pool #310001 ....... 6.00 9/1/00 1,362,648 1,355,249
Federal National Mortgage Association, Pool #343195 ....... 7.50 5/1/26 1,895,444 1,938,684
Federal National Mortgage Association, Pool #343812 ....... 7.50 5/1/26 437,246 447,221
Federal National Mortgage Association,
Series 1993-104, Class C, REMIC ........................ 6.50 3/25/21 2,000,000 1,970,744
Government National Mortgage Association,
Pool #356578 ........................................... 7.50 6/15/23 3,172,896 3,261,102
-----------
Total U.S. Government Agency Obligations (Cost - $20,598,260) ................................ 21,191,701
-----------
</TABLE>
6
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)
FIXED INCOME FUND
<TABLE>
<CAPTION>
SHARES OR
INTEREST MATURITY PRINCIPAL VALUE
RATE DATE AMOUNT (NOTE 2)
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (30.0%):
U.S. TREASURY BONDS (13.1%):
U.S. Treasury Bonds ......................................... 8.75% 8/15/20 $2,280,000 $ 3,040,239
U.S. Treasury Bonds ......................................... 7.88 2/15/21 1,000,000 1,227,813
U.S. Treasury Bonds ......................................... 6.63 2/15/27 3,500,000 3,798,596
-----------
8,066,648
-----------
U.S. TREASURY NOTES (16.9%):
U.S. Treasury Notes ......................................... 7.88 11/15/04 4,250,000 4,750,705
U.S. Treasury Notes ......................................... 6.88 5/15/06 1,000,000 1,070,313
U.S. Treasury Notes ......................................... 6.88 7/31/99 4,450,000 4,527,875
-----------
10,348,893
-----------
Total U.S. Government Obligations (Cost - $17,382,898) ....................................... 18,415,541
-----------
MUNICIPAL OBLIGATIONS (3.4%):
Oakland, California Pension Obligation,
Subseries A (MBIA Insured) ............................... 6.91 12/15/07 2,000,000 2,096,668
-----------
Total Municipal Obligations (Cost - $2,000,000) .............................................. 2,096,668
-----------
OPEN END INVESTMENT COMPANIES (2.0%):
Provident Institutional Temporary Investment Fund 1,232,000 1,232,000
-----------
Total Open-End Investment Companies (Cost - $1,232,000) ...................................... 1,232,000
-----------
TOTAL INVESTMENTS (99.3%) (Cost - $58,912,038)(a) ............................................ 60,992,051
-----------
OTHER ASSETS IN EXCESS OF LIABILITIES (0.7%) ................................................. 410,227
-----------
NET ASSETS (100.0%) .......................................................................... $61,402,278
===========
- ---------------
(a) Represents cost for financial reporting purposes and federal income tax
purposes and differs from value by net unrealized appreciation of securities as
follows:
Unrealized appreciation ...................................................................... $2,138,992
Unrealized depreciation ...................................................................... (58,979)
-----------
Net unrealized appreciation .................................................................. $2,080,013
===========
<FN>
ABS - Asset Backed Security
MBIA - Municipal Bond Insurance Association
REMIC - Real Estate Mortgage Investment Conduit
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997
NEW YORK TAX-FREE BOND FUND
<TABLE>
<CAPTION>
INTEREST MATURITY PRINCIPAL VALUE
RATE DATE AMOUNT (NOTE 2)
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (104.4%):
NEW YORK (101.8%):
Albany County Airport Authority, Airport Revenue, AMT
(FSA Insured), Callable 12/15/07 @ 102 ................... 5.50% 12/15/19 $ 750,000 $ 769,687
Bethlehem Central School District, GO
(AMBAC Insured) .......................................... 7.10 11/1/07 200,000 245,250
Metropolitan Transportation Authority, Transportation
Facilities Revenue, Series A (MBIA Insured),
Callable 7/1/07 @ 101.5 .................................. 5.63 7/1/25 1,200,000 1,255,500
Monroe County Water Authority, Water Revenue** .............. 5.00 8/1/08 1,000,000 1,040,000
Monroe County, Series B, GO,
Callable 6/1/98 @102 ..................................... 7.00 6/1/04 10,000 10,329
Monroe County, Series B, GO,
Prerefunded 6/1/98 @102 .................................. 7.00 6/1/04 40,000 41,316
New York City, Series A, GO,
Callable 8/15/01 @ 101.5 ................................. 7.75 8/15/04 125,000 140,625
New York City, Series A, GO,
Callable 8/15/01 @ 101.5 ................................. 7.75 8/15/07 355,000 398,487
New York City, Series A, GO,
Prerefunded 8/15/01 @ 101.5 .............................. 7.75 8/15/04 475,000 537,675
New York City, Series B, GO, ................................ 6.10 8/15/05 2,000,000 2,167,500
New York City, Series B, GO, (FGIC Insured)* ................ 4.15 10/1/20 900,000 900,000
New York City, Series B, GO,
Callable 2/1/02 @ 101.5 .................................. 7.50 2/1/07 1,000,000 1,121,250
New York City, Series E, GO, ................................ 6.50 2/15/06 2,000,000 2,225,000
New York City, Series F, GO,
Callable 11/15/01 @ 101.5 ................................ 8.40 11/15/05 45,000 51,806
New York City, Series F, GO,
Prerefunded 11/15/01 @ 101.5 ............................. 8.40 11/15/05 105,000 122,325
New York City, Series G, GO, ................................ 6.75 2/1/09 1,000,000 1,142,500
New York City, Sub-Series B-4, GO,
(LOC Union Bank of Switzerland)* ......................... 4.15 8/15/21 1,000,000 1,000,000
New York City, Municipal Water Finance Authority,
Water & Sewer System Revenue, Series A,
Callable 6/15/06 @ 101 ................................... 5.50 6/15/24 1,800,000 1,854,000
New York City, Transitional Finance Authority,
Future Tax Secured, Series A,
Callable 8/15/07 @ 101 ................................... 5.00 8/15/17 1,800,000 1,795,500
New York City, Trust for Cultural Resources,
Museum of Modern Art (AMBAC Insured)
Prerefunded 1/1/02 @ 102 ................................. 6.40 1/1/04 350,000 384,125
New York State, Dormitory Authority, City University
System Revenue, Series A (FGIC-TCRS Insured) ............. 5.75 7/1/18 2,370,000 2,612,925
New York State, Dormitory Authority,
State Service Contract, Albany County** .................. 5.50 4/1/08 1,000,000 1,042,500
New York State, Dormitory Authority, State University
Educational Facilities Revenue, Series A ................. 5.88 5/15/11 1,500,000 1,651,875
</TABLE>
8
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)
NEW YORK TAX-FREE BOND FUND
<TABLE>
<CAPTION>
INTEREST MATURITY PRINCIPAL VALUE
RATE DATE AMOUNT (NOTE 2)
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (CONTINUED)
New York State, Energy, Research & Development
Authority, Pollution Control Revenue, Niagara Mohawk
Power Corp. Project, AMT (LOC - Morgan
Guaranty Trust)* ......................................... 4.55% 12/1/23 $1,500,000 $ 1,500,000
New York State, Environmental Facilities Corp., Pollution
Control Revenue, State Water, Series A,
Prerefunded 6/15/01 @ 102 ................................ 7.00 6/15/12 150,000 166,500
New York State, Environmental Facilities Corp., Pollution
Control Revenue, State Water, Series A,
Callable 6/15/01 @ 102 ................................... 7.00 6/15/12 150,000 165,937
New York State, Environmental Facilities Corp., Pollution
Control Revenue, State Water, Series B,
Callable 3/15/99 @ 102 ................................... 7.50 3/15/11 250,000 265,313
New York State, Environmental Facilities Corp., Pollution
Control Revenue, State Water, Series C,
Callable 3/15/00 @ 102 ................................... 7.20 3/15/11 200,000 216,500
New York State, Housing Finance Agency, Multifamily
Mortgage Housing Revenue, Series A (FHA Insured)
Callable 8/15/02 @ 102 ................................... 7.00 8/15/22 900,000 968,625
New York State, Medical Care Facilities Finance Agency,
Adult Day Care Facility, Series A (SONYMA Insured)
Callable 11/15/05 @ 102 .................................. 6.38 11/15/20 1,990,000 2,181,538
New York State, Medical Care Facilities Finance Agency,
Mental Health Services, Series F ......................... 6.00 8/15/03 1,900,000 2,049,625
New York State, Medical Care Facilities Finance Agency,
Series A (FSA Insured) Callable 2/15/98 @ 102 ............ 7.70 2/15/18 80,000 81,917
New York State, Medical Care Facilities Finance Agency,
Series A (FSA Insured) Prerefunded 2/15/98 @ 102 ......... 7.70 2/15/18 35,000 35,848
New York State, Power Authority & General Purpose
Revenue (MBIA Insured) Callable 1/1/03 @ 102 ............. 5.00 1/1/14 1,550,000 1,544,188
New York State, Urban Development Corp., Senior Lien,
Corporate Purpose, Callable 7/1/06 @ 102 ................. 5.50 7/1/16 2,000,000 2,080,000
Niagara Frontier Transportation Authority, Greater Buffalo
International Airport Revenue, Series A, AMT
(AMBAC Insured) Callable 4/1/04 @ 102 .................... 6.13 4/1/14 2,400,000 2,589,000
Port Authority of New York & New Jersey, Series 109
(FSA Insured) Callable 1/15/07 @ 101 ..................... 5.38 7/15/27 1,000,000 1,017,500
Syracuse, GO, Prerefunded 2/15/01 @ 102 ..................... 6.70 2/15/07 300,000 327,750
Triborough Bridge & Tunnel Authority, General Purpose
Revenue, Series A, GO, Callable 1/1/07 @ 101 ............. 5.25 1/1/28 500,000 500,625
-----------
38,201,041
-----------
PUERTO RICO (2.6%):
Puerto Rico Commonwealth, Infrastructure Financing
Authority, Series A (AMBAC Insured),
Callable 1/1/08 @ 101 .................................... 5.00 7/1/21 1,000,000 986,250
-----------
Total Municipal Bonds (Cost - $36,665,216) ................................................... 39,187,291
-----------
</TABLE>
9
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)
NEW YORK TAX-FREE BOND FUND
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
--------- -----------
<S> <C> <C>
OPEN-END INVESTMENT COMPANIES (0.1%):
New York Money Fund .............................................................. 39,000 $ 39,000
-----------
Total Open-End Investment Companies (Cost - $39,000) ........................................ 39,000
-----------
TOTAL INVESTMENTS (104.5%)
(Cost - $36,704,216)(a) ...................................................................... 39,226,291
-----------
LIABILITIES IN EXCESS OF OTHERASSETS (-4.5%) ................................................. (1,702,317)
-----------
NET ASSETS (100.0%) .......................................................................... $37,523,974
===========
- ------------------
(a) Represents cost for financial reporting purposes and federal income tax
purposes and differs from value by net unrealized appreciation of securities as
follows:
Unrealized appreciation ...................................................................... $2,522,075
Unrealized depreciation ...................................................................... -0-
-----------
Net unrealized appreciation .................................................................. $2,522,075
===========
<FN>
* Variable rate security. Rate presented represents rate in effect at December 31, 1997.
** Security purchased on a delayed delivery basis.
AMBAC - American Municipal Bond Assurance Corp.
AMT - Alternative Minimum Taxable Paper
FGIC - Financial Guaranty Insurance Corp.
FHA - Federal Housing Administration
FSA - Financial Security Assurance
GO - General Obligation
LOC - Letter of Credit
MBIA - Municipal Bond Insurance Association
SONYMA - State of New York Mortgage Agency
TCRS - Transferable Custodial Receipts
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIXED NEW YORK
INCOME TAX-FREE
FUND BOND FUND
------------ -----------
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $58,912,038, and $36,704,216,
respectively) ............................................................ $60,992,051 $39,226,291
Cash ....................................................................... 877 856
Interest and dividends receivable .......................................... 786,393 633,483
Prepaid expenses ........................................................... 14,016 11,376
----------- -----------
Total Assets .................................................................. 61,793,337 39,872,006
----------- -----------
LIABILITIES:
Dividends payable .......................................................... 296,064 144,564
Payable for investment securities purchased ................................ 3,571 2,072,730
Payable for capital shares redeemed ........................................ -- 40,110
Accrued expenses and other payables:
Investment advisory fees ................................................. 28,594 8,126
Administration fees ...................................................... 5,338 3,306
Distribution fees ........................................................ -- 10,824
Custodian fees ........................................................... 3,660 2,757
Legal and audit fees ..................................................... 23,390 14,637
Fund accounting and transfer agent fees .................................. 9,223 15,477
Deferred trustees fees payable ........................................... 11,506 20,890
Other .................................................................... 9,713 14,611
----------- -----------
Total Liabilities ............................................................. 391,059 2,348,032
----------- -----------
Net Assets .................................................................... $61,402,278 $37,523,974
=========== ===========
COMPUTATION OF NET ASSET VALUE:
Net assets ................................................................. $61,402,278 $37,523,974
Shares of beneficial interest issued and outstanding
($0.001 par value per share, unlimited number of shares authorized) ...... 6,067,976 3,269,573
----------- -----------
Net asset value ............................................................ $ 10.12 $ 11.48
Maximum sales charge ....................................................... 4.75% 4.75%
Maximum offering price
(Net Asset Value / (100% - Maximum Sales Charge)) ........................ $ 10.62 $ 12.05
=========== ===========
COMPOSITION OF NET ASSETS:
Paid-in Capital ............................................................ $62,304,706 $36,299,018
Accumulated undistributed net investment income ............................ 14,033 --
Accumulated undistributed net realized
losses from investment transactions ...................................... (2,996,474) (1,297,119)
Net unrealized appreciation from investments ............................... 2,080,013 2,522,075
----------- -----------
Net Assets, December 31, 1997 ................................................. $61,402,278 $37,523,974
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIXED NEW YORK
INCOME TAX-FREE
FUND BOND FUND
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest ....................................................................... $4,290,851 $2,219,042
Dividends ...................................................................... 141,530 29,715
---------- ----------
Total Income ...................................................................... 4,432,381 2,248,757
---------- ----------
EXPENSES:
Advisory fees .................................................................. 354,982 177,118
Administration fees ............................................................ 96,813 59,039
Co-administration and shareholder servicing fees ............................... 45,179 27,551
Distribution fees .............................................................. -- 69,731
Organizational costs ........................................................... 11,704 --
Audit fees ..................................................................... 6,579 8,426
Fund accounting fees ........................................................... 4,194 5,209
Transfer agent fees ............................................................ 37,587 92,884
Custodian fees ................................................................. 9,647 5,586
Printing costs ................................................................. 28,819 17,050
Registration fees .............................................................. 5,607 1,041
Legal fees ..................................................................... 23,210 15,285
Trustee fees ................................................................... 5,459 3,671
Other expenses ................................................................. 13,815 7,136
---------- ----------
Gross Expenses .................................................................... 643,595 489,727
Less: Fee waivers .............................................................. (77,515) (125,990)
---------- ----------
Net Expenses ...................................................................... 566,080 363,737
---------- ----------
Net Investment Income ............................................................. 3,866,301 1,885,020
---------- ----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENTS:
Net realized gains / (losses) from investment transactions ..................... (421,712) 613,728
Net change in unrealized appreciation from investments ......................... 1,841,223 850,123
---------- ----------
Net realized and unrealized gains from investments ................................ 1,419,511 1,463,851
---------- ----------
Net Increase in Net Assets Resulting from Operations .............................. $5,285,812 $3,348,871
========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FIXED INCOME FUND NEW YORK TAX-FREE BOND FUND
------------------------------------ ------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
From Investment Activities:
OPERATIONS:
Net investment income ....................... $ 3,866,301 $ 6,073,106 $ 1,885,020 $ 2,257,044
Net realized gains (losses) from investment
transactions .............................. (421,712) (1,449,259) 613,728 1,168,816
Net change in unrealized appreciation
(depreciation) from investments ........... 1,841,223 (2,191,530) 850,123 (1,819,652)
------------ ------------ ----------- ------------
Change in net assets resulting from
operations .................................. 5,285,812 2,432,317 3,348,871 1,606,208
------------ ------------ ----------- ------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS:
From net investment income .................. (3,866,301) (6,073,106) (1,885,020) (2,257,044)
In excess of net investment income .......... -- (1,496) -- --
------------ ------------ ----------- ------------
Change in net assets from
shareholder distributions ................. (3,866,301) (6,074,602) (1,885,020) (2,257,044)
------------ ------------ ----------- ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued ................. 10,843,888 35,631,687 2,112,149 1,426,786
Dividends reinvested ........................ 68,234 76,121 1,114,438 1,243,334
Cost of shares redeemed ..................... (55,804,404) (27,132,519) (9,141,149) (10,721,363)
------------ ------------ ----------- ------------
Change in net assets from capital
transactions ................................ (44,892,282) 8,575,289 (5,914,562) (8,051,243)
------------ ------------ ----------- ------------
Change in net assets ........................... (43,472,771) 4,933,004 (4,450,711) (8,702,079)
------------ ------------ ----------- ------------
NET ASSETS:
Beginning of year ........................... 104,875,049 99,942,045 41,974,685 50,676,764
------------ ------------ ----------- ------------
End of year ................................. $ 61,402,278 $104,875,049 $37,523,974 $ 41,974,685
============ ============ =========== ============
Accumulated net investment income
included in net assets, end of year ......... $ 14,033 $ 10,321 $ 0 $ 0
------------ ------------ ----------- ------------
SHARE TRANSACTIONS:
Issued ...................................... 1,101,997 3,608,906 188,254 130,184
Reinvested .................................. 6,909 7,721 100,156 114,042
Redeemed .................................... (5,649,518) (2,726,104) (818,395) (983,166)
------------ ------------ ----------- ------------
Change in shares ............................... (4,540,612) 890,523 (529,985) (738,940)
============ ============ =========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
HSBC 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 amended ("1940 Act"), as a diversified, open-end
management investment company with multiple investment portfolios,
including the Fixed Income Fund and the New York Tax-Free Bond Fund (herein
referred to individually as a "Fund" and collectively as the "Funds").
The investment objective of the Fixed Income Fund is generation of high
current income consistent with appreciation of capital. The investment
objective of the New York Tax-Free Bond Fund is to provide its investors
with as high a level of current income exempt from federal, New York State
and New York City income taxes as is consistent with relative stability of
capital. Economic changes affecting the state and certain of its public
bodies and municipalities may affect the ability of issuers within the
state to pay interest on, or repay principal of, municipal obligations held
by the Fund.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their 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: Portfolio securities for which market quotations are
readily available are valued at the quoted bid price. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the supervision of the Trust's
officers in accordance with guidelines which have been adopted by the Board
of Trustees. Such procedures include the use of independent pricing
services which use prices based on yields or prices of securities of
comparable quality, coupon, maturity and type, indicators as to value from
dealers and general market conditions. 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 their taxable income and
net realized capital gains to their shareholders for each taxable year.
Therefore, no provision is required for federal income tax.
At December 31, 1997, the Fixed Income Fund had available $2,888,261 of
capital loss carryforwards which, if not utilized, $1,082,278, $1,442,234
and $363,749 will expire in the years 2003, 2004 and 2005, respectively.
At December 31, 1997, the New York Tax-Free Bond Fund had available
$1,297,119 of capital loss carryforwards which, if not utilized, $647,384,
$644,055 and $5,680 will expire in the years 2002, 2003 and 2005,
respectively.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capital losses incurred after October 31 for the Funds are deemed to arise
on the first business day of the following fiscal year for tax purposes.
The Fixed Income Fund has incurred and will elect to defer such capital
losses of $108,213 after October 31, 1997.
DIVIDENDS AND DISTRIBUTIONS: The Funds intend to declare as a dividend
substantially all of their net investment income at the end of each
business day and to pay within five business days after the end of each
month. Net capital gains, if any, are distributed at least annually.
The amounts of dividends from net investment income and of distributions
from net realized gains are determined in accordance with federal income
tax regulations which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in
nature, such amounts are reclassified within the composition of net assets
based on their federal tax-basis treatment; temporary differences do not
require reclassification. Dividends and distributions to shareholders which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as dividends in
excess of net investment income or distributions in excess of net realized
gains. To the extent they exceed net investment income and net realized
gains for tax purposes, they are reported as distributions of capital.
As of December 31, 1997, the following reclassifications have been made to
increase (decrease) the indicated accounts with offsetting adjustments made
to paid-in-capital:
<TABLE>
<CAPTION>
ACCUMULATED NET REALIZED GAINS
ACCUMULATED NET INVESTMENT INCOME (LOSSES) ON INVESTMENTS
--------------------------------- ------------------------------
<S> <C> <C>
Fixed Income Fund ............... $3,712 ($3,712)
</TABLE>
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. Interest income,
including amortization of discount and premium, 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 on the basis of relative net assets or
another appropriate basis.
ORGANIZATIONAL COSTS: Costs incurred in connection with the organization of
the Fund are being amortized on a straight-line basis over a five-year
period from the date operations commenced.
3. PORTFOLIO SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Fixed Income Fund ..................................... $33,257,790 $38,261,580
New York Tax-Free Bond Fund ........................... $13,252,157 $20,081,760
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS
The Trust retains HSBC Asset Management Americas Inc. to act as Investment
Adviser for the Funds. HSBC Asset Management Americas Inc. is the North
American investment affiliate of HSBC Holdings plc (Hong Kong and Shanghai
Banking Corporation). As Investment Adviser, HSBC Asset Management Americas
Inc. furnishes investment guidance and policy direction in connection with
the management of the investment portfolios of the Funds, subject to
policies established by the Board of Trustees.
As compensation for its services, HSBC Asset Management Americas Inc. is
paid monthly advisory fees at the following annual rates:
<TABLE>
<CAPTION>
ADVISORY FEE RATE
-----------------
FIXED INCOME
PORTIONS OF THE FUND'S AVERAGE DAILY NET ASSETS FUND
------------------------------------------------------------ -----------------
<S> <C>
Up to $400 million ......................................... 0.550%
In excess of $400 million but not exceeding $800 million ... 0.505%
In excess of $800 million but not exceeding $1.2 billion ... 0.460%
In excess of $1.2 billion but not exceeding $1.6 billion ... 0.415%
In excess of $1.6 billion but not exceeding $2.0 billion ... 0.370%
In excess of $2.0 billion .................................. 0.315%
</TABLE>
<TABLE>
<CAPTION>
ADVISORY FEE RATE
-----------------
NEW YORK
TAX-FREE BOND
PORTIONS OF THE FUND'S AVERAGE DAILY NET ASSETS FUND
------------------------------------------------------------ -----------------
<S> <C>
Up to $300 million ......................................... 0.450%
In excess of $300 million but not exceeding $600 million ... 0.420%
In excess of $600 million but not exceeding $1.0 billion ... 0.385%
In excess of $1.0 billion but not exceeding $1.5 billion ... 0.350%
In excess of $1.5 billion but not exceeding $2.0 billion ... 0.315%
In excess of $2.0 billion .................................. 0.280%
</TABLE>
For the year ended December 31, 1997, HSBC Asset Management Americas Inc.
earned advisory fees of $354,982 from the Fixed Income Fund and $98,398
from the New York Tax-Free Bond Fund, net of fee waivers of $0 and $78,720,
respectively.
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 are affiliated, serves the Trust as
distributor, administrator, transfer agent and fund accountant. Such
officers are not paid any fees directly by the Funds for serving as
officers of the Trust.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
In accordance with the terms of the Management and Administration Agreement
and the Fund Accounting Agreement, BISYS is paid a monthly asset-based fee
of 0.15% (annualized) of the Fund's first $200 million of average net
assets; 0.125% of the Fund's next $200 million of average net assets; 0.10%
of the Fund's next $200 million of average net assets; and 0.08% of the
Fund's average net assets in excess of $600 million; exclusive of
out-of-pocket expenses. For the year ended December 31, 1997, BISYS earned
administrative services fees of $64,477 from the Fixed Income Fund, and
$39,320 from the New York Tax-Free Bond Fund, net of fee waivers of $32,336
and $19,719, respectively.
HSBC Asset Management Americas Inc. is paid a co-administration/shareholder
servicer assistance fee of 0.07% of each Fund's average daily net assets.
For the year ended December 31, 1997, HSBC Asset Management Americas Inc.
waived all of their co-administration/shareholder servicer assistance fees.
These waivers totaled $45,179 for the Fixed Income Fund and $27,551 for the
New York Tax-Free Fund.
The Funds have adopted a Distribution Plan and Agreement (the "Plan")
pursuant to Rule 12b-1 of the 1940 Act. The 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 each Fund's average net assets during the preceding
month. The expenses incurred as a result of these agreements totaled $0
from the Fixed Income Fund and $69,731 from the New York Tax-Free Bond
Fund. As distributor, BISYS is entitled to receive commissions on sales of
shares of the variable net asset value funds. For the year ended December
31, 1997, BISYS received $32,109 from commissions earned on sales of shares
of the Fund, $27,415 of which was reallowed to affiliated broker/dealers of
the Funds.
The Funds 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 for the performance of its
service under the Service Agreement. The payments from the Funds on an
annual basis will not exceed 0.35% of the average value of the Funds'
shares held in the subaccounts of the Service Organizations. During the
year ended December 31, 1997, the Funds did not enter into any service
agreements.
A partner of Baker & McKenzie, legal counsel to the Trust, serves as
Secretary of the Trust. For the year ended December 31, 1997 the Funds
incurred legal fees of $23,210 for the Fixed Income Fund, and $15,285 for
the New York Tax-Free Bond Fund.
5. CONCENTRATION OF CREDIT
The New York Tax-Free Bond Fund invests primarily in debt obligations
issued by the State of New York and its respective political subdivisions,
agencies and public authorities to obtain funds for various public
purposes. The Fund is more susceptible to economic and political factors
adversely affecting issuers of New York specific municipal securities than
is a municipal bond fund that is not concentrated in these issuers to the
same extent.
6. FEDERAL INCOME TAX INFORMATION (UNAUDITED)
During the year ended December 31, 1997, the New York Tax-Free Bond Fund
declared tax-exempt income distributions of $1,864,367.
17
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
FIXED INCOME FUND
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE PERIOD
----------------------------------------- ----------------------
JANUARY 15, 1993(A) TO
1997 1996 1995 1994 DECEMBER 31, 1993
------- ------- ------- ------- ----------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .............. $ 9.89 $10.28 $ 9.35 $10.13 $ 10.00
------- ------ ------- ------ -------
Investment Activities
Net investment income ........................ 0.59 0.59 0.59 0.59 0.63
Net realized and unrealized gains
(losses) from investments ................. 0.23 (0.39) 0.93 (0.78) 0.21
------- ------ ------- ------ -------
Total from Investment Activities ............. 0.82 0.20 1.52 (0.19) 0.84
------- ------ ------- ------ -------
Distributions
From net investment income ................... (0.59) (0.59) (0.59) (0.59) (0.63)
From net realized gains ...................... -- -- -- -- (0.08)
------- ------ ------- ------ -------
Total Distributions .......................... (0.59) (0.59) (0.59) (0.59) (0.71)
------- ------ ------- ------ -------
Net Asset Value, End of Period .................... $ 10.12 $ 9.89 $ 10.28 $ 9.35 $ 10.13
======= ====== ======= ====== =======
Total Return(b) ................................... 8.62% 2.11% 16.73% (1.89)% 8.57%(d)
Ratios/Supplemental Data:
Net Assets at end of period (000) ............ $61,402 $104,875 $99,942 $84,774 $90,907
Ratio of expenses to average net assets ...... 0.88% 0.88% 0.93% 0.77% 0.22%(c)
Ratio of net investment income to
average net assets ........................ 6.00% 5.94% 6.03% 6.10% 6.40%(c)
Ratio of expenses to average net assets* ..... 1.00% 0.98% 0.96% 0.86% 0.87%(c)
Ratio of net investment income to
average net assets* ....................... 5.88% 5.84% 6.00% 6.01% 5.75%(c)
Portfolio Turnover Rate ...................... 60.98% 156.05% 41.58% 63.96% 107.34%(d)
<FN>
- ------------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
(a) Commencement of operations.
(b) Excludes sales charge.
(c) Annualized.
(d) Not annualized.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
NEW YORK TAX-FREE BOND FUND
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ............................. $ 11.05 $ 11.17 $ 10.20 $ 11.70 $ 11.01
------- ------- ------- ------- -------
Investment Activities
Net investment income ..................................... 0.53 0.55 0.54 0.53 0.59
Net realized and unrealized gains (losses)
from investments ....................................... 0.43 (0.12) 0.97 (1.47) 0.95
------- ------- ------- ------- -------
Total from Investment Activities .......................... 0.96 0.43 1.51 (0.94) 1.54
------- ------- ------- ------- -------
Distributions
From net investment income ................................ (0.53) (0.55) (0.54) (0.53) (0.59)
From net realized gains ................................... -- -- -- (0.03) (0.26)
------- ------- ------- ------- -------
Total distributions ....................................... (0.53) (0.55) (0.54) (0.56) (0.85)
------- ------- ------- ------- -------
Net Asset Value, End of Year ................................... $ 11.48 $ 11.05 $ 11.17 $ 10.20 $ 11.70
======= ======= ======= ======= =======
Total Return(a) ................................................ 8.97% 3.99% 15.17% (8.13)% 14.27%
Ratios/Supplemental Data:
Net Assets at end of year (000) ........................... $37,524 $41,975 $50,677 $50,711 $61,740
Ratio of expenses to average
net assets ............................................. 0.92% 0.91% 0.99% 0.84% 0.63%
Ratio of net investment income
to average net assets .................................. 4.79% 5.02% 5.07% 4.93% 4.98%
Ratio of expenses to average
net assets* ............................................ 1.24% 1.21% 1.20% 1.10% 1.06%
Ratio of net investment income to
average net assets* .................................... 4.47% 4.72% 4.86% 4.67% 4.55%
Portfolio Turnover Rate ................................... 35.64% 87.40% 24.43% 122.43% 70.36%
<FN>
- ------------
* During the year, certain fees were voluntarily reduced and/or reimbursed. If
such voluntary fee reductions and/or reimbursements had not occurred, the ratios
would have been as indicated.
(a) Excludes sales charge.
</FN>
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<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 Fixed Income Fund and the New
York Tax-Free Bond Fund (two of the portfolios comprising HSBC Mutual Funds
Trust) as of December 31, 1997, 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
periods 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, 1997, 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
Fixed Income Fund and the New York Tax-Free Bond Fund at December 31, 1997, 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 periods, in conformity with generally
accepted accounting principles.
/S/ ERNEST & YOUNG LLP
New York, New York
February 13, 1998
20
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
HSBC[SERVICE MARK] MUTUAL FUNDS TRUST
3435 Stelzer Road
Columbus,Ohio 43219
INFORMATION:
(800) 634-2536
INVESTMENT ADVISER
HSBC Asset Management Americas Inc.
140 Broadway (6th Floor)
New York, New York 10005-1180
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. Shares of the Funds are not an obligation of or guaranteed
or endorsed by HSBC Holdings plc or its affiliates.In addition, such shares are
not insured by the Federal Deposit Insurance Corporation, the Federal Reserve
Board, or any other agency and may involve investment risks, including the
possible loss of principal.
2/98
