<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN INSTITUTIONAL EUROPEAN EQUITY FUND
February 12, 1998
Dear Shareholder:
Your Fund has changed its name. The JPM Institutional European Equity Fund is
now the J.P. Morgan Institutional European Equity Fund. When J.P. Morgan began
advising mutual funds over 15 years ago, regulatory restrictions prevented us
from using our name in the title of any mutual fund, which led to the JPM
acronym. With the evolution of today's financial marketplace, we are now able to
proudly include the full J.P. Morgan name in the title of your Fund.
In a period plagued by increased volatility in global equity markets, we are
pleased to report that the J.P. Morgan Institutional European Equity Fund
produced a strong return for the year ended December 31, 1997. Although the Fund
underperformed its benchmark, the MSCI Europe Index, it significantly
outperformed its competitors for the annual period (as measured by the Lipper
European Region Funds Average). The Fund returned 22.27% for the year, versus
23.80% for its benchmark, and 15.78% for the Lipper Average.
The Fund's net asset value increased from $11.56 per share at the beginning of
the year to $12.56 by December 31, 1997, after making distributions of
approximately $0.17 from ordinary income, approximately $0.40 from short-term
capital gains and approximately $0.98 from long-term capital gains of which
$0.68 represents distributions of 20% rate gains. The Fund's net assets were
approximately $10.2 million at the end of the reporting period. The net assets
of The European Equity Portfolio, in which the Fund invests, totaled
approximately $15.0 million on December 31, 1997.
In addition to the performance and allocation highlights within this report, we
have also provided a portfolio manager Q&A with Nigel F. Emmett, a member of the
Fund's portfolio management team. This interview is designed to address commonly
asked questions regarding the Portfolio and the markets in which it invests.
Nigel also discusses major decisions affecting the Portfolio during the fiscal
year just past, as well as an outlook and strategy 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 on February 29, 1996 would have grown to
$1,439,009 on December 31, 1997.
Another way to look at performance is to review a fund's average annual total
return. This figure takes the 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.
GROWTH OF $1,000,000 SINCE INCEPTION
FEBRUARY 29, 1996 - DECEMBER 31, 1997
[GRAPH]
J.P. Morgan Institutional Lipper European Region
European Equity Fund MSCI Europe Index Funds Average
- --------------------------------------------------------------------------------
Inception 1,000,000 1,000,000 1,000,000
1,011,060 1,011,960 1,021,100
1,019,100 1,019,280 1,037,950
1,035,180 1,027,160 1,064,000
1,048,240 1,038,470 1,073,580
1,028,140 1,025,460 1,045,340
1,052,260 1,055,890 1,075,760
1,073,370 1,078,100 1,090,500
1,097,490 1,103,140 1,112,310
1,150,750 1,159,030 1,161,360
Dec-96 1,176,930 1,181,490 1,185,630
1,171,840 1,184,690 1,195,710
1,186,090 1,200,340 1,212,090
1,228,850 1,239,120 1,239,490
1,222,740 1,232,950 1,220,520
1,269,580 1,285,600 1,265,190
1,327,610 1,349,920 1,320,740
1,377,500 1,413,180 1,358,640
1,306,070 1,332,440 1,298,720
1,431,970 1,461,650 1,405,740
1,359,300 1,389,770 1,342,200
1,381,820 1,411,120 1,350,250
Dec-97 1,439,010 1,462,700 1,373,210
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------
THREE SIX ONE SINCE
AS OF DECEMBER 31, 1997 MONTHS MONTHS YEAR INCEPTION*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J.P. Morgan Institutional European Equity Fund 0.49% 8.39% 22.27% 21.89%
MSCI Europe Index 0.07% 8.35% 23.80% 22.98%
Lipper European Region Funds Average -2.30% 4.03% 15.78% 18.23%
</TABLE>
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. FUND RETURNS ARE NET OF
FEES, ASSUME REINVESTMENT OF DIVIDENDS AND REFLECT THE REIMBURSEMENT OF EXPENSES
AS DESCRIBED IN THE PROSPECTUS. HAD EXPENSES NOT BEEN SUBSIDIZED, RETURNS WOULD
HAVE BEEN LOWER. THE MSCI EUROPE INDEX IS AN UNMANAGED INDEX WHICH DOES NOT
INCLUDE FEES OR OPERATING EXPENSES AND IN WHICH INVESTORS MAY NOT DIRECTLY
INVEST. LIPPER ANALYTICAL SERVICES, INC. IS A LEADING RESOURCE FOR MUTUAL FUND
DATA.
2
<PAGE>
Portfolio manager Q&A
[PHOTOGRAPH]
Following is an interview with NIGEL F. EMMETT, VICE PRESIDENT, a portfolio
manager with the International Equity Group. Nigel joined J.P. Morgan in 1997.
Prior to J.P. Morgan, he was employed by Brown Brothers Harriman & Co. in New
York and Gartmore Investment Management in London. Nigel earned a B.A. degree in
Economics from Manchester University, is an Associate Member of the Institute of
Investment Management and Research (AIIMR), and is a Chartered Financial
Analyst. This interview was conducted on February 9, 1998 and reflects Nigel's
views on that date.
THE PORTFOLIO ENDED ITS FISCAL YEAR DURING A VERY VOLATILE TIME FOR GLOBAL
EQUITY MARKETS. WOULD YOU COMMENT ON WHAT CAUSED THAT TURBULENCE?
NFE: The September through December period saw volatility around the world, in
reaction to economic problems and currency devaluations in the Southeast
(SE) Asian region. As you may or may not know, many SE Asian currencies were
pegged to the U.S. dollar, meaning their currency values were kept at levels
near the value of the U.S. dollar. Throughout the summer, investors began to
question the sustainability of those pegs to the U.S. dollar. In other words,
based on the overheated and unhealthy economic scenarios in many of these
SE Asian countries, investors were understanding that many SE Asian currencies
were unjustifiably expensive, and a widespread sell-off of these currencies
occurred.
The selling momentum carried into the last months of the year. That seemed
to be the catalyst for investors to scrutinize the world's equity markets, and
reprice downward where it was perceived that greater risk actually existed. As a
result, October saw a "repricing of risk." While some of the selling was
justified and based on investors' understanding that the fundamentals behind the
prices were weaker than originally perceived, other selling was more
"sympathetic," and occurred despite strong fundamentals. Either way, the world
saw a lot of turbulence at the end of 1997.
DESPITE THIS VOLATILITY IN THE WORLD'S EQUITY MARKETS, THE MSCI EUROPE INDEX
POSTED A STRONG 1997 RETURN. WHAT WERE THE PRIMARY REASONS FOR EUROPE'S ADVANCE?
NFE: In an environment of generally poor international equity returns in
calendar 1997, European equity markets stood out as being among the best
performers. The MSCI Europe Index returned 23.80% (in U.S. dollar terms),
compared to an overall international equity return of 1.80% (MSCI EAFE Index).
European markets benefited from a low interest rate environment, as well as from
the trend we've seen over the last couple of years of ongoing mergers and
restructurings, and the reduced corporate costs that have resulted.
What also helped European markets was a good macro-economic picture.
European governments have done a very good job of controlling their spending to
keep inflation low. They have also used interest rates as a tool to keep
inflation rates low, which should help Europe in its competitiveness going
forward.
3
<PAGE>
COMMENT ON THE INVESTMENT PERFORMANCE OF THE FUND -- PARTICULARLY IN TERMS OF
COUNTRY WEIGHTING AND STOCK SELECTION -- THROUGHOUT THE ANNUAL PERIOD
NFE: As you can see from the overall returns, the Fund outperformed its
competition, but was slightly behind its benchmark for the annual period. The
two major drags on performance in country allocation terms were underweight
positions in the markets of Switzerland and the Netherlands; both had done very
well for the year.
These two markets had been dominated by large blue-chip multinationals,
which, as a group, had very strong performance. In the same way we feel the
large multinationals in the U.S. have become overvalued, we feel the Swiss and
Dutch markets are overvalued as well. It turned out, however, that the large-cap
stocks in both these markets performed well. So Fund performance was hurt by its
underexposure to these markets. The Portfolio was also hurt by performance in
the U.K. market; it had a bias to mid-cap companies -- as we believed they
offered better value -- but large-cap stocks continued to outperform.
On the positive side, however, the Fund did outperform its competitors. One
reason is due to successful stock-selection decisions, particularly in Germany
and Italy. Even in the U.K., where stock-selection decisions detracted for most
of the year, the last quarter saw strong U.K. performance as some of the
Portfolio's holdings paid off; specifically, ALLIED COLLOIDS GROUP PLC.
The Portfolio's position in Allied Colloids is a classic example of where
value was uncovered, when a large U.S. chemical company made a bid for Allied
Colloids toward the end of 1997. Roughly speaking, the bid was made at around
155 pence; Allied Colloids share price was actually 105 pence at that time.
Allied's share price obviously jumped substantially on the back of that bid, and
then again, when another bid was made by CIBA Chemicals (a Swiss chemical
company) at an even higher share price of 205 pence. So while it would have been
nice for the market to have realized the value we already saw in that company
earlier, its value was eventually realized. While holding that stock hurt
performance in the first nine months of 1997, it provided very strong gains for
the Fund in the last quarter.
WHAT IS YOUR OUTLOOK FOR THE EUROPEAN MARKETS AS WE MOVE INTO 1998?
NFE: We feel that European equity markets have a very encouraging start to
1998. We believe many European markets will benefit from continued corporate
restructuring and takeover activity, as we have already witnessed in the
pharmaceutical and insurance industries. These restructurings should produce
better profit margins and better earnings growth, which should therefore support
higher future valuations.
Also, Europe continues to head towards European Monetary Union (EMU), which
will help keep the region focused on maintaining favorable economic conditions
(in the form of controlled government spending, low rates, and low inflation).
So all in all, we believe Europe will offer promising prospects for 1998. All
these positives should help compensate for whatever negative impact the Asian
crisis may have on the European region. While some European companies do have
Asian exposure, overall, the benefits of restructuring and the growth in
domestic demand in Europe seems to be more than compensating for any problems
created by Asia.
Now, as far as our outlook for specific countries, we still favor the U.K.
and Germany, and expect to maintain high exposure there. We believe these
markets will benefit most from continued corporate restructurings.
4
<PAGE>
We are also favoring Ireland; from a top-down, economic perspective, this
country continues to exhibit among the strongest GDP growth prospects in Europe.
That strong domestic demand should positively influence the Irish stock market.
Regarding other smaller markets, we also favor the Spanish and Austrian markets,
as we believe individual opportunities exist there. In fact, we think Austrian
banks represents some of the best values in the European banking sector.
Our outlook is less favorable for Switzerland and the Netherlands, as we
continue to believe those markets remain overvalued. We are also still somewhat
cautious on the Scandinavian markets. Generally speaking, however, we are
positive on Europe, and believe promising opportunities will continue to exist
in 1998.
5
<PAGE>
Fund facts
INVESTMENT OBJECTIVE
The J.P. Morgan Institutional European Equity Fund seeks to provide a high total
return from a portfolio of equity securities of European companies. It is
designed for investors who want an actively managed portfolio of European equity
securities that seeks to outperform the MSCI Europe Index, which is comprised of
more than 500 companies in fourteen European countries. As an international
investment, the Fund is subject to foreign market, political and currency risks.
- --------------------------------------------------------------------------------
COMMENCEMENT OF OPERATIONS
2/29/96
- --------------------------------------------------------------------------------
NET ASSETS AS OF 12/31/97
$10,173,934
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/18/98
EXPENSE RATIO
The Fund's annualized expense ratio of 1.00% covers shareholders' expenses for
custody, tax reporting, investment advisory and shareholder services, after
reimbursement. 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 DECEMBER 31, 1997
COUNTRY ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
United Kingdom 35.1%
France 14.7%
Germany 14.1%
Switzerland 10.1%
Italy 6.9%
Netherlands 4.8%
Sweden 3.8%
Spain 3.4%
Ireland 1.7%
Other countries 5.4%
% OF TOTAL
LARGEST HOLDINGS INVESTMENTS
- ------------------------------------------------------------
UNION BANK OF SWITZERLAND (SWITZERLAND) 3.1%
LLOYDS TSB GROUP PLC (UNITED KINGDOM) 3.0%
GLAXO WELLCOME PLC (UNITED KINGDOM) 2.8%
COMPAGNIE GENERALE DES EAUX (FRANCE) 2.2%
ROCHE HOLDING AG (SWITZERLAND) 2.2%
ZENECA GROUP PLC (UNITED KINGDOM) 2.1%
MUENCHENER RUECKVERSICHERUNGS-GESELLSCHAFT
AG (GERMANY) 1.9%
LUFTHANSA AG (GERMANY) 1.6%
NESTLE SA (SWITZERLAND) 1.5%
ENI SPA (ITALY) 1.4%
6
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. MORGAN GUARANTY TRUST COMPANY OF NEW
YORKSERVES AS AN INVESTMENT 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.
RETURN AND SHARE PRICE WILL FLUCTUATE AND REDEMPTION VALUE MAY BE MORE OR LESS
THAN ORIGINAL COST.
The Fund invests through a master portfolio (another fund with the same
objective). The Portfolio invests in foreign securities which are subject to
special risks including currency fluctuation and political uncertainty.
References to specific securities and their issuers are for illustrative
purposes only and should not be interpreted as recommendations to purchase or
sell securities. Opinions expressed herein are based on current market
conditions and are subject to change without notice.
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.
7
<PAGE>
J.P. MORGAN INSTITUTIONAL EUROPEAN EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The European Equity Portfolio
("Portfolio"), at value $10,152,453
Receivable for Expense Reimbursements 7,752
Deferred Organization Expenses 5,592
Prepaid Expenses and Other Assets 28,227
-----------
Total Assets 10,194,024
-----------
LIABILITIES
Shareholder Servicing Fee Payable 898
Administrative Services Fee Payable 271
Accrued Trustees' Fees and Expenses 28
Fund Services Fee Payable 12
Accrued Expenses 18,881
-----------
Total Liabilities 20,090
-----------
NET ASSETS
Applicable to 810,070 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $10,173,934
-----------
-----------
Net Asset Value, Offering and Redemption Price
Per Share $12.56
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $11,477,406
Distributions in Excess of Net Investment Income (3,926)
Accumulated Net Realized Loss on Investment and
Foreign Currency Transactions (1,592,958)
Net Unrealized Appreciation of Investment and
Foreign Currency Translations 293,412
-----------
Net Assets $10,173,934
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
J.P. MORGAN INSTITUTIONAL EUROPEAN EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Dividend Income (Net of Foreign
Withholding Tax of $54,249) $ 234,416
Allocated Interest Income 18,574
Allocated Portfolio Expenses (Net of
Reimbursement of $37,349) (87,872)
----------
Net Investment Income Allocated from
Portfolio 165,118
FUND EXPENSES
Printing Expenses $ 16,845
Registration Fees 15,852
Transfer Agent Fees 15,085
Professional Fees 11,392
Shareholder Servicing Fee 9,835
Amortization of Organization Expenses 3,398
Administrative Services Fee 3,022
Fund Services Fee 339
Administration Fee 293
Trustees' Fees and Expenses 149
Insurance Expense 41
Miscellaneous 2,982
--------
Total Fund Expenses 79,233
Less: Reimbursement of Expenses (68,752)
--------
NET FUND EXPENSES 10,481
----------
NET INVESTMENT INCOME 154,637
NET REALIZED GAIN ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS ALLOCATED FROM PORTFOLIO 2,287,232
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENT AND FOREIGN CURRENCY TRANSLATIONS
ALLOCATED FROM PORTFOLIO (472,494)
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $1,969,375
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
J.P. MORGAN INSTITUTIONAL EUROPEAN EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 29,
1996
(COMMENCEMENT OF
FOR THE FISCAL OPERATIONS) TO
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 1996
----------------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 154,637 $ 67,086
Net Realized Gain on Investment and Foreign
Currency Transactions Allocated from Portfolio 2,287,232 68,912
Net Change in Unrealized Appreciation
(Depreciation) of Investment and Foreign
Currency Translations Allocated from Portfolio (472,494) 765,906
----------------- ----------------
Net Increase in Net Assets Resulting from
Operations 1,969,375 901,904
----------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (129,345) (55,253)
Net Realized Gain (1,039,518) (27,798)
----------------- ----------------
Total Distributions to Shareholders (1,168,863) (83,051)
----------------- ----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 4,703,845 6,230,075
Reinvestment of Dividends and Distributions 7 12,575
Cost of Shares of Beneficial Interest Redeemed (1,861,933) (530,000)
----------------- ----------------
Net Increase from Transactions in Shares of
Beneficial Interest 2,841,919 5,712,650
----------------- ----------------
Total Increase in Net Assets 3,642,431 6,531,503
NET ASSETS
Beginning of Period 6,531,503 --
----------------- ----------------
End of Period (including distributions in excess
of net investment income of $3,926 and $3,926,
respectively) $ 10,173,934 $ 6,531,503
----------------- ----------------
----------------- ----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN INSTITUTIONAL EUROPEAN EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 29,
1996
(COMMENCEMENT OF
FOR THE FISCAL OPERATIONS) TO
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 1996
----------------- ----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.56 $ 10.00
----------------- ----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.21 0.12
Net Realized and Unrealized Gain on Investment
and Foreign Currency 2.34 1.59
----------------- ----------------
Total from Investment Operations 2.55 1.71
----------------- ----------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.17) (0.10)
Net Realized Gain (1.38) (0.05)
----------------- ----------------
Total Distributions to Shareholders (1.55) (0.15)
----------------- ----------------
NET ASSET VALUE, END OF PERIOD $ 12.56 $ 11.56
----------------- ----------------
----------------- ----------------
RATIOS AND SUPPLEMENTAL DATA
Total Return 22.27% 17.10%(a)
Net Assets, End of Period (in thousands) $ 10,174 $ 6,532
Ratios to Average Net Assets
Expenses 1.00% 1.00%(b)
Net Investment Income 1.57% 1.68%(b)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement 1.08% 1.50%(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>
J.P. MORGAN INSTITUTIONAL EUROPEAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The J.P. Morgan Institutional European Equity Fund (the "Fund") is a separate
series of the J.P. Morgan Institutional Funds, a Massachusetts business trust
(the "Trust") which was organized on November 4, 1992. The Trust is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations on February 29, 1996. Prior to
January 1, 1998, the Trust's and the Fund's names were The JPM Institutional
Funds and The JPM Institutional European Equity Fund, respectively.
The Fund invests all of its investable assets in The European Equity Portfolio
(the "Portfolio"), a 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 (approximately 68% at December 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) Distributions to shareholders of net investment income and net realized
capital gain, if any, are declared and paid annually.
d) The Fund incurred organization expenses in the amount of $11,800. These
costs are being deferred and amortized on a straight-line basis over a
period not to exceed five years beginning with the commencement of
operations of the Fund.
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.
12
<PAGE>
J.P. MORGAN INSTITUTIONAL EUROPEAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 Presentations of Income, Capital Gain, and Return
of Capital Distributions by Investment Companies." The effect of applying
this statement for the year ended December 31, 1997 was to decrease
undistributed net investment income by $25,292, increase accumulated net
realized loss on investment and foreign currency transactions by
$2,898,708 and increase paid-in capital by $2,924,000. The adjustments are
attributable to foreign currency gains and net realized gain on transfer
of securities as discussed in Note 5 of the Portfolio's Notes to Financial
Statements which are included elsewhere in this report. Net investment
income, net realized gains and net assets were not affected by this
change.
h) The Fund incurred approximately $3,000 of foreign currency losses in the
period November 1, 1997 to December 31, 1997. These losses were deferred
for tax purposes until January 1, 1998.
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 for the Fund. Under a 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 December 31, 1997, the fee for these services amounted
to $293.
b) The Trust, on behalf of the Fund, has an Administrative Services Agreement
(the "Services Agreement") with Morgan Guaranty Trust Company of New York
("Morgan") under which Morgan is responsible for overseeing 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 the other portfolios in which the Trust and the J.P. Morgan
Funds (formerly The JPM Pierpont Funds) invest (the "Master Portfolios")
and J.P. Morgan Series Trust (formerly 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 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 J.P. Morgan
Series Trust. For the fiscal year ended December 31, 1997, the fee for
these services amounted to $3,022.
13
<PAGE>
J.P. MORGAN INSTITUTIONAL EUROPEAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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
1.00% of the average daily net assets of the Fund through April 30, 1998.
For the fiscal year ended December 31, 1997, Morgan has agreed to
reimburse the Fund $68,752 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 and account
maintenance services 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 December 31, 1997, the fee for these
services amounted to $9,835.
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
$339 for the fiscal year ended December 31, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of the Trust, the J.P. Morgan Funds, the Master Portfolios and
J.P. Morgan Series Trust. The Trustees' Fees and Expenses shown in the
financial statements represents the Fund's allocated portion of the 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 $68.
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 PERIOD
FEBRUARY 29,
1996
(COMMENCEMENT OF
FOR THE FISCAL OPERATIONS) TO
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 1996
----------------- ----------------
<S> <C> <C>
Shares sold...................................... 383,974 614,762
Reinvestment of dividends and distributions...... 1 1,112
Shares redeemed.................................. (138,759) (51,020)
----------------- ----------------
Net Increase..................................... 245,216 564,854
----------------- ----------------
----------------- ----------------
</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 the Portfolio.
14
<PAGE>
J.P. MORGAN INSTITUTIONAL EUROPEAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
4. 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 covenants of the Agreement. The maximum borrowing under the
Agreement is $100,000,000. Prior to January 26, 1998, the maximum borrowing
under the Agreement was $150,000,000. The Agreement expires on May 27, 1998,
however, the Fund and unaffiliated lenders as parties to the Agreement will have
the ability to extend the Agreement and continue their 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 borrowing 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 December 31, 1997.
5. OTHER MATTERS
Prior to December 12, 1997, the Fund invested in the Portfolio along with
another registered management investment company and a non-U.S. fund both
managed by Morgan. On December 12, 1997, the non U.S. fund withdrew its interest
in the Portfolio through an in-kind withdrawal amounting to $472,588,477. The
withdrawal did not create a taxable event to the Fund or reduce the net assets
of the Fund, but did reduce the net assets of the Portfolio.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan Institutional European Equity Fund
(formerly The JPM Institutional European Equity 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
J.P. Morgan Institutional European Equity Fund (one of the series constituting
part of J.P. Morgan Institutional Funds (formerly The JPM Institutional Funds),
hereafter referred to as the "Fund") at December 31, 1997, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and for the period February 29,
1996 (commencement of operations) to December 31, 1996, 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
February 23, 1998
16
<PAGE>
The European Equity Portfolio
Annual Report December 31, 1997
(The following pages should be read in conjunction
with the J.P. Morgan Institutional European Equity Fund
Annual Financial Statements)
17
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
COMMON STOCK (100.8%)
AUSTRIA (0.3%)
Voest-Alpine Technologie AG (Electrical
Equipment)..................................... 300 $ 45,483
------------
BELGIUM (1.6%)
Algemene Maatschappij voor Nijverheidskredit NV
(Financial Services)........................... 1,000 50,472
Arbed SA (Metals & Mining)....................... 600 65,587
Delhaize-Le Lion SA (Retail)..................... 650 32,983
PetroFina SA (Oil-Production).................... 260 95,965
------------
245,007
------------
FINLAND (1.1%)
Rautaruukki OYJ (K Shares) (Metals & Mining)..... 6,700 54,137
UPM-Kymmene OYJ (Forest Products & Paper)........ 5,600 112,093
------------
166,230
------------
FRANCE (15.4%)
AXA-UAP (Insurance).............................. 1,715 132,762
Carrefour Supermarche SA (Retail)................ 286 149,279
Compagnie de Saint Gobain SA (Building
Materials)..................................... 703 99,913
Compagnie Financiere de Paribas (Financial
Services)...................................... 1,815 157,790
Compagnie Generale des Eaux (Utilities).......... 2,427 338,884
Dexia France (Financial Services)................ 955 110,647
Elf Aquitaine SA (Oil-Services).................. 1,000 116,359
Eridania Beghin-Say SA (Food, Beverages &
Tobacco)....................................... 400 62,568
France Telecom SA (Telecommunication
Services)+..................................... 4,000 145,150
L'Air Liquide SA (Chemicals)..................... 668 104,599
Lagardere S.C.A. (Multi - Industry).............. 1,950 64,504
PSA Peugeot Citroen (Automotive)................. 605 76,331
Sanofi SA (Pharmaceuticals)...................... 1,445 160,933
SEITA (Food, Beverages & Tobacco)................ 1,000 35,905
SGS Thomson Microelectronics NV (Electronics)+... 1,251 77,461
Societe Generale (Banking)....................... 452 61,610
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
FRANCE (CONTINUED)
Synthelabo (Pharmaceuticals)..................... 722 $ 90,252
Thomson CSF (Electronics)........................ 2,552 80,473
Total SA (Oil-Services).......................... 1,111 120,964
Union des Assurances Federales (Insurance)....... 367 48,194
Usinor SA (Metals & Mining)...................... 5,026 72,601
------------
2,307,179
------------
GERMANY (12.2%)
Bilfinger & Berger Bau AG (Construction &
Housing)....................................... 2,290 71,067
Continental AG (Automotive)...................... 7,160 158,090
Deutsche Bank AG (Banking)....................... 1,700 120,075
Deutsche Pfandbrief-und Hypothekenbank AG
(Banking)...................................... 99 5,869
Douglas Holding AG (Retail)...................... 936 28,267
Dresdner Bank AG (Banking)....................... 1,580 72,935
Hannover Rueckversicherungs AG (Insurance)....... 751 70,170
Henkel KGaA (Chemicals).......................... 1,139 63,980
Lufthansa AG (Airlines).......................... 13,480 258,648
Muenchener Rueckversicherungs-Gesellschaft AG
(Insurance).................................... 800 301,661
SAP AG (Computer Software)....................... 650 197,562
Schering AG (Pharmaceuticals).................... 900 86,844
SGL Carbon AG (Chemicals)........................ 400 51,612
Siemens AG (Electrical Equipment)................ 3,000 177,693
SKW Trostberg AG (Chemicals)..................... 1,000 31,757
VEBA AG (Utilities).............................. 2,000 136,259
------------
1,832,489
------------
IRELAND (1.8%)
Allied Irish Banks PLC (Banking)................. 9,695 93,966
CRH PLC (Building Materials)..................... 3,265 38,253
Elan Corp. PLC (Spon. ADR) (Pharmaceuticals)+.... 600 30,713
Greencore Group PLC (Food, Beverages &
Tobacco)....................................... 6,647 31,265
Irish Life PLC (Insurance)....................... 5,188 29,800
Jefferson Smurfit Group PLC (Forest Products &
Paper)......................................... 13,726 38,737
------------
262,734
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
18
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
ITALY (7.0%)
Banco Ambrosiano Veneto SPA (Banking)............ 29,000 $ 56,589
Edison SPA (Utilities)........................... 12,000 72,625
ENI SPA (Oil-Services)........................... 40,000 226,924
Istituto Bancario San Paolo di Torino
(Banking)...................................... 12,000 114,706
Istituto Mobiliare Italiano SPA (Financial
Services)...................................... 12,000 142,534
Istituto Nazionale Delle Assicurazioni
(Insurance).................................... 100,000 202,772
Mediaset SPA (Broadcasting & Publishing)......... 20,000 98,303
Mediolanum SPA (Financial Services).............. 2,587 48,726
Telecom Italia SPA - RNC (Telecommunication
Services)...................................... 20,000 88,235
------------
1,051,414
------------
NETHERLANDS (5.1%)
Aegon NV (Insurance)............................. 1,065 94,825
Ispat International NV (Metals & Mining)+........ 1,479 31,983
Koninklijke Ahold NV (Retail).................... 2,044 53,338
Moeara Enim Petroleum MIJ NV (Oil-Services)...... 34 60,043
Moeara Enim Petroleum MIJ NV (New shares)
(Oil-Services)................................. 5 114,195
Philips Electronics NV (Electronics)............. 1,818 109,050
Royal Dutch Petroleum Co. (Oil-Services)......... 3,398 186,559
Unilever NV (Food, Beverages & Tobacco).......... 1,800 110,989
------------
760,982
------------
NORWAY (1.4%)
Kvaerner ASA (Series B) (Capital Goods).......... 2,200 102,358
Norsk Hydro ASA (Oil-Services)................... 1,000 48,764
Nycomed Amersham PLC (Biotechnology)+............ 1,813 65,908
------------
217,030
------------
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
SPAIN (3.6%)
Acerinox SA (Metals & Mining).................... 268 $ 39,756
Banco Bilbao Vizcaya SA (Banking)................ 5,051 163,379
Banco Popular Espanol SA (Banking)............... 760 53,105
Cortefiel SA (Retail)............................ 1,318 26,461
Hidroelectrica del Cantabrico SA (Electric)...... 720 31,556
Iberdrola SA (Electric).......................... 9,995 131,483
Repsol SA (Gas Exploration)...................... 1,463 62,392
Vallehermoso SA (Real Estate).................... 1,032 31,620
------------
539,752
------------
SWEDEN (4.0%)
Astra AB (B Shares) (Pharmaceuticals)............ 4,875 82,025
Autoliv, Inc. (SDR) (Automotive Supplies)........ 5,710 186,031
Incentive AB (B Shares) (Pharmaceuticals)........ 1,200 108,440
Skandia Forsakrings AB (Insurance)............... 2,608 123,097
SKF AB (B Shares) (Capital Goods)................ 1,900 40,470
Svenska Handelsbanken (Banking).................. 1,500 51,895
------------
591,958
------------
SWITZERLAND (10.6%)
ABB AG (Machinery)............................... 66 83,034
BELL AG BASEL (Food, Beverages & Tobacco)........ 141 47,852
Holderbank Financiere Glarus AG (Building
Materials)..................................... 80 65,380
Liechtenstein Global Trust AG (Banking).......... 150 93,072
Nestle SA (Food, Beverages & Tobacco)............ 160 240,129
Novartis AG (Pharmaceuticals).................... 100 162,490
Roche Holding AG (Pharmaceuticals)............... 34 338,123
Schweizerische Rueckversicherungs-Gesellschaft
(Insurance).................................... 34 63,685
Union Bank of Switzerland (Banking).............. 339 490,876
------------
1,584,641
------------
UNITED KINGDOM (36.7%)
Allied Colloids Group PLC (Chemicals)............ 25,414 69,415
Associated British Foods PLC (Food, Beverages &
Tobacco)....................................... 3,100 27,034
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
19
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Bass PLC (Food, Beverages & Tobacco)............. 5,500 $ 85,704
BAT Industries PLC (Food, Beverages & Tobacco)... 9,700 88,612
Billiton PLC (Metals & Mining)+.................. 30,400 78,031
British Airways PLC (Airlines)................... 12,100 111,492
British Petroleum Co. PLC (Oil-Services)......... 16,866 223,506
British Sky Broadcasting Group PLC (Broadcasting
& Publishing).................................. 8,100 60,774
British Telecommunications PLC
(Telecommunications)........................... 26,800 211,545
Burmah Castrol PLC (Oil-Production).............. 2,900 50,675
Cadbury Schweppes PLC (Food, Beverages &
Tobacco)....................................... 11,300 114,250
Compass Group PLC (Food, Beverages & Tobacco).... 7,300 89,966
Diageo PLC (Food, Beverages & Tobacco)........... 18,600 170,467
Glaxo Wellcome PLC (Pharmaceuticals)............. 18,100 432,276
Glynwed International PLC (Metals & Mining)...... 21,421 91,287
Great Universal Stores PLC (Retail).............. 8,700 109,796
Hanson PLC (Building Materials).................. 11,300 50,503
HSBC Holdings PLC (75p) (Banking)................ 7,800 202,779
Hyder PLC (Water)................................ 5,116 81,485
Kingfisher PLC (Retail).......................... 7,700 107,691
Lloyds TSB Group PLC (Banking)................... 35,960 468,651
Lucas Varity PLC (Automotive Supplies)........... 39,300 139,028
MEPC PLC (Real Estate)........................... 9,100 76,064
MFI Furniture Group PLC (Household Products)..... 33,892 67,198
National Power PLC (Electric).................... 1,796 17,731
Nycomed Amersham PLC (Biotechnology)............. 1,200 44,663
Pilkington PLC (Building Materials).............. 26,600 55,804
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Prudential Corp. PLC (Insurance)................. 9,600 $ 117,109
Racal Electronic PLC
(Telecommunications-Equipment)................. 23,900 104,998
Rank Group PLC (Entertainment, Leisure &
Media)......................................... 8,600 47,970
Reed International PLC (Broadcasting &
Publishing).................................... 10,000 95,433
RMC Group PLC (Building Materials)............... 3,300 46,805
Royal & Sun Alliance Insurance Group PLC
(Insurance).................................... 13,000 131,122
Royal Bank of Scotland Group PLC (Banking)....... 14,900 190,294
RTZ Corp. PLC (Metals & Mining).................. 3,865 47,728
Sainsbury (J.) PLC (Retail)...................... 18,807 158,748
Scottish Power PLC (Electric).................... 6,900 61,081
Shell Transport & Trading Co. (Oil-Services)..... 16,900 118,737
Smith & Nephew PLC (Medical Supplies)............ 16,200 47,980
Standard Chartered PLC (Banking)................. 6,200 66,310
Tomkins PLC (Multi - Industry)................... 19,400 91,932
Unilever PLC (Food, Beverages & Tobacco)......... 12,600 108,574
Vickers PLC (Capital Goods)...................... 24,100 93,584
Vodafone Group PLC (Telecommunications).......... 29,300 212,125
Wessex Water PLC (Water)......................... 12,200 102,979
Zeneca Group PLC (Pharmaceuticals)............... 9,500 337,097
------------
5,507,033
------------
TOTAL COMMON STOCK (COST $13,413,138).......... 15,111,932
------------
</TABLE>
<TABLE>
<S> <C> <C>
PREFERRED STOCK (2.4%)
AUSTRIA (1.1%)
Bank Austria AG (Banking)+....................... 3,724 165,435
------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
20
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
<S> <C> <C>
GERMANY (1.3%)
AXA Colonia Konzern AG (Insurance)............... 900 $ 86,093
Jungheinrich AG (Machinery)...................... 350 52,557
ProSieben Media AG (Broadcasting &
Publishing)+................................... 817 38,168
Volkswagen AG (Automotive)....................... 30 12,881
------------
189,699
------------
TOTAL PREFERRED STOCK (COST $357,275).......... 355,134
------------
</TABLE>
<TABLE>
<S> <C> <C>
RIGHTS (0.3%)
ITALY (0.3%)
Banco Ambrosiano Veneto SPA, Expiring 01/02/98,
(right to shares & warrants) (Banking)+........ 28,500 35,625
Banco Ambrosiano Veneto SPA, Expiring 01/02/98,
(right to convertible bonds) (Banking)+........ 28,500 3,853
------------
39,478
------------
TOTAL RIGHTS (COST $0)......................... 39,478
------------
</TABLE>
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES VALUE
- ------------------------------------------------- --------- ------------
WARRANTS (1.2%)
<S> <C> <C>
GERMANY (1.2%)
Veba International Finance, Expiring 04/06/98
(Utilities)+................................... 240 $ 110,787
Volkswagen AG, Expiring 10/27/98 (Automotive)+... 270 76,433
------------
187,220
------------
TOTAL WARRANTS
(COST $79,202)................................ 187,220
------------
TOTAL INVESTMENTS
(COST $13,849,615) (104.7%)............................... 15,693,764
LIABILITIES IN EXCESS OF OTHER ASSETS (-4.7%)...............
(701,543)
------------
NET ASSETS (100.0%)......................................... $ 14,992,221
------------
------------
</TABLE>
- ------------------------------
Note: Based on the cost of investments of $13,853,149 for federal income tax
purposes at December 31, 1997, the aggregate gross unrealized appreciation and
depreciation was $2,434,151 and $593,536, respectively, resulting in net
unrealized appreciation of $1,840,615.
+ - Non-income producing securities.
Spon. ADR - Sponsored American Depository Receipt
SDR - Swedish Depository Receipt
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY DIVERSIFICATION
PERCENT OF
PORTFOLIO
----------
<S> <C>
Banking.......................................................... 16.3%
Pharmaceuticals.................................................. 11.7%
Insurance........................................................ 8.9%
Oil-Services..................................................... 8.4%
Food, Beverages & Tobacco........................................ 7.7%
Retail........................................................... 4.2%
Utilities........................................................ 4.2%
Financial Services............................................... 3.2%
Metals & Mining.................................................. 3.1%
Telecommunications............................................... 2.7%
Airlines......................................................... 2.4%
Building Materials............................................... 2.3%
Automotive Supplies.............................................. 2.1%
Automotive....................................................... 2.1%
Chemicals........................................................ 2.0%
Broadcasting & Publishing........................................ 1.9%
Electronics...................................................... 1.7%
Electric......................................................... 1.5%
Capital Goods.................................................... 1.5%
Telecommunication Services....................................... 1.5%
Electrical Equipment............................................. 1.4%
Computer Software................................................ 1.2%
Water............................................................ 1.2%
Multi-Industry................................................... 1.0%
Forest Products & Paper.......................................... 1.0%
Machinery........................................................ 0.9%
Real Estate...................................................... 0.7%
Telecommunications-Equipment..................................... 0.7%
Household Products............................................... 0.4%
Biotechnology.................................................... 0.4%
Construction & Housing........................................... 0.4%
Gas Exploration.................................................. 0.4%
Oil-Production................................................... 0.3%
Medical Supplies................................................. 0.3%
Entertainment, Leisure & Media................................... 0.3%
----------
100.0%
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $13,849,615 ) $15,693,764
Receivable for Investments Sold 1,598,673
Receivable for Expense Reimbursement 58,185
Dividends Receivable 32,269
Deferred Organization Expenses 9,720
Prepaid Trustees' Fees 19
Prepaid Expenses and Other Assets 10,036
-----------
Total Assets 17,402,666
-----------
LIABILITIES
Payable to Custodian 2,064,507
Custody Fee Payable 196,575
Advisory Fee Payable 128,551
Administrative Services Fee Payable 5,927
Fund Services Fee Payable 561
Accrued Expenses 14,324
-----------
Total Liabilities 2,410,445
-----------
NET ASSETS
Applicable to Investors' Beneficial Interests $14,992,221
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividend Income (Net of Foreign Withholding Tax
of $3,463,688 ) $ 12,743,649
Interest Income (Net of Foreign Withholding Tax
of $43 ) 1,227,939
-------------
Investment Income 13,971,588
EXPENSES
Advisory Fee $ 3,879,040
Custodian Fees and Expenses 1,104,843
Administrative Services Fee 184,239
Professional Fees and Expenses 55,441
Fund Services Fee 21,837
Administration Fee 14,117
Trustees' Fees and Expenses 10,520
Printing Expenses 7,981
Amortization of Organization Expenses 6,676
Insurance Expense 204
Miscellaneous 2
-------------
Total Expenses 5,284,900
Less: Reimbursement of Expenses (58,185)
-------------
NET EXPENSES 5,226,715
-------------
NET INVESTMENT INCOME 8,744,873
NET REALIZED GAIN (LOSS) ON
Investment Transactions (including $4,802,639
net realized gain from futures contracts) 214,374,485
Foreign Currency Transactions (1,010,604)
-------------
Net Realized Gain 213,363,881
NET CHANGE IN UNREALIZED DEPRECIATION OF
Investments (110,198,297)
Foreign Currency Contracts and Translations (23,726)
-------------
Net Change in Unrealized Depreciation (110,222,023)
-------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 111,886,731
-------------
-------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 8,744,873 $ 9,485,132
Net Realized Gain on Investment and Foreign
Currency Transactions 213,363,881 28,212,359
Net Change in Unrealized Appreciation
(Depreciation) of Investments and Foreign
Currency Translations (110,222,023) 75,161,064
----------------- -----------------
Net Increase in Net Assets Resulting from
Operations 111,886,731 112,858,555
----------------- -----------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 230,293,076 276,685,442
Withdrawals (1,017,256,734) (131,367,814)
----------------- -----------------
Net Increase (Decrease) from Investors'
Transactions (786,963,658) 145,317,628
----------------- -----------------
Total Increase (Decrease) in Net Assets (675,076,927) 258,176,183
NET ASSETS
Beginning of Fiscal Year 690,069,148 431,892,965
----------------- -----------------
End of Fiscal Year $ 14,992,221 $ 690,069,148
----------------- -----------------
----------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
MARCH 28, 1995
(COMMENCEMENT OF
FOR THE FISCAL FOR THE FISCAL OPERATIONS) TO
YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.88% 0.84% 0.90%(a)
Net Investment Income 1.47% 1.65% 1.67%(a)
Decrease Reflected in Expense Ratio due to
Expense Reimbursement 0.01% -- --
Portfolio Turnover 65% 57% 36%(b)
Average Broker Commissions $ 0.0237 $ 0.0230 --
</TABLE>
- ------------------------
(a) Annualized.
(b) Not Annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
25
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The European Equity Portfolio (the "Portfolio") is one of eight subtrusts
(portfolios) comprising The Series Portfolio (the "Series Portfolio"). The
Series Portfolio is registered under the Investment Company Act of 1940, as
amended, as a no-load open-end management investment company which was organized
as a trust under the laws of the State of New York on June 24, 1994. The
Portfolio's investment objective is to provide a high total return from a
portfolio of equity securities of European companies. The Portfolio commenced
operations on March 28, 1995. The Declaration of the Trust permits the Trustees
to issue an unlimited number of beneficial interests in the Portfolio.
Investments in European markets may involve certain considerations and risks not
typically associated with investments in the United States. Future economic and
political developments in European 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 industry 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) The value of each security for which readily available market quotations
exist is based on a decision as to the broadest and most representative
market for such security. The value of such security will be based either
on the last sale price on a national securities exchange or, in the
absence of recorded sales, at the average of readily available closing bid
and asked prices on such exchanges. Securities listed on a foreign
exchange are valued at the last quoted sale price available before the
time when net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Securities or other assets for which market quotations are not readily
available are valued at fair value in accordance with procedures
established by the Portfolio's Trustees. Such procedures include the use
of independent pricing services, which use prices based upon yields or
prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. All
portfolio securities with a remaining maturity of less than 60 days are
valued at amortized cost.
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 value of investment securities, other assets and liabilities and
foreign currency contracts are translated at the prevailing exchange rates
at the end of the period. Purchases, sales, income and expenses are
translated at the
26
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
exchange rates prevailing on the respective dates of such transactions.
Translation gains and losses resulting from changes in exchange rates
during the reporting period and gains and losses realized upon settlement
of foreign currency transactions are reported in the Statement of
Operations.
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. Dividend
income is recorded on the ex-dividend date or as of the time that the
relevant ex-dividend date and amount become known. 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 foreign currency translations. At December
31, 1997, the Portfolio had no open forward foreign currency contracts.
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
liquid 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 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. At December 31, 1997, the Portfolio had no open futures
contracts.
27
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
f) The Portfolio's custodian takes possession of the collateral pledged for
investments in repurchase agreements on behalf of the Portfolio. It is the
policy of the Portfolio to value the underlying collateral daily on a
mark-to-market basis to determine that the value, including accrued
interest, is at least equal to the repurchase price plus accrued interest.
In the event of default of the obligation to repurchase, the Portfolio has
the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. Under certain circumstances, in the event
of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral or proceeds may be subject to legal
proceedings.
g) 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.
h) The Portfolio incurred organization expenses in the amount of $33,000.
These costs are being deferred and amortized on a straight-line basis over
a period not to exceed five years beginning with the commencement of
operations of the Portfolio.
i) Expenses incurred by the Series Portfolio with respect to any two or more
portfolios in the Series Portfolio are allocated in proportion to the net
assets of each portfolio in the Series Portfolio, except where allocations
of direct expenses to each portfolio can otherwise be made fairly.
Expenses directly attributable to a portfolio are charged to that
portfolio.
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 0.65% of the Portfolio's
average daily net assets. For the fiscal year ended December 31, 1997 such
fees amounted to $3,879,040.
b) The Portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as the 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 December 31, 1997, the fee
for these services amounted to $14,117.
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 J.P. Morgan Series Trust in
accordance with the following annual
28
<PAGE>
THE EUROPEAN EQUITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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 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 J.P. Morgan Series Trust. For the fiscal year ended December
31, 1997, the fee for these services amounted to $184,239.
In addition, Morgan has agreed to reimburse the Portfolio to the extent
necessary to maintain the total operating expenses of the Portfolio at no
more than 1.00% of the average daily net assets of the Portfolio through
April 30, 1998. For the fiscal year ended December 31, 1997, Morgan has
agreed to reimburse the Portfolio $58,185 for the expenses that exceeded
this limit.
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 $21,837 for the fiscal year ended December 31, 1997.
e) An aggregate annual fee of $75,000 is paid to each Trustee for serving as
a Trustee of the J.P. Morgan Funds, the J.P. Morgan Institutional Funds,
the Master Portfolios and J.P. Morgan 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 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 $4,400.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended December 31, 1997 were as follows:
COST OF PROCEEDS
PURCHASES FROM SALES
------------ ------------
$362,455,602 $637,902,752
4. CREDIT AGREEMENT
The Portfolio is party to a revolving line of credit agreement as discussed more
fully in Note 4 of the Fund's Notes to Financial Statements which are included
elsewhere in this report.
5. OTHER MATTERS
On December 12, 1997, the Portfolio received a withdrawal request in the amount
of $472,588,477 as discussed in Note 5 of the Fund's Notes to Financial
Statements which are included elsewhere in this report. This amount is included
in Withdrawals shown on the Statement of Changes in Net Assets. The withdrawal
which was made in-kind by transferring certain assets and liabilities, including
securities, directly to a non-U.S. fund resulted in a net realized gain on
transfer of the securities in the amount of $97,478,979, which is included in
Net Realized Gain on Investment Transactions in the Statement of Operations.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The European Equity 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 European Equity Portfolio (one of the
portfolios comprising part of The Series Portfolio, hereafter referred to as the
"Portfolio") at December 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the supplementary data for each of the two years in the
period then ended and for the period March 28, 1995 (commencement of operations)
to December 31, 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 December 31, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 23, 1998
30
<PAGE>
J.P. MORGAN INSTITUTIONAL FUNDS
FEDERAL MONEY MARKET FUND
PRIME MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
TREASURY MONEY MARKET FUND
BOND FUND
CALIFORNIA BOND FUND: INSTITUTIONAL SHARES
GLOBAL STRATEGIC INCOME FUND
INTERNATIONAL BOND FUND
NEW YORK TOTAL RETURN BOND FUND
SHORT TERM BOND FUND
TAX EXEMPT BOND FUND
DIVERSIFIED FUND
DISCIPLINED EQUITY FUND
TAX AWARE DISCIPLINED EQUITY FUND:
INSTITUTIONAL SHARES
U.S. EQUITY FUND
U.S. SMALL COMPANY FUND
EMERGING MARKETS EQUITY FUND
EUROPEAN EQUITY FUND
INTERNATIONAL EQUITY FUND
INTERNATIONAL OPPORTUNITIES FUND
JAPAN EQUITY FUND
FOR MORE INFORMATION ON THE J.P. MORGAN INSTITUTIONAL
FUNDS, CALL J.P. MORGAN FUNDS SERVICES AT
(800) 766-7722.
J.P. Morgan
Institutional
European Equity
Fund
ANNUAL REPORT
DECEMBER 31, 1997
