<PAGE>
LETTER TO THE SHAREHOLDERS OF THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
November 14, 1997
Dear Shareholder:
We are pleased to report that The JPM Institutional International Bond Fund
produced strong investment performance for the fiscal year ending September 30,
1997.
In a challenging investment environment, made complex by the varying economic
cycles in both Europe and Japan, the Fund returned 12.52% for the year -- which
compares favorably to both benchmark and competitor returns. The Fund
outperformed the 12.25% return of the Salomon Brothers Non-U.S. Government Bond
Index (currency hedged) for the year, and significantly outpaced its
competitors, as measured by the Lipper International Income Fund Average (which
returned 4.03%).
The Fund's net asset value decreased from $11.30 per share at the beginning of
its fiscal year, to $8.65 by September 30, 1997, after making distributions of
approximately $2.78 in income, $0.86 from short-term capital gains, and $0.11
from long-term capital gains respectively. The Fund's net assets also decreased
from $13.3 million to $7.1 million. The net assets of The Non-U.S. Fixed Income
Portfolio, in which the Fund invests, totaled approximately $234.3 million on
September 30, 1997.
The report that follows includes an interview with Dominic Pegler, a member of
the portfolio management team responsible for the Fund. This interview is
designed to answer commonly asked questions about the Fund, elaborate on what
happened during the reporting period, and provide an outlook for the months
ahead.
As chairman and president of Asset Management Services, we look forward to
sharing Morgan's insights regarding global markets with you going forward. If
you have any comments or questions, please call your Morgan representative or
J.P. Morgan Funds Services at (800) 766-7722.
Sincerely yours,
/s/ Ramon de Oliveira /s/ Keith M. Schappert
Ramon de Oliveira Keith M. Schappert
Chairman of Asset Management Services President of Asset Management Services
J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
LETTER TO THE SHAREHOLDERS. . . . . 1 FUND FACTS AND HIGHLIGHTS . . . . 6
FUND PERFORMANCE. . . . . . . . . . 2 FINANCIAL STATEMENTS . . . . . . 8
PORTFOLIO MANAGER Q&A . . . . . . . 3
- --------------------------------------------------------------------------------
1
<PAGE>
FUND PERFORMANCE
EXAMINING PERFORMANCE
There are several ways to evaluate a mutual fund's historical performance
record. One approach is to take a look at the growth of a hypothetical
investment of $1,000,000 (the minimum investment in the Fund). The chart at
right shows that $1,000,000 invested in the Fund on December 1, 1994* would have
grown to $1,423,092 at September 30, 1997. This figure takes the fund's actual
(or cumulative) return and shows what would have happened if the fund had
achieved that return by performing at a constant rate each year. Average annual
total returns represent the average yearly change of a fund's value over various
time periods, typically 1, 5, or 10 years (or since inception). Total returns
for periods of less than one year are not annualized and provide a picture of
how a fund has performed over the short term.
[GRAPH]
GROWTH OF $1,000,000 SINCE INCEPTION*
- - JPM Institutional International Bond Fund
- - Salomon Brothers Non-U.S. Government Bond Index (currency hedged)
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
----------------------- ----------------------------
THREE SIX ONE SINCE
AS OF SEPTEMBER 30, 1997 MONTHS MONTHS YEAR INCEPTION*
- ------------------------------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C>
The JPM Institutional International Bond Fund 3.50% 7.06% 12.52% 13.26%
Salomon Brothers Non-U.S. Government
Bond Index (currency hedged) 3.42% 6.66% 12.25% 13.40%
Lipper International Income
Fund Average 1.54% 4.05% 4.03% 9.19%
</TABLE>
*12/1/94 -- COMMENCEMENT OF OPERATIONS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF FEES
AND ASSUME THE REINVESTMENT OF DISTRIBUTIONS AND REFLECT REIMBURSEMENT OF
CERTAIN FUND AND PORTFOLIO EXPENSES AS DESCRIBED IN THE PROSPECTUS. HAD EXPENSES
NOT BEEN SUBSIDIZED, RETURNS WOULD HAVE BEEN LOWER. THE SALOMON BROTHERS NON-
U.S. GOVERNMENT BOND INDEX (CURRENCY HEDGED) IS AN UNMANAGED INDEX IN WHICH
INVESTORS MAY NOT DIRECTLY INVEST. LIPPER ANALYTICAL SERVICES, INC. IS A LEADING
SOURCE FOR MUTUAL FUND DATA.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
Following is an interview with DOMINIC J. PEGLER, VICE PRESIDENT, who is a
member of the portfolio management team responsible for managing THE NON-U.S.
FIXED INCOME PORTFOLIO in which the Fund invests. Mr. Pegler joined J.P. Morgan
(London) in 1996 after seven years at the Bank of England, serving first as an
economist, and then in the Reserves Management Department, managing the U.K.'s
foreign exchange reserves. His time at the Bank included a two year secondment
to the Directorate of Monetary Affairs, ECCommission. Mr. Pegler holds a B.S.
and M.S. in Economics from the London School of Economics (LSE). This interview
was conducted on October 29, 1997, and reflects Dominic's views on that date.
THROUGHOUT THE ANNUAL REPORTING PERIOD, INTERNATIONAL BOND INVESTORS ENJOYED
FAVORABLE INVESTMENT CONDITIONS. MODERATE ECONOMIC GROWTH AND LOW INFLATION
HAVE KEPT INTEREST RATES LOW, AND PRODUCED VERY STRONG BOND RETURNS ACROSS ALL
DEVELOPED COUNTRIES. ARE WE SEEING ANY SIGNS THAT THESE POSITIVE CONDITIONS ARE
CHANGING?
DJP: During the past year, the investment environment for international fixed
income markets was quite positive. The favorable tone was essentially driven by
the cyclical position of different economies throughout the world. For
investment purposes, we think of the world as divided into three distinct blocs:
North America, Europe, and Asia.
To varying degrees, we believe investment conditions still remain
favorable in each of these blocs. In the U.S. -- which over the past 12 months
had the least compelling investment story from a fixed-income market point of
view since the economy was growing so strongly -- the questions were just how
much inflationary pressure would result and, more importantly, would the Federal
Reserve embark on a policy of monetary constraint (of raising short-term
interest rates). The consensus in the market was that the extensive
restructuring in the U.S. economy made the economy better able to respond to
stronger demand conditions and still maintain a lower inflation environment. So
even though the Fed was looking to increase interest rates going forward, the
anticipatory effect on the bond market was not so pronounced and investment
conditions have remained favorable in the U.S.
This environment carried over to the Canadian market as well because of the
strong links between the U.S. and Canada. However, the investment story in
Canada was much stronger since the Canadian economy was going through a period
of cyclical weakness. Combining its weak economy with bond yields well below
U.S. yields and extensive structural reforms, the Canadian bond market performed
very strongly within a global context.
In Europe, making the usual distinction between core-Europe -- those
countries most likely to participate in the European Monetary Union (EMU) -- and
"high-yield" Europe, the investment climate was extremely positive because these
economies were also experiencing periods of cyclical weakness. The one
economy that differed was the United Kingdom. With the exception of the U.K.,
official interest rates throughout Europe fell, which resulted in strong bond
markets for most countries.
3
<PAGE>
To this cyclical story, we must add the impact of EMU. With this monetary
union expected to begin on January 1, 1999, the key question for the market was
"which countries would participate?" Likewise, the key question for the
authorities in the countries that wanted to participate was "what must we do to
meet the required convergence criteria? Regarding meeting the criteria,
structural reforms were required. Throughout the year, many governments embarked
on programs of tightening fiscal policy and easing monetary policy -- the
impetus behind reducing official interest rates was very strong indeed. So we
had a situation where official rates in Europe were falling markedly, which was
very beneficial for bond markets.
ARE MOST INVESTORS ANTICIPATING THAT EUROPE'S MONETARY UNION WILL OCCUR ON TIME?
DJP: The answer is clearly yes. The more important question is which countries
are going to participate. And the answer there is that investors are expecting
more countries to participate than they were expecting 12 months ago. Italy and
Spain are the main newcomers.
Regarding the U.K., things have changed very recently in that the
government is starting to be clearer about future economic policy. And the
government has ruled out participation in the monetary union before the first
round. They've also implied that they won't participate by 2002, either. So U.K.
participation seems five years away.
Markets, in general, have begun to act as if monetary union in January 1999
will occur. As a result, yield spreads have tightened across the board against
Germany in Italy, Spain, and the U.K.
WHAT IS THE STORY IN JAPAN?
DJP: The story in Japan really hasn't changed in almost three years, as interest
rates have been falling almost continuously over that period. Official rates in
Japan reached around the half-percent level and have stayed there for the past
12 months or so. The feeling in the market is that rates really can't go any
lower. But the big question is, with yields so low, why haven't interest rates
turned up, particularly with indications of strength in the economy during the
last 12 months.
The answer lies in the weakness of the Japanese financial system. Japan has
been extremely reluctant to do anything to its financial system that would harm
the prospects of economic recovery. And while we and other market participants
judged the strength of the real economy fairly precisely, I would say that most
were wrong in judging the impact of the weakness of the financial system on the
official interest rate structure -- and that's an important distinction.
On the whole, we don't expect the Bank of Japan to raise rates and we think
that the weakness of financial system will continue. Most recently, of course,
we've had turbulence in world stock markets led by markets in the Far East. We
think that turbulence will likely continue and that it will put pressure on the
Bank of Japan to keep rates low.
So even though Japanese yields are extremely low historically, we do not
expect them to rise very much over the next 12 months, and certainly not enough
to offset the yield advantage that you get by being in the Japanese market.
4
<PAGE>
GOING FORWARD, WHAT KIND OF INVESTMENT ENVIRONMENT DO YOU SEE DEVELOPING IN THE
MAJOR INTERNATIONAL BOND MARKETS? HOW ARE YOU POSITIONING THE PORTFOLIO?
DJP: Well, as we mentioned earlier, we believe that the extensive restructuring
that has occurred in the U.S. economy has made it better able to respond to
stronger demand conditions and still maintain a lower inflation environment. So
we expect favorable conditions to continue in the U.S.
In Europe, it appears that the easing cycle in core Europe is esentially
over -- meaning that interest rates are not expected to go lower in core Europe
(Germany, France, Belgium, Netherlands, Luxembourg or Austria). On a strategic,
12-month basis we intend to underweight the core European markets, and we've
already started to do that.
It's a bit different, however, for the high-yielding market sector in
Europe. The main characteristic of performance in the high-yielding markets has
been the convergence of their yields to Germany's. Looking at Italy, Spain, and
Sweden, their yield-spreads relative to Germany tightened dramatically. Now, of
course, the biggest impetus behind this phenomenon was the expectation of EMU.
In particular, Spain and Italy are now likely to participate in the monetary
union from the outset. This is a substantial change in the market's expectations
from 12 months ago. Having said this, we feel that the convergence story has
played itself out. There's simply no more room in the interest rate structure.
So, going forward, we don't expect to be overweighted in this sector.
Our one big strategic view is that the European economy should perform more
strongly than in the past. Therefore on a strategic basis, we want to be
underweighted in Europe as a whole and more overweighted in North America. We
also look for continued economic weakness in Australia, and therefore expect
that low interest rates will continue. That, plus the promise of some kind of
fiscal reform by the government, should mean strong bond market performance
there as oppossed to Europe, where economic activity is strengthing.
In Japan, the recovery on the real side of the economy (that is, industrial
production and export sectors) should continue. Last year, we had a bias to be
tactically underweighted in Japan from time to time. But overall, this
underweight to Japan detracted from the performance of the Fund. Going forward
we expect to stay neutral in Japan.
WHAT DECISION, OR DECISIONS, HAVE CONTRIBUTED MOST TO THE FUND'S ANNUAL
PERFORMANCE?
DJP: It has really been the country-specific decisions that have driven the
Fund's performance. We got the convergence story right, and we played Canada
correctly as well. The only thing that, from time to time, detracted from
performance was our positions regarding Japan. But these positions weren't held
for any long period of time, so overall, the Fund did quite well from our
country selections throught the annual period.
5
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
The JPM Institutional International Bond Fund seeks to provide a high total
return consistent with moderate risk of capital, from a portfolio of
international fixed income securities. It is designed for investors who seek
exposure to international bond markets in their investment portfolios.The
Portfolio's benchmark is The Salomon Brothers Non-U.S. Government Bond Index
(currency hedged).
- --------------------------------------------------------------------------------
INCEPTION DATE
12/1/94
- --------------------------------------------------------------------------------
NET ASSETS AS OF 9/30/97
$7,126,115
- --------------------------------------------------------------------------------
DIVIDEND PAYABLE DATE
MONTHLY
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/24/97
EXPENSE RATIO
The Fund's current expense ratio of 0.50% covers shareholders' expenses for
custody, tax reporting, investment advisory and shareholder services. The Fund
is no-load and does not charge any sales, redemption, or exchange fees. There
are no additional charges for buying, selling, or safekeeping Fund shares, or
for wiring redemption proceeds from the Fund.
FUND HIGHLIGHTS
ALL DATA AS OF SEPTEMBER 30, 1997
PORTFOLIO ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
JAPAN 22.6%
UNITED KINGDOM 16.2%
GERMANY 14.9%
ITALY 10.3%
SWEDEN 4.6%
CANADA 3.4%
FRANCE 3.3%
SPAIN 2.6%
OTHER 6.4%
SHORT TERM HOLDINGS 15.7%
30-DAY SEC YIELD
4.56%
DURATION
5.4 years
6
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. MORGAN GUARANTY TRUST COMPANY OF NEW
YORKSERVES AS AN ADVISOR AND MAKES THE FUND AVAILABLE SOLELY IN ITS CAPACITY AS
SHAREHOLDER SERVICING AGENT. SHARES OF THE FUND ARE NOT BANK DEPOSITS AND ARE
NOT GUARANTEED BY ANY BANK, GOVERNMENT ENTITY, OR THE FDIC. AN INVESTMENT IN THE
FUND WILL FLUCTUATE AND MAY LOSE VALUE.
Past performance is no guarantee for future performance. Returns are net of
fees, assume the reinvestment of fund ditributions and may reflect the
reimbursement of the fund expenses as described in the prospectus. Had expenses
not been subsidized, returns would have been lower.The fund invests through a
master portfolio (another fund with the same objective). The fund invests in
foreign securities which are subject to special risks such as currency
fluctuations and economic and political risk. Prospective investors should refer
to the fund's Prospectus for a discussion of these risks.
CALL J.P. MORGAN FUNDS SERVICES AT (800) 766-7722 FOR A PROSPECTUS CONTAINING
MORE COMPLETE INFORMATION ABOUT THE FUND INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES. PLEASE READ IT CAREFULLY BEFORE INVESTING.
7
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Non-U.S. Fixed Income Portfolio
("Portfolio"), at value $7,179,146
Deferred Organization Expenses 10,201
Receivable for Shares of Beneficial Interest Sold 4,000
Receivable for Expense Reimbursements 360
Prepaid Expenses and Other Assets 117
----------
Total Assets 7,193,824
----------
LIABILITIES
Dividends Payable to Shareholders 1,980
Shareholder Servicing Fee Payable 523
Administrative Services Fee Payable 159
Administration Fee Payable 39
Fund Services Fee Payable 3
Accrued Expenses 65,005
----------
Total Liabilities 67,709
----------
NET ASSETS
Applicable to 823,452 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $7,126,115
----------
----------
Net Asset Value, Offering and Redemption Price
Per Share $8.65
----
----
ANALYSIS OF NET ASSETS
Paid-in Capital $6,536,595
Undistributed Net Investment Income 324,946
Accumulated Net Realized Gain on Investment 274,148
Net Unrealized Depreciation of Investment (9,574)
----------
Net Assets $7,126,115
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income (Net of Foreign
Withholding Tax of $1,571) $ 286,927
Allocated Portfolio Expenses (Net of
reimbursement of $1,597) (26,715)
---------
Net Investment Income Allocated from
Portfolio 260,212
FUND EXPENSES
Professional Fees $ 21,320
Transfer Agent Fees 17,180
Registration Fees 20,420
Printing Expenses 7,740
Shareholder Servicing Fee 5,328
Amortization of Organization Expenses 4,701
Administrative Services Fee 1,669
Fund Services Fee 214
Administration Fee 177
Trustees' Fees and Expenses 76
Miscellaneous 22,841
---------
Total Fund Expenses 101,666
Less: Reimbursement of Expenses (101,666)
---------
NET FUND EXPENSES --
---------
NET INVESTMENT INCOME 260,212
NET REALIZED GAIN ON INVESTMENT ALLOCATED FROM
PORTFOLIO 806,863
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENT ALLOCATED FROM PORTFOLIO (307,115)
---------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 759,960
---------
---------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 260,212 $ 367,490
Net Realized Gain on Investment Allocated from
Portfolio 806,863 590,402
Net Change in Unrealized Depreciation of
Investment Allocated from Portfolio (307,115) (155,561)
------------------ ------------------
Net Increase in Net Assets Resulting from
Operations 759,960 802,331
------------------ ------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (952,055) --
Net Realized Gains (325,360) (179,451)
------------------ ------------------
Total Distributions to Shareholders (1,277,415) (179,451)
------------------ ------------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 8,877,753 12,658,600
Reinvestment of Dividends and Distributions 1,078,872 179,445
Cost of Shares of Beneficial Interest Redeemed (15,622,643) (4,384,337)
------------------ ------------------
Net Increase (Decrease) from Transactions in
Shares of Beneficial Interest (5,666,018) 8,453,708
------------------ ------------------
Total Increase (Decrease) in Net Assets (6,183,473) 9,076,588
NET ASSETS
Beginning of Fiscal Year 13,309,588 4,233,000
------------------ ------------------
End of Fiscal Year (including undistributed net
investment income of $324,946 and $747,856,
respectively) $ 7,126,115 $ 13,309,588
------------------ ------------------
------------------ ------------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 1, 1994
(COMMENCEMENT OF
FOR THE FISCAL FOR THE FISCAL OPERATIONS) TO
YEAR ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 1995
------------------ ------------------ ----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.30 $ 11.12 $ 10.00
------------------ ------------------ ----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 2.21 0.31 0.49
Net Realized and Unrealized Gain on Investment
and Foreign Currency (Loss) Allocated from
Portfolio (1.11) 0.95 0.78
------------------ ------------------ ----------------
Total from Investment Operations 1.10 1.26 1.27
------------------ ------------------ ----------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (2.78) -- (0.15)
Net Realized Gain (0.97) (1.08) --
------------------ ------------------ ----------------
Total Distributions to Shareholders (3.75) (1.08) (0.15)
------------------ ------------------ ----------------
NET ASSET VALUE, END OF PERIOD $ 8.65 $ 11.30 $ 11.12
------------------ ------------------ ----------------
------------------ ------------------ ----------------
Total Return 12.52% 12.09% 12.83%(a)
------------------ ------------------ ----------------
------------------ ------------------ ----------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (in thousands) $ 7,126 $ 13,310 $ 4,233
Ratios to Average Net Assets
Expenses 0.50% 0.65% 0.60%(b)
Net Investment Income 4.88% 5.28% 5.82%(b)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement 1.91% 1.02% 1.90%(b)(c)
</TABLE>
- ------------------------
(a) Not annualized.
(b) Annualized.
(c) After consideration of certain state limitations.
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The JPM Institutional International Bond Fund (the "Fund") is a separate series
of The JPM Institutional Funds, a Massachusetts business trust (the "Trust").
The Trust is registered under the Investment Company Act of 1940, as amended, as
a non-diversified open-end management investment company. The Fund commenced
operations on December 1, 1994.
The Fund invests all of its investable assets in The Non-U.S. Fixed Income
Portfolio (the "Portfolio"), a no-load, non-diversified, open-end management
investment company having the same investment objective as the Fund. The value
of such investment included in the Statement of Assets and Liabilities reflects
the Fund's proportionate interest in the net assets of the Portfolio (3% at
September 30, 1997). The performance of the Fund is directly affected by the
performance of the Portfolio. The financial statements of the Portfolio,
including the Schedule of Investments, are included elsewhere in this report and
should be read in conjunction with the Fund's financial statements.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Fund:
a) Valuation of securities by the Portfolio is discussed in Note 1 of the
Portfolio's Notes to Financial Statements which are included elsewhere in
this report.
b) The Fund records its share of net investment income, realized and
unrealized gain and loss and adjusts its investment in the Portfolio each
day. All the net investment income and realized and unrealized gain and
loss of the Portfolio is allocated pro rata among the Fund and other
investors in the Portfolio at the time of such determination.
c) Currently, the Fund declares and pays income dividends monthly.
Distributions to shareholders of net realized capital gain, if any, are
declared and paid annually.
d) The Fund incurred organization expenses in the amount of $32,867. These
costs were deferred and are being amortized on a straight-line basis over
a five-year period from the commencement of operations.
e) The Fund is treated as a separate entity for federal income tax purposes.
The Fund intends to comply with the provisions of the Internal Revenue
Code of 1986, as amended, applicable to regulated investment companies and
to distribute substantially all of its income, including net realized
capital gains, if any, within the prescribed time periods. Accordingly, no
provision for federal income or excise tax is necessary.
f) Expenses incurred by the Trust with respect to any two or more funds in
the Trust are allocated in proportion to the net assets of each fund in
the Trust, except where allocations of direct expenses to each fund can
otherwise be made fairly. Expenses directly attributable to a fund are
charged to that fund.
g) The Fund accounts for and reports distributions to shareholders in
accordance with "Statement of Position 93-2: Determination, Disclosure,
and Financial Statement Presentation of Income, Capital
12
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
Gain, and Return of Capital Distributions by Investment Companies." The
effect of applying this statement for the year ended September 30, 1997
was to increase undistributed net investment income by $268,933 and
decrease accumulated net realized gain on investment and foreign currency
transactions by $268,933. The adjustments are primarily attributable to
foreign currency gains. Net investment income, net realized gains and net
assets were not affected by this change.
2. TRANSACTIONS WITH AFFILIATES
a) The Trust, on behalf of the fund, has retained Funds Distributor, Inc.
("FDI"), a registered broker-dealer, to serve as co-administrator and
distributor. Under an Co-Administration Agreement between FDI and the
Trust on behalf of the Fund, FDI provides administrative services
necessary for the operations of the Fund, furnishes office space and
facilities required for conducting the business of the Fund and pays the
compensation of the Fund's officers affiliated with FDI. The Fund has
agreed to pay FDI fees equal to its allocable share of an annual
complex-wide charge of $425,000 plus FDI's out-of - pocket expenses. The
amount allocable to the Fund is based on the ratio of the Fund's net
assets to the aggregate net assets of the Trust and certain other
investment companies subject to similar agreements with FDI. For the
fiscal year ended September 30, 1997, the fee for these services amounted
to $177.
b) The Trust, on behalf of the Fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan under which Morgan is responsible
for certain aspects of the administration and operation of the Fund. Under
the Services Agreement, the Fund has agreed to pay Morgan a fee equal to
its allocable share of an annual complex-wide charge. This charge is
calculated based on the aggregate average daily net assets of the
Portfolio and other portfolios in which the Trust and The JPM Pierpont
Funds invest (the "Master Portfolios") and JPM Series Trust in accordance
with the following annual schedule: 0.09% on the first $7 billion of their
aggregate average daily net assets and 0.04% of their aggregate average
daily net assets in excess of $7 billion less the complex-wide fees
payable to FDI. The portion of this charge paid by the Fund is determined
by the proportionate share that its net assets bear to the net assets of
the Trust, the Master Portfolios, other investors in the Master Portfolios
for which Morgan provides similar services, and JPM Series Trust. For the
fiscal year ended September 30, 1997, the fee for these services amounted
to $1,669.
Currently, Morgan has agreed to reimburse the Fund to the extent necessary
to maintain the total operating expenses of the Fund, including the
expenses allocated to the Fund from the Portfolio, at no more than 0.65%
of the average daily net assets of the Fund. For the fiscal year ended
September 30, 1997, Morgan has agreed to reimburse the Fund $101,666 for
expenses under this agreement.
c) The Trust, on behalf of the Fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal account
maintenance service to Fund shareholders. The agreement provides for the
Fund to pay Morgan a fee for these services which is computed daily and
paid monthly at an annual rate of 0.10% of the average daily net assets of
the Fund. For the fiscal year ended September 30, 1997, the fee for these
services amounted to $5,328.
13
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
d) The Trust, on behalf of the Fund, has a Fund Services Agreement with
Pierpont Group, Inc. ("Group") to assist the Trustees in exercising their
overall supervisory responsibilities for the Trust's affairs. The Trustees
of the Trust represent all the existing shareholders of Group. The Fund's
allocated portion of Group's costs in performing its services amounted to
$214 for the fiscal year ended September 30, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of the Trust, The JPM Pierpont Funds, the Master Portfolios and
JPM Series Trust. The Trustees' Fees and Expenses shown in the financial
statements represents the Fund's allocated portion of these total fees and
expenses. Prior to April 1, 1997, the aggregate annual Trustee Fee was
$65,000. The Trust's Chairman and Chief Executive Officer also serves as
Chairman of Group and receives compensation and employee benefits from
Group in his role as Group's Chairman. The allocated portion of such
compensation and benefits included in the Fund Services Fee shown in the
financial statements was $27.
3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest of one or more series.
Transactions in shares of beneficial interest of the Fund were as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Shares of beneficial interest sold............... 1,035,218 1,176,106
Reinvestment of dividends and distributions...... 134,038 17,074
Shares of beneficial interest redeemed........... (1,523,512) (396,016)
------------------ ------------------
Net Increase (Decrease).......................... (354,256) 797,164
------------------ ------------------
------------------ ------------------
</TABLE>
From time to time, the Fund may have a concentration of several shareholders
holding a significant percentage of shares outstanding. Investment activities of
these shareholders could have a material impact on the Fund and Portfolio.
4. CREDIT AGREEMENT
The Trust, on behalf of the Fund, together with other affiliated investment
companies (the "Funds"), entered into a revolving line of credit agreement (the
"Agreement") on May 28, 1997, with unaffiliated lenders. Additionally, since all
of the investable assets of the Fund are in the Portfolio, the Portfolio is
party to certain convenants of the Agreement. The maximum borrowing under the
commitment Agreement is $150,000,000. The Agreement expires on May 27, 1998,
however, the Fund as party to the Agreement will have the ability to extend the
Agreement and continue its participation therein for an additional 364 days. The
purpose of the Agreement is to provide another alternative for settling large
fund shareholder redemptions. Interest on any such borrowings outstanding will
approximate market rates. The Funds pay a commitment fee at an annual rate of
0.065% on the unused portion of the committed amount which is allocated to the
Funds in accordance with procedures established by their respective Trustees or
Directors. The Fund has not borrowed pursuant to the Agreement as of September
30, 1997.
14
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
5. SUBSEQUENT EVENT
The Fund invests in The Non-U.S. fixed Income Portfolio along with a non-U.S.
fund managed by Morgan. The non-U.S. fund is scheduled to reorganize by
transferring its assets to another non-U.S. fund in January 1998. The Portfolio
expects to receive a substantial redemption request from the non-U.S. fund in
connection with its reorganization. This redemption will not reduce the net
assets of the Fund, but it will reduce the size of the Portfolio. After the
redemption, the Portfolio's assets are expected to be approximately $7 million.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
The JPM Institutional International Bond Fund
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The JPM Institutional International Bond Fund (one of the series constituting
part of The JPM Institutional Funds, hereafter referred to as the "Fund") at
September 30, 1997, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the two years in the period then ended and
for the period December 1, 1994 (commencement of operations) through September
30, 1995, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
New York, New York
November 25, 1997
16
<PAGE>
The Non-U.S. Fixed Income Portfolio
Annual Report September 30, 1997
(The following pages should be read in conjuction
with The JPM Institutional International Bond Fund
Annual Financial Statements)
17
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED)(1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -------------
<C> <S> <C>
CORPORATE OBLIGATIONS (20.0%)
FRANCE (2.7%)
FRF 23,000 Household Finance Corp., 6.25% due 04/30/07...... $ 3,991,026
FRF 13,500 Societe Generale, 6.00% due 03/12/07............. 2,298,467
-------------
6,289,493
-------------
GERMANY (4.7%)
ITL 5,595,000 Bayerische Landesbank Girozentrale, 10.75% due
03/01/03....................................... 3,971,764
DEM 12,000 Deutsche Pfandbriefe Hypobank, 5.625% due
02/07/03....................................... 6,950,562
-------------
10,922,326
-------------
UNITED KINGDOM (12.6%)
GBP 4,900 Alliance & Leicester Building Society PLC, 8.75%
due 12/07/06................................... 8,657,530
GBP 1,200 Alliance & Leicester Building Society PLC, 9.75%
due 04/02/08................................... 2,259,540
GBP 3,200 ASDA Group PLC, 8.375% due 04/24/07.............. 5,576,358
GBP 960 Halifax Building Society PLC, 9.375% due
05/15/21....................................... 1,859,971
GBP 3,400 Imperial Chemical Industries, 7.625% due
08/21/07....................................... 5,626,234
GBP 2,100 Royal Bank of Scotland PLC, 8.375% due
01/29/07....................................... 3,646,764
GBP 1,000 Woolwich, 9.50% due 08/07/21..................... 1,933,431
-------------
29,559,828
-------------
TOTAL CORPORATE OBLIGATIONS (COST
$46,257,894)............................... 46,771,647
-------------
GOVERNMENT OBLIGATIONS (56.9%)
AUSTRALIA (1.1%)
AUD 3,100 Government of Australia, 7.50% due 07/15/05...... 2,452,374
-------------
AUSTRIA (0.1%)
JPY 25,000 Republic of Austria, 3.75% due 02/03/09.......... 236,323
-------------
CANADA (3.2%)
Government of Canada
CAD 5,540 7.00% due 12/01/06............................. 4,362,153
CAD 3,184 9.00% due 06/01/25............................. 3,103,377
-------------
7,465,530
-------------
DENMARK (1.6%)
DKK 22,000 Kingdom of Denmark, 8.00% due 03/15/06........... 3,740,944
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED)(1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -------------
<C> <S> <C>
FINLAND (2.0%)
FIM 20,000 Republic of Finland, 9.50% due 03/15/04.......... $ 4,607,835
-------------
FRANCE (0.4%)
FRF 5,700 Government of France, 6.00% due 10/25/25......... 941,638
-------------
GERMANY (9.1%)
DEM 13,470 Federal Republic of Germany, Series 93, 7.125%
due 12/20/02................................... 8,378,577
DEM 8,800 Federal Republic of Germany, Series 92, 8.00% due
07/22/02....................................... 5,641,166
DEM 11,650 German Unity Fund, 8.00% due 01/21/02 (2)........ 7,408,110
-------------
21,427,853
-------------
ITALY (9.5%)
Republic of Italy
ITL 10,295,000 7.25% due 11/01/26............................. 6,408,535
ITL 25,475,000 9.50% due 12/01/99............................. 15,884,506
-------------
22,293,041
-------------
JAPAN (20.9%)
Government of Japan
JPY 5,380,050 Series 187, 3.30% due 06/20/06 (2)............. 49,045,649
-------------
SPAIN (2.4%)
ESP 767,400 Government of Spain, 7.90% due 02/28/02.......... 5,680,517
-------------
SWEDEN (4.2%)
Kingdom of Sweden
SEK 25,500 6.50% due 10/25/06............................. 3,454,232
SEK 43,200 8.00% due 08/15/07............................. 6,467,532
-------------
9,921,764
-------------
UNITED KINGDOM (2.4%)
GBP 2,970 Treasury Gilt, 8.00% due 06/07/21................ 5,636,778
-------------
TOTAL GOVERNMENT OBLIGATIONS (COST
$131,241,193).............................. 133,450,246
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED)(1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -------------
<C> <S> <C>
SUPRANATIONAL OBLIGATIONS (3) (1.4%)
European Investment Bank
ITL 1,700,000 10.875% due 12/14/05........................... $ 1,278,214
ITL 2,537,000 12.20% due 02/18/03............................ 1,893,763
-------------
TOTAL SUPRANATIONAL OBLIGATIONS (COST
$2,975,598)................................ 3,171,977
-------------
SHORT-TERM INVESTMENTS (14.5%)
EURODOLLAR TIME DEPOSITS (14.4%)
State Street Bank & Trust Co. London
30,000,000 5.875% due 10/01/97............................ 30,000,000
3,686,000 4.50% due 10/01/97............................. 3,686,000
-------------
33,686,000
-------------
U.S. TREASURY OBLIGATIONS (0.1%)
400,000 United States Treasury Bills 4.87% due 11/13/97
(2)............................................ 397,550
-------------
TOTAL SHORT-TERM INVESTMENTS (COST
$34,083,550)............................... 34,083,550
-------------
TOTAL INVESTMENTS (COST $214,558,235) (92.8%).... 217,477,420
OTHER ASSETS IN EXCESS OF LIABILITIES (7.2%)..... 16,869,452
-------------
NET ASSETS (100.0%).............................. $ 234,346,872
-------------
-------------
</TABLE>
- ------------------------------
(1) -- Principal is in the local currency of the country in which the currency
is traded, which may not be the country of origin.
(2) -- Security is fully or partially segregated as collateral for futures
contracts.
(3) -- International agencies.
NOTE: Based on the cost of investments of $214,666,597 for federal income tax
purposes at September 30, 1997, the aggregate gross unrealized appreciation was
$3,502,544 and the aggregate gross unrealized depreciation was $691,721
resulting in net unrealized appreciation of investments of $2,810,823.
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $214,558,235 ) $217,477,420
Foreign Currency at Value (Cost $2,448,065 ) 2,492,629
Receivable for Investments Sold 19,415,912
Interest Receivable 5,061,502
Unrealized Appreciation of Forward Foreign
Currency Contracts 535,724
Variation Margin Receivable 84,845
Prepaid Expenses and Other Assets 2,232
------------
Total Assets 245,070,264
------------
LIABILITIES
Payable for Investments Purchased 6,508,167
Unrealized Depreciation of Forward Foreign
Currency Contracts 4,028,106
Advisory Fee Payable 69,616
Custody Fee Payable 50,747
Administrative Services Fee Payable 6,031
Accrued Trustees' Fees and Expenses 612
Administration Fee Payable 556
Fund Services Fee Payable 147
Accrued Expenses 59,410
------------
Total Liabilities 10,723,392
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $234,346,872
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income (Net of Foreign Withholding Tax
of $278,071 ) $ 9,753,644
EXPENSES
Advisory Fee $ 650,545
Custodian Fees and Expenses 184,901
Administrative Services Fee 57,815
Professional Fees and Expenses 43,150
Printing Expenses 19,710
Fund Services Fee 6,587
Administration Fee 4,505
Trustees' Fees and Expenses 3,543
Miscellaneous 1,077
-----------
Total Expenses 971,833
-----------
NET INVESTMENT INCOME 8,781,811
NET REALIZED GAIN (LOSS) ON
Investment Transactions (including $1,039,013
net realized gain from futures contracts) (1,925,482)
Foreign Currency Transactions 18,390,030
-----------
Net Realized Gain 16,464,548
NET CHANGE IN UNREALIZED DEPRECIATION OF
Investments (including $206,962 net unrealized
appreciation from futures contracts) 1,318,101
Foreign Currency Contracts and Translation (5,303,822)
-----------
Net Change in Unrealized Depreciation (3,985,721)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $21,260,638
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 8,781,811 $ 11,244,228
Net Realized Gain on Investments and Foreign
Currency Transactions 16,464,548 12,170,665
Net Change in Unrealized Appreciation
(Depreciation) of Investments and Foreign
Currency Translation (3,985,721) 1,814,400
------------------ ------------------
Net Increase in Net Assets Resulting from
Operations 21,260,638 25,229,293
------------------ ------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 151,112,076 116,826,143
Withdrawals (83,928,855) (262,275,340)
------------------ ------------------
Net Increase (Decrease) from Investors'
Transactions 67,183,221 (145,449,197)
------------------ ------------------
Total Increase (Decrease) in Net Assets 88,443,859 (120,219,904)
NET ASSETS
Beginning of Fiscal Year 145,903,013 266,122,917
------------------ ------------------
End of Fiscal Year $ 234,346,872 $ 145,903,013
------------------ ------------------
------------------ ------------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 11, 1994
(COMMENCEMENT OF
FOR THE FISCAL FOR THE FISCAL OPERATIONS) TO
YEAR ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 1995
------------------ ------------------ ----------------
<S> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.52% 0.51% 0.55%(a)
Net Investment Income 4.72% 5.34% 5.73%(a)
Portfolio Turnover 346% 330% 288%(b)
</TABLE>
- ------------------------
(a) Annualized.
(b) Not annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Non-U.S. Fixed Income Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a no-load,
non-diversified, open-end management investment company which was organized as a
trust under the laws of the State of New York. The Portfolio's investment
objective is to provide a high total return, consistent with moderate risk of
capital, from a portfolio of international fixed income securities. The
Portfolio commenced operations on October 11, 1994. The Declaration of Trust
permits the Trustees to issue an unlimited number of beneficial interests in the
Portfolio.
Investments in international markets may involve certain considerations and
risks not typically associated with investments in the United States. Future
economic and political developments in foreign countries could adversely affect
the liquidity or value, or both, of such securities in which the Portfolio is
invested. The ability of the issuers of the debt securities held by the
Portfolio to meet their obligations may be affected by economic and political
developments in a specific industy or region.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual amounts could differ from
those estimates. The following is a summary of the significant accounting
policies of the Portfolio:
a) Portfolio securities with a maturity of 60 days or more, including
securities that are listed on an exchange or traded over the counter, are
valued using prices supplied daily by an independent pricing service or
services that (i) are based on the last sale price on a national
securities exchange, or in the absence of recorded sales, at the readily
available bid price on such exchange or at the quoted bid price in the
over-the-counter market, if such exchange or market constitutes the
broadest and most representative market for the security and (ii) in other
cases, take into account various factors affecting market value, including
yields and prices of comparable securities, indication as to value from
dealers and general market conditions. If such prices are not supplied by
the Portfolio's independent pricing services, such securities are priced
in accordance with procedures adopted by the Trustees. All portfolio
securities with a remaining maturity of less than 60 days are valued by
the amortized cost method.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of the domestic market and
may also take place on days on which the domestic market is closed. If
events materially affecting the value of foreign securities occur between
the time when the exchange on which they are traded closes and the time
when the Portfolio's net assets are calculated, such securities will be
valued at fair value in accordance with procedures established by and
under the general supervision of the Portfolio's Trustees.
b) The books and records of the Portfolio are maintained in U.S. dollars. The
market values of investment securities, other assets and liabilities and
forward contracts stated in foreign currencies are translated at the
prevailing exchange rates at the end of the period. Purchases, sales,
income and expenses are translated at the exchange rates prevailing on the
respective dates of such transactions. Translation gains and losses
resulting from changes in the exchange rates during the reporting period
and gains and losses realized upon settlement of foreign currency
transactions are reported in the Statement of Operations.
24
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
Although the net assets of the Portfolio are presented at the exchange
rates and market values prevailing at the end of the period, the Portfolio
does not isolate the portion of the results of operations arising as a
result of changes in foreign exchange rates from the fluctuations arising
from changes in the market prices of securities during the period.
c) Securities transactions are recorded on a trade date basis. Interest
income, which includes the amortization of premiums and discounts, if any,
is recorded on an accrual basis. For financial and tax reporting purposes,
realized gains and losses are determined on the basis of specific lot
identification.
d) The portfolio may enter into forward and spot foreign currency contracts
to protect securities and related receivables and payables against
fluctuations in future foreign currency rates. A forward contract is an
agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. Risks associated with such contracts
include the movement in the value of the foreign currency relative to the
U.S. dollar and the ability of the counterparty to perform.
The market value of the contract will fluctuate with changes in currency
exchange rates. Contracts are valued daily based on procedures established
by and under the general supervision of the Portfolio's Trustees and the
change in the market value is recorded by the Portfolio as unrealized
appreciation or depreciation of forward foreign currency contract
translations. At September 30, 1997, the Portfolio had open forward
currency contracts as follows:
SUMMARY OF OPEN FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
U.S. DOLLAR NET UNREALIZED
VALUE AT APPRECIATION/
PURCHASE CONTRACTS COST/PROCEEDS 9/30/97 (DEPRECIATION)
- ------------------------------------------------- ------------- ----------- --------------
<S> <C> <C> <C>
British Pound 14,875, expiring 10/01/97.......... $ 24,045 $ 24,029 $ (16)
Canadian Dollar 6,415,037, expiring 11/12/97..... 4,640,653 4,650,984 10,331
German Mark 9,707,145, expiring 11/12/97......... 5,534,290 5,512,185 (22,105)
Italian Lira 29,500,000,000, expiring 11/12/97... 16,758,630 17,075,443 316,813
Italian Lira 900,000, expiring 10/01/97.......... 523 522 (1)
Italian Lira 1,920,000, expiring 10/02/97........ 1,113 1,113 0
Japanese Yen 812,000,000, expiring 11/12/97...... 6,772,987 6,768,075 (4,912)
Netherlands Guilder 563,382, expiring 11/12/97... 284,741 284,014 (727)
Netherlands Guilder 9,395,969 for Finnish Markka
25,021,467 expiring 11/12/97.................... 4,746,050 4,736,721 (9,329)
Spanish Peseta 1,904,691,300, expiring
11/12/97........................................ 12,809,895 12,775,399 (34,496)
</TABLE>
25
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. DOLLAR NET UNREALIZED
VALUE AT APPRECIATION/
PURCHASE CONTRACTS COST/PROCEEDS 9/30/97 (DEPRECIATION)
- ------------------------------------------------- ------------- ----------- --------------
<S> <C> <C> <C>
Spanish Peseta 238,000, expiring 10/01/97........ $ 1,598 $ 1,595 $ (3)
Spanish Peseta 1,156,000, expiring 10/02/97...... 7,750 7,750 0
Swedish Krona 49,347,808, expiring 10/01/97...... 6,516,896 6,508,167 (8,729)
<CAPTION>
SALES CONTRACTS
- -------------------------------------------------
<S> <C> <C> <C>
Australian Dollar 3,172,834, expiring 11/12/97... 2,322,515 2,299,902 22,613
British Pound 23,282,050, expiring 11/12/97...... 36,772,210 37,543,519 (771,309)
British Pound 7,438, expiring 10/02/97........... 12,015 12,015 0
Canadian Dollar 16,959,431, expiring 11/12/97.... 12,282,239 12,295,804 (13,565)
Danish Krone 25,604,578, expiring 11/12/97....... 3,721,595 3,816,848 (95,253)
French Franc 44,445,205, expiring 11/12/97....... 7,298,063 7,513,214 (215,151)
German Mark 61,394,366, expiring 11/12/97........ 34,133,681 34,862,681 (729,000)
German Mark 9,707,145, expiring 10/02/97......... 5,519,188 5,496,100 23,088
Italian Lira 82,685,080,437 expiring 11/12/97.... 46,620,484 47,860,488 (1,240,004)
Italian Lira 4,500,000, expiring 10/01/97........ 2,614 2,608 6
Italian Lira 2,500,000,000, expiring 10/02/97.... 1,449,275 1,448,729 546
Japanese Yen 6,755,932,743, expiring 11/12/97.... 56,297,300 56,311,154 (13,854)
Netherlands Guilder 10,512,405, expiring
11/12/97........................................ 5,158,197 5,299,542 (141,345)
Spanish Peseta 2,946,870,655, expiring
11/12/97........................................ 19,258,013 19,765,643 (507,630)
Spanish Peseta 578,000, expiring 10/01/97........ 3,890 3,875 15
Spanish Peseta 1,876,515,792, expiring
10/01/97........................................ 12,616,929 12,579,709 37,220
Swedish Krona 77,035,137, expiring 11/12/97...... 10,080,188 10,175,773 (95,585)
--------------
NET UNREALIZED DEPRECIATION ON FORWARD FOREIGN
CURRENCY CONTRACTS.............................. $ (3,492,382)
--------------
--------------
</TABLE>
e) Futures -- A futures contract is an agreement to purchase/sell a specified
quantity of an underlying instrument at a specified future date or to
make/receive a cash payment based on the value of a securities index. The
price at which the purchase and sale will take place is fixed when the
Portfolio enters into the contract. Upon entering into such a contract,
the Portfolio is required to pledge to the broker an amount of cash and/or
securities equal to the minimum "initial margin" requirements of the
exchange. Pursuant to the contract, the Portfolio agrees to receive from
or pay to the broker an amount of cash equal to the daily fluctuation in
the value of the contract. Such receipts or payments are known as
"variation margin" and are recorded by the Portfolio as unrealized gains
or losses. When the contract
26
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
is closed the Portfolio records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and
the value at the time when it was closed. The Portfolio invests in futures
contracts solely for the purpose of hedging its existing portfolio
securities, or securities the Portfolio intends to purchase, against
fluctuations in value caused by changes in prevailing market interest
rates or securities movements. The use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures
contracts, interest rates and the underlying hedged assets. Futures
transactions during the fiscal year ended September 30, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL AMOUNT
CONTRACTS OF CONTRACTS
--------- ----------------
<S> <C> <C>
Contracts open at beginning of year.............. 14 $ 1,121,505
Contracts opened - long positions................ 723 92,688,456
Contracts opened - short positions............... 285 32,815,778
Contracts closed - long positions................ (695) (85,848,971)
Contracts closed - short positions............... (217) (25,899,749)
--------- ----------------
Contracts open at end of year.................... 110 $ 14,877,019
--------- ----------------
--------- ----------------
</TABLE>
SUMMARY OF OPEN CONTRACTS AT SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NET UNREALIZED
NUMBER OF APPRECIATION/
CONTRACTS LONG (DEPRECIATION)
-------------- --------------
<S> <C> <C>
Ten-Year Spanish Government Note, expiring
December 1997................................... 34 $ 47,456
Ten-Year Italian Government Note, expiring
December 1997................................... 3 10,571
Ten-Year Japan Government Note, expiring December
1997............................................ 5 68,020
-------------- --------------
Totals........................................... 42 $ 126,047
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
NET UNREALIZED
NUMBER OF APPRECIATION/
CONTRACTS SHORT (DEPRECIATION)
--------------- --------------
<S> <C> <C>
Ten-Year Long Gilt, expiring December 1997....... (68) $ (296,209)
--------------- --------------
--------------- --------------
</TABLE>
f) The Portfolio intends to be treated as a partnership for federal income
tax purposes. As such, each investor in the Portfolio will be taxed on its
share of the Portfolio's ordinary income and capital gains. It is intended
that the Portfolio's assets will be managed in such a way that an investor
in the Portfolio will be able to satisfy the requirements of Subchapter M
of the Internal Revenue Code. The Portfolio earns foreign income which may
be subject to foreign withholding taxes at various rates.
27
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
a) The Portfolio has an Investment Advisory Agreement with Morgan Guaranty
Trust Company of New York ("Morgan"). Under the terms of the agreement,
the Portfolio pays Morgan at an annual rate of 0.35% of the Portfolio's
average daily net assets. For the fiscal year ended September 30, 1997,
such fees amounted to $650,545.
b) The Portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as co-administrator and exclusive placement agent.
Under a Co-Administration Agreement between FDI and the Portfolio, FDI
provides administrative services necessary for the operations of the
Portfolio, furnishes office space and facilities required for conducting
the business of the Portfolio and pays the compensation of the officers
affiliated with FDI. The Portfolio has agreed to pay FDI fees equal to its
allocable share of an annual complex-wide charge of $425,000 plus FDI's
out-of-pocket expenses. The amount allocable to the Portfolio is based on
the ratio of the Portfolio's net assets to the aggregate net assets of the
Portfolio and certain other investment companies subject to similar
agreements with FDI. For the fiscal year ended September 30, 1997, the fee
for these services amounted to $4,505.
c) The Portfolio has an Administrative Services Agreement (the "Services
Agreement") with Morgan under which Morgan is responsible for overseeing
certain aspects of the administration and operation of the Portfolio.
Under the Services Agreement, the Portfolio has agreed to pay Morgan a fee
equal to its allocable share of an annual complex-wide charge. This charge
is calculated based on the aggregate average daily net assets of the
Portfolio and certain other portfolios for which Morgan acts as investment
advisor (the "Master Portfolios") and JPM Series Trust in accordance with
the following annual schedule: 0.09% on the first $7 billion of their
aggregate average daily net assets and 0.04% of their aggregate average
daily net assets in excess of $7 billion less the complex -wide fees
payable to FDI. The portion of this charge payable by the Portfolio is
determined by the proportionate share that its net assets bear to the net
assets of the Master Portfolios, other investors in the Master Portfolios
for which Morgan provides similar services, and JPM Series Trust. For the
fiscal year ended September 30, 1997, the fee for these services amounted
to $57,815.
d) The Portfolio has a Fund Services Agreement with Pierpont Group, Inc.
("Group") to assist the Trustees in exercising their overall supervisory
responsibilities for the Portfolio's affairs. The Trustees of the
Portfolio represent all the existing shareholders of Group. The
Portfolio's allocated portion of Group's costs in performing its services
amounted to $6,587 for the fiscal year ended September 30, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of The JPM Pierpont Funds, The JPM Institutional Funds, the
Master Portfolios and JPM Series Trust. The Trustees' Fees and Expenses
shown in the financial statements represents the Portfolio's allocated
portion of the total fees and expenses. Prior to April 1, 1997 the
aggregate annual Trustee Fee was $65,000. The Portfolio's Chairman and
Chief Executive Officer also serves as Chairman of Group and received
compensation and employee benefits from Group in his role as Group's
Chairman. The allocated portion of such compensation and benefits included
in the Fund Services Fee shown in the financial statements was $1,300.
28
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended September 30, 1997 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
- ----------------- ------------
<S> <C>
$ 580,308,643 $528,981,330
- ----------------- ------------
- ----------------- ------------
</TABLE>
4. CREDIT AGREEMENT
The Portfolio is party to a revolving line of credit agreement (the "Agreement")
as discussed more fully in Note 4 of the Fund's Notes to the Financial
Statements which are included elsewhere in this report.
5. SUBSEQUENT EVENT
The Portfolio expects to receive a substantial redemption request in January,
1998 as more fully discussed in Note 5 to the Fund's Financial Statements which
are included elsewhere in this report.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Non-U.S. Fixed Income Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the supplementary data present fairly, in all material
respects, the financial position of The Non-U.S. Fixed Income Portfolio (the
"Portfolio") at September 30, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the supplementary data for each of the two years in the
period then ended and for the period October 11, 1994 (commencement of
operations) through September 30, 1995, in conformity with generally accepted
accounting principles. These financial statements and supplementary data
(hereafter referred to as "financial statements") are the responsibility of the
Portfolio's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1997 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
New York, New York
November 25, 1997
30
<PAGE>
THE JPM INSTITUTIONAL PRIME MONEY MARKET FUND
THE JPM INSTITUTIONAL TAX EXEMPT MONEY MARKET FUND
THE JPM INSTITUTIONAL TREASURY MONEY MARKET FUND
THE JPM INSTITUTIONAL FEDERAL MONEY MARKET FUND
THE JPM INSTITUTIONAL SHORT TERM BOND FUND
THE JPM INSTITUTIONAL BOND FUND
THE JPM INSTITUTIONAL TAX EXEMPT BOND FUND
THE JPM INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
THE JPM INSTITUTIONAL SHARES: CALIFORNIA BOND FUND
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
THE JPM INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
THE JPM INSTITUTIONAL DIVERSIFIED FUND
THE JPM INSTITUTIONAL U.S. EQUITY FUND
THE JPM INSTITUTIONAL DISCIPLINED EQUITY FUND
THE JPM INSTITUTIONAL U.S. SMALL COMPANY FUND
THE JPM INSTITUTIONAL INTERNATIONAL EQUITY FUND
THE JPM INSTITUTIONAL INTERNATIONAL OPPORTUNITIES FUND
THE JPM INSTITUTIONAL EMERGING MARKETS EQUITY FUND
THE JPM INSTITUTIONAL EUROPEAN EQUITY FUND
THE JPM INSTITUTIONAL JAPAN EQUITY FUND
THE JPM INSTITUTIONAL ASIA GROWTH FUND
FOR MORE INFORMATION ON THE JPM INSTITUTIONAL
FUNDS, CALL J.P. MORGAN FUNDS SERVICES AT
(800)766-7722.
THE
JPM INSTITUTIONAL
INTERNATIONAL
BOND FUND
ANNUAL REPORT
SEPTEMBER 30, 1997
