HSBC MUTUAL FUNDS TRUST
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GROWTH & INCOME FUND
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HSBC Asset Management Americas Inc. (GRAPHIC OMITTED)
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ANNUAL REPORT
December 31, 1997
Managed by:
HSBC ASSET MANAGEMENT AMERICAS INC.
Sponsored and distributed by:
BISYS FUND SERVICES
<PAGE>
HSBC MUTUAL FUNDS TRUST
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GROWTH &INCOME FUND
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HSBC Asset Management Americas Inc. (GRAPHIC OMITTED)
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January 15, 1998
Dear Shareholder:
The year 1997 represented the third consecutive annual return of above 20% for
the US equity market, as the S&P 500 Composite Index gained 33.4% on a total
return basis for the year. Over the three year period, the S&P 500 Index
returned 125.5% and included the shortest period in history that investors could
have doubled their money in these stocks. While 1997 proved more volatile than
the previous two calendar years, the bulletproof US market repeatedly evidenced
its resilience to internal and external threats. This was apparent by the
ability to fight off a Fed rate hike in late March, ongoing concerns of
inflation - which failed to materialize but did cause the long bond yield to hit
7.17% in May, a much stronger dollar, and finally the Asian crisis in the fourth
quarter. The latter threatened to derail the US market and resulted in the
single largest one-day point decline ever for the Dow Jones Industrial Average.
However, lower stock prices were immediately met with strong investor interest
and the Average managed to recover nearly all of the loss within a week.
The economic backdrop remained very equity friendly in 1997, as above-average
growth was accompanied by surprisingly muted inflation. Rates were quite
volatile for much of the year, with the 30-year Treasury yield rising from 6.64%
at year end 1996 to 7.17% by mid-April in the wake of a single and insignificant
Fed tightening move in late March. Rates hovered around the 7% into June but
declined, albeit not smoothly, during the second half and ended the year at
5.92%, a four year low and only 14 basis points from the all-time low set on
October 15, 1993.
While the economic environment in itself was quite positive and supportive to
equity valuations during the year, corporate profits were surprisingly strong
and well ahead of expectations, providing the real impetus to the equity market.
Corporate profits posted double-digit gains for four consecutive quarters,
beginning the fourth quarter of 1996 (reported during the first quarter of
1997). Further fueling equity prices gains was a positive supply/demand dynamic
as an estimated $190 billion came into US equity mutual funds in 1997 up from
$180 billion in 1996, a new annual record. In addition, an intense level of
consolidation activity continued as $541.6 billion in deals were announced
through October alone, a new annual record with just 10 months of data available
and well ahead of the $495 billion posted for all of 1996.
Sectorally, the Financial stocks led the market, up over 45%, benefitting from
lower rates during the second half, strong fundamentals and by a torrid level of
merger and acquisition activity. The Healthcare sector posted a very strong
performance as well, up 41.5% for the year, driven by new products, strong
current fundamentals, and a low interest rate environment which favored growth
stocks. Communication Services also generated strong returns, with the sector up
37.2% on a price basis. However, the bulk of this gain came in the fourth
quarter when the stocks rose nearly 20% benefitting from a more defensive
climate as investors sought domestic players with a yield kicker, as well the
heightened takeout speculation. Conversely, Basic Materials stocks turned in the
worst annual performance, up a mere 6.8%, hurt by weak commodity prices
throughout the year and then declining in the fourth quarter as concerns of a
global downturn in demand became prevalent. Energy and Utilities were also
relatively weak, the former due to weak crude prices, while the latter were
ignored until the fourth quarter when defensiveness came back into
<PAGE>
favor. Finally, large capitalization (S&P 500) stocks outperformed the mid- and
small-cap issues during the year, although the smaller stocks did manage yet
another abortive mid-year rally.
Looking ahead, after a truly spectacular 1997, we are forecasting a positive,
but closer to trendline return of approximately 10%-12% for the year ahead. We
expect that corporate profit growth, a prime driver of the market in 1997, will
be modestly constrained in 1998. Dampening results will be a lack of pricing
power exacerbated by cheap Asian imports as the region is forced to ratchet up
production in order to keep their economies afloat. However, we continue to
believe that there is still margin expansion to be had, as the vast majority of
profit improvements have accrued to only the largest domestic companies. In
aggregate we expect earnings growth to move toward the 8% level down from the
double-digit levels we have seen in 1997.
Other key supports to the market during 1998 should be a slow growth/low
inflation environment favoring low[er] interest rates as it is unlikely that the
Fed will need to move. Further, US Treasuries are expected to continue to be
prized in the wake of the Asian turmoil keeping bond prices aloft and in turn,
yields down. We are forecasting a slowdown in GDP growth back toward trendline
levels of 2-2.5% but believe that consumer demand - two-thirds of the US economy
- - given current levels of employment, confidence and interest rates, will keep
the economy from slowing dramatically or stalling out in the face of weaker
exports.
The supply/demand dynamic is expected to remain quite positive in 1998. Equity
mutual fund inflows are expected to remain strong given the uncompelling yields
on money market alternatives, the growing use of defined contribution (401K)
plans and the recurrent nature of those cash flows. Further, overall demand is
likely to be buoyed by foreign buyers who have been very underinvested in the
U.S. market. We expect this global interest to be a function of the relatively
`safe haven' standing of the US market compared to international equity markets
as well as the strong[er] dollar. On the supply side, corporate stock
repurchases continue to replace dividend increases as the favored method of
`increasing shareholder value'. Finally, it is difficult to envision an end to
the torrid pace of consolidation activity (via mergers and acquisitions) so
prevalent in 1997, given the momentum coming into 1998.
In summary, while it is difficult to forecast a repeat of 1997 in a climate of
modestly slowing earnings such as we envision for 1998, the continuing presence
of many of the key drivers of last year's phenomenal equity market has the
potential to yield a respectable annual return.
The HSBC Growth & Income Fund generated a gain of 27.42% on a net total return
basis for 1997. Results lagged the S&P 500 Index, which rose 33.4% but outpaced
peer medians as the Lipper Growth & Income Average rose 27.14%. As we have noted
repeatedly over the last few YEARS active managers have simply been unable to
keep up with the benchmark in part due to the significant inflows into Index
funds, with new money chasing the largest stocks. Further, small and mid-caps
stocks the traditional favorites of managers trying to boost performance of
`large cap' funds - have continued to lag as noted above.
Going into 1998 we have constructed the Fund with fewer issues, stressing those
sectors that we believe will outperform in a climate of low interest rates and
slowing global demand. While we continued to hold well diversified
multinationals, most companies selected tended to be in more stable industries
such as pharmaceuticals, household products and bottling. Domestically-oriented
stocks figure prominently in the portfolio with regional banks, insurers and
food and drug retailers among our favorites.
HSBC Asset Management Americas Equity Team
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.
2
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
GROWTH & INCOME FUND VS. S&P 500 COMPOSITE STOCK INDEX
CHART
[GRAPHIC OMITTED]
Average Annual Total Return
- ----------------------------------------------------------------
Inception
1 Year 5 Years 10 Years (6/2/86)
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Offering Price(1) 21.19% 15.49% 15.09% 13.09%
NAV(2) 27.42% 16.63% 15.63% 13.59%
- ----------------------------------------------------------------
FUND(1) S&P 500 LIPPER FUND(2)
6/86 $10,000 $10,000 $10,000 $10,000
12/86 $ 9,860 $10,049 $10,134 $10,320
12/87 $ 9,780 $10,578 $10,400 $10,300
12/88 $11,300 $12,334 $12,310 $11,900
12/89 $14,190 $16,241 $15,236 $14,940
12/90 $13,560 $15,737 $14,322 $14,280
12/91 $17,890 $20,532 $18,277 $18,840
12/92 $19,280 $22,097 $20,038 $20,300
12/93 $21,440 $24,322 $22,967 $22,580
12/94 $20,439 $24,643 $22,811 $21,523
12/95 $27,696 $33,901 $29,882 $29,165
12/96 $32,656 $40,518 $36,082 $34,387
12/97 $41,610 $54,040 $45,856 $43,816
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 5.00%
(2) EXCLUDES THE MAXIMUM SALES CHARGE OF 5.00%
THE ABOVE ILLUSTRATION COMPARES A $10,000 INVESTMENT IN THE GROWTH &INCOME FUND
ON JUNE 2, 1986 (DATE OF INCEPTION), 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 FUND INDEX IS AN INDEX BASED ON THIRTY LARGEST
GROWTH AND INCOME MUTUAL FUNDS (EQUALLY WEIGHTED) TRACKED BY LIPPER ANALYTICAL
SERVICES INCORPORATED.
3
<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
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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
4
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997
GROWTH & INCOME FUND
SECURITY VALUE
SHARES DESCRIPTION (NOTE 2)
- ------------ ------------ ----------
COMMON STOCKS (133.7%):
AUTOMOTIVE PARTS (0.9%):
10,700 Lear Corp.(b) .................................... $ 508,250
----------
BANKING (14.4%):
10,800 BANC ONE CORP .................................... 586,575
23,700 Bank of New York Co., Inc. ....................... 1,370,156
19,100 BankAmerica Corp. ................................ 1,394,300
8,800 Chase Manhattan Corp. ............................ 963,600
4,700 Citicorp ......................................... 594,256
11,200 First Tennessee National Corp. ................... 747,600
30,000 First Union Corp. ................................ 1,537,500
12,000 NationsBank Corp. ................................ 729,750
----------
7,923,737
----------
BEVERAGES (4.4%):
13,200 Coca-Cola Co. .................................... 879,450
24,700 Coca Cola Enterprises, Inc. ...................... 878,394
19,000 PepsiCo, Inc. .................................... 692,312
----------
2,450,156
----------
CHEMICALS (4.3%):
21,500 E.I. DU PONT DE NEMOURS & CO ..................... 1,291,344
15,500 Morton International, Inc. ....................... 532,812
9,700 PPG Industries, Inc. ............................. 554,112
----------
2,378,268
----------
COMPUTERS & PERIPHERALS (10.2%):
17,950 Cisco Systems, Inc.(b) ........................... 1,000,712
14,800 Compaq Computer Corp. ............................ 835,275
18,400 Intel Corp. ...................................... 1,292,600
14,900 International Business Machines Corp. ............ 1,557,981
23,000 Sun Microsystems, Inc.(b) ........................ 917,125
----------
5,603,693
----------
COMPUTER SOFTWARE (5.2%):
9,900 BMC SOFTWARE, INC.(B) ............................ 649,687
14,400 Computer Associates International, Inc. .......... 761,400
11,500 Microsoft Corp.(b) ............................... 1,486,375
----------
2,897,462
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5
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)
GROWTH & INCOME FUND
SECURITY VALUE
SHARES DESCRIPTION (NOTE 2)
- ------------ ------------ ----------
COMMON STOCKS (CONTINUED)
CONSUMER GOODS & SERVICES (4.0%):
9,800 Nike, Inc., Class B .............................. $ 384,650
8,200 Philip Morris Cos., Inc. ......................... 371,562
18,000 Procter & Gamble Co. ............................. 1,436,625
----------
2,192,837
----------
COSMETICS & TOILETRIES (0.9%):
14,000 Revlon, Inc.(b) .................................. 494,375
----------
DIVERSIFIED (5.0%):
14,800 AlliedSignal, Inc. ............................... 576,275
22,300 General Electric Co. ............................. 1,636,262
6,600 Minnesota Mining & Manufacturing Co. ............. 541,613
----------
2,754,150
----------
ELECTRIC UTILITY (1.4%):
14,000 Duke Energy Corp. ................................ 775,250
----------
ELECTRICAL & ELECTRONIC (1.7%):
16,300 Emerson Electric Co. ............................. 919,931
----------
ENERGY (0.9%):
17,700 CalEnergy Co., Inc.(b) ........................... 508,875
----------
ENTERTAINMENT (2.0%):
11,100 Walt Disney Co ................................... 1,099,594
----------
FINANCIAL SERVICES (8.4%):
9,000 H.F. Ahmanson & Co. .............................. 602,437
13,900 American Express Co. ............................. 1,240,575
20,800 Fannie Mae ....................................... 1,186,900
29,850 Travelers Group, Inc. ............................ 1,608,169
----------
4,638,081
----------
FOOD PRODUCTS & SERVICES (5.9%):
30,900 H.J. Heinz Co. ................................... 1,570,106
15,700 Nabisco Holdings Corp., Class A .................. 760,469
14,300 Safeway, Inc. (b) ................................ 904,475
----------
3,235,050
----------
6
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)
GROWTH & INCOME FUND
SECURITY VALUE
SHARES DESCRIPTION (NOTE 2)
- ------------ ------------ ----------
COMMON STOCKS (CONTINUED)
HEALTHCARE (3.5%):
23,100 HEALTHSOUTH Corp.(b) ............................. $ 641,025
19,800 Johnson & Johnson ................................ 1,304,325
----------
1,945,350
----------
INDUSTRIAL GOODS & SERVICES (0.7%):
5,500 United Technologies Corp. ........................ 400,469
----------
INSURANCE (3.7%):
15,900 Allstate Corp. ................................... 1,444,913
5,400 American International Group, Inc. ............... 587,250
----------
2,032,163
----------
MACHINERY & EQUIPMENT (3.3%):
16,500 Applied Materials, Inc.(b) ....................... 497,063
6,600 Deere & Co. ...................................... 384,863
23,700 Ingersoll-Rand Co. ............................... 959,850
----------
1,841,776
----------
MEDICAL - HOSPITAL MANAGEMENT &
SERVICES (1.1%):
19,000 Tenet Healthcare Corp.(b) ........................ 629,375
----------
OFFICE EQUIPMENT & SERVICES (1.4%):
12,400 Hewlett-Packard Co. .............................. 775,000
----------
OIL & GAS EXPLORATION, PRODUCTION &
SERVICES (10.5%):
10,100 Consolidated Natural Gas Co. ..................... 611,050
24,000 Exxon Corp. ...................................... 1,468,500
12,100 Mobil Corp. ...................................... 873,469
3,016 Nabors Industries, Inc.(b) ....................... 94,816
11,500 Royal Dutch Petroleum Co., New York Shares ....... 623,156
15,400 Schlumberger Ltd. ................................ 1,239,700
35,600 Union Pacific Resources Group, Inc. .............. 863,300
----------
5,773,991
----------
PHARMACEUTICALS (12.0%):
18,800 Bristol-Myers Squibb Co. ......................... 1,778,950
23,500 Eli Lilly & Co. .................................. 1,636,188
24,700 Pfizer, Inc. ..................................... 1,841,694
11,000 Warner-Lambert Co. ............................... 1,364,000
----------
6,620,832
----------
7
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)
GROWTH & INCOME FUND
SECURITY VALUE
SHARES DESCRIPTION (NOTE 2)
- ------------ ------------ ----------
COMMON STOCKS (CONTINUED)
PRINTING & PUBLISHING (1.5%):
13,400 Tribune Co. ...................................... $ 834,150
-----------
RETAIL (10.6%):
22,600 Home Depot, Inc. ................................. 1,330,575
10,290 May Department Stores Co. ........................ 542,154
26,900 Rite Aid Corp. ................................... 1,578,694
11,500 TJX Cos., Inc. ................................... 395,313
19,200 Toys R Us, Inc.(b) ............................... 603,600
35,300 Wal-Mart Stores, Inc. ............................ 1,392,144
----------
5,842,480
-----------
STEEL (0.8%):
8,600 Nucor Corp. ...................................... 415,488
-----------
TELECOMMUNICATIONS (12.2%):
17,100 Bell Atlantic Corp. .............................. 1,556,100
8,100 BellSouth Corp. .................................. 456,131
19,800 Lucent Technologies, Inc. ........................ 1,581,525
14,800 SBC Communications, Inc. ......................... 1,084,100
15,200 Tellabs, Inc.(b) ................................. 803,700
41,500 WorldCom, Inc.(b) ................................ 1,255,375
-----------
6,736,931
-----------
TIRE & RUBBER (1.4%):
12,000 Goodyear Tire & Rubber Co. ....................... 763,500
-----------
TRANSPORTATION (1.5%):
6,800 Delta Air Lines, Inc. ............................ 809,200
-----------
Total Common Stocks (Cost - $58,424,481) ......... 73,800,414
-----------
8
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS AS OF DECEMBER 31, 1997 (CONTINUED)
GROWTH & INCOME FUND
SECURITY VALUE
SHARES DESCRIPTION (NOTE 2)
- ------------ ------------ -----------
OPEN-END INVESTMENT COMPANIES (0.6%):
336,000 Provident Institutional Temporary
Investment Fun.................................... $ 336,000
-----------
TOTAL OPEN-END INVESTMENT COMPANIES
(COST - $336,000)................................. 336,000
-----------
TOTAL INVESTMENTS (134.3%)
(Cost - $58,760,481)(a)........................... 74,136,414
-----------
LIABILITIES IN EXCESS OF OTHER ASSETS (-34.3%).... (18,941,670)
-----------
NET ASSETS (100.0%)............................... $55,194,744
===========
- --------------
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax purposes of $27,843.
Cost for federal income tax purposes differs from value by net unrealized
appreciation of securities as follows:
UNREALIZED APPRECIATION $16,636,547
Unrealized depreciation (1,288,457)
-----------
Net unrealized appreciation $15,348,090
===========
(b) Represents non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1997
GROWTH &
INCOME FUND
------------
ASSETS:
Investments in securities, at value (cost $58,760,481) .... $74,136,414
Cash ...................................................... 841
Interest and dividends receivable ......................... 68,439
Receivable for capital shares sold ........................ 50
Receivable from investment securities sold ................ 17,048,842
Prepaid expenses .......................................... 8,973
-----------
Total Assets ................................................ 91,263,559
-----------
LIABILITIES:
Dividends payable ......................................... 261,002
Capital gain payable ...................................... 35,553,410
Payable for investment securities purchased ............... 95,167
Accrued expenses and other payables:
Investment advisory fees ................................ 42,693
Administration fees ..................................... 7,957
Custodian fees .......................................... 6,871
Legal and audit fees .................................... 44,820
Accounting and transfer agent fees ...................... 16,265
Deferred trustee payable ................................ 22,558
Other ................................................... 18,072
-----------
Total Liabilities ........................................... 36,068,815
-----------
Net Assets .................................................. $55,194,744
===========
COMPUTATION OF NET ASSET VALUE:
Net assets ................................................ $55,194,744
Shares of beneficial interest issued and outstanding
($0.001 par value per share, unlimited number of
shares authorized) ...................................... 4,465,516
-----------
Net asset value ........................................... $ 12.36
Maximum sales charge ...................................... 5.00%
Maximum offering price
(Net Asset Value / (100% - Maximum Sales Charge))......... $ 13.01
===========
COMPOSITION OF NET ASSETS:
Paid-in capital ........................................... $34,778,728
Undistributed net investment income ....................... 36,028
Accumulated undistributed net realized gains from
investment transactions ................................. 5,004,055
Net unrealized appreciation from investments .............. 15,375,933
-----------
Net Assets, December 31, 1997 ............................... $55,194,744
===========
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
GROWTH &
INCOME FUND
------------
INVESTMENT INCOME:
Dividends .................................................. $ 2,445,138
Interest ................................................... 866
------------
Total Income ................................................. 2,446,004
------------
EXPENSES:
Advisory fees .............................................. 755,596
Administration fees ........................................ 206,072
Co-administration and shareholder servicing fees ........... 96,166
Audit fees ................................................. 22,309
Fund accounting fees ....................................... 3,921
Transfer agent fees ........................................ 72,642
Custodian fees ............................................. 20,738
Printing costs ............................................. 32,529
Registration fees .......................................... 19,441
Legal fees ................................................. 52,667
Trustees' fees ............................................. 12,459
Other expenses ............................................. 14,619
------------
Total Gross Expenses ....................................... 1,309,159
Less: Fee waivers .......................................... (164,994)
------------
Total Net Expenses ........................................... 1,144,165
------------
Net Investment Income ........................................ 1,301,839
------------
NET REALIZED / UNREALIZED GAINS FROM INVESTMENTS:
Net realized gains from investment transactions .............. 40,637,112
Net change in unrealized appreciation from investments ....... (4,934,551)
------------
Net Realized / Unrealized Gains from Investments ............. 35,702,561
------------
Net Increase in Net Assets Resulting from Operations ......... $ 37,004,400
============
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH &
INCOME FUND
----------------------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
From Investment Activities:
OPERATIONS:
Net investment income ....................................................... $ 1,301,839 $ 1,555,489
Net realized gains from investment transactions ............................. 40,637,112 9,426,589
Net change in unrealized appreciation (depreciation)
from investments .......................................................... (4,934,551) 6,757,934
------------- -------------
Change in net assets resulting from operations .............................. 37,004,400 17,740,012
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income .................................................. (1,305,354) (1,555,489)
In excess of net investment income .......................................... -- (2,224)
From net realized gain from investment transactions ......................... (36,862,753) (8,195,067)
-------------
Change in net assets from shareholder distributions ......................... (38,168,107) (9,752,780)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued ................................................. 30,839,794 87,476,893
Dividends reinvested ........................................................ 446,344 304,665
Cost of shares redeemed ..................................................... (115,615,426) (21,143,109)
------------- -------------
Change in net assets from capital transactions .............................. (84,329,288) 66,638,449
------------- -------------
Change in net assets ........................................................... (85,492,995) 74,625,681
------------- -------------
NET ASSETS:
Beginning of year .............................................................. 140,687,739 66,062,058
------------- -------------
End of year .................................................................... $ 55,194,744 $140,687,739
============= ============
Accumulated net investment income
included in net assets, end of year ......................................... $ 36,028 $ 39,543
============= ============
SHARE TRANSACTIONS:
Issued ...................................................................... 1,740,537 5,433,181
Reinvested .................................................................. 26,099 20,597
Redeemed .................................................................... (5,941,405) (1,287,720)
------------- -------------
Change in shares ............................................................... (4,174,769) 4,166,058
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<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 Growth & Income Fund (herein referred to as the "Fund").
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 the Fund's assets may be
invested in various types of fixed income and in money market instruments.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of income
and expenses for the period. Actual results could differ from those
estimates.
SECURITIES VALUATION: Investments in securities 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 open-end investment companies 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 Fund's 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.
DIVIDENDS AND DISTRIBUTIONS: The Fund intends to pay, as a semi-annual
dividend, substantially all of its net investment income. 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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITY TRANSACTIONS AND RELATED INCOME: Security transactions are
recorded on trade date. Identified cost of investments sold is used for
both financial 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 on the basis of relative net assets or
another appropriate basis.
3. PORTFOLIO SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
year ended December 31, 1997 were $89,409,660 and $199,431,029,
respectively.
4. RELATED PARTY TRANSACTIONS
The Trust retains HSBC Asset Management Americas Inc. to act as Investment
Adviser for the Fund. 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 portfolio of the Fund, 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
-----------------
GROWTH & INCOME
PORTION OF EACH FUNDS' 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>
For the year ended December 31, 1997, HSBC Asset Management Americas Inc.
earned advisory fees of $755,596 from the Fund.
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 Fund for serving as officers
of the Trust.
14
<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 fees of $137,244 from the Fund, net of fee waivers of
$68,828.
HSBC Asset Management Americas Inc. is paid a co-administration/shareholder
servicer assistance fee of 0.07% of the Fund's average daily net assets.
For the year ended December 31, 1997, HSBC Asset Management Americas Inc.
waived all of its co-administration/shareholder servicer assistance fees.
These waivers totaled $96,166 for the Fund.
The Fund has 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 0.50% for the Growth & Income Fund. The Fund did not incur
any expenses with regards to the Plan for the year ended December 31, 1997.
As distributor, BISYS is entitled to receive commissions on sales of shares
of the Fund. For the year ended December 31, 1997, BISYS received $2,599
from commissions earned on sales of shares of the Fund, $694 of which was
reallowed to affiliated broker/dealers of the Fund.
The Fund 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 Fund
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 Fund on an
annual basis will not exceed 0.35% of the average value of the Fund's
shares held in the subaccounts of the Service Organizations. During the
year ended December 31, 1997, the Fund did not enter into any Service
Agreements.
A partner of Baker & McKenzie, legal counsel to the Trust, also serves as
Secretary of the Trust. For the year ended December 31, 1997, the Fund
incurred legal fees of $52,667.
5. FEDERAL INCOME TAX INFORMATION (UNAUDITED)
During the year ended December 31, 1997, the Fund declared mid-term capital
gain distributions of $18,142,394 and long-term capital gain distributions
of $10,342,608. For the taxable year ended December 31, 1997, 18.63% of
income dividends paid by the Fund qualify for the dividends received
deduction available to corporations.
15
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
GROWTH & INCOME FUND
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
------- -------- ------- ------- -------
Net Asset Value, Beginning of Year $16.28 $ 14.77 $ 11.93 $ 12.87 $ 12.02
------- -------- ------- ------- -------
Investment Activities
Net investment income .......................... 0.18 0.18 0.30 0.29 0.33
Net realized and unrealized
gains (losses) from investment transactions .. 4.28** 2.46 3.64 (0.67) 1.00
------- -------- ------- ------- -------
Total from Investment Activities ............... 4.46 2.64 3.94 (0.38) 1.33
------- -------- ------- ------- -------
Distributions
From net investment income ..................... (0.19) (0.18) (0.30) (0.29) (0.33)
From net realized gains ........................ (8.19) (0.95) (0.80) (0.15) (0.15)
In excess of net realized gains ................ -- -- -- (0.12) --
------- -------- ------- ------- -------
Total Distributions ............................ (8.38) (1.13) (1.10) (0.56) (0.48)
------- -------- ------- ------- -------
Net Asset Value, End of Year ...................... $ 12.36 $ 16.28 $ 14.77 $ 11.93 $ 12.87
======= ======== ======= ======= =======
Total Return(a) ................................... 27.42% 17.90% 33.11% (2.97)% 11.23%
Ratios/Supplemental Data:
Net Assets at end of year (000) ................ $55,195 $140,688 $66,062 $64,999 $77,718
Ratio of expenses to average net assets ........ 0.83% 0.85% 0.94% 0.78% 0.23%
Ratio of net investment income to
average net assets ........................... 0.95% 1.43% 2.06% 2.25% 2.95%
Ratio of expenses to average net assets* ....... 0.95% 0.96% 0.97% 0.86% 0.88%
Ratio of net investment income to
average net assets* .......................... 0.83% 1.32% 2.03% 2.17% 2.30%
Average Commission Rate Paid(b) ................ $0.0583 $0.0572 -- -- --
Portfolio Turnover Rate ........................ 69.07% 61.68% 52.77% 23.31% 14.25%
</TABLE>
- --------------
* DURING THE YEAR, CERTAIN FEES WERE VOLUNTARILY REDUCED AND/OR REIMBURSED.
IF SUCH VOLUNTARY FEE REDUCTIONS AND/OR EXPENSE REIMBURSEMENTS HAD NOT
OCCURRED, THE RATIOS WOULD HAVE BEEN AS INDICATED.
** In addition to the net realized and unrealized gains from investment
transactions, this amount includes a decrease in net asset value per share
resulting from the timing of issuances and redemptions of Fund shares in
relation to fluctuating market values for the portfolio.
(a) Excludes sales charge.
(b) Represents the dollar amount of commissions paid on portfolio transactions
divided by total number of shares purchased or sold for which commissions
were charged. Disclosure is not required for periods prior to December 31,
1996.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
HSBC Mutual Funds Trust
We have audited the accompanying statement of assets and liabilities, including
the schedule of portfolio investments, of the Growth & Income Fund (one of the
portfolios comprising HSBC Mutual Funds Trust) as of December 31, 1997, the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the years indicated therein. These
financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 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
Growth & Income Fund at December 31, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and its financial highlights for each of the indicated years,
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
NewYork, New York
February 13, 1998
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
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- ----------------------------------------------------------------------
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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 Fund 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
