<PAGE>
HSBC Mutual Funds Trust
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Logo HSBC Asset Management Americas Inc.
- --------------------------------------------------------------------------------
International Equity Fund
------------------------------------------------------------------
January 29, 1999
Dear Shareholder:
Executive Summary
For the year ended December 31, 1998, international stocks, as represented by
the MSCI-EAFE Index/1/, rose 20%. In comparison, the International Equity Fund
rose 11% (Institutional Class).
During the 12-month period, the international equity market experienced strong
volatility. The dramatic rallies seen in Asia in the first quarter were
replaced quickly by renewed pessimism. The weakness of the Japanese economy,
the yen and the withdrawal of credit facilities in Asia by financial
institutions exacerbated regional difficulties. The Russian devaluation and
default on debt touched off a financial crisis, as developed and emerging
markets experienced heavy declines. With concern over the possibility of a
recession intensifying, a flight-to-quality drove the markets.
Then, in the fourth quarter, the international equity market staged a
significant rebound. This recovery was spurred by a concerted round of global
interest rate cuts as central banks responded to the financial dislocations
that resulted from Russia's debt default. The Asian (ex-Japan) markets were the
strongest performers on the back of recovery hopes. Europe also performed well.
But Japan, at least in local currency terms, continued to be a laggard. One of
the features of the fourth quarter was the weakness of the U.S. dollar,
especially against the yen, which surged 21%.
In aggregate, the prospects for the world economy in 1999 are reasonable, but
the picture is an unbalanced one and hence risky. Japan must stabilize its
economy. We believe this will occur but the fragility of financial institutions
there could prove problematic. The United States must address its external
deficit without, in the process, puncturing world demand growth. In the longer
term, the participating European economies must look beyond the euro toward
enhancing their competitiveness, particularly in terms of labor markets
flexibility.
Against this background our current plans for positioning the portfolio are as
follows:
. We expect to remain underweighted in Japanese equities. Even assuming an
economic recovery there, we believe that corporate profits will remain
inadequate until genuine restructuring gets underway.
. In our view, the best values are in the United Kingdom, Australia and
Asia. We are, however, defensively hedging a portion of the Fund's pound
sterling exposure, as it appears overvalued against the U.S. dollar.
. Positions in continental Europe remain substantial, but are below index
weightings. Valuations are, in general, becoming stretched in this region.
- ------
/1/Morgan Stanley Capital International Europe, Australia and Far East Index
(MSCI-EAFE) is a broad based capitalization weighted unmanaged index that
represents the general performance of over 1,000 companies of the European,
Australian and Far Eastern equity markets.
<PAGE>
UNITED KINGDOM
The consensus view is that the United Kingdom is likely to experience a mild
recession in 1999. The slowdown began in the manufacturing sector, as a
consequence of currency appreciation and the Asian crisis. It has now spread
to the construction, retailing and business service sectors, resulting from
tight fiscal and monetary policies employed in the first half of 1998. As
consumer confidence appeared to evaporate and (overly) pessimistic business
surveys were published, the Bank of England moved interest rates lower in
order to take some pressure off the currency. We continue to have high
confidence that recession can be avoided as the consumer does not appear to be
particularly leveraged and the savings ratio is not stretched.
After remaining at the 2.5% target throughout the fourth quarter, inflation is
likely to rise a little before settling down to within the target. In the
manufacturing sector, pricing indicators are pointing to a sharp fall in
producer output prices and surveys of the service sector suggest that
domestically generated inflation pressures are ebbing quickly. Valuation
levels suggest that a slowdown in corporate earnings is now priced into
shares. From an international perspective, U.K. valuations also look
reasonably attractive and in an environment where investors are becoming
increasingly risk averse the U.K. market could prove to be relatively
defensive. Pound sterling exposure is being defensively hedged as our analysis
shows that it is overvalued against the U.S. dollar.
The currency hedge added value late in the year, as the pound sterling fell
2%. Stocks in the United Kingdom performed extremely well during the year,
rising 16.5% according to Morgan Stanley Capital International. This market
performed better than international markets in general, but lagged many of its
neighbors in continental Europe. Performance of the portfolio benefited from
our above-index exposure to the United Kingdom.
CONTINENTAL EUROPE
The euro-area economy is slowing sharply as European Monetary Unit (EMU) is
launched. Business surveys show that global weakness is taking its toll on
regional activity. Meanwhile, activity data suggest that firms are adjusting
their spending plans, indicating a more broad-based slowing in capital good
orders and employment.
The European Central Bank (ECB)-inspired rate cut in early December is
unlikely to be the last in the current cycle. Further poor industrial news or
a drop in inflation likely will prompt the ECB into further action.
Interestingly, there is likely to be a reallocation of income toward the
household. Euro-area household income has stagnated during this decade,
leaving regional activity vulnerable to shifts in corporate profitability. A
variety of factors are not turning in households' favor, including the shift
leftward in European politics. This reallocation of incomes is the euro area's
main line of defense against weaker global growth.
Following the sharp declines of the summer, European stocks performed strongly
in the fourth quarter. Investors decided that the Asian and Russian problems
were isolated incidents and that any weakening in growth would feed quickly
through to lower inflation and a looser monetary stance. Corporate activity
has also continued to keep investors' interest high.
Given the slowdown in the global economy, the risk to European earnings for
1999 is on the downside. However, consumer expenditure is expected to remain
robust and, given the ongoing corporate restructuring across Europe, the area
appears to offer reasonable value. But sentiment, and not valuation, is
driving markets.
Throughout the year, the Fund portfolio benefited from an overweight position
in Europe. However, during the fourth quarter, several European markets
appeared to us to be overvalued. As such, we eliminated the Fund's holdings in
Finland, Italy and Switzerland, all of which delivered strong returns in the
fourth quarter. Portfolio performance late in the year, relative to the EAFE
Index, was adversely affected by an underweighting to these vulnerable
markets.
2
<PAGE>
JAPAN
The economy is still stuck in its worst recession in 30 years, with all
sectors of the economy contracting, and the outlook for the Japanese economy
remains very poor. We believe that the government's latest stimulus package is
still inadequate to assure a recovery in 1999, as it adds only 0.7% to growth
compared with 1998's stimulus measures. So far, the income tax cuts are only
slightly larger than those of 1998, so there will be little net stimulus, only
the effect of a shift from temporary to permanent tax cuts. Public works
spending will probably grow by about 5%. A much needed fall in the corporate
tax rate to 40% from 46.3% will bolster corporate profits, but this will only
have a modest impact on capital spending due to continued excess capacity and
falling profits.
Indications that banks will take on nearly 6 trillion yen of new capital from
the government is positive news, but the amount of restructuring and
consolidation which will take place in the sector remains doubtful.
A key problem of the government's stimulus package is that it is designed to
ease the pain temporarily, but not to promote structural adjustment. Not
surprisingly, the combination of higher spending, lower tax rates and a weak
economy have severely undermined the government's fiscal balances. An
estimated government deficit of nearly 10% of GDP (Gross Domestic Products)
will probably limit the government's ability to boost spending further in
2000, and could thus set the stage for another downturn.
The Japanese equity market gained only 5.1% during the year (U.S. dollars).
While we continue to believe the market is overvalued, we have identified a
number of companies whose valuations underestimate the fundamental quality of
their business. The portfolio's low exposure to lagging Japanese stocks was a
positive contributor to performance.
SOUTHEAST ASIA
Declining interest rates, viewed for the past year as a necessary precondition
for Asian recovery, became a reality in the fourth quarter. The increase in
the value of the Japanese yen from 147 yen to the dollar on August 11 to 108
on January 12 has offered stability to other Asian currencies and reduced the
need for a further interest rate prop.
For the region as a whole, output is no longer falling, although there are
clear leaders and laggards. At the extremes are Korea and Malaysia, with the
former already in recovery and the latter still in decline.
Going forward, Asia's prospects cannot be seen in isolation from those of the
rest of the world. But even in the event of a global slowdown, Asia can expect
some recovery in 1999. Sustained low levels of real exchange rates will show
up in further gains in export market shares and provide new incentives for
investment spending. Low inflation and operating rates also provide room for
further interest rate declines, while producers will gain confidence to
replenish their inventories.
After posting disappointing results for the first three quarters of the year,
Asian stock markets recovered sharply in the fourth quarter on the back of
declining interest rates. At the extreme end, Indonesia and Korea have more
than doubled in US dollar terms over the quarter. These markets are not
currently represented in the portfolio, nor are they a part of the benchmark
index. Consequently, our lack of exposure there had no impact on relative
performance. We continue to believe that selective Asian stock markets still
offer reasonable value. Moreover, aside from the yen and the Hong Kong dollar,
currencies are undervalued and are now well supported by current account
surpluses. We also believe, though, that investors are likely to find the next
stage of recovery more complicated.
3
<PAGE>
AUSTRALIA/NEW ZEALAND
Despite slumps in both export volumes and commodity prices due to the Asian
recession, the Australian economy proved resilient throughout 1998. External
drag was more than offset by near-booming consumer spending and increased
infrastructure spending. While GDP growth is likely to slow as construction
spending draws to a close, we believe that a recession will be avoided because
of the big drop in the Australian dollar and low borrowing costs.
While New Zealand was hit hard by the Asian recession, this alone did not
precipitate its recession. Very high interest rates were the trigger for a
contraction in domestic spending, led by residential construction. A 15% fall
in the trade-weighted value of the New Zealand dollar has boosted
international competitiveness, but depressed demand in traditional markets is
holding back the expected benefits. We feel that monetary conditions are now
supportive of economic growth, and with the output gap likely to remain
substantially negative through 1999, are likely to remain supportive for some
time yet.
We believe that both Australia and New Zealand are at attractive levels and we
remain overweight in both countries.
EMERGING MARKETS
The MSCI Emerging Markets Free Index/2/ rebounded strongly late in the year,
with a 17.3% fourth-quarter rise going some way to offsetting the collapse
earlier in the year.
Russian stocks managed a 68.4% recovery in the fourth quarter, as some modest
progress was made in debt restructuring negotiations. Nevertheless, the
overall performance of the market for the year was still a disastrous 83.2%
fall in dollar terms.
Brazil continues to give cause for concern. A loan package amounting to $41
billion was agreed during the period with the International Monetary Fund
(IMF) and other international lenders. Currency outflows remained high, mainly
as a result of debt servicing commitments, and though these had been the
reason for the need for IMF assistance in the first place, investors remained
very nervous. The failure of Brazil's Congress to pass one of the proposed
reform measures reinforced international concerns that the crisis was not
being taken sufficiently seriously by the local politicians.
In a number of emerging markets, there is an inconsistency between the
condition of the overall economy and the valuation levels for the stocks. In
Brazil's case, the poor economic situation has hit stock performance despite
the fact that companies are financially strong and still have earnings
strength from restructuring benefits. In Korea's case, by contrast, sensible
measures by the government have been rewarded by a strong equity market,
despite corporate earnings prospects and balance sheets continuing to look
problematical.
Given the high risk currently in developing markets, HSBC's portfolio has no
exposure at this time.
CURRENCY BACKGROUND
The dollar ended the year weaker, which primarily was due to a sharp rise in
the yen. Dollar weakness probably reflects low savings and the continuing
current account deficit. At about 3% of GDP, it may not be too much of a
problem in itself, but its persistence over some years has left the U.S. with
a negative external asset situation. This may result in a progressive
undermining of the U.S. dollar during the coming year.
- --------
/2/The MSCI Emerging Markets Free Index is an unmanaged index generally
representative of emerging market securities.
4
<PAGE>
The yen is in an almost opposite situation. Japan saves too much and has a
large surplus, so it needs capital outflow to prevent the yen from rising and
making its economic problems even worse. With yen interest rates already rock-
bottom, the authorities cannot cut them any further to encourage capital
outflows. This makes the yen unusually subject to swings in capital market
sentiment, including capital repatriation by hard-pressed Japanese financial
institutions.
The euro has made a smooth start in terms of market mechanics. First
indications are that bond and equity markets are positive and the currency
itself has risen against both the dollar and pound sterling. This was slightly
better than had been expected, and shows faith in the basically strong current
account of Euroland and its excellent inflation performance. These are early
days, however. GDP forecasts for the euro countries are being trimmed back,
for Germany in particular. When this translates into pressure on government
policy, the new currency will be tested.
Sincerely,
/s/ Walter B. Grimm
Walter B. Grimm
President, HSBC Mutual Funds Trust
The views expressed in this letter reflect those of the president for the
period from October 1998 through the end of the period covered by the report
as stated on the cover. The president's views are subject to change at any
time based on the market and other conditions. Past performance is no
guarantee of future results.
5
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERNATIONAL EQUITY FUND VS. MSCI-EAFE INDEX
Graph Appears Here
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Total Return - Institutional Class Shares Service Class Shares
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inception Inception
1 Year (3/1/95) 1 Year (4/25/94)
- --------------------------------------------------------------------------------
Offering Price(1) N/A N/A 5.80% 2.01%
NAV(2) 11.32% 7.33% 11.32% 3.14%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
WITHOUT MAXIMUM WITH MAXIMUM MSCI-EAFE
SALES CHARGE SALES CHARGE INDEX
<S> <C> <C> <C>
- ---------------------------------------------------------------------
APR 1994 10000 9500 10000
- ---------------------------------------------------------------------
DEC 1994 9550 9069.35 9991
- ---------------------------------------------------------------------
DEC 1995 9970 9468.21 11111
- ---------------------------------------------------------------------
DEC 1996 10600 10066.5 11775
- ---------------------------------------------------------------------
DEC 1997 10382.08 9859.62 11999
- ---------------------------------------------------------------------
DEC 1998 11556.96 10975.44 14420
- ---------------------------------------------------------------------
</TABLE>
Past performance is not predictive of future performance. Without certain fee
waivers, the return would have been lower. The Fund's investment return and
principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than the 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 Service Class
Shares of the International Equity Fund on April 25, 1994 (date of inception)
to a $10,000 investment in the Morgan Stanley Capital International Europe,
Australia and Far East (MSCI-EAFE) Index on that date. All dividends and
capital gain distributions are reinvested. Please refer to the box above for
returns on Institutional Class Shares, which have been offered since March 1,
1995.
The Fund's performance takes into account all applicable fees and expenses.
The Morgan Stanley Capital International Europe, Australia and Far East Index
(MSCI-EAFE) is a broad based capitalization weighted unmanaged index that
represents the general performance of over 1,000 companies of the European,
Australian and Far Eastern equity markets. This index is widely accepted and
does not take into account charges, fees and other expenses.
International investing involves increased risks and volatility.
6
<PAGE>
Board of Trustees
JOHN P. PFANN* Chairman and President, JPP Equities, Inc.
WOLF J. FRANKL* Former Director, North American, Berlin Economic
Development Corporation
HARALD PAUMGARTEN President, Paumgarten and Company
ROBERT A. ROBINSON* Trustee, Henrietta and B. Frederick H. Bugher
Foundation
RICHARD J. LOOS Vice Chairman Emeritus
*Member of the Audit and Nominating Committees
- --------------------------------------------------------------------------------
Officers
WALTER B. GRIMM President
ERIC F. ALMQUIST Senior Vice President
ANTHONY J. FISCHER Vice President
CHARLES L. BOOTH Vice President
PAUL KANE Assistant Treasurer
STEVEN R. HOWARD Secretary
ALAINA V. METZ Assistant Secretary
ROBERT L. TUCH Assistant Secretary
7
<PAGE>
Schedule of Portfolio Investments as of December 31, 1998
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Country/ Percent of
Industry Shares Security Market Value Net Assets
- -------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
EQUITIES
AUSTRALIA
---------
National Australia Bank
Banking 124,000 Ltd..................... $ 1,870,993 2.9%
----------- -----
Brewery 781,000 Fosters Brewing Group... 2,117,331 3.2
----------- -----
Broadcasting &
Publishing 82 News Corp., Ltd......... 542 0.0
----------- -----
Building Materials 707,000 CSR Ltd................. 1,730,246 2.6
----------- -----
Commercial Services 728 Mayne Nickless Ltd...... 2,701 0.0
----------- -----
Industrial Goods &
Services 326,000 Amcor Ltd............... 1,394,289
118,000 Orica Ltd............... 614,476
----------- -----
2,008,765 3.1
----------- -----
Total Australia......... 7,730,578 11.8
----------- -----
FRANCE
------
Banking 10,800 Societe Generale........ 1,749,730 2.6
----------- -----
Industrial Goods & Compagnie de Saint
Services 9,318 Gobain.................. 1,316,128 2.0
----------- -----
Oil & Gas Exploration,
Production, & Services 10,000 Elf Aquitane SA......... 1,156,461 1.8
----------- -----
Telecommunication -
Services & Equipment 13,300 Alcatel Alsthom......... 1,628,569 2.5
----------- -----
Total France............ 5,850,888 8.9
----------- -----
GERMANY
-------
Bayerische Vereinsbank
Banking 15,893 AG...................... 1,245,276 1.9
----------- -----
Chemicals 49,000 Bayer AG................ 2,046,173 3.1
----------- -----
Industrial Goods &
Services 37,400 Siemens AG.............. 2,413,954 3.7
----------- -----
Oil Co. - Integrated 22,600 RWE AG.................. 1,238,199 1.9
----------- -----
Total Germany........... 6,943,602 10.6
----------- -----
</TABLE>
8
<PAGE>
Schedule of Portfolio Investments as of December 31, 1998 (continued)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Country/ Percent of
Industry Shares Security Market Value Net Assets
- ---------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
EQUITIES (continued)
HONG KONG
---------
Diversified 787,000 Wharf Holdings.......... $ 1,147,938 1.8%
----------- -----
Hong Kong Electric
Electric Utility 265,000 Holdings................ 803,857 1.2
----------- -----
Total Hong Kong......... 1,951,795 3.0
----------- -----
JAPAN
-----
Electrical & Electronics 257,000 Hitachi Ltd............. 1,594,906
Matsushita Electric
106,000 Industrial Co........... 1,878,550
----------- -----
3,473,456 5.3
----------- -----
Insurance 65,000 Nichido Fire & Marine
Insurance Company,
Ltd.................... 319,823 0.5
----------- -----
Office Equipment &
Supplies 88,000 Canon Inc............... 1,884,099 2.9
----------- -----
Pharmaceuticals 90,000 Eisai Company, Ltd...... 1,755,372 2.7
----------- -----
Transportation 360 West Japan Railway Co... 1,595,793 2.4
----------- -----
Total Japan............. 9,028,543 13.8
----------- -----
NETHERLANDS
-----------
Financial Services 28,218 ING Groep N.V........... 1,721,649 2.6
----------- -----
Broadcasting &
Publishing 84,400 Elsevier................ 1,182,799 1.8
----------- -----
Royal Dutch Petroleum
Oil Co. - Integrated 35,699 Co...................... 1,778,608 2.8
----------- -----
Total Netherlands....... 4,683,056 7.2
----------- -----
NEW ZEALAND
-----------
Carter Holt Harvey
Paper & Related Products 1,303,000 Ltd..................... 1,170,143 1.8
----------- -----
Telecom Corp Of New
Telecommunications 377,000 Zealand Ltd............. 1,643,013 2.5
----------- -----
Total New Zealand....... 2,813,156 4.3
----------- -----
SINGAPORE
---------
Jardine Matheson
Retail 388,000 Holdings Ltd............ 1,001,040 1.5
----------- -----
Total Singapore......... 1,001,040 1.5
----------- -----
</TABLE>
9
<PAGE>
Schedule of Portfolio Investments as of December 31, 1998 (continued)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Country/ Percent of
Industry Shares Security Market Value Net Assets
- -------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
EQUITIES (continued)
SPAIN
-----
Banco Central
Banking 101,690 Hispanoamer............. $ 1,209,302 1.8%
----------- -----
Electrical & Electronics 74,000 Iberdrola SA............ 1,386,606 2.1
----------- -----
Telecommunications 44,133 Telefonica SA........... 1,965,394
Telefonica SA Rights
44,133 (b)..................... 39,246
----------- -----
2,004,640 3.1
----------- -----
Total Spain............. 4,600,548 7.0
----------- -----
UNITED KINGDOM
--------------
Brewery 157,600 Bass PLC................ 2,217,026 3.4
----------- -----
Blue Circle Industries
Building Products 244,600 PLC..................... 1,412,170
426,300 Taylor Woodrow PLC...... 1,067,463
----------- -----
2,479,633 3.8
----------- -----
Scottish & Southern
Electric Utility 104,821 Energy PLC.............. 1,176,336 1.8
----------- -----
Associated British Foods
Food Products & Services 123,800 PLC..................... 1,155,539 1.8
----------- -----
Health & Personal Care 109,400 Boots Co. PLC........... 1,859,331
62,723 Glaxo Holdings PLC...... 2,150,828
----------- -----
4,010,159 6.2
----------- -----
Machinery & Equipment 192,600 GKN PLC................. 2,574,798 3.9
----------- -----
Metals & Mining 162,800 Rio Tinto PLC........... 1,879,814 2.9
----------- -----
Oil & Gas - Wholesale 229,300 BG PLC.................. 1,448,781 2.2
----------- -----
Telecommunications 193,200 Cable & Wireless PLC.... 2,377,093 3.6
----------- -----
Transportation 181,000 British Airways PLC..... 1,225,671 1.9
----------- -----
Total United Kingdom.... 20,544,850 31.5
----------- -----
Total Equities ......... 65,148,056 99.6
----------- -----
(Cost $58,176,013)
</TABLE>
10
<PAGE>
Schedule of Portfolio Investments as of December 31, 1998 (continued)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Percent of
Security Market Value Net Assets
- --------------------------------------------------------------------------------
<S> <C> <C>
Total Investments ...... $65,148,056 99.6%
----------- -----
(Cost $58,176,013) (a)
Other Assets in Excess
of Liabilities.......... 249,606 0.4
----------- -----
Total Net Assets........ $65,397,662 100.0%
=========== =====
</TABLE>
- --------
Percentages indicated are based on net assets of $65,397,662.
(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
$393,387. Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................................... $7,370,632
Unrealized depreciation.......................................... (791,976)
----------
Net unrealized appreciation...................................... $6,578,656
==========
</TABLE>
(b) Represents non-income producing security.
AG--Aktiengesellschaft (West German stock company)
N.V.--Naamloze Vennootschap (Dutch corporation)
SA--Sociedad Anonima (Spanish corporation)
PLC--Public Limited Company
See Notes to Financial Statements.
11
<PAGE>
Statement of Assets and Liabilities
As of December 31, 1998
INTERNATIONAL EQUITY FUND
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $58,176,013)........... $65,148,056
Cash............................................................. 286,289
Interest and dividends receivable................................ 86,029
Foreign tax reclaims receivable.................................. 43,256
Unrealized appreciation on forward foreign currency exchange
contracts....................................................... 61,450
Prepaid expenses................................................. 4,857
-----------
Total Assets.................................................... 65,629,937
-----------
LIABILITIES:
Foreign currency overdraft....................................... 6,770
Payable for capital shares redeemed.............................. 1,462
Accrued expenses and other payables:
Investment advisory fees........................................ 89,270
Administration fees............................................. 5,459
Accounting and transfer agent fees.............................. 19,541
Other liabilities............................................... 109,773
-----------
Total Liabilities............................................... 232,275
-----------
Net Assets........................................................ $65,397,662
===========
COMPUTATION OF NET ASSET VALUE:
Net Assets:
Institutional Class............................................. $65,138,645
Service Class................................................... 259,017
-----------
Total........................................................... $65,397,662
===========
Shares of beneficial interest issued and outstanding:
($0.001 par value per share, unlimited number of shares
authorized)
Institutional Class............................................. 5,722,439
Service Class................................................... 22,754
-----------
Total........................................................... 5,745,193
===========
Net Asset Value:
Institutional Class--offering and redemption price per share.... $ 11.38
===========
Service Class--redemption price per share....................... $ 11.38
Maximum sales charge............................................ 5.00%
Maximum offering price (Service Class) (Net asset value
of Service Class / (100% - Maximum Sales Charge)............... $ 11.98
===========
COMPOSITION OF NET ASSETS:
Paid-in capital.................................................. $58,802,471
Distributions in excess of net investment income................. (68,928)
Accumulated distributions in excess of net realized gains
from investment and foreign currency transactions............... (370,807)
Net unrealized appreciation from investments and translation
of assets and liabilities denominated in foreign currencies..... 7,034,926
-----------
Net Assets........................................................ $65,397,662
===========
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Statement of Operations
For the year ended December 31, 1998
INTERNATIONAL EQUITY FUND
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $203,598)........... $1,193,860
Interest......................................................... 85,020
----------
Total Income.................................................... 1,278,880
----------
EXPENSES:
Advisory fees.................................................... 589,589
Administration fees.............................................. 98,265
Co-administration fees........................................... 19,653
Shareholder servicer assistance fees (Service shares)............ 115
Distribution fees (Service shares)............................... 1,006
Fund accounting fees............................................. 12,906
Transfer agent fees.............................................. 70,051
Legal fees....................................................... 166,621
Other expenses................................................... 95,128
----------
Gross expense..................................................... 1,053,334
Less: Fee waivers................................................ (306,368)
----------
Net Expenses...................................................... 746,966
----------
Net Investment Income............................................. 531,914
----------
NET REALIZED/UNREALIZED GAINS FROM INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gains from investment and foreign currency
transactions..................................................... 1,450,203
Net change in unrealized appreciation from investments
and assets and liabilities denominated in foreign currencies..... 3,340,139
----------
Net Realized/Unrealized Gains from Investments and Foreign
Currencies....................................................... 4,790,342
----------
Change in Net Assets Resulting from Operations.................... $5,322,256
==========
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Statement of Changes in Net Assets
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
For the For the
Year ended Year ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
From Investment Activities:
OPERATIONS:
Net investment income..................... $ 531,914 $ 157,541
Net realized gains (losses) from
investment and
foreign currency transactions............ 1,450,203 (1,197,928)
Net change in unrealized appreciation
(depreciation) from investments
and assets and liabilities denominated in
foreign currencies....................... 3,340,139 (1,687,823)
----------- -----------
Change in net assets resulting from
operations............................... 5,322,256 (2,728,210)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Institutional Class
From net investment income............... (529,501) (156,823)
In excess of net investment income....... (72,469) (52,622)
From net realized gains from investment
transactions............................ (239,229) --
Service Class
From net investment income............... (2,400) (718)
In excess of net investment income....... -- (241)
From net realized gains from investment
transactions............................ (951) --
----------- -----------
Change in net assets from shareholder
distributions............................ (844,550) (210,404)
----------- -----------
Change in net assets from capital share
transactions............................. (6,847,414) 49,196,756
----------- -----------
Change in net assets...................... (2,369,708) 46,258,142
----------- -----------
NET ASSETS:
Beginning of year......................... 67,767,370 21,509,228
----------- -----------
End of year (including distributions in
excess of net investment
income of $68,928 and $422,475
respectively.)........................... $65,397,662 $67,767,370
=========== ===========
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Notes to Financial Statements
1.Organization
HSBC Mutual Funds Trust (the "Trust") was organized in Massachusetts on
November 1, 1989 as a Massachusetts business trust, and is registered under
the Investment Company Act of 1940, as amended ("1940 Act"), as a
diversified, open-end management investment company with multiple
investment portfolios. The accompanying financial statements and notes
relate only to the International Equity Fund ("the Fund"). The Fund offers
two classes of shares: Institutional Shares and Service Shares. The
Institutional Class is available to customers of financial institutions or
corporations on behalf of their customers or employees, or on behalf of any
trust, pension, profit-sharing or other benefit plan for such customers or
employees. The Service Class is available to all other investors. The
Institutional Class shares and Service Class shares are identical in all
respects except that Institutional Class Shares are not subject to a sales
load or the imposition of any shareholder servicing fees or Rule 12b-1
fees.
The Fund's investment objective is to seek to provide investors with long-
term capital appreciation by investing, under ordinary market conditions,
at least 65% of its total assets in equity securities (including American,
European, and Global Depositary Receipts) issued by companies based outside
of the United States. The balance of the Fund's assets will generally be
invested in equity and debt securities of companies based in the United
States and outside of the United States including bonds and money market
instruments. The Fund may also use other investment practices to enhance
return or to hedge against fluctuations in the value of portfolio
securities.
2.Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of income
and expenses for the period. Actual results could differ from those
estimates.
Securities Valuation: Investments in securities are valued at the last
quoted sale price as of the close of business on the day the valuation is
made, or if a sale is not reported for that day, at the mean between
closing bid and asked prices. Price information for listed securities is
taken from the exchange where the securities are primarily traded.
Investments in futures and related options, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such
exchanges. Other securities for which no quotations are readily available
are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees. Short-term investments having
maturities of 60 days or less are valued at amortized cost, which
approximates market value.
All assets and liabilities initially expressed in foreign currencies are
translated into U.S. dollars at the bid price of such currencies against
the U.S. dollar's last quoted price by a major bank or broker. If such
quotations are not available as of the close of the New York Stock
Exchange, the rate of exchange will be determined in accordance with
policies established in good faith by the Board of Trustees.
Foreign Currencies: Transactions denominated in foreign currencies are
recorded at the prevailing rate of exchange as incurred or earned. Asset
and liability accounts are adjusted to reflect the current rate at the end
of each period. Such adjustments are recorded in "net unrealized
appreciation from investments and translation of
15
<PAGE>
Notes to Financial Statements (continued)
2.Significant Accounting Policies (continued)
assets and liabilities denominated in foreign currencies". Net realized
foreign currency gains or losses include exchange rate differences between
trade date and settlement date for security purchases and sales, and
between the date the Fund records income, expenses and other assets and
liabilities and the date such assets and liabilities are received or paid.
The portion of both realized and unrealized gains and losses on investments
that result from fluctuations in foreign currency exchange rates is not
separately disclosed.
The Fund may enter into forward foreign currency exchange contracts for
investment purposes and to hedge its exposure to changes in foreign
currency exchange rates on its foreign portfolio holdings and to hedge
certain firm purchase and sales commitments denominated in foreign
currencies. A forward foreign currency exchange contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated rate.
The gain or loss arising from the difference between the original contracts
and the closing of such contracts is included in realized gains or losses
from foreign currency transactions. Fluctuations in the value of forward
foreign currency exchange contracts are recorded for financial reporting
purposes as unrealized gains or losses by the Fund until settlement date.
The Fund's custodian will place cash or liquid high grade debt securities
into a segregated account of the Fund in an amount equal to the value of
the Fund's total assets committed to the consummation of forward foreign
exchange contracts requiring the Fund to purchase foreign currency of
foreign exchange contracts entered into for non-hedging purposes. If the
value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Fund's
commitments with respect to such contracts.
Risks may arise from the potential inability of a counterparty to meet the
terms of a contract and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The face or contract amount,
in U.S. dollars reflects the total exposure the Fund has in that particular
currency contract. The Fund had the following outstanding forward foreign
currency exchange contracts as of December 31, 1998:
<TABLE>
<CAPTION>
Foreign Settlement Current Unrealized
Currency Contracts Date Contracted Amount Proceeds Value Appreciation
------------------ ---------- ----------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Sales
Contracts:
British
Pound 1/29/99 (Pounds)1,408,107 $2,369,000 $2,342,808 $26,192
British
Pound 1/29/99 1,481,394 2,500,000 2,464,742 35,258
----------------- ---------- ---------- -------
Total: (Pounds)2,889,501 $4,869,000 $4,807,550 $61,450
================= ========== ========== =======
</TABLE>
Taxes: It is the Fund's policy to continue to comply with the requirements
of the Internal Revenue Code, as amended, applicable to regulated
investment companies, and to distribute substantially all of its taxable
income, and net realized capital gains, if any, to its shareholders.
Therefore, no provision is required for federal income tax. Under the
applicable foreign tax law, a withholding tax may be imposed on interest,
dividends and capital gains earned on foreign investments at various rates.
Where available, the Fund will file for claims on foreign taxes withheld.
Dividends and Distributions: The Fund intends to declare and pay
substantially all of its net investment income and net realized capital
gains, if any, annually in the form of dividends.
16
<PAGE>
Notes to Financial Statements (continued)
2.Significant Accounting Policies (continued)
Dividends and distributions are recorded by the Fund on the ex-dividend
date. The amounts of dividends from net investment income and of
distributions from net realized gains are determined in accordance with
federal income tax regulations that 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, 1998, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to paid-
in capital.
<TABLE>
<CAPTION>
Accumulated Distributions in Excess
of Net Realized Gains from
Distributions in Excess of Investments and Foreign Currency
Net Investment Income Transactions
-------------------------- -----------------------------------
<S> <C> <C>
International Equity
Fund $426,003 ($400,734)
</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. 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, 1998 were $104,619,407 and $108,253,399,
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 a monthly advisory fee at an
annual rate of 0.90% of the Fund's average daily net assets. For the year
ended December 31, 1998, HSBC Asset Management Americas Inc. waived
$252,838 in advisory fees.
17
<PAGE>
Notes to Financial Statements (continued)
4.Related Party Transactions (continued)
HSBC Asset Management America, Inc. appointed Delaware International
Advisers Ltd. to act as investment sub-adviser pursuant to a Subadvisory
Agreement, effective October 1st, 1998. Under the Subadvisory Agreement,
the Subadviser has sole discretion, bonded by the investment policies and
restrictions of the Fund as are set forth in the Fund's prospectus, with
respect to investments of assets in the Fund. The Subadviser receives
compensation equal to an amount based on certain percentages of the Fund's
average daily net assets, all of which is paid by the Investment Adviser.
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 of the Trust are affiliated, serves
the Trust as distributor, administrator, fund accountant and transfer
agent. Such officers are not paid any fees directly by the Fund for serving
as officers of the Trust.
In accordance with the terms of the Management and Administration and Fund
Accounting Agreements, BISYS is paid a monthly fee equal to an annual rate
of 0.15% of the Fund's average daily net assets. For the year ended
December 31, 1998, BISYS waived $32,756 in administrative services fees.
HSBC Asset Management Americas Inc. is entitled to co-administration fees
of up to 0.03% of the Fund's average net assets and shareholder servicer
assistance fees of up to 0.04% of the Service Class's average net assets.
For the year ended December 31, 1998 the aforementioned fees totaled
$19,653 and $115 respectively, all of which were waived.
The Fund has adopted a Distribution Plan and Agreement (the "Plan")
pursuant to Rule 12b-1 of the 1940 Act with respect to Service Shares of
the Fund. The Service Class Plan provides for a monthly payment by the Fund
to BISYS for expenses incurred in connection with distribution services
provided to the Fund not to exceed an annual rate of 0.35% of the Fund's
average net assets. The Fund incurred expenses totaling $1,006 with regard
to the Plan for the year ended December 31, 1998, all of which was waived.
As distributor, BISYS is entitled to receive commissions on sales of shares
of the Fund. For the year ended December 31, 1998, BISYS received $108 from
commissions earned on sales of shares of the Fund, $43 of which was
reallowed to affiliated broker/dealers of the Fund, $65 of which was
retained by BISYS.
The Fund may enter into agreements (the "Service Agreements") with certain
banks, financial institutions and corporations ("Service Organizations")
whereby each Service Organization handles recordkeeping 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 Funds'
shares held in the subaccounts of the Service Organizations. For the year
ended December 31, 1998, the Fund did not participate in any Service
Agreements.
A partner of the Trust's legal counsel served as Secretary of the Trust.
Baker & McKenzie served as legal counsel until April 2, 1998. Paul, Weiss,
Rifkind, Wharton and Garrison assumed the role of legal counsel as of April
3, 1998. For the year ended December 31, 1998, legal fees incurred by the
Fund totaled $166,621.
18
<PAGE>
Notes to Financial Statements (continued)
5.Capital Share Transactions
Transactions in capital shares for the Fund were as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
------------------------ ------------------------
Amount Shares Amount Shares
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Institutional Class
Shares:
Shares issued $ 20,085,592 1,642,226 $ 22,732,764 2,100,838
Shares issued in common
trust
fund conversion -- -- 41,892,562 3,815,352
Shares reinvested 239,264 20,933 -- --
Shares redeemed (27,092,926) (2,460,775) (15,334,320) (1,384,639)
------------ ---------- ------------ ----------
Net increase (decrease) $ (6,768,070) (797,616) $ 49,291,006 4,531,551
============ ========== ============ ==========
Service Class Shares:
Shares issued $ 3,560 333 $ 18,757 1,663
Shares reinvested 4,310 377 -- --
Shares redeemed (87,214) (7,824) (113,007) (10,373)
------------ ---------- ------------ ----------
Net decrease $ (79,344) (7,114) $ (94,250) (8,710)
============ ========== ============ ==========
</TABLE>
6.Common Trust Fund Conversion
On September 2, 1997, the Fund issued Institutional shares in a tax-free
conversion to acquire the assets and liabilities of the Diversified
International Equity Fund of Marine Midland Bank. The following is a
summary of the shares issued, net assets acquired, net asset value per
share and unrealized appreciation on the investments transferred as of the
date transferred:
<TABLE>
<CAPTION>
Net Asset Unrealized
Shares Net Assets Value Appreciation
--------- ----------- --------- ------------
<S> <C> <C> <C> <C>
International Equity Fund 3,815,352 $41,892,562 $10.98 $3,820,904
</TABLE>
The net assets of the Fund prior to the conversion were $36,660,474.
7.Federal Income Tax Information (Unaudited)
For the taxable year ended December 31, 1998 the International Equity Fund
declared long-term capital gain distributions of $269,527.
8.Results of Shareholder Meeting (Unaudited)
On September 25, 1998, a Special Meeting of the Shareholders of the
International Equity Fund was held to approve the following changes to the
Fund:
19
<PAGE>
Notes to Financial Statements (continued)
8.Results of Shareholder Meeting (Unaudited) (continued)
A new Sub-Advisory Agreement between the HSBC Asset Management Americas
Inc. and Delaware International Advisers Ltd. for the HSBC International
Equity Fund.
<TABLE>
<CAPTION>
% of % of
Outstanding Shares
No. of Shares Shares Voted
------------- ----------- -------
<S> <C> <C> <C>
FOR: 5,331,331 88.04% 99.85%
AGAINST: 2,146 0.04% 0.04%
ABSTAIN: 5,715 0.09% 0.11%
TOTAL: 5,339,192 88.17% 100.00%
</TABLE>
A change to the investment objective of the Fund to seek to provide
investors with long-term capital appreciation by investing, under ordinary
market conditions, at least 65% of its total assets in equity securities
(including American, European, and Global Depositary Receipts) issued by
companies based outside the United States. The Fund's investment objective
was to seek to provide investors with long-term capital appreciation by
investing at least 80% of its total assets in equity securities (including
American and European Depositary Receipts) issued by companies based
outside of the United States.
<TABLE>
<CAPTION>
% of % of
Outstanding Shares
No. of Shares Shares Voted
------------- ----------- -------
<S> <C> <C> <C>
FOR: 5,319,291 87.84% 99.63%
AGAINST: 16,991 0.28% 0.32%
ABSTAIN: 2,910 0.05% 0.05%
TOTAL: 5,339,192 88.17% 100.00%
</TABLE>
A change to the investment policies of the Fund to remove the restriction
on the Fund purchasing securities of any company with a record of less than
three years' continuous operation if such purchase would cause the Fund's
investment in all such companies taken at cost to exceed 5% of the fund's
total assets taken at market value.
<TABLE>
<CAPTION>
% of % of
Outstanding Shares
No. of Shares Shares Voted
------------- ----------- -------
<S> <C> <C> <C>
FOR: 5,319,440 87.85% 99.63%
AGAINST: 16,036 0.26% 0.30%
ABSTAIN: 3,716 0.06% 0.07%
TOTAL: 5,339,192 88.17% 100.00%
</TABLE>
20
<PAGE>
Notes to Financial Statements (continued)
8.Results of Shareholder Meeting (Unaudited) (continued)
A change in the investment policies of the Fund to remove the restriction
on the Fund investing in warrants in excess of 5% of the Fund's net assets,
and to remove the restriction on the Fund investing in warrants which are
listed on the New York or American Stock Exchanges in excess of 2% of the
Fund's net assets.
<TABLE>
<CAPTION>
% of % of
Outstanding Shares
No. of Shares Shares Voted
------------- ----------- -------
<S> <C> <C> <C>
FOR: 5,318,734 87.83% 99.62%
AGAINST: 10,167 0.17% 0.19%
ABSTAIN: 10,291 0.17% 0.19%
TOTAL: 5,339,192 88.17% 100.00%
</TABLE>
A change in the investment policies of the Fund to remove the restriction
on the Fund purchasing or retaining securities of any company which the
officers and trustees of the Trust and officers and directors of the
Adviser who individually own more than 1/2 of 1% of the securities of that
company, together own beneficially more than 5% of such securities.
<TABLE>
<CAPTION>
% of % of
Outstanding Shares
No. of Shares Shares Voted
------------- ----------- -------
<S> <C> <C> <C>
FOR: 5,317,575 87.81% 99.60%
AGAINST: 11,374 0.19% 0.21%
ABSTAIN: 10,243 0.17% 0.19%
TOTAL: 5,339,192 88.17% 100.00%
</TABLE>
21
<PAGE>
FINANCIAL HIGHLIGHTS
HSBC INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Institutional Class Shares
-------------------------------------------------------------------------
For the For the For the For the Period
Year ended Year ended Year ended March 1, 1995(c) to
December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 10.35 $ 10.61 $ 9.98 $ 8.81
------- ------- ------- -------
Investment Activities
Net investment income.. 0.08 0.04** (0.01) (0.03)
Net realized and
unrealized gains
from investment and
foreign
currency
transactions.......... 1.09 (0.27) 0.64 1.20
------- ------- ------- -------
Total from Investment
Activities............ 1.17 (0.23) 0.63 1.17
------- ------- ------- -------
Distributions
From net investment
income................ (0.08) (0.02) -- --
In excess of net
investment income..... (0.02) (0.01) -- --
From net realized
gains................. (0.04) -- -- --
------- ------- ------- -------
Total Distributions..... (0.14) (0.03) -- --
------- ------- ------- -------
Net Asset Value, End of
Period................. $ 11.38 $ 10.35 $ 10.61 $ 9.98
======= ======= ======= =======
Total Return (excludes
sales or
redemption charges).... 11.32% (2.15)% 6.31% 13.28%(a)
Ratios/Supplemental
Data:
Net Assets at end of
period (000).......... $65,139 $67,458 $21,110 $15,253
Ratio of expenses to
average net assets.... 1.14% 1.12% 2.04% 2.62%(b)
Ratio of net investment
income to average net
assets................ 0.81% 0.35% (0.10)% (0.34)%(b)
Ratio of expenses to
average net assets*... 1.61% 1.91% 2.89% 3.12%(b)
Portfolio turnover
rate***............... 163.90% 112.54% 77.91% 90.31%(a)
</TABLE>
- --------
* 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.
** Based on average shares outstanding.
*** Portfolio turnover is calculated on the basis of the fund as a whole
without distinguishing between the classes of shares issued.
(a) Not annualized
(b) Annualized
(c) Commencement of operations.
22
<PAGE>
<TABLE>
<CAPTION>
Service Class Shares
- ---------------------------------------------------------------------------------------------
For the For the For the For the For the Period
Year ended Year ended Year ended Year ended April 25, 1994(c) to
December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994
- ----------------- ----------------- ----------------- ----------------- --------------------
<S> <C> <C> <C> <C>
$ 10.35 $10.60 $ 9.97 $ 9.55 $ 10.00
------- ------ ------ ------ -------
0.08 0.06** (0.02) (0.07) --
1.09 (0.28) 0.65 0.49 (0.43)
------- ------ ------ ------ -------
1.17 (0.22) 0.63 0.42 (0.43)
------- ------ ------ ------ -------
(0.10) (0.03) -- -- --
-- -- -- -- (0.02)
(0.04) -- -- -- --
------- ------ ------ ------ -------
(0.14) (0.03) -- -- (0.02)
------- ------ ------ ------ -------
$ 11.38 $10.35 $10.60 $ 9.97 $ 9.55
======= ====== ====== ====== =======
11.32% (2.06)% 6.32% 4.40% (4.30)%(a)
$ 259 $ 309 $ 409 $ 658 $16,819
1.12% 1.17% 2.10% 1.98% 2.16%(b)
0.81% 0.54% (0.19)% (1.01)% (0.04)%(b)
1.94% 2.19% 2.94% 3.66% 2.50%(b)
163.90% 112.54% 77.91% 90.31% 29.37%(a)
</TABLE>
23
<PAGE>
Report of Independent Auditors
The Board of Trustees and Shareholders
HSBC Mutual Funds Trust
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of the International Equity
Fund (one of the portfolios comprising HSBC Mutual Funds Trust) as of December
31, 1998, 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 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, 1998, by correspondence
with the custodian. 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
International Equity Fund at December 31, 1998, 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 periods, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
February 12, 1999
24
<PAGE>
HSBC Mutual Funds Trust
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Logo HSBS Asset Management
Americas Inc.
- --------------------------------------------------------------------------------
International Equity Fund
HSBC /SM/ 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
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
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.
2/99
Annual Report
December 31, 1998
Managed by:
HSBC Asset Management Americas Inc.
Sponsored and distributed by:
BISYS Fund Services
