<PAGE>
HSBC Mutual Funds Trust
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[LOGO OF HSBC ASSET MANAGEMENT AMERICAS INC. APPEARS HERE]
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International Equity Fund
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January 31, 2000
Dear Shareholder:
Executive Summary and Equity Strategy
- -------------------------------------
The MSCI-EAFE index* had a remarkably strong second half of 1999 rising by
22.12% in US dollar terms. Returns were dominated once more by the Japanese and
Scandinavian equity markets where there were rises of greater than 30% and 50%
respectively. Currencies continued in the same direction as was seen in the
first half of the year with the yen showing significant strength. It rose by
over 18% against the U.S. dollar in the six months ending December 1999.
Although not included within the EAFE universe, emerging markets continued to
improve both economically and at the equity market level. The recovery in these
smaller economies has been spectacular reflecting the solid state of the world
economy and their oversold status in 1998.
Polarization of returns was not only evident at the market and currency levels
but at the stock level as well. The trend towards greater market breadth seen
in the second quarter was completely reversed with two sectors dominating the
return picture. Technology and Telecommunications accounted for the lions share
of the local market performance, made all the more remarkable by the beginnings
of an uptick in the interest rate cycle. Present narrowness of focus is even
more extreme than that witnessed in 1998.
Against this backdrop performance lagged the index in the second half of the
year. It was adversely affected in all three attributes of international
performance. Our underweight position in the Yen negatively impacted currency
selection and at the market level the strength of the Scandinavian markets,
where we have zero exposure, adversely impacted the Fund. The focus on the
growth sectors of technology and telecommunications at the expense of value
(where we are overweight) impacted stock selection adversely.
In 1999, investors focused a lot of energy on the good news coming out of
Japan: nascent signs of economic recovery and tantalizing forays into corporate
restructuring. While we acknowledge the progress of the past eighteen months,
the pace of change is still very slow, the economic recovery fragile, and most
companies continue to destroy shareholder value. Stock valuations do not
generally reflect this reality.
The single minded focus of investors, strong economic growth and low inflation
has left large sections of the international stock markets offering even better
value than twelve months ago. Last year, prices of 70% of the stocks in the S&P
500 actually fell, while in Japan, one of the strongest world markets, almost
60% of the First Section companies offered negative returns.
Our broad portfolio focus remains unchanged. The portfolio is significantly
overweight in the "Anglo-Saxon' markets of the United Kingdom, Australia and
New Zealand. All three are beneficiaries of rising commodity prices, even the
UK is a net oil exporter. We retain a significant position in continental
Europe where we like Spain, and the Netherlands in particular.
- ------
*The MSCI-EAFE Index is an unmanaged index generally representative of emerging
market securities.
<PAGE>
When a currency is very overvalued we will consider hedging the fund's
exposure back into U.S. dollars for defensive purposes. Most currencies offer
fair value versus the U.S. dollar and therefore there are no currency hedges
in place at the present time.
We continue to focus on identifying long term value for the Funds investors.
Excellent opportunities abound at the stock level in international markets
despite their strength in the second half of 1999.
Economic Outlook
- ----------------
US demand growth is fast, money supply soaring and unemployment rock bottom,
but inflation is still low. Some of that demand is leaking out of the safety
valve of a huge balance of payments deficit. In Q3 it was already $1 billion a
day, and with a record October trade deficit of $26 billion, Q4 was worse. Yet
the Fed is still dragging its feet on interest rates. Yes, inflation is still
low, but it is dangerous to ignore tight labor markets, low savings and the
need to rely on foreign capital. December's standstill on interest rates
reflected misplaced Y2K concerns. Early in January, Mr. Greenspan was re-
appointed chairman for another four years. This clears the decks for rate
rises, and the Fed may have to be less gradualist if it wants to cool the
economy within a reasonable period. Another symptom of the final phase of the
U.S. boom will probably be a fall in the value of U.S. assets, coming from a
fall in domestic profits and stock valuations, and internationally from a fall
in the value of the dollar.
World growth will probably be quite strong in 2000. While the US will remain
on a high, growth is improving in Europe, especially in the euro zone. The
cheaper euro is generating a sharp rise in export demand, and industrial
confidence is strong. Growth is concentrated in France, Italy and Spain, while
Germany is less bouncy. Possibly, the DM was locked in to the euro a little
too high. Despite a weak Q3, Japan is more stable now, and the rest of Asia is
strong. Australia will be boosted by the Olympics in 2000, and also by
stronger prices for soft commodities, which would also help New Zealand. In
all, there may be fewer black spots on world growth this year. Inflation is
still very much under control everywhere. Wage pressures remain subdued by
global competition, and by continued low inflation expectations.
Political Outlook
- -----------------
China has joined the World Trade Organization; unthinkable not so long ago. In
time, China's signing up to free trade and free markets may be seen as a
keynote of the last year of the old millennium. However, the WTO has problems.
As boring old GATT (General Agreement on Tariffs and Trade), it could quietly
get on with the nitty-gritty of trade talks, out of the political glare.
December's Seattle meeting may have changed that. The meeting was badly run by
the U.S., allowing the WTO to be seen as pro big business and anti-
environment. There may be serious long-term damage. GATT has made a huge
contribution to the prosperity of the last 50 years and been given little
credit for it.
Did president Yeltsin think he needed to secure a place in history by quitting
on the last day of 1999? The timing was useful in dramatizing the event for
Russians and maybe the world too. Acting president Putin looks to be the most
likely successor. In view of the Chechen war, it is encouraging that no
extremist looks a likely winner.
In Europe, an important political process has begun with the listing of
countries suitable to apply to join the EU. Turkey is there, but unlikely to
get in. It is too poor, too big, too embarrassing and has a big dispute with
Greece. The process will be delicate, for it implies separating Eastern Europe
away from Russia. There will be investment opportunities as their capital
markets develop and perhaps converge toward western valuation levels.
2
<PAGE>
A little unexpectedly, New Zealand elected a more leftist government. Its slim
majority means the new parliament may not run a full term. Public spending may
rise somewhat, but no great change in monetary policy is expected.
Currency Outlook
- ----------------
Over the whole of 1999, the dollar averaged a rise of 4%. It is hard to
believe that this perception of the dollar will stay around much longer. Its
huge payments deficit means that the US is dependent on foreign capital. Take
away that large capital inflow, and the dollar has to fall. The euro, where
there is a big surplus, should be one beneficiary, and by now the fall in the
euro looks overdone. Japan has a big surplus too, but the authorities there
will not be happy to see a large rise in the yen, which would threaten
recovery. Canada, Australia and New Zealand are at very competitive levels, so
they should also benefit from dollar weakness. During 2000, currency trends
should run in favor of the dollar based bond investor.
Fixed Income Outlook
- --------------------
This year markets should retrace many of the trends of 1999. Japan offers even
worse real value now, so it would be a surprise if it were again the star. Its
economy is picking up, so zero interest rates and public sector debt
ballooning over 100% of GNP both point to an inflation risk, and we do not
expect the yen to rise, as it would undermine Japan's recovery. Europe has a
strong balance of payments, the economy is livelier, and the European Central
Bank hawkish. Inflation is low, so both bonds and the euro itself should do
relatively well. In contrast, the strategic position of dollar bonds is weak.
The Fed has let the US boom run too long and too fast. The result has been a
big hole in the balance of payments and almost certainly faster inflation on
the way.
Best returns for dollar investors are likely to be found outside the US, with
the euro zone and the non-US dollars also offering attractive real value.
Another consideration is that, while global bonds may not promise huge
returns, they do offer less risk than is apparent in some other sectors.
Sincerely,
/s/ C. Gillmore
Clive Gillmore
Regional Research Director, Equities
Delaware International Advisers Ltd.
- --------
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.
The manager's views are subject to change at any time based on the market and
other conditions. Past performance is no guarantee of future results.
3
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
INTERNATIONAL EQUITY FUND VS. MSCI-EAFE INDEX
[LINE CHART HERE]
International International
Equity Fund- Equity Fund-
Class A Class A MSCI-EAFE
(without load) (with load) Index
DEC 1993 10000 9497 10000
DEC 1994 9550 9069 10008
DEC 1995 9970 9468 11164
DEC 1996 10600 10066 11874
DEC 1997 10382 9860 12118
DEC 1998 11557 10975 14582
DEC 1999 13853 13156 18563
[CHART APPEARS HERE]
The performance data quoted represents past performance and is not an
indication of future results. The investment return and net asset 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 International
Equity Fund, Class A shares, 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 reflects the waiver and reimbursement of a portion of
the Fund's fees. Without waiver and reimbursement the performance for the
period would have been lower. The MSCI-EAFE Index 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. The index is widely accepted and does not reflect the
expenses associated with a mutual fund, such as investment management and fund
accounting fees. The Fund's performance reflects the deduction of fees for
these value added services.
An investor can not invest directly in an index.
International investing involves increased risks and volatility.
4
<PAGE>
Board of Trustees
WOLF J. FRANKL Former Director, North America, Berlin Economic
Development Corporation
JEFFREY J. HASS Professor of Law, New York Law School
RICHARD J. LOOS Former Managing Director, HSBC Asset Management
Americas, Inc.
CLIFTON H.W. MALONEY President, C.H.W. Maloney & Co. Incorporated
JOHN C. MEDITZ President, Horizon Asset Management, Inc.
HARALD PAUMGARTEN Managing Director, Heritage Capital Corp.
JOHN P. PFANN Former Senior Vice President and Treasurer, ITT
ROBERT A. ROBINSON Trustee, Henrietta and B. Frederick H. Bugher
Foundation
- --------------------------------------------------------------------------------
Officers
WALTER B. GRIMM President
ERIC F. ALMQUIST Senior Vice President
ANTHONY J. FISCHER Vice President
CHARLES L. BOOTH Vice President
JOEL B. ENGLE Treasurer
STEVEN R. HOWARD Secretary
ALAINA V. METZ Assistant Secretary
ROBERT L. TUCH Assistant Secretary
5
<PAGE>
Schedule of Portfolio Investments as of December 31, 1999
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 135,550 Ltd.................... $ 2,066,327 3.0%
----------- ----
Brewery 631,000 Fosters Brewing Group... 1,804,074 2.6
----------- ----
Building Materials 615,900 CSR Ltd................. 1,490,924 2.1
----------- ----
Industrial Goods &
Services 321,000 Amcor Ltd............... 1,498,242 2.2
121,173 Orica Ltd............... 650,868 0.9
----------- ----
2,149,110 3.1
----------- ----
Total Australia......... 7,510,435 10.8
----------- ----
BELGIUM
-------
Oil Co. - Integrated 3,220 Electrabel SA........... 1,054,715 1.5
----------- ----
FRANCE
------
Banking 5,500 Societe Generale........ 1,280,474 1.8
----------- ----
Industrial Goods & Compagnie de Saint
Services 7,268 Gobain................. 1,367,588 2.0
----------- ----
Oil & Gas Exploration,
Production, & Services 9 Elf Aquitane SA......... 1,388 0.0
----------- ----
Oil Co. - Integrated 11,533 Total SA, Class B....... 1,540,118 2.2
----------- ----
Telecommunication -
Services & Equipment 7,100 Alcatel Alsthom......... 1,631,507 2.4
----------- ----
Total France............ 5,821,075 8.4
----------- ----
GERMANY
-------
Bayerische Vereinsbank
Banking 30,293 AG..................... 2,069,989 3.0
----------- ----
Chemicals 49,000 Bayer AG................ 2,321,079 3.3
----------- ----
Industrial Goods &
Services 15,250 Siemens AG.............. 1,941,195 2.8
----------- ----
Oil Co. - Integrated 43,980 RWE AG.................. 1,724,252 2.5
----------- ----
Total Germany........... 8,056,515 11.6
----------- ----
</TABLE>
6
<PAGE>
Schedule of Portfolio Investments as of December 31, 1999 (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 385,485 Wharf Holdings.......... $ 894,995 1.3%
----------- ----
Hong Kong Electric
Electric Utility 265,000 Holdings............... 828,301 1.2
----------- ----
Total Hong Kong......... 1,723,296 2.5
----------- ----
JAPAN
-----
Electrical & Electronics 178,000 Hitachi Ltd............. 2,852,453 4.2
Matsushita Electric
68,000 Industrial Co.......... 1,880,399 2.7
----------- ----
4,732,852 6.9
----------- ----
Insurance 65,000 Nichido Fire & Marine
Insurance Co., Ltd..... 373,461 0.5
----------- ----
Office Equipment &
Supplies 60,000 Canon Inc............... 2,380,301 3.5
----------- ----
Pharmaceuticals 66,000 Eisai Co., Ltd.......... 1,267,246 1.8
----------- ----
Transportation 360 West Japan Railway Co... 1,273,402 1.8
----------- ----
Total Japan............. 10,027,262 14.5
----------- ----
NETHERLANDS
-----------
Banking 28,877 ING Groep NV............ 1,744,475 2.5
----------- ----
Broadcasting &
Publishing 173,200 Elsevier................ 2,070,277 3.0
----------- ----
Royal Dutch Petroleum
Oil Co. - Integrated 37,399 Co..................... 2,293,594 3.3
----------- ----
Total Netherlands....... 6,108,346 8.8
----------- ----
NEW ZEALAND
-----------
Carter Holt Harvey
Paper & Related Products 487,000 Ltd.................... 634,622 0.9
----------- ----
Telecom Corp. of New
Telecommunications 310,000 Zealand Ltd............ 1,454,288 2.1
----------- ----
Total New Zealand....... 2,088,910 3.0
----------- ----
SINGAPORE
---------
Jardine Matheson
Retail 151,000 Holdings Ltd........... 594,940 0.9
----------- ----
</TABLE>
7
<PAGE>
Schedule of Portfolio Investments as of December 31, 1999 (continued)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Country/ Percent of
Industry Shares Security Market Value Net Assets
- -------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
EQUITIES (continued)
SOUTH AFRICA
------------
Insurance 563,200 Sanlam Ltd.............. $ 786,925 1.2%
----------- ---
Oil & Gas Exploration,
Production, & Services 44,000 Sasol Ltd............... 361,007 0.5
----------- ---
Total South Africa...... 1,147,932 1.7
----------- ---
SPAIN
-----
Banco Central
Banking 122,028 Hispanoamer............ 1,382,362 2.0
----------- ---
Electrical & Electronics 121,510 Iberdrola SA............ 1,685,103 2.4
----------- ---
Telecommunications 74,859 Telefonica SA........... 1,871,077 2.7
----------- ---
Total Spain............. 4,938,542 7.1
----------- ---
UNITED KINGDOM
--------------
Brewery 149,700 Bass PLC................ 1,858,082 2.7
----------- ---
Blue Circle Industries
Building Products 273,200 PLC.................... 1,563,110 2.2
426,300 Taylor Woodrow PLC...... 922,613 1.3
----------- ---
2,485,723 3.5
----------- ---
Electric Utility 205,099 PowerGen PLC............ 1,461,664 2.1
----------- ---
Associated British Foods
Food Products & Services 108,944 PLC.................... 599,568 0.9
----------- ---
Health & Personal Care 157,400 Boots Co. PLC........... 1,535,468 2.2
62,723 Glaxo Wellcome PLC...... 1,776,869 2.5
----------- ---
3,312,337 4.7
----------- ---
Machinery & Equipment 114,200 GKN PLC................. 1,853,666 2.7
----------- ---
Metals & Mining 48,900 Rio Tinto PLC........... 1,175,198 1.7
----------- ---
Oil & Gas Exploration,
Production, & Services 303,111 BG Group PLC............ 1,942,307 2.8
----------- ---
Great Universal Stores
Retail 326,480 PLC.................... 1,811,267 2.6
----------- ---
Telecommunications 133,400 Cable & Wireless PLC.... 2,255,806 3.3
----------- ---
</TABLE>
8
<PAGE>
Schedule of Portfolio Investments as of December 31, 1999 (continued)
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Country/ Percent of
Industry Shares Security Market Value Net Assets
- -------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
EQUITIES (continued)
UNITED KINGDOM (continued)
--------------------------
Transportation 237,500 British Airways PLC..... $ 1,545,852 2.2%
----------- -----
Total United Kingdom.... 20,301,470 29.2
----------- -----
Total Equities
(Cost - $58,604,261)... 69,373,438 100.0
----------- -----
TOTAL (Cost -
$58,604,261)(a)....... $69,373,438 100.0%
=========== =====
</TABLE>
- --------
Percentages are based on market value of investments of $69,373,438.
(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
$23,077. Cost for Federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......................................... $15,210,881
Unrealized depreciation.......................................... (4,464,781)
-----------
Net unrealized appreciation...................................... $10,746,100
===========
</TABLE>
(b) Represents non-income producing security.
AG - Aktiengesellschaft (German stock company)
NV - Naamloze Vennootschap (Dutch corporation)
PLC - Public Limited Company
SA - Societe Anonyme (French corporation)
See Notes to Financial Statements.
9
<PAGE>
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
<S> <C>
ASSETS:
Investments in securities, at value (cost $58,604,261)............ $69,373,438
Cash.............................................................. 660,976
Interest and dividends receivable................................. 287,283
Receivable for capital shares sold................................ 55,154
Foreign tax reclaims receivable................................... 75,872
Prepaid expenses.................................................. 9,641
-----------
Total Assets....................................................... 70,462,364
-----------
LIABILITIES:
Payable for capital shares redeemed............................... 608
Accrued expenses and other payables:
Investment advisory fee.......................................... 32,301
Administration fee............................................... 5,952
Audit Fees....................................................... 20,879
Custodian Fees................................................... 26,793
Transfer agent fees.............................................. 12,878
Other............................................................ 54,012
-----------
Total Liabilities.................................................. 153,423
-----------
Net Assets......................................................... $70,308,941
===========
COMPUTATION OF NET ASSET VALUE:
Net Assets:
Institutional Class.............................................. $70,059,552
Class A.......................................................... 249,389
-----------
Total............................................................ $70,308,941
===========
Shares of beneficial interest issued and outstanding:
($0.001 par value per share, unlimited number of shares
authorized)
Institutional Class.............................................. 5,576,162
Class A.......................................................... 19,851
-----------
Total............................................................ 5,596,013
===========
Net Asset Value:
Institutional Class--offering and redemption price per share..... $ 12.56
===========
Class A--redemption price per share.............................. $ 12.56
Maximum sales charge............................................. 5.00%
Maximum offering price (Class A) (Net asset value of Class A /
(100% - Maximum sales charge)).................................. $ 13.22
===========
COMPOSITION OF NET ASSETS:
Paid-in capital................................................... $57,530,269
Accumulated undistributed net realized gains from investment and
foreign currency transactions.................................... 2,006,744
Net unrealized appreciation from investments and translation of
assets and liabilities denominated in foreign currencies......... 10,771,928
-----------
Net Assets......................................................... $70,308,941
===========
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Statement of Operations
For the year ended December 31, 1999
INTERNATIONAL EQUITY FUND
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $153,732)............ $ 1,843,913
-----------
Total Income....................................................... 1,843,913
-----------
EXPENSES:
Investment Advisory fees.......................................... 586,022
Administration fees............................................... 97,671
Co-administration and shareholder servicing fees.................. 45,589
Service organization fees (Class A)............................... 96
Distribution fees (Class A )...................................... 263
Legal fees........................................................ 66,569
Printing costs.................................................... 59,286
Transfer agent fees............................................... 25,989
Other expenses.................................................... 75,334
-----------
Total expenses before fee reductions and reimbursements.......... 956,819
Fee reductions and reimbursement of expenses..................... (304,075)
-----------
Net Expenses....................................................... 652,744
-----------
Net Investment Income.............................................. 1,191,169
-----------
NET REALIZED/UNREALIZED GAINS FROM INVESTMENTS AND FOREIGN
CURRENCIES:
Net realized gains from investment and foreign currency
transactions..................................................... 7,163,117
Net change in unrealized appreciation from investments............ 3,737,002
-----------
Net Realized/Unrealized Gains from Investments and Foreign
Currencies....................................................... 10,900,119
-----------
Change in Net Assets Resulting from Operations..................... $12,091,288
===========
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
International Equity Fund
----------------------------------
For the For the
year ended year ended
December 31, 1999 December 31,1998
----------------- ----------------
<S> <C> <C>
From Investment Activities:
OPERATIONS:
Net investment income...................... $ 1,191,169 $ 531,914
Net realized gains from investment and
foreign currency transactions............. 7,163,117 1,450,203
Net change in unrealized appreciation from
investments............................... 3,737,002 3,340,139
----------- -----------
Change in net assets resulting from
operations................................ 12,091,288 5,322,256
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Institutional Class
From net investment income................ (1,118,602) (529,501)
In excess of net investment income........ (350,209) (72,469)
From net realized gains................... (4,419,816) (239,229)
Class A*
From net investment income................ (3,639) (2,400)
In excess of net investment income........ (1,139) --
From net realized gains................... (14,402) (951)
----------- -----------
Change in net assets from shareholder
distributions............................. (5,907,807) (844,550)
----------- -----------
Change in net assets from capital share
transactions.............................. (1,272,202) (6,847,414)
----------- -----------
Change in Net Assets....................... 4,911,279 (2,369,708)
----------- -----------
NET ASSETS:
Beginning of year.......................... 65,397,662 67,767,370
----------- -----------
End of year................................ $70,308,941 $65,397,662
=========== ===========
</TABLE>
- --------
* Prior to July 1, 1999, Class A was known as the Service Class.
See Notes to Financial Statements.
12
<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.
Effective July 1, 1999 the International Equity Fund (herein after as the
"Fund") was authorized to issue four classes of shares as follows:
Institutional, Class A, Class B and Class C. At December 31, 1999, the Fund
had not issued any Class B and Class C shares. Class A shares are subject
to a sales load as described in the prospectus. Class B and Class C shares
are subject to a contingent deferred sales charge at the time of the
redemption, as described in the Fund's prospectus. Class A, Class B, and
Class C shares bear distribution (12b-1) fees and service organization
fees. The Institutional class is not subject to a sales load, or the
imposition of service organization or distribution (12b-1) fees. Each class
has identical rights and privileges except with respect to the distribution
(12b-1) fees paid by Class A, Class B, and Class C shares, the service
organization fees paid by each respective class, voting matters affecting a
single class of shares and the exchange privileges of each class of shares.
The Fund's investment objective is to provide investors with long-term
capital appreciation by investing at least 65% of its total assets in
equity securities (including American and European Depositary Receipts)
issued by companies based outside of the United States. The balance of the
Fund's assets will be invested in equity and debt securities of companies
based in the United States and outside of the United States including bonds
and money market instruments. 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 ask prices. Price information for listed securities is
taken from the exchange where the securities are primarily traded.
Investments in futures and options, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such
exchanges, or if a sale is not reported for that day, at the mean between
closing bid and ask prices. 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.
13
<PAGE>
Notes to Financial Statements (continued)
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 day. Such adjustments are recorded in "net unrealized appreciation
from investments and translation of 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 "net realized gains or
losses from investment and 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 other liquid 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 United States dollar. The face or contract
amount, in United States dollars reflects the total exposure the Fund has
in that particular currency contract. As of December 31, 1999, the Fund had
no outstanding forward foreign currency exchange contracts.
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: 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.
Dividends 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
14
<PAGE>
Notes to Financial Statements (continued)
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, 1999, the following reclassifications have been made to
increase (decrease) such accounts with offsetting adjustments made to paid-
in capital.
<TABLE>
<CAPTION>
Accumulated Net
Realized Gains from
Accumulated Net Investment and Foreign
Investment Income Currency Transactions
----------------- ----------------------
<S> <C> <C>
International Equity Fund........... $351,348 ($351,348)
</TABLE>
Security Transactions and Related Income: Security transactions in the Fund
are accounted for on the date the security is purchased or sold ("trade
date"). Interest income is recognized on the accrual basis and includes,
where applicable, the amortization of premium or discount. Dividend income
is recorded on the ex-dividend date. Securities gains and losses are
calculated on the identified cost basis.
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, 1999 were $14,083,486 and $20,998,234,
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. accrues daily, and is paid monthly, an
advisory fee at an annual rate of 0.90% of the Fund's average daily net
assets. For the year ended December 31, 1999, HSBC Asset Management
Americas Inc. waived $225,569 in advisory fees.
HSBC Asset Management Americas, Inc. appointed Delaware International
Advisers Ltd. to act as investment sub-adviser pursuant to a Subadvisory
Agreement. 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 from the
Investment Adviser equal to an amount based on certain percentages of the
Fund's average daily net assets.
15
<PAGE>
Notes to Financial Statements (continued)
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), an Ohio limited partnership is a subsidiary of The BISYS Group,
Inc. BISYS, with whom certain officers 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 accrues daily, and is paid monthly, a fee
equal to an annual rate of 0.15% of the Fund's average daily net assets.
BISYS is contractually limiting its Administration fee to 0.10% of the
Fund's average net assets. For the year ended December 31, 1999, BISYS
waived $32,558 in administrative services fees.
HSBC Asset Management Americas Inc. earned co-administration and
shareholder services assistance fees of up to 0.07% of the Fund's average
net assets totaling $45,589 from the Fund for the year ended December 31,
1999, all of which was waived. Effective July 1, 1999, HSBC Asset
Management Americas Inc. is no longer charging co-administration and
shareholder services assistance fees.
The Fund has adopted a Distribution Plan and Agreement (the "Plan")
pursuant to Rule 12b-1 of the 1940 Act with respect to Class A shares of
the Fund. The Class A 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 $263 with regard to
the Plan for the year ended December 31, 1999, 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, 1999, BISYS received $30 from
commissions earned on sales of shares of the Fund, all of which was
reallowed to affiliated broker/dealers of the Fund.
With respect to Class B and Class C, 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 0.75% of the average net assets for
Class B and Class C shares during the preceding month.
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. BISYS Fund
Services waived service organization fees for Class A in the amount of $96
during the year ended December 31, 1999.
A partner of the Trust's legal counsel served as Secretary of the Trust.
Paul, Weiss, Rifkind, Wharton and Garrison served as the Trust's legal
counsel for the year ended December 31, 1999.
16
<PAGE>
Notes to Financial Statements (continued)
5.Capital Share Transactions
Transactions in capital shares for the years indicated were as follows:
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1999 December 31, 1998
------------------------ ------------------------
Amount Shares Amount Shares
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Institutional Class
Shares:
Shares issued........... $ 20,432,876 1,626,249 $ 20,085,592 1,642,226
Shares reinvested....... -- -- 239,264 20,933
Shares redeemed......... (21,671,840) (1,772,526) (27,092,926) (2,460,775)
------------ ---------- ------------ ----------
Net (decrease)........... $ (1,238,964) (146,277) $ (6,768,070) (797,616)
============ ========== ============ ==========
Class A Shares:
Shares issued........... $ 12,839 1,002 $ 3,560 333
Shares reinvested....... 19,181 1,573 4,310 377
Shares redeemed......... (65,258) (5,478) (87,214) (7,824)
------------ ---------- ------------ ----------
Net (decrease)........... $ (33,238) (2,903) $ (79,344) (7,114)
============ ========== ============ ==========
Total Net (decrease)..... $ (1,272,202) (149,180) $ (6,847,414) (804,730)
============ ========== ============ ==========
</TABLE>
6.Federal Income Tax Information (Unaudited)
For the taxable year ended December 31, 1999 the International Equity Fund
declared long-term capital gain distributions of $385,744.
17
<PAGE>
FINANCIAL HIGHLIGHTS
Selected Per Share Data and Ratios for a Share Outstanding Each Year and Period
Indicated.
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Institutional Class Shares
-------------------------------------------------------------------------------------------
For the For the For the For the For the Period
Year ended Year ended Year ended Year ended March 1, 1995(c) to
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 11.38 $ 10.35 $ 10.61 $ 9.98 $ 8.81
------- ------- ------- ------- -------
Investment Activities
Net investment income.. 0.22 0.08 0.04** (0.01) (0.03)
Net realized and
unrealized gains from
investment and foreign
currency
transactions.......... 2.01 1.09 (0.27) 0.64 1.20
------- ------- ------- ------- -------
Total from Investment
Activities............. 2.23 1.17 (0.23) 0.63 1.17
------- ------- ------- ------- -------
Distributions
From net investment
income................ (0.20) (0.08) (0.02) -- --
In excess of net
investment income..... (0.06) (0.02) (0.01) -- --
From net realized
gains................. (0.79) (0.04) -- -- --
------- ------- ------- ------- -------
Total Distributions..... (1.05) (0.14) (0.03) -- --
------- ------- ------- ------- -------
Net Asset Value, End of
Period................. $ 12.56 $ 11.38 $ 10.35 $ 10.61 $ 9.98
======= ======= ======= ======= =======
Total Return (excludes
sales charges)......... 19.87% 11.32% (2.15)% 6.31% 13.28%(a)
Ratios/Supplemental
Data:
Net Assets at end of
period (000).......... $70,060 $65,139 $67,458 $21,110 $15,253
Ratio of expenses to
average net assets.... 1.00% 1.14% 1.12% 2.04% 2.62%(b)
Ratio of net investment
income to average net
assets................ 1.83% 0.81% 0.35% (0.10)% (0.34)%(b)
Ratio of expenses to
average net assets*... 1.47% 1.61% 1.91% 2.89% 3.12%(b)
Portfolio turnover
rate***............... 22.60% 163.90% 112.54% 77.91% 90.31%(a)
</TABLE>
- --------
* During the period, certain fees were reduced and/or reimbursed. If such 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.
(d) Effective July 1, 1999, the Fund redesignated the Service Class Shares to
Class A.
18
<PAGE>
<TABLE>
<CAPTION>
Class A (d)
- ------------------------------------------------------------------------------------------
For the For the For the For the For the
Year ended Year ended Year ended Year ended Year ended
December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
$11.38 $ 10.35 $10.60 $ 9.97 $ 9.55
------ ------- ------ ------ ------
0.22 0.08 0.06** (0.02) (0.07)
2.01 1.09 (0.28) 0.65 0.49
------ ------- ------ ------ ------
2.23 1.17 (0.22) 0.63 0.42
------ ------- ------ ------ ------
(0.20) (0.10) (0.03) -- --
(0.06) -- -- -- --
(0.79) (0.04) -- -- --
------ ------- ------ ------ ------
(1.05) (0.14) (0.03) -- --
------ ------- ------ ------ ------
$12.56 $ 11.38 $10.35 $10.60 $ 9.97
====== ======= ====== ====== ======
19.87% 11.32% (2.06)% 6.32% 4.40%
$ 249 $ 259 $ 309 $ 409 $ 658
1.01% 1.12% 1.17% 2.10% 1.98%
1.84% 0.81% 0.54% (0.19)% (1.01)%
1.63% 1.94% 2.19% 2.94% 3.66%
22.60% 163.90% 112.54% 77.91% 90.31%
</TABLE>
19
<PAGE>
Report of Independent Auditors
The Board of Trustees and Shareholders
HSBC Mutual Funds Trust
We have audited the accompanying statements 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, 1999, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999,
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, 1999, 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 accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
New York, New York
February 23, 2000
20
<PAGE>
HSBC Mutual Funds Trust
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF HSBC ASSET MANAGEMENT
AMERICAS INC. APPEARS HERE]
- --------------------------------------------------------------------------------
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.
2/00
Annual Report
December 31, 1999
Managed by:
HSBC Asset Management Americas Inc.
Sponsored and distributed by:
BISYS Fund Services
