<PAGE>
LETTER TO THE SHAREHOLDERS OF THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
April 30, 1997
Dear Shareholder:
We are pleased to report that The JPM Institutional International Bond Fund
produced strong investment performance for the six-month period ending March
31, 1997.
In a challenging investment environment, made complex by the varying economic
cycles in both Europe and Japan, the Fund returned 5.09% for the period,
versus a 5.24% return of the Salomon Brothers Non-U.S. Government Bond Index
(currency hedged) for six months ending March 31, 1997. Although the Fund
performed below its benchmark, it significantly outperformed its competitors,
as measured by the Lipper Universe Average, which returned -0.31% for the
six-month period ending March 31, 1997.
The Fund's net asset value decreased from $11.30 per share, as of September
30, 1996, to $8.14 by March 31, 1997, after making distributions of $3.68
($2.71 from income, $0.11 from long-term capital gains, and $0.86 from
short-term capital gains). The Fund's net assets also decreased from $13.3
million to $1.7 million. The net assets of The Non-U.S. Fixed Income
Portfolio, in which the Fund invests, totaled approximately $158.1 million on
March 31, 1997.
In addition to the performance and Fund highlights within this report, we
have also provided a portfolio manager Q&A with Dominic J. Pegler, a member
of our international portfolio management team. This interview is designed to
address commonly asked questions regarding the Portfolio and the markets in
which it invests. Dominic also discusses major decisions affecting the
Portfolio during the past six months, as well as our outlook and strategy for
the months ahead.
As always, we welcome your comments and questions or any suggestions as to
how we can improve the financial reports we prepare for you. As such, we
encourage you to call J.P. Morgan Funds Services toll free at (800) 766-7722.
Sincerely yours,
/s/ Evelyn E. Guernsey
Evelyn E. Guernsey
J.P. Morgan Funds Services
TABLE OF CONTENTS
LETTER TO THE SHAREHOLDERS 1 FUND FACTS AND HIGHLIGHTS 9
FUND PERFORMANCE 2 FINANCIAL STATEMENTS 11
PORTFOLIO MANAGER Q&A 3
1
<PAGE>
FUND PERFORMANCE
EXAMINING PERFORMANCE
One way to look at performance is to review a fund's average annual total
return. This figure takes a fund's actual (or cumulative) return and shows
you 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.
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURN
------------------------ ---------------------------
THREE SIX ONE SINCE
AS OF MARCH 31, 1997 MONTHS MONTHS YEAR INCEPTION*
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The JPM Institutional International Bond Fund 1.37% 5.09% 12.03% 13.00%
Salomon Brothers Non-U.S. Government
Bond Index (currency hedged) 1.49% 5.24% 12.42% 13.32%
Lipper Universe Average -3.85% -0.31% 5.13% 9.27%
</TABLE>
*12/1/94 - COMMENCEMENT OF OPERATIONS.
PAST PERFORMANCE IS NOT A 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. THE
JPM INSTITUTIONAL INTERNATIONAL BOND FUND INVESTS ALL OF ITS INVESTABLE ASSETS
IN THE NON-U.S. FIXED INCOME PORTFOLIO, A SEPARATELY REGISTERED INVESTMENT
COMPANY WHICH IS NOT AVAILABLE TO THE PUBLIC BUT ONLY TO OTHER COLLECTIVE
INVESTMENT VEHICLES SUCH AS THE FUND. 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 RESOURCE FOR
MUTUAL FUND DATA. NO REPRESENTATION IS MADE THAT INFORMATION GATHERED FROM
THIS SOURCE IS ACCURATE OR COMPLETE.
2
<PAGE>
PORTFOLIO MANAGER Q&A
Following is an interview with DOMINIC J. PEGLER, VICE PRESIDENT, who
[PHOTO] 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, which was responsible for managing the U.K.'s foreign
exchange reserves. His time at the Bank included a two year secondment to the
Directorate of Monetary Affairs, EC Commission. Mr. Pegler holds a B.S. and an
M.S. in Economics from the London School of Economics (LSE). This interview
was conducted on April 29, 1997, and reflects Dominic's views on that date.
GENERALLY, THROUGHOUT THE PAST YEAR OR MORE, INTERNATIONAL BOND INVESTORS HAVE
ENJOYED FAVORABLE INVESTMENT CONDITIONS -- MODERATE ECONOMIC GROWTH AND
MARKET-SUPPORTING MONETARY POLICIES HAVE CREATED STRONG BOND RETURNS ACROSS
MOST COUNTRIES.
CAN YOU PROVIDE SOME REASONS AS TO WHY THESE CONDITIONS PREVAILED WITHIN SO
MANY SEPARATE ECONOMIES AROUND THE WORLD? SOME SAY GOVERNMENTS, IN GENERAL,
HAVE BECOME QUICKER TO ADJUST MONETARY POLICY AND HAVE ALSO BECOME MORE
FISCALLY RESPONSIBLE. DO YOU AGREE? ALSO, HOW LONG CAN INTERNATIONAL INVESTORS
EXPECT THIS SCENARIO TO CONTINUE?
DJP: There are two reasons why bond investors have been enjoying such strong
returns. First, the cyclical behavior of economies throughout the world seem
to have been slowing down in tandem. And therefore, as your question implies,
this slow or moderate growth created a generally positive environment for
bonds.
Having said that, it's certainly also true that the authorities throughout
the world have been reacting quickly in terms of monetary policy, and have
moved towards being more fiscally responsible. In the U.S., movement towards
making a balanced budget a legal requirement is an example of the type of
fiscal responsibility becoming more the norm. As for an example of responsive
monetary policy, the Federal Reserve also made great efforts to be preemptive
whenever economic activity appeared too strong. Whenever inflationary
pressures in the economy cropped up, the Fed has been seen as, and wanted to
be seen as, reacting quickly to that.
In Europe we can focus on the fiscal reforms that governments have been
putting in place in their attempt to qualify for Economic & Monetary Union
(EMU). Briefly, EMU represents the attempt of several European countries to
share a single currency (the Euro). In any event, in addition to the fiscal
reforms necessary for EMU inclusion, there has also been a major shift
regarding the way in which monetary policy has been recently set. In the past,
the central banks within Europe would tend to adjust interest rates primarily
to stimulate economic activity. Over the past ten years or so, however,
there's been a major shift in motive -- instead of operating monetary policy
to control the rate of economic growth, monetary policy, or interest rates,
were adjusted instead to control prices and achieve price stability. This is a
very different premise.
Now having said that, and still speaking within the context of Europe (given
the extent of its cyclical slow-down and the extent of the fiscal policy
disciplines put in place to qualify for EMU), monetary policy has been relaxed
substantially for the past eighteen months or so. The resulting slow growth,
low inflation environment, then, has significantly contributed to that
region's bond market returns.
3
<PAGE>
Japan, now, is an exception to the case regarding the more responsible
fiscal policies throughout the world. In fact, Japan has actually had a rather
large fiscal expansion over the past two years, combined with loose monetary
policies. The problem in Japan has been a cyclical slow down in terms of
activity, exacerbated by weakness in its financial sector. So as the banking
system, in particular, has had severe problems, and asset prices in general
have fallen, the Bank of Japan has had no alternative but to keep monetary
policy loose (interest rates low) for an extended period of time.
Another element we should mention in explaining bond market returns is
exchange rates. A feature of the past eighteen months has been an appreciation
of the U.S. dollar against both the yen and the deutschmark. This, by the way,
is a reversal of a trend that's been in place for several years. A major
feature of the world financial markets, for at least thirty years, had been a
trend depreciation of the dollar against the mark and the yen. Now that seems
to have been reversed -- perhaps temporarily. In any event, the relevant point
here is that the authorities in Japan and in Europe considered the
depreciation of their currencies against the dollar as another way to achieve
economic recovery -- without having to reduce interest rates even further.
That's also a dynamic that has been a boost to bonds.
BEFORE MOVING ONTO SOME SPECIFIC QUESTIONS WE HAVE REGARDING EUROPEAN BOND
MARKETS, WE HAVE A COUPLE OF GENERAL QUESTIONS WE WERE HOPING YOU COULD
ANSWER. WHEN PORTFOLIO MANAGERS DISTINGUISH BETWEEN "CORE EUROPE," AND
"HIGH-YIELDING EUROPE," SPECIFICALLY, TO WHICH COUNTRIES ARE THEY REFERRING?
AND WHY THE DISTINCTION? WHEN INVESTING THE PORTFOLIO, DO YOU REGARD CORE AND
HIGH-YIELDING EUROPE AS SEPARATE REGIONS?
DJP: "Core" Europe refers to Germany, France, Netherlands, Austria, Belgium,
and Luxembourg. "High-yielding" Europe refers to Spain, Italy, the U.K. and
Sweden. Now there are a couple of countries I haven't mentioned that fall in
between the two -- Denmark and Finland, for example. And then there's Portugal
and Greece which are off screen if you like, categorized more with emerging
economies, rather than with the core or high-yielding countries.
Now, your question also asks why this distinction is made. On the face of
it, it's simple, in that if a country has high yields then it's classified as
high yielding. Conversely, if a country has relatively low, stable yields,
then it would be classified as core. Generally, a `core' classification also
implies the country is among those that would be most likely to participate in
EMU, in which case its monetary policy would follow closely with the policy
set by Germany's Bundesbank; its inflation would also be characteristically
low. The high-yielders by contrast, have been characterized as having more
independence in terms of their monetary policy relative to the Bundesbank.
High-yielders, because they characteristically also had more volatility in
terms of their yields and their exchange rates, were considered less likely to
join EMU.
Now, for the final part of the question, when investing the portfolio do we
regard core and high yielding Europe as separate regions? Well, in practice,
yes. But of course it's not really as simple as that. As a first distinction
between the countries in Europe, we would consider them separately. But then
afterwards, however, the characteristics of Europe as a whole would be
regarded as a single asset class, to which we might, or might not, allocate
assets.
4
<PAGE>
ALTHOUGH CUMULATIVE SIX-MONTH PERFORMANCE (ENDING MARCH 1997) WAS VERY
POSITIVE FOR EUROPE AS A WHOLE, RETURNS IN BOTH CORE AND HIGH-YIELDING EUROPE
BECAME NEGATIVE TOWARD THE LAST MONTH OF THE PERIOD. WAS THIS A RESULT OF MORE
RAPID GROWTH AND/OR HIGHER INFLATION FOR THE REGION -- OR WERE NON-ECONOMIC
FACTORS AFFECTING THIS MOST RECENT PERFORMANCE? ALSO, CAN WE EXPECT TO SEE
WEAKER EUROPEAN PERFORMANCE CONTINUING IN THE FUTURE -- FOR BOTH CORE AND
HIGH-YIELDING EUROPE?
DJP: Two things caused the poor performance in markets during the last month
of the quarter (March 1997). First of all, given the correlation between the
European and U.S. markets, the major sell-off in the U.S. bond market caused a
sell-off in Europe as well. The sell-off in the U.S., by the way, was caused
by the expectation of the increase in interest rates. Now, in addition to the
dynamics regarding the U.S., the European markets performed badly in their own
right. The story in Europe for a long time had been economic recession, and
the resulting loose monetary policy to restore activity without instigating
inflation. There was, then, the beginning of sentiment in the market that
Europe was about to recover, and therefore that short-term interest rates
wouldn't fall any lower. That being the case, the market actually started to
price in higher interest rates throughout the course of the year -- meaning
the market acted as if rates were higher, when they actually were not. As a
result, the market sold off and underperformed.
Now, can we expect to see weaker European bond performance for both core and
high-yielding Europe? Well that's a major question, and, in fact, easier to
answer on a relative basis. From where we are now, we would expect the U.S.
market to perform relatively better than European markets, over a twelve month
period. This is based on the premise that Europe is about to recover
economically, and therefore, its interest rates may soon increase. By
contrast, the Fed has already adjusted rates up in the U.S.; therefore, we
should start to see value in the U.S. markets sooner, perhaps six months out.
So on a relative basis, we would expect the European markets to underperform
North America. On an absolute basis, given that yields are already so
historically low in Europe (and unlikely to go any lower), we have probably
already seen Europe's best values.
The exception to that would be the U.K., as its economic cycle is closer to
that of the U.S. If the U.K. authorities tighten monetary policy sufficiently,
we could expect to see more value in the U.K. towards the end of the year.
REGARDING ECONOMIC & MONETARY UNION (EMU) AND THE MAASTRICHT CRITERIA,
INVESTORS HAVE BECOME INCREASINGLY CONCERNED ABOUT THE POSSIBILITY OF EMU
BEING DELAYED PAST 1999. WHAT BROUGHT THIS CONCERN, AND DO YOU BELIEVE IT
JUSTIFIED? WHAT PROBABILITY DO YOU PLACE ON EMU HAPPENING ON TIME? ALSO,
PLEASE BRIEFLY EXPLAIN THE RAMIFICATIONS FOR INTERNATIONAL BOND INVESTORS
REGARDING EMU, ON TIME, AND EMU, DELAYED.
DJP: The concern over a possible delay of EMU was brought about when investors
began to focus on whether or not the eligible countries would meet the
Maastricht convergence criteria. European countries currently eligible for EMU
membership (15 in all) are required to meet a total of five measures of
economic performance -- the Maastricht criteria -- in order to qualify for
membership and to participate in the single currency.
Specifically, strong concern developed after it was concluded that Germany
would not meet one of the criteria; the requirement based on its budget
deficit relative to its GDP. Because Germany is at the center of the monetary
union process, without Germany, there would be no monetary union. So it is
understandable, then, if Germany's participation was called into question that
concern would develop regarding the fate of the whole process.
5
<PAGE>
Now, do we believe these concerns are justified? On the face of it yes, in
that there are severe risks that Germany and other countries might not meet
all the criteria. But for a full answer, you really have to look a bit deeper;
and two things initally come to mind. First of all, the Maastricht Treaty
allows for a flexible interpretation of the criteria -- that was always
supposed to be the case. The spirit of the Treaty more importantly requires
that the countries exhibit a movement toward a culture of stability so that a
monetary union could be sustained. It was not intended to be stopped in its
tracks if specific nominal criteria were not met. So just because countries
like Germany, or perhaps France, don't meet the nominal requirements
precisely, doesn't necessarily mean they will be excluded from participation.
Secondly, to the extent that a monetary union is more a political process
anyway, we believe there is sufficient political momentum required to make EMU
a reality. We do not think there will be a delay in EMU, primarily because we
do not think the politicians in Europe will agree to any delay at all.
WHAT PROBABILITY DO YOU PLACE ON EMU HAPPENING ON TIME? Well, I think our
main case is that there is a 65% probability that monetary union will start on
time in January, 1999, with eight members -- Germany, France, Netherlands,
Belgium, Luxembourg, Finland, Ireland, and Austria. We also believe the rest
of the countries will join by 2002, with the exception of the U.K. and Greece,
which could join later. The U.K. is currently skeptical of the benefits
expected to be derived from a monetary union, and is therefore voluntarily
delaying its participation. And Greece, coming out of a substantial economic
recession, is currently unable to meet any of the Maastricht criteria, so its
membership will be involuntarily delayed.
Now, to explain the ramifications for international bond investors regarding
the EMU on time or, the EMU delayed -- to the extent that EMU does or does not
happen, it is likely that as long as the separate currencies continue to
exist, the performance of bond markets will be driven by the same factors that
always drove them. The only main difference will be that as those countries
that don't move to EMU at the beginning, but continue the process toward
participation, it is likely that the volatility you see in yields of those
countries, relative to EMU members, will fall historically. Now that's been
the case for about ten years anyway. As a result of economic convergence we
would expect that process to continue. The ramifications anyway for bond
investors regarding EMU are more profound as currencies disappear, currency
risk between the different markets of course disappears. And therefore,
managing a portfolio of European bonds if they're all in monetary union just
becomes a process of managing credit risk between the different countries. So
instead of having risk associated with currency, you'll just have risk
associated with the different credit qualities of the countries. This is a
profound difference, which has implications too for optimal portfolio
construction, in that if diversification benefits of the different European
countries disappeared, how can you best construct a portfolio? So, we at J.P.
Morgan are now spending a lot of time thinking about that. Basically, once
Europe is in a monetary union, we would separately review each country on a
credit basis, so that managing portfolios would rely more heavily on our
skills of measuring different credit qualities.
WE WOULD LIKE TO SWITCH THE DISCUSSION FROM EUROPE TO JAPAN. THROUGHOUT THE SIX-
MONTH PERIOD, JAPAN HAS BEEN A PERPETUAL UNDERWEIGHT IN THE PORTFOLIO, EVEN
THOUGH IN SOME OF THOSE MONTHS JAPANESE BONDS WERE AMONG THE TOP INTERNATIONAL
PERFORMERS. WHY THE CONTINUAL UNDERWEIGHT? WHEN DO YOU FORESEE ADDING TO
EXPOSURE IN JAPAN?
DJP: Oh, well, this is a good question, and has two parts to its answer. First
of all, yields in Japan have been historically very low. With short-term
interest rates at a half percent, we firmly believed they couldn't get much
lower. We also firmly believed there would be an economic recovery in Japan,
and therefore, based on
6
<PAGE>
such a scenario, viewed there was no value in Japanese bonds. It was therefore
worth being underweighted in that country, relative to the benchmark. Now,
we've been correct on the economy, as there has been something of an economic
recovery in some sectors. But because of the weakness of the financial system,
the Bank of Japan has not been able to raise interest rates, nor do they
really need to from an inflation standpoint. The result of this scenario has
been that the market has performed fairly well. So basically, we got the
position wrong, as the underweight in Japan was in place until the very end of
March, while, as you noted, the market did well in some of these months. Since
March, however, we've gone neutral, which is a substantial shift for the
portfolio.
Now it's true, that over the period the underweighting in Japan had been in
place, that specific position detracted from Portfolio returns. But then
again, yields had traded in a range of extreme fluctuation, which helped the
Portfolio, in some months, by not being exposed. Additionally, as the
Portfolio was under exposed to Japan, we invested those assets elsewhere, in
Europe, for example, which, overall, contributed positively to the period's
returns.
REGARDING THE DOLLAR-BLOC COUNTRIES OF CANADA AND AUSTRALIA, THE PORTFOLIO HAS
MAINTAINED AN OVERWEIGHT POSITION IN THESE MARKETS THROUGHOUT THE SIX-MONTH
PERIOD. WHAT WERE SOME OF THE FACTORS THAT CONTRIBUTED TO THE TEAM'S DECISION
TO OVERWEIGHT THESE COUNTRIES? DO PROSPECTS LOOK EQUALLY FAVORABLE FOR THESE
COUNTRIES INTO THE NEXT SIX-MONTH PERIOD?
DJP: We do not believe there is much more value in Canada, as it has already
outperformed very strongly relative to the U.S. over the past eighteen months.
We have, therefore, removed the Portfolio's overweight position in Canada. The
more interesting story continues in Australia, where a cyclical slow down has
begun. We think also the government has started on a process of fiscal reform
which we think will contribute to more positive market sentiment. Now, the
economic slowdown and the fiscal tightening we believe will be combined with a
further easing of Australia's monetary policy. Therefore, we think there's
value in Australia -- not only relative to the other dollar-bloc markets, but
also to other markets in the index. So, we're happy to keep the Portfolio's
overweight position in Australia.
COMMENT, IF YOU CAN, ON THE ECONOMIC CONDITIONS IN THE U.S., AND THE EFFECTS
THE FEDERAL RESERVE'S MARCH 25TH INCREASE IN INTEREST RATES HAD ON
INTERNATIONAL BOND MARKETS. ALSO, IF THE FED CONTINUES TO TIGHTEN, HOW WILL
THAT AFFECT INTERNATIONAL BOND MARKETS GOING FORWARD?
DJP: Our view here is that there's still strength in the U.S. economy, through
more or less all sectors. The interesting thing is whether this is going to
start to feed into consumer price inflation; so far, it has not.
Having said that, though, the Federal Reserve has shown it is prepared to
raise rates -- not just on the basis of rising prices, but on the basis of
strong economic activity. And because of that, we expect them to continue to
remain vigilant, and remain preemptive in their policy stance. We expect
another rate increase between twenty five and fifty basis points over the next
six-month period.
Now, how will that effect international markets going forward? Typically
whenever the Fed raises rates, markets will fall -- and that means all markets
throughout the world, with the exception of Japan. This is simply due to basic
correlations between financial markets. So we would expect all markets to fall
if the Fed continues its policy of tightening.
7
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND PRODUCED STRONG RESULTS
THOROUGHOUT THE SIX-MONTH PERIOD. WHAT WERE THE PRIMARY REASONS FOR THIS
STRONG PERFORMANCE -- WAS IT SECURITY SPECIFIC, COUNTRY SPECIFIC OR DURATION
DRIVEN?
DJP: Strong results throughout the six-month period ending March 31, 1997
came as a result of both country and duration decisions. As we discussed
earlier, although the Portfolio's underweighted position in Japan hurt
returns, that underperformance was significantly mitigated by overweighted
positions in both core and high-yielding Europe. Also contributing positively
to performance for the period was a reduced exposure to Canada.
IN GENERAL, WHAT KIND OF INVESTMENT ENVIRONMENT DO YOU SEE DEVELOPING IN
INTERNATIONAL MARKETS FOR THE REMAINDER OF 1997? WHAT STRATEGY WILL BE EMPLOYED
FOR THE NON-U.S. FIXED INCOME PORTFOLIO GIVEN YOUR EXPECTED SCENARIO?
DJP: First of all, in terms of direction, we do not see the Japanese market
moving much, either up or down. So for the time being, we're happy to have the
Portfolio remain neutral the Japanese market, relative to the benchmark.
The interesting question, however, is whether it's time to move assets out
of Europe, and into North America. If the economic slowdown in Europe has come
to an end, then the markets will have to begin discounting higher rates going
forward. Or, on the other hand, if the slowdown has been so deep and so
pronounced then, going forward, it will be necessary to keep interest rates at
their current, low levels. We'll be watching closely to see how this will pan
out, and will be prepared to adjust assets out of Europe if deemed necessary.
In terms of currencies, we're expecting the dollar to remain at least at
these levels, or perhaps stronger against both the mark and the yen. Regarding
yields, however, projections are a bit more difficult; a bit more of a closer
call. In terms of yield direction, we don't think there is much value left in
European markets, on an absolute basis. And on a relative basis, we're getting
close to the time when we might want to start putting assets into North
America instead.
Now regarding high-yield Europe versus core Europe, we believe most of this
story has run its course. If you look at where the markets are pricing yields
on a forward basis for the start of monetary union, there's not much more room
left for further convergence of Italy, Spain and Sweden. For example, Spain,
5-year maturity bonds, are something like thirty-two basis points over
Germany, two years forward. What that means is that the markets are attaching
a very high probability that Spain joins EMU in 1999. That being the case,
there's no longer value in that market on a relative basis. So we think most
of the convergence story has been played out. We also expect that at some
point during the course of this year, the markets will begin to discount
higher rates in Europe. On that basis, we believe it will be difficult to
avoid the conclusion that there will be more value in North America relative
to Europe.
Regarding specific countries into 1997, you could expect to see
underweighted positions in Germany, France and probably the other core
countries, with neutral positions in high-yielding Europe. We expect to
maintain an overweight position in Australia, and, for the time being, in the
U.K.
8
<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 03/31/97
$1,645,389
- ------------------------------------------------------------------------
DIVIDEND PAYABLE DATE
12/27/97
- ------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/27/97
EXPENSE RATIO
The Fund's annual expense ratio not to exceed 0.65% 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 MARCH 31, 1997
PORTFOLIO ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
[EDGAR REPRESENTATION OF PIE CHART]
<TABLE>
<S> <C>
JAPAN 28.0%
CANADA 10.8%
UNITED KINGDOM 8.4%
GERMANY 6.8%
AUSTRALIA 6.8%
FRANCE 6.4%
AUSTRIA 3.9%
BELGIUM 3.6%
NETHERLANDS 3.4%
SWEDEN 3.3%
OTHER 10.1%
SHORT-TERM HOLDINGS 8.5%
</TABLE>
30-DAY SEC YIELD
5.60%
DURATION
5.4 years
9
<PAGE>
FUNDS DISTRIBUTOR, INC. IS THE DISTRIBUTOR FOR THE JPM INSTITUTIONAL
INTERNATIONAL BOND FUND (THE "FUND").
MORGAN GUARANTY TRUST COMPANY OF NEW YORK ("MORGAN")SERVES AS PORTFOLIO
INVESTMENT ADVISOR AND MAKES THE FUND AVAILABLE SOLELY IN ITS CAPACITY AS
SHAREHOLDER SERVICING AGENT FOR CUSTOMERS. INVESTMENTS IN THE FUND ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, MORGAN OR ANY OTHER
BANK. SHARES OF THE FUND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL
AGENCY. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND CAN
FLUCTUATE, SO AN INVESTOR'S SHARES WHEN REDEEMED MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.
Performance data quoted herein represent past performance. Please remember
that past performance is not a guarantee of future performance. Fund returns
are net of fees and assume the reinvestment of Fund distributions. Had
expenses not been subsidized, returns would have been lower. The Fund invests
all of its investable assets in The Non-U.S. Fixed Income Portfolio (the
"Portfolio"), a separately registered investment company which is not
available to the public but only to other collective investment vehicles such
as the Fund. The Portfolio invests in foreign securities which are subject to
special risks; prospective investors should refer to the Fund's Prospectus for
a discussion of these risks.
MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES, IS PROVIDED IN THE PROSPECTUS, WHICH SHOULD BE READ CAREFULLY BEFORE
INVESTING. YOU MAY OBTAIN ADDITIONAL COPIES OF THE PROSPECTUS BY CALLING J.P.
MORGAN FUNDS SERVICES AT (800) 766-7722.
10
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Non-U.S. Fixed Income Portfolio
("Portfolio"), at value $1,722,287
Deferred Organization Expenses 12,559
Prepaid Expenses and Other Assets 45
----------
Total Assets 1,734,891
----------
LIABILITIES
Accrued Trustees' Fees and Expenses 462
Shareholder Servicing Fee Payable 320
Administrative Services Fee Payable 99
Administration Fee Payable 42
Fund Services Fee Payable 10
Accrued Expenses 88,569
----------
Total Liabilities 89,502
----------
NET ASSETS
Applicable to 202,176 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $1,645,389
----------
----------
Net Asset Value, Offering and Redemption Price
Per Share $8.14
----
----
ANALYSIS OF NET ASSETS
Paid-in Capital $1,256,050
Undistributed Net Investment Income 31,194
Accumulated Net Realized Gain on Investment and
Foreign Currency Transactions 483,766
Net Unrealized Depreciation of Investment and
Foreign Currency Translations (125,621)
----------
Net Assets $1,645,389
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income $ 210,912
Allocated Portfolio Expenses (18,508)
---------
Net Investment Income Allocated from
Portfolio 192,404
FUND EXPENSES
Professional Fees $ 22,503
Registration Fees 22,280
Transfer Agent Fees 9,379
Printing Expenses 9,109
Shareholder Servicing Fee 3,752
Amortization of Organization Expenses 2,344
Administrative Services Fee 1,187
Trustees' Fees and Expenses 529
Fund Services Fee 160
Administration Fee 132
Miscellaneous 29,702
---------
Total Fund Expenses 101,077
Less: Reimbursement of Expenses (101,077)
---------
NET FUND EXPENSES 0
---------
NET INVESTMENT INCOME 192,404
NET REALIZED GAIN ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS ALLOCATED FROM PORTFOLIO 747,548
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENT AND FOREIGN CURRENCY TRANSLATIONS
ALLOCATED FROM PORTFOLIO (423,162)
---------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 516,790
---------
---------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FISCAL
MARCH 31, 1997 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 1996
-------------- ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 192,404 $ 367,490
Net Realized Gain on Investment and Foreign
Currency Transactions Allocated from Portfolio 747,548 590,402
Net Change in Unrealized Depreciation of
Investment and Foreign Currency Translations
Allocated from Portfolio (423,162) (155,561)
-------------- ------------------
Net Increase in Net Assets Resulting from
Operations 516,790 802,331
-------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (909,066) --
Net Realized Gain (325,360) (179,451)
-------------- ------------------
Total Distributions to Shareholders (1,234,426) (179,451)
-------------- ------------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 2,640,748 12,658,600
Reinvestment of Dividends and Distributions 1,038,541 179,445
Cost of Shares of Beneficial Interest Redeemed (14,625,852) (4,384,337)
-------------- ------------------
Net Increase (Decrease) from Transactions in
Shares of Beneficial Interest (10,946,563) 8,453,708
-------------- ------------------
Total Increase (Decrease) in Net Assets (11,664,199) 9,076,588
NET ASSETS
Beginning of Period 13,309,588 4,233,000
-------------- ------------------
End of Period (including undistributed net
investment income of $31,194 and $747,856,
respectively) $ 1,645,389 $ 13,309,588
-------------- ------------------
-------------- ------------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
13
<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
FOR THE (COMMENCEMENT OF
SIX MONTHS ENDED FOR THE OPERATIONS) TO
MARCH 31, 1997 FISCAL YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 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 2.23 0.31 0.49
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Allocated from
Portfolio (1.71) 0.95 0.78
---------------- ------------------ ----------------
Total from Investment Operations 0.52 1.26 1.27
---------------- ------------------ ----------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (2.71) -- (0.15)
Net Realized Gain (0.97) (1.08) --
---------------- ------------------ ----------------
Total Distributions to Shareholders (3.68) (1.08) (0.15)
---------------- ------------------ ----------------
NET ASSET VALUE, END OF PERIOD $ 8.14 $ 11.30 $11.12
---------------- ------------------ ----------------
---------------- ------------------ ----------------
Total Return 5.09%(a) 12.09% 12.83%(a)
---------------- ------------------ ----------------
---------------- ------------------ ----------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (in thousands) $1,645 $13,310 $4,233
Ratios to Average Net Assets
Expenses 0.49%(b) 0.65% 0.60%(b)
Net Investment Income 5.12%(b) 5.28% 5.82%(b)
Decrease Reflected in Expense Ratio
due to Expense Reimbursement 2.72%(b) 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.
14
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 (1% at
March 31, 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)The Fund declares and pays income dividends annually. 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.
15
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
a)The Trust has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as co-administrator and distributor. Under an
Co-Administration Agreement, 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. Under the
Co-Administration Agreement, 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, The JPM Pierpont Funds, The JPM Advisor Funds, the Portfolios and
other portfolios (the "Master Portfolios") in which the Trust, The JPM
Pierpont Funds and The JPM Advisor Funds invest, JPM Series Trust and JPM
Series Trust II. For the six months ended March 31, 1997, the fee for
these services amounted to $132.
On November 15, 1996, The JPM Advisor Funds terminated operations and were
liquidated. Subsequent to that date, the net assets of the JPM Advisor
Funds were no longer included in the calculation of the allocation of
FDI's fees.
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 proportionate share of an annual complex-wide charge. This charge is
calculated daily based on the aggregate net assets of the Master
Portfolios and JPM Series Trust in accordance with the following 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 JPM Pierpont Funds,
the Master Portfolios, other investors in the Master Portfolios for which
Morgan provides similar services, and JPM Series Trust. For the six months
ended March 31, 1997, the fee for these services amounted to $1,187.
In addition, 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 through January 31,
1998. For the six months ended March 31, 1997, Morgan has agreed to
reimburse the Fund $101,077 for expenses under this agreement.
c)The Trust, on behalf of the Fund, has a Shareholder Servicing Agreement
with Morgan. 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 six months
ended March 31, 1997, the fee for these services amounted to $3,752.
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
$160 for the six months ended March 31, 1997.
16
<PAGE>
THE JPM INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 1997
- --------------------------------------------------------------------------------
e)An aggregate annual fee of $65,000 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 the total fees and
expenses. The Trust'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 $20.
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 SIX
MONTHS ENDED FOR THE FISCAL
MARCH 31, 1997 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 1996
-------------- ------------------
<S> <C> <C>
Shares of beneficial interest sold............... 297,742 1,176,106
Reinvestment of dividends and distributions...... 129,333 17,074
Shares of beneficial interest redeemed........... (1,402,607) (396,016)
-------------- ------------------
Net Increase (Decrease).......................... (975,532) 797,164
-------------- ------------------
-------------- ------------------
</TABLE>
17
<PAGE>
The Non-U.S. Fixed Income Portfolio
Semi-Annual Report March 31, 1997
(unaudited)
(The following pages should be read in conjuction
with The JPM Institutional International Bond Fund
Semi-Annual Financial Statements)
18
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED)
MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED)(1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -------------
<C> <S> <C>
CORPORATE OBLIGATIONS (19.4%)
CANADA (2.7%)
GBP 2,617 Hydro-Quebec, 6.50% due 12/09/98................. $ 4,243,403
-------------
FRANCE (1.6%)
FRF 12,300 Electricite de France, 8.60% due 04/09/04........ 2,582,158
-------------
GERMANY (6.4%)
ITL 5,595,000 Bayerische Landesbank Girozentrale, 10.75% due
03/01/03....................................... 3,825,444
DEM 5,000 Deutsche Pfandbriefe Hypobank, 5.625% due
02/07/03, 144A................................. 3,046,946
DEM 5,000 KFW International Finance, 6.75% due 02/08/02.... 3,221,665
-------------
10,094,055
-------------
THAILAND (2.2%)
USD 3,500 Krung Thai Bank Public Company Ltd., 6.855% due
09/30/97, FRN.................................. 3,471,300
-------------
UNITED KINGDOM (6.5%)
GBP 3,000 MEPC PLC, 8.75% due 12/07/06..................... 5,015,287
GBP 3,300 Royal Bank of Scotland PLC, 7.88% due 12/07/06... 5,303,458
-------------
10,318,745
-------------
TOTAL CORPORATE OBLIGATIONS (COST
$30,145,607)............................... 30,709,661
-------------
GOVERNMENT OBLIGATIONS (67.8%)
AUSTRALIA (6.6%)
AUD 14,500 Government of Australia, 6.75% due 11/15/06(3)... 10,401,756
-------------
AUSTRIA (3.8%)
DEM 9,000 Autobahnen Und Schnellstr Finance Agency, 7.13%
due 12/22/99................................... 5,774,722
JPY 25,000 Republic of Austria, 3.75% due 02/03/09.......... 221,357
-------------
5,996,079
-------------
BELGIUM (3.5%)
Kingdom of Belgium
BEF 110,000 7.00% due 05/15/06(3).......................... 3,447,159
BEF 63,000 7.75% due 12/22/00(3).......................... 2,025,068
-------------
5,472,227
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED)(1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -------------
<C> <S> <C>
CANADA (7.8%)
Government of Canada
CAD 12,200 7.00% due 09/01/01............................. $ 9,184,719
CAD 4,050 8.00% due 06/01/23............................. 3,169,227
-------------
12,353,946
-------------
FRANCE (4.7%)
FRF 20,600 Government of France, 6.00% due 10/25/25......... 3,369,344
FRF 19,000 Societe National de Chemins, 8.60% due
03/09/04....................................... 3,973,846
-------------
7,343,190
-------------
GERMANY (0.2%)
DEM 550 Germany Unity Fund, 8.00% due 01/21/02(3)........ 372,778
-------------
IRELAND (1.3%)
ESP 250,000 Republic of Ireland, 10.55% due 02/21/02......... 2,052,179
-------------
ITALY (2.8%)
ITL 6,900,000 Republic of Italy, 9.00% due 10/01/03............ 4,357,350
-------------
JAPAN (27.2%)
Government of Japan
JPY 1,370,000 Series 144, 6.00% due 12/20/01(3).............. 13,310,495
JPY 374,000 Series 157, 4.50% due 06/20/03................. 3,479,005
JPY 1,065,000 Series 164, 4.10% due 12/22/03................. 9,730,454
JPY 1,909,000 Series 187, 3.30% due 06/20/06................. 16,547,436
-------------
43,067,390
-------------
NETHERLANDS (3.4%)
Government of the Netherlands
NLG 2,500 6.00% due 01/15/06............................. 1,361,447
NLG 6,500 8.50% due 03/15/01(3).......................... 3,943,466
-------------
5,304,913
-------------
SPAIN (1.7%)
ESP 323,000 Government of Spain, 10.50% due 10/30/03......... 2,708,032
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED)(1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -------------
<C> <S> <C>
SWEDEN (3.2%)
Kingdom of Sweden
SEK 6,700 6.00% due 02/09/05............................. $ 837,242
SEK 28,300 10.25% due 05/05/00............................ 4,248,637
-------------
5,085,879
-------------
UNITED KINGDOM (1.6%)
GBP 1,491 Treasury Gilt, 8.50% due 12/07/05................ 2,581,460
-------------
TOTAL GOVERNMENT OBLIGATIONS (COST
$111,427,187).............................. 107,097,179
-------------
SUPRANATIONAL OBLIGATIONS (2) (1.9%)
European Investment Bank
ITL 1,700,000 10.875% due 12/14/05........................... 1,197,999
ITL 2,537,000 12.20% due 02/18/03............................ 1,829,659
-------------
TOTAL SUPRANATIONAL OBLIGATIONS (COST
$2,988,762)................................ 3,027,658
-------------
SHORT-TERM INVESTMENTS (8.3%)
TIME DEPOSITS (8.1%)
State Street Bank & Trust Co. London,
2,879,000 4.50% due 04/01/97............................. 2,879,000
10,000,000 6.125% due 04/01/97............................ 10,000,000
-------------
12,879,000
-------------
U.S. TREASURY OBLIGATIONS (0.2%)
280,000 United States Treasury Bills 5.13% due
06/19/97(3).................................... 276,771
-------------
TOTAL SHORT-TERM INVESTMENTS (COST
$13,155,916)............................... 13,155,771
-------------
TOTAL INVESTMENTS (COST $157,717,472) (97.4%).... 153,990,269
OTHER ASSETS IN EXCESS OF LIABILITIES (2.6%)..... 4,123,694
-------------
NET ASSETS (100.0%).............................. $ 158,113,963
-------------
-------------
</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) -- International agencies.
(3) -- Amount segregated as collateral for initial and variation margin on
futures contracts.
144A -- Securities restricted for sale to Qualified Institutional Buyers.
FRN -- Floating Rate Note. Maturity date reflects the later of the next interest
rate change or the next put date.
NOTE: Based on the cost of investments of $158,179,678 for federal income tax
purposes at March 31, 1997, the aggregate gross unrealized appreciation was
$1,331,966 and the aggregate gross unrealized depreciation was $5,521,375
resulting in net unrealized depreciation of investments of $4,189,409.
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $157,717,472 ) $153,990,269
Cash 895
Foreign Currency at Value (Cost $6,469,237 ) 6,536,679
Receivable for Investments Sold 11,066,213
Interest Receivable 2,959,569
Unrealized Appreciation of Forward Foreign
Currency Contracts 907,001
Prepaid Expenses and Other Assets 298
------------
Total Assets 175,460,924
------------
LIABILITIES
Payable for Investments Purchased 14,693,051
Unrealized Depreciation of Forward Foreign
Currency Contracts 2,489,273
Advisory Fee Payable 48,434
Variation Margin Payable 31,371
Custody Fee Payable 26,057
Administrative Services Fee Payable 4,327
Administration Fee Payable 513
Fund Services Fee Payable 392
Accrued Trustees' Fees and Expenses 1,356
Accrued Expenses 52,187
------------
Total Liabilities 17,346,961
------------
NET ASSETS
Applicable to Investors' Beneficial Interests $158,113,963
------------
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income $ 4,208,627
EXPENSES
Advisory Fee $ 266,522
Custodian Fees and Expenses 69,817
Professional Fees and Expenses 29,788
Administrative Services Fee 24,061
Printing Expenses 4,980
Fund Services Fee 2,802
Trustees' Fees and Expenses 2,779
Administration Fee 1,944
Insurance Expense 1,001
Registration Fees 224
Miscellaneous 263
-----------
Total Expenses 404,181
-----------
NET INVESTMENT INCOME 3,804,446
NET REALIZED GAIN (LOSS) ON
Investment Transactions (including $783,662 net
realized gain from futures contracts) (732,169)
Foreign Currency Transactions 12,572,291
-----------
Net Realized Gain 11,840,122
NET CHANGE IN UNREALIZED DEPRECIATION OF
Investment (including $280,217 net unrealized
depreciation from futures contracts) (5,401,400)
Foreign Currency Contracts and Translations (3,359,490)
-----------
Net Change in Unrealized Depreciation (8,760,890)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 6,883,678
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED FOR THE FISCAL
MARCH 31, 1997 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 1996
-------------- ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 3,804,446 $ 11,244,228
Net Realized Gain on Investment and Foreign
Currency Transactions 11,840,122 12,170,665
Net Change in Unrealized Appreciation
(Depreciation) of Investment and Foreign
Currency Translations (8,760,890) 1,814,400
-------------- ------------------
Net Increase in Net Assets Resulting from
Operations 6,883,678 25,229,293
-------------- ------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 49,203,010 116,826,143
Withdrawals (43,875,738) (262,275,340)
-------------- ------------------
Net Increase (Decrease) from Investors'
Transactions 5,327,272 (145,449,197)
-------------- ------------------
Total Increase (Decrease) in Net Assets 12,210,950 (120,219,904)
NET ASSETS
Beginning of Period 145,903,013 266,122,917
-------------- ------------------
End of Period $ 158,113,963 $ 145,903,013
-------------- ------------------
-------------- ------------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 11, 1994
FOR THE (COMMENCEMENT OF
SIX MONTHS ENDED FOR THE FISCAL OPERATIONS) TO
MARCH 31, 1997 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) SEPTEMBER 30, 1996 1995
---------------- ------------------ ----------------
<S> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.53%(a) 0.51% 0.55%(a)
Net Investment Income 4.99%(a) 5.34% 5.73%(a)
Portfolio Turnover 111%(b) 330% 288%(b)
</TABLE>
- ------------------------
(a) Annualized.
(b) Not annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,1997
- --------------------------------------------------------------------------------
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.
25
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31,1997
- --------------------------------------------------------------------------------
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 and spot foreign currency contract
translations. At March 31, 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 3/31/97 (DEPRECIATION)
- ------------------------------------------------- ------------- ----------- --------------
<S> <C> <C> <C>
Australian Dollar 265,560, expiring 5/14/97...... $ 207,562 $ 207,979 $ 417
British Pound 118,027, expiring 5/14/97.......... 192,048 194,108 2,060
Canadian Dollar 4,057,317, expiring 5/14/97...... 2,981,130 2,940,417 (40,713)
Finnish Markka 8,124,398, expiring 5/14/97....... 1,593,019 1,644,337 51,318
French Franc 1,848,159, expiring 5/14/97......... 326,588 330,325 3,737
German Mark 11,758,106, expiring 5/14/97......... 6,980,723 7,081,085 100,362
Italian Lira 549,469,740, expiring 5/14/97....... 324,636 329,432 4,796
Japanese Yen 699,215,507, expiring 5/14/97....... 5,735,976 5,695,553 (40,423)
</TABLE>
26
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31,1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. DOLLAR NET UNREALIZED
VALUE AT APPRECIATION/
SALES CONTRACTS COST/PROCEEDS 3/31/97 (DEPRECIATION)
- ------------------------------------------------- ------------- ----------- --------------
<S> <C> <C> <C>
Australian Dollar 14,381,744, expiring 5/14/97... $ 11,347,196 $11,263,385 $ 83,811
Belgium Franc 198,511,735, expiring 5/14/97...... 5,623,562 5,787,928 (164,366)
British Pound 11,539,784, expiring 5/14/97....... 18,515,994 18,978,442 (462,448)
Canadian Dollar 18,962,586, expiring 5/14/97..... 13,907,287 13,742,558 164,729
Finnish Markka 7,300,764, expiring 5/14/97....... 1,428,721 1,477,638 (48,917)
French Franc 60,545,849, expiring 5/14/97........ 10,494,258 10,821,482 (327,224)
German Mark 34,411,203, expiring 5/14/97......... 20,094,133 20,723,461 (629,328)
Italian Lira 21,486,271,323, expiring 5/14/97.... 12,583,468 12,881,993 (298,525)
Japanese Yen 6,068,448,872, expiring 5/14/97..... 49,927,132 49,431,360 495,772
Netherland Guilder 10,512,406, expiring
5/14/97......................................... 5,452,493 5,627,174 (174,681)
Spanish Peseta 776,181,879, expiring 5/14/97..... 5,330,773 5,500,037 (169,264)
Swedish Krona 44,897,962, expiring 5/14/97....... 5,846,089 5,979,474 (133,385)
--------------
NET UNREALIZED DEPRECIATION ON FORWARD FOREIGN
CURRENCY CONTRACTS.............................. $ (1,582,272)
--------------
--------------
</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 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, and the possible inability of counterparties to meet the terms of
their contracts. Futures transactions during the six months ended March
31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
NUMBER OF CONTRACTS OF CONTRACTS
------------------- ----------------
<S> <C> <C>
Contracts open at beginning of period............ 14 $ 1,121,505
Contracts opened................................. 339 39,566,381
Contracts closed................................. (256) (30,782,042)
------------------- ----------------
Contracts open at end of period.................. 97 $ 9,905,844
------------------- ----------------
------------------- ----------------
</TABLE>
27
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31,1997
- --------------------------------------------------------------------------------
SUMMARY OF OPEN CONTRACTS AT MARCH 31, 1997
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION/
CONTRACTS LONG (DEPRECIATION)
--------------- --------------
<S> <C> <C>
Ten-Year German Liffe, expiring June 1997........ 26 $ (104,361)
Fifteen-Year Treasury Gilt, expiring June 1997... 57 (143,794)
Ten-Year Spanish Government Note, expiring June
1997............................................ 20 (21,280)
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS SHORT
---------------
<S> <C> <C>
Ten-Year Italian Government Note, expiring June
1997............................................ (6) 26,332
--------------- --------------
Totals........................................... 97 $ (243,103)
--------------- --------------
--------------- --------------
</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.
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 six months ended March 31, 1997, such
fees amounted to $266,522.
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, 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 Portfolio's officers affiliated with FDI. Under
the Co-Administration Agreement, 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 The JPM Pierpont Funds, The JPM Institutional Funds, The JPM
Advisor Funds, the Portfolio and other portfolios (the "Master
Portfolios") in which The JPM Pierpont Funds, The JPM Institutional Funds
and The JPM Advisor Funds invest, JPM Series Trust and JPM Series Trust
II. For the six months ended March 31, 1997, the fee for these services
amounted to $1,944.
On November 15, 1996, The JPM Advisor Funds terminated operations and were
liquidated. Subsequent to that date, the net assets of the JPM Advisor
Funds were no longer included in the calculation of the allocation of
FDI's fees.
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
28
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
MARCH 31,1997
- --------------------------------------------------------------------------------
the Portfolio. Under the Services Agreement, the Portfolio has agreed to
pay Morgan a fee equal to its proportionate share of an annual
complex-wide charge. This charge is calculated daily based on the
aggregate net assets of 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
Portfolio is determined by the proportionate share that its net assets
bear to the net assets of the Master Portfolios, investors in the Master
Portfolios for which Morgan provides similar services, and JPM Series
Trust. For the six months ended March 31, 1997, the fee for these services
amounted to $24,061.
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 $2,802 for the six months ended March 31, 1997.
e)An aggregate annual fee of $65,000 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. 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 $400.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the six months
ended March 31, 1997 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
- ---------------------- ------------
<S> <C>
$160,061,356........... $146,756,244
</TABLE>
29
<PAGE>
JPM INSTITUTIONAL PRIME MONEY MARKET FUND
JPM INSTITUTIONAL TAX EXEMPT MONEY MARKET FUND
JPM INSTITUTIONAL FEDERAL MONEY MARKET FUND
JPM INSTITUTIONAL SHORT TERM BOND FUND
JPM INSTITUTIONAL BOND FUND
JPM INSTITUTIONAL TAX EXEMPT BOND FUND
JPM INSTITUTIONAL NEW YORK TOTAL RETURN BOND FUND
JPM INSTITUTIONAL SHARES: CALIFORNIA BOND FUND
JPM INSTITUTIONAL INTERNATIONAL BOND FUND
JPM INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
JPM INSTITUTIONAL DIVERSIFIED FUND
JPM INSTITUTIONAL U.S. EQUITY FUND
JPM INSTITUTIONAL DISCIPLINED EQUITY FUND
JPM INSTITUTIONAL U.S. SMALL COMPANY FUND
JPM INSTITUTIONAL INTERNATIONAL EQUITY FUND
JPM INSTITUTIONAL INTERNATIONAL OPPORTUNITIES FUND
JPM INSTITUTIONAL EMERGING MARKETS EQUITY FUND
JPM INSTITUTIONAL EUROPEAN EQUITY FUND
JPM INSTITUTIONAL JAPAN EQUITY FUND
JPM INSTITUTIONAL ASIA GROWTH FUND
FOR MORE INFORMATION ON THE JPM INSTITUTIONAL FAMILY OF FUNDS, CALL J.P. MORGAN
FUNDS SERVICES AT (800)766-7722.
THE
JPM INSTITUTIONAL
INTERNATIONAL
BOND FUND
SEMI-ANNUAL REPORT
MARCH 31, 1997
