<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND
FUND
November 2, 1998
Dear Shareholder:
We are pleased to submit our annual report on the J.P. Morgan Institutional
International Bond Fund for the fiscal year ended September 30, 1998.
During the year, investors witnessed a challenging investment environment made
volatile by the impact of not only Southeast Asia's crisis, but also the
economic and budget deficit crises in Russia and South America, respectively. As
a result, worldwide investor risk aversion reached an all-time high, driving
investors deeper into a flight to quality. Despite this backdrop, the fund
returned 13.56% for the year. Although the fund underperformed the 13.83% return
of its benchmark, the Salomon Brothers Non-U.S. World Government Bond Index
(currency hedged), it significantly outpaced the 7.78% return of its
competitors, as measured by the Lipper International Income Funds Average. In
fact, as of September 30, 1998, Morningstar* awarded the fund a 5-star overall
rating and was rated among 160 other international bond funds; the highest
ranking a fund can achieve.
The fund's net asset value decreased from $8.65 at the beginning of the year, to
$8.54 per share by September 30, 1998, after making distributions of
approximately $0.97 in income, $0.19 from short-term capital gains, and $0.01
from long-term capital gains respectively. The fund's net assets increased from
$7.1 million to $7.2 million. The net assets of The Non-U.S. Fixed Income
Portfolio, in which the fund invests, totaled approximately $7.3 million on
September 30, 1998.
* MORNINGSTAR PROPRIETARY RATINGS REFLECT RISK-ADJUSTED PERFORMANCE THROUGH
9/30/98. THE RATINGS ARE SUBJECT TO CHANGE EVERY MONTH. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. MORNINGSTAR RATINGS ARE CALCULATED FROM THE FUNDS
THREE-, FIVE-, AND TEN-YEAR RETURN (WITH FEE ADJUSTMENTS) IN EXCESS OF 90-DAY
TREASURY BILL RETURNS, AND A RISK FACTOR THAT REFLECTS FUND PERFORMANCE BELOW
90-DAY T-BILL RETURNS. FOR THE THREE-YEAR PERIOD, THE J.P. MORGAN INSTITUTIONAL
INTERNATIONAL BOND FUND RECEIVED FIVE STARS AND WAS RATED AMONG 160 FUNDS. TEN
PERCENT OF THE FUNDS IN A RATING CATEGORY RECEIVE FIVE STARS, AND THE NEXT 22.5%
RECEIVE FOUR STARS.
<TABLE>
<CAPTION>
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TABLE OF CONTENTS
<S> <C> <C> <C>
LETTER TO THE SHAREHOLDERS. . . . 1 PORTFOLIO MANAGER Q&A . . . . . . 4
FUND PERFORMANCE. . . . . . . . . 3 FUND FACTS AND HIGHLIGHTS . . . . 7
FINANCIAL STATEMENTS. . . . . . .10
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</TABLE>
1
<PAGE>
The report that follows includes an interview with Dominic Pegler, a member of
the portfolio management team responsible for the fund. This interview is
designed to answer commonly asked questions about the fund, elaborate on what
happened during the reporting period, and provide an outlook for the months
ahead.
As chairman and president of Asset Management Services, we appreciate your
investment in the fund. 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 Services President of Asset Management
J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated
2
<PAGE>
FUND PERFORMANCE
EXAMINING PERFORMANCE
There are several ways to evaluate a mutual fund's historical performance
record. One approach is to 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 December 1, 1994, would have grown to $1,616,049 on
September 30, 1998.
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
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 one, five,
or ten 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 FUND INCEPTION*
DECEMBER 1, 1994 -- SEPTEMBER 30, 1998
[CHART]
[PLOT POINTS TO COME]
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
---------------- ------------------------------
THREE SIX ONE THREE SINCE
AS OF SEPTEMBER 30, 1998 MONTHS MONTHS YEAR YEARS INCEPTION*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan Inst. International Bond Fund 5.69% 7.96% 13.56% 12.72% 13.34%
Salomon Brothers Non-U.S. World
Government Bond Index (currency hedged) 5.21% 7.65% 13.83% 12.73% 13.51%
Lipper International Income Funds Average 5.69% 7.15% 7.78% 6.89% 9.05%
</TABLE>
*12/1/94 - COMMENCEMENT OF OPERATIONS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. RETURNS ARE NET OF FEES,
ASSUME THE REINVESTMENT OF DISTRIBUTIONS AND REFLECT REIMBURSEMENT OF CERTAIN
FUND AND PORTFOLIO EXPENSES AS DESCRIBED IN THE PROSPECTUS. HAD EXPENSES NOT
BEEN SUBSIDIZED, RETURNS AND YIELDS WOULD HAVE BEEN LOWER. THE SALOMON BROTHERS
NON-U.S. WORLD GOVERNMENT BOND INDEX (CURRENCY HEDGED) IS AN UNMANAGED INDEX
WHICH DOES NOT INCLUDE FEES OR EXPENSES IN WHICH INVESTORS MAY NOT DIRECTLY
INVEST. LIPPER ANALYTICAL SERVICES, INC. IS A LEADING SOURCE FOR MUTUAL FUND
DATA.
3
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
Following is an interview with DOMINIC J. PEGLER, VICE PRESIDENT, who is a
member of the portfolio management team responsible for managing The Non-U.S.
Fixed Income Portfolio in which the fund invests. Mr. Pegler joined J.P. Morgan
(London) in 1996 after seven years at the Bank of England, serving first as an
economist and then in the Reserves Management Department managing the U.K.'s
foreign exchange reserves. His time at the Bank included a two year secondment
to the Directorate of Monetary Affairs, EC Commission. Mr. Pegler holds a BS and
MS in Economics from the London School of Economics. This interview was
conducted on October 14, 1998 and reflects his views on that date.
DURING THE FIRST HALF OF THE YEAR UNDER REVIEW, THE FIXED INCOME MARKETS WERE
LARGELY DOMINATED BY THE ASIAN FINANCIAL CRISIS. WAS THIS ALSO TRUE FOR THE MOST
RECENT SIX MONTHS?
The focus for attention in the fixed income markets over the current review
period primarily shifted from SouthEast Asia, where activity still shows little
sign of improvement, to areas such as Russia and South America, where increased
investor risk aversion has exposed their vulnerabilities. The collapse in
commodity prices over the last year took its toll on the Russian economy and
with tax revenues barely measuring 10% of GDP, Russian finances were
deteriorating. Ultimately, the failure of the IMF to attach conditions to
lending agreements precipitated a de-facto default on Ruble-denominated
government debt in August. The resulting significant losses for international
investors, coupled with earlier losses experienced in South East Asia, rapidly
prompted an increase in investor risk aversion. As that aversion developed,
market attention focused, naturally, on markets in deficit and requiring net
capital inflows.
Also noteworthy is the current situation in Brazil, where the government has
been running a budget deficit amounting to almost 8% of GDP and a current
account deficit of roughly 4% of GDP. Such a policy mix necessitates
substantial capital inflows. In the Brazilian case, the financing of the budget
deficit has been aggravated by rising interest rates coupled with the structure
of the government debt stock, having an average outstanding maturity of just
seven months. Plans to tighten fiscal policy and cut spending will need to be
significant to address this problem and given that Brazil accounts for 40% of
Latin American GDP, growth prospects in the region look poor. Moreover, with
20% of U.S. exports entering South America (including Mexico); any marked
deterioration in demand simply adds to the existing slowdown in the U.S. export
economy. European economic activity, particularly in the goods sector, has
similarly suffered. Orders have weakened significantly and the resultant squeeze
in profit margins and loss of growth potential have taken their toll on equity
markets during the third quarter, benefiting fixed income investors holding high
quality government bonds.
4
<PAGE>
HOW DID THE PORTFOLIO PERFORM OVER THE YEAR? PLEASE COMMENT ON ANY FACTORS OR
EVENTS THAT EITHER POSITIVELY OR NEGATIVELY AFFECTED PERFORMANCE.
International bond markets performed well in relation to U.S. domestic bond
markets over the period. The portfolio's neutral duration position was
considerably enhanced by a currency hedged yield advantage over U.S. dollar
assets, initially by investing in short-dated European bonds before extending
out to longer maturities as the outlook for european monetary policy became
more accommodative. Consequently, the portfolio held overweight positions in
both Germany and France. The portfolio was neutral UK assets at the end of
September but had remained underweight at times during the period,
contributing positively to performance. The portfolio's declining exposure to
Japanese bonds benefited the portfolio initially, but due to slow improvement
in the Japanese banking sector, the portfolio's position in this regard was a
marginal net drag on performance over the period.
PLEASE PROVIDE INVESTORS WITH AN UPDATE ON EUROPE'S ECONOMIC AND MONETARY UNION
(EMU) AND HOW IT HAS AFFECTED BOND PORTFOLIOS.
Throughout the year, European and Economic Monetary Union continued to progress
towards the start date of January 1, 1999, when the member countries' currencies
become fixed to each other and the Euro and the European Central Bank (ECB)
takes over operation of monetary policy. The effect of Asian economic weakness
and prospect of weaker economic growth throughout the Euro region in the latter
part of the review period appears to present very little chance of stalling the
process. In the final run up to January 1 foreign investors in particular have
shown a preference for large, liquid German and French bond issues which are
likely to become prominent on the new Euro yield curve; the portfolio has been
well positioned to take advantage of this preference.
GIVEN THAT JAPAN HAS BEEN EXPERIENCING TURMOIL IN ITS BANKING INDUSTRY FOR WELL
OVER A YEAR NOW, HOW ARE WE VIEWING OUR POSITION IN THAT COUNTRY?
Japanese economic and financial difficulties worsened further during the third
quarter as the economy continued to contract, the price level (of goods and
services) continued to fall and the banking system capital base was further
eroded by growing bad loans, a weak stock market and, at least initially in the
quarter, by a weaker Yen. The Yen weakened further early in the quarter before
rallying on the basis of capital repatriation by Japanese investors late in the
quarter. Recent agreement between the Government and opposition with respect to
a banking system restructuring plan requires further clarification, particularly
regarding the scale and speed of the restructuring, before safe judgment can be
passed.
5
<PAGE>
WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS? IN LIGHT OF THAT FORECAST, HOW IS
THE PORTFOLIO BEING POSITIONED?
In coming months we do not anticipate any material improvement in economic
conditions in Asia or Russia. The possibility of a further crisis in emerging
markets (emanating from Brazil) remains; the emerging economies' ability to
attract private sector capital inflows amidst a reduced appetite for risk
amongst investors is likely to severely depress activity in those markets in the
foreseeable future.
With this in mind, developed markets face a significant risk to their own
economies, expressed in the form of a marked reduction in consumer spending and
business investment, with slower GDP growth as a consequence. In Europe, leading
economic indicators point to slower activity, giving the European Central Bank
little scope to alter monetary policy, with the possibility they follow the lead
shown by the United States Federal Reserve in easing policy. With this in mind,
the portfolio maintains a positive outlook on the major government bond markets.
6
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. Morgan 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. World Government Bond
Index (currency hedged).
- --------------------------------------------------------------------------------
INCEPTION DATE
12/1/94
- --------------------------------------------------------------------------------
FUND NET ASSETS AS OF 9/30/98
$7,216,962
- --------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 9/30/98
$7,272,939
- --------------------------------------------------------------------------------
DIVIDEND PAYABLE DATE
MONTHLY
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/18/98
EXPENSE RATIO
The fund's current annual expense ratio of 0.65% 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 SEPTEMBER 30, 1998
PORTFOLIO ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
<TABLE>
<S> <C>
GERMANY 29.2%
FRANCE 17.0%
NETHERLANDS 4.4%
DENMARK 4.3%
CANADA 3.3%
UNITED STATES 2.4%
OTHER 1.7%
SHORT-TERM 37.7%
</TABLE>
30-DAY SEC YIELD
3.23%*
DURATION
6.5 years
*YIELD IS NET OF FEES AND REFLECTS THE REIMBURSEMENT OF CERTAIN EXPENSES AS
DISCUSSED IN THE PROSPECTUS. HAD EXPENSES NOT BEEN SUBSIDIZED, YIELD WOULD HAVE
BEEN LOWER.
7
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. AS OF OCTOBER 28, 1998 J.P. MORGAN
INVESTMENT MANAGEMENT INC., A WHOLLY OWNED SUBSIDIARY OF J.P. MORGAN & CO.,
WILLSERVE AS THE PORTFOLIO'S INVESTMENT ADVISOR. 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 WORTH MORE OR
LESS THAN ORIGINAL COST.
The fund invests through a master portfolio (another fund with the same
objective). The fund invests in foreign securities which are subject to special
risks such as currency fluctuations and economic and political instability.
Prospective investors should refer to the fund's prospectus for a discussion of
these risks.
CALL J.P. MORGAN FUNDS SERVICES AT (800) 766-7722 FOR A PROSPECTUS CONTAINING
MORE COMPLETE INFORMATION ABOUT THE FUND INCLUDING MANAGEMENT FEES AND OTHER
EXPENSES. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
8
<PAGE>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
<PAGE>
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The Non-U.S. Fixed Income Portfolio
("Portfolio"), at value $7,245,485
Receivable for Expense Reimbursements 21,084
Receivable for Shares of Beneficial Interest Sold 200
Prepaid Trustees' Fees 31
Prepaid Expenses and Other Assets 7
----------
Total Assets 7,266,807
----------
LIABILITIES
Dividends Payable to Shareholders 4,520
Shareholder Servicing Fee Payable 590
Administrative Services Fee Payable 172
Administration Fee Payable 31
Fund Services Fee Payable 6
Accrued Expenses 44,526
----------
Total Liabilities 49,845
----------
NET ASSETS
Applicable to 845,297 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $7,216,962
----------
----------
Net Asset Value, Offering and Redemption Price
Per Share $8.54
----
----
ANALYSIS OF NET ASSETS
Paid-in Capital $6,942,073
Accumulated Net Realized Gain on Investment and
Foreign Currency Contracts and Transactions 349,734
Net Unrealized Depreciation of Investment and
Foreign Currency Contracts and Translations (74,845)
----------
Net Assets $7,216,962
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income (Net of Foreign
Withholding Tax of $1,697) $303,792
Allocated Portfolio Expenses (Net of
Reimbursement of $94,209) (44,454)
--------
Net Investment Income Allocated from
Portfolio 259,338
FUND EXPENSES
Transfer Agent Fees $16,306
Registration Fees 11,762
Amortization of Organization Expenses 10,202
Printing Expenses 9,595
Shareholder Servicing Fee 6,964
Professional Fees 4,514
Administrative Services Fee 2,047
Fund Services Fee 217
Administration Fee 162
Trustees' Fees and Expenses 77
Miscellaneous 262
-------
Total Fund Expenses 62,108
Less: Reimbursement of Expenses (61,297)
-------
NET FUND EXPENSES 811
--------
NET INVESTMENT INCOME 258,527
NET REALIZED GAIN ON INVESTMENT AND FOREIGN
CURRENCY CONTRACTS AND
TRANSACTIONS ALLOCATED FROM PORTFOLIO 707,208
NET CHANGE IN UNREALIZED DEPRECIATION OF
INVESTMENT AND FOREIGN CURRENCY
CONTRACTS AND TRANSLATIONS ALLOCATED FROM
PORTFOLIO (65,271)
--------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $900,464
--------
--------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 258,527 $ 260,212
Net Realized Gain on Investment and Foreign
Currency Contracts and Transactions Allocated
from Portfolio 707,208 806,863
Net Change in Unrealized Depreciation of
Investment and Foreign Currency Contracts and
Translations Allocated from Portfolio (65,271) (307,115)
------------------ ------------------
Net Increase in Net Assets Resulting from
Operations 900,464 759,960
------------------ ------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (833,915) (952,055)
Net Realized Gain (172,435) (325,360)
------------------ ------------------
Total Distributions to Shareholders (1,006,350) (1,277,415)
------------------ ------------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 5,681,184 8,877,753
Reinvestment of Dividends and Distributions 861,338 1,078,872
Cost of Shares of Beneficial Interest Redeemed (6,345,789) (15,622,643)
------------------ ------------------
Net Increase (Decrease) from Transactions in
Shares of Beneficial Interest 196,733 (5,666,018)
------------------ ------------------
Total Increase (Decrease) in Net Assets 90,847 (6,183,473)
NET ASSETS
Beginning of Fiscal Year 7,126,115 13,309,588
------------------ ------------------
End of Fiscal Year (including undistributed net
investment income of $0 and $324,946,
respectively) $ 7,216,962 $ 7,126,115
------------------ ------------------
------------------ ------------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
12
<PAGE>
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each period are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL YEAR ENDED DECEMBER 1, 1994
SEPTEMBER 30, (COMMENCEMENT OF
--------------------------- OPERATIONS) THROUGH
1998 1997 1996 SEPTEMBER 30, 1995
------- ------- ------- -------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.65 $ 11.30 $ 11.12 $ 10.00
------- ------- ------- -------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.28 2.21 0.31 0.49
Net Realized and Unrealized Gain (Loss) on
Investment and Foreign Currency Contracts and
Transactions 0.78 (1.11) 0.95 0.78
------- ------- ------- -------------------
Total from Investment Operations 1.06 1.10 1.26 1.27
------- ------- ------- -------------------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.97) (2.78) -- (0.15)
Net Realized Gain (0.20) (0.97) (1.08) --
------- ------- ------- -------------------
Total Distributions to Shareholders (1.17) (3.75) (1.08) (0.15)
------- ------- ------- -------------------
NET ASSET VALUE, END OF PERIOD $ 8.54 $ 8.65 $ 11.30 $ 11.12
------- ------- ------- -------------------
------- ------- ------- -------------------
RATIOS AND SUPPLEMENTAL DATA
Total Return 13.56% 12.52% 12.09% 12.83%(a)
Net Assets, End of Period (in thousands) $ 7,217 $ 7,126 $13,310 $ 4,233
Ratios to Average Net Assets
Expenses 0.65% 0.50% 0.65% 0.60%(b)
Net Investment Income 3.71% 4.88% 5.28% 5.82%(b)
Expenses without Reimbursement 2.88% 2.41% 1.67% 2.50%(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.
13
<PAGE>
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The J.P. Morgan Institutional International Bond Fund (the "fund") is a separate
series of the J.P. Morgan 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. Prior to January 1, 1998, the
trust's and the fund's names were The JPM Institutional Funds and The JPM
Institutional International Bond Fund, respectively.
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 (99.62% at
September 30, 1998). 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 1a 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) Substantially all of the fund's net investment income is declared as
dividends daily and paid monthly. Distributions to shareholders of net
realized capital gain, if any, are declared and paid annually.
d) 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.
e) The fund is treated as a separate entity for federal income tax purposes
and 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) The fund accounts for and reports distributions to shareholders in
accordance with Statement of Position 93-2 "Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investments Companies." The effect of applying
this
14
<PAGE>
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
statement was to increase Undistributed Net Income by $250,442, decrease
Accumulated Net Realized Gain on Investment by $459,187 and increase
Paid-in Capital by $208,745. Net investment income, net realized gains and
net assets were not affected by this change.
2. TRANSACTIONS WITH AFFILIATES
a) The trust, on behalf of the fund, has retained Funds Distributor, Inc.
("FDI"), a registered broker-dealer, to serve as co-administrator and
distributor 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 September 30, 1998, the fee for these services amounted
to $162.
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 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 September 30, 1998, the fee for these services amounted to
$2,047.
In addition, J.P. 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,
1999. The reimbursement arrangement can be changed or terminated at any
time after January 31, 1999 at the option of J.P. Morgan. For the fiscal
year ended September 30, 1998, J.P. Morgan has agreed to reimburse the
fund $155,506 for expenses under this agreement.
c) The trust, on behalf of the fund, has a Shareholder Servicing Agreement
with Morgan to provide account administration and personal account
maintenance service to fund shareholders. The agreement provides for the
fund to pay Morgan a fee for these services which is computed daily and
paid monthly at an annual rate of 0.10% of the average daily net assets of
the fund. For the fiscal year ended September 30, 1998 the fee for these
services amounted to $6,964.
15
<PAGE>
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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
$217 for the fiscal year ended September 30, 1998.
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 these
total fees and expenses.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 $50.
3. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest of one or more series.
Transactions in shares of beneficial interest of the fund were as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Shares of beneficial interest sold............... 689,033 1,035,218
Reinvestment of dividends and distributions...... 106,742 134,038
Shares of beneficial interest redeemed........... (773,930) (1,523,512)
------------------ ------------------
Net Increase (Decrease).......................... 21,845 (354,256)
------------------ ------------------
------------------ ------------------
</TABLE>
4. CREDIT AGREEMENT
The trust, on behalf of the fund, together with other affiliated investment
companies (the "funds"), entered into a revolving line of credit agreement (the
"Agreement") on May 28, 1997, with unaffiliated lenders. Additionally, since all
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
was $100,000,000. The agreement expired on May 27, 1998, however, the fund as
party to the Agreement has extended the Agreement and continues its
participation therein for an additional 364 days until May 26, 1999.The maximum
borrowing under the new Agreement is $150,000,000. The purpose of the Agreement
is to provide another alternative for settling large fund shareholder
redemptions. Interest on any such borrowings outstanding will approximate market
rates. The funds pay a commitment fee at an annual rate of 0.065% on the unused
portion of the committed amount which is allocable to the funds in accordance
with procedures established by their respective trustees or directors. There
were no outstanding borrowings pursuant to the Agreement at September 30, 1998.
16
<PAGE>
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
5. OTHER MATTERS
Prior to January 20, 1998, the fund invested in the portfolio along with a
non-U.S. fund managed by Morgan. On January 20, 1998, the non-U.S. fund withdrew
its interest in the portfolio through an in-kind withdrawal amounting to
$217,929,049. The withdrawal did not create a taxable event to the fund or
reduce the net assets of the fund, but it did reduce the net assets of the
portfolio.
6. TERMINATION OF FUND
The trustees on November 12, 1998 approved a resolution to terminate the fund.
The liabilities incurred in connection with the termination and any liabilities
which arise after the termination date will be paid by Morgan. The fund will be
liquidated and all shareholder accounts will be redeemed on a date to be
determined by management.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan Institutional International Bond Fund
(Formerly The JPM Institutional International Bond Fund)
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
J.P. Morgan Institutional International Bond Fund (one of the series
constituting part of the J.P. Morgan Institutional Funds, hereafter referred to
as the "Fund") at September 30, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the three years in
the period then ended and for the period December 1, 1994 (commencement of
operations) through September 30, 1995, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As more fully explained in Note 6, the trustees have resolved and it is the
intention of management to liquidate the Fund.
PricewaterhouseCoopers LLP
New York, New York
November 12, 1998
18
<PAGE>
J.P. MORGAN INSTITUTIONAL INTERNATIONAL BOND FUND
SUPPLEMENTAL PROXY INFORMATION
- --------------------------------------------------------------------------------
A Joint Special Meeting of Shareholders of the J.P. Morgan Family of Funds was
held on August 20, 1998. Each of the applicable funds voted in favor of adopting
the following proposals, therefore, the results are aggregated for the Trust
unless otherwise specified. The meeting was held for the following purposes:
1. To elect a slate of five Trustees to hold office for a term of unlimited
duration subject to the current retirement age of 70.
2a.To approve the amendment of the Fund's investment restriction relating to
diversification of assets.
2b.To approve the amendment of the Fund's investment restriction relating to
concentration of assets in a particular industry.
2c.To approve the amendment of the Fund's investment restriction relating to the
issuance of senior securities.
2d.To standardize the borrowing ability of the Fund to the extent permitted by
applicable law.
2e.To approve the amendment of the Fund's investment restriction relating to
underwriting.
2f.To approve the amendment of the Fund's investment restriction relating to
investment in real estate.
2g.To approve the amendment of the Fund's investment restriction relating to
commodities.
2h.To approve the amendment of the Fund's investment restriction relating to
lending.
2i.To approve the reclassification of the Fund's other fundamental restrictions
as nonfundamental.
3. To approve the reclassification of the Fund's investment objective from
fundamental to nonfundamental.
4. To approve a new investment advisory agreement of the Fund.
5. To amend the Declaration of Trust to provide dollar-based voting rights.
6. To ratify the selection of independent accountants, PricewaterhouseCoopers
LLP.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
DIRECTORS/MATTER VOTES FOR VOTES AGAINST ABSTENTIONS
- ------------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C>
1. Frederick S. Addy............................. 2,592,561,591 8,840,251 --
William G. Burns............................... 2,592,561,591 8,840,251 --
Arthur C. Eschenlauer.......................... 2,592,561,591 8,840,251 --
Matthew Healey................................. 2,592,561,591 8,840,251 --
Michael P. Mallardi............................ 2,592,561,591 8,840,251 --
2. Amending of Investment Restrictions:
a. Relating to diversification of assets....... 358,238 9,828 19,394
b. Relating to concentration of assets......... 356,915 11,151 19,394
c. Relating to issuance of senior securities... 354,355 9,113 23,992
d. Relating to borrowing....................... 360,106 11,151 16,203
e. Relating to underwriting.................... 356,915 11,151 19,394
f. Relating to investment in real estate....... 356,915 11,151 19,394
g. Relating to commodities..................... 356,915 11,151 19,394
h. Relating to lending......................... 356,915 11,151 19,394
i.Reclassification of other restrictions as
nonfundamental............................. 361,429 8,888 17,143
3. Reclassification of investment objectives..... 343,898 26,419 17,143
4. Investment advisory agreement................. 404,544 11,304 17,142
5. Dollar-based voting rights.................... 2,411,567,264 7,638,329 179,591,823
6.Independent accountants,
PricewaterhouseCoopers LLP................... 2,402,592,025 19,567,729 179,242,087
</TABLE>
19
<PAGE>
The Non-U.S. Fixed Income Portfolio
Annual Report September 30, 1998
(The following pages should be read in conjunction
with J.P. Morgan Institutional International Bond Fund
Annual Financial Statements)
20
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED) (1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -----------
<C> <S> <C>
ASSET-BACKED SECURITY (2.1%)
UNITED STATES (2.1%)
USD 155 Discover Card Master Trust 1, Series 1997-3,
Class A, 5.720% due 04/17/07, FRN (s) (cost
$155,000)...................................... $ 153,934
-----------
CORPORATE OBLIGATIONS (1.8%)
GERMANY (1.8%)
ITL 175,000 Bayerische Landesbank Girozentrale, 10.750% due
03/01/03 (s) (cost $112,435)................... 133,835
-----------
GOVERNMENT OBLIGATIONS (50.2%)
CANADA (3.0%)
Government of Canada
CAD 200 7.000% due 12/01/06 (s).......................... 148,808
CAD 74 Series A55, 8.000% due 06/01/23 (s).............. 66,231
-----------
215,039
-----------
DENMARK (3.9%)
DKK 1,471 Kingdom of Denmark, 8.000% due 03/15/06 (s)...... 280,265
-----------
FRANCE (15.2%)
Government of France
FRF 870 5.250% due 04/25/08 (s).......................... 169,412
FRF 3,860 5.500% due 04/25/07 (s).......................... 764,452
FRF 814 6.000% due 10/25/25 (s).......................... 168,470
-----------
1,102,334
-----------
GERMANY (24.2%)
Federal Republic of Germany
DEM 525 Series 90, 7.750% due 02/21/00 (s)............... 331,833
DEM 353 Series 94, 6.250% due 01/04/24 (s)............... 254,292
DEM 850 Series 97, 6.000% due 01/04/07 (s)............... 577,531
DEM 445 Series 97, 6.000% due 07/04/07 (s)............... 304,644
DEM 470 Series 116, 5.750% due 08/22/00 (s).............. 292,626
-----------
1,760,926
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
21
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(LOCAL CURRENCY
000'S OMITTED) (1) SECURITY DESCRIPTION VALUE
- ------------------ ------------------------------------------------- -----------
<C> <S> <C>
NETHERLANDS (3.9%)
NLG 505 Government of the Netherlands, 5.750% due
09/15/02 (s)................................... $ 287,450
-----------
TOTAL GOVERNMENT OBLIGATIONS (COST
$3,272,779)................................. 3,646,014
-----------
SUPRANATIONAL OBLIGATIONS (2) (1.5%)
European Investment Bank
ITL 79,000 12.200% due 02/18/03 (s)......................... 63,345
ITL 55,000 Series E, MTN, 10.875% due 12/14/05 (s).......... 46,847
-----------
TOTAL SUPRANATIONAL OBLIGATIONS (COST
$93,300).................................... 110,192
-----------
SHORT-TERM INVESTMENTS (33.6%)
EURO DOLLAR TIME DEPOSITS (32.6%)
2,372,000 State Street Bank & Trust Co. London, 4.250% due
10/01/98....................................... 2,372,000
-----------
U.S. TREASURY OBLIGATIONS (1.0%)
70,000 Bills, 4.500% (y) due 02/04/99 (s)............... 68,763
-----------
TOTAL SHORT-TERM INVESTMENTS (COST
$2,440,763)................................. 2,440,763
-----------
TOTAL INVESTMENTS (COST $6,074,277)
(89.2%)..................................... 6,484,738
-----------
</TABLE>
<TABLE>
<CAPTION>
LOCAL
CURRENCY
-----------------
<S> <C> <C>
FOREIGN CURRENCY (14.3%)
Belgian Franc.................................... BEL 657 19
British Pound.................................... GBP 445,381 756,880
Canadian Dollar.................................. CAD 296 194
French Franc..................................... FRF 250,919 44,767
German Mark...................................... DEM 375,318 224,559
Italian Lira..................................... ITL 41,081 25
Spanish Peseta................................... ESP 1,749,995 12,318
-----------
TOTAL FOREIGN CURRENCY
(COST $988,317)............................. 1,038,762
-----------
TOTAL INVESTMENTS AND
FOREIGN CURRENCY
(COST $7,062,594)
(103.5%).................................... 7,523,500
LIABILITIES IN EXCESS OF
OTHER ASSETS (-3.5%)........................ (250,561)
-----------
NET ASSETS (100.0%)....... $ 7,272,939
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
22
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Note: Based on the cost of investments of $6,074,277 for federal income tax
purposes at September 30, 1998, the aggregate gross unrealized appreciation and
depreciation was $412,349 and $1,888, respectively, resulting in a net
unrealized appreciation of investments of $410,461.
(1) -- Principal is in the local currency of the country in which the security
is traded, which may not be the country of origin.
(2) -- International agencies.
(s) -- Security is fully or partially segregated with custodian as collateral
for futures contracts or with broker as initial margin for futures contracts.
$3,378,945 of the market value has been segregated.
(y) -- Yield to maturity.
BEL -- Belgian Franc.
CAD -- Canadian Dollar.
DEM -- German Mark.
DKK -- Danish Krone.
ESP -- Spanish Peseta.
FRF -- French Franc.
FRN -- Floating Rate Note. Maturity date reflects the later of the next interest
rate change or next put date.
GBP -- British Pound.
ITL -- Italian Lira.
MTN -- Medium Term Note.
NLG -- Netherlands Guilder.
USD -- United States Dollar.
The Accompanying Notes are an Integral Part of the Financial Statements.
23
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments at Value (Cost $6,074,277 ) $6,484,738
Cash 932
Foreign Currency at Value (Cost $988,317 ) 1,038,762
Interest Receivable 110,041
Receivable for Expense Reimbursement 21,541
Variation Margin Receivable 17,014
Prepaid Trustees' Fees 432
Prepaid Expenses and Other Assets 558
----------
Total Assets 7,674,018
----------
LIABILITIES
Unrealized Depreciation of Forward Foreign
Currency Contracts 326,725
Advisory Fee Payable 2,084
Administrative Services Fee Payable 170
Fund Services Fee Payable 6
Accrued Expenses 72,094
----------
Total Liabilities 401,079
----------
NET ASSETS
Applicable to Investors' Beneficial Interests $7,272,939
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest Income (Net of Foreign Withholding Tax
of $41,452 ) $3,425,327
EXPENSES
Advisory Fee $ 265,532
Custodian Fees and Expenses 108,825
Professional Fees and Expenses 52,121
Administrative Services Fee 22,833
Printing Expenses 12,074
Fund Services Fee 2,695
Administration Fee 1,636
Insurance Expense 1,141
Trustees' Fees and Expenses 839
-----------
Total Expenses 467,696
Less: Reimbursement of Expenses (94,563)
-----------
NET EXPENSES 373,133
----------
NET INVESTMENT INCOME 3,052,194
NET REALIZED GAIN (LOSS) ON
Investment Transactions (1,583,108)
Futures Contracts 583,791
Foreign Currency Contracts and Transactions 5,400,094
-----------
Net Realized Gain 4,400,777
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF
Investments (2,508,725)
Futures Contracts 233,072
Foreign Currency Contracts and Translations 3,088,352
-----------
Net Change in Unrealized Appreciation 812,699
----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $8,265,670
----------
----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
25
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 3,052,194 $ 8,781,811
Net Realized Gain on Investments, Futures and
Foreign Currency Contracts and Transactions 4,400,777 16,464,548
Net Change in Unrealized Appreciation
(Depreciation) of Investments, Futures and
Foreign Currency Contracts and Translations 812,699 (3,985,721)
------------------ ------------------
Net Increase in Net Assets Resulting from
Operations 8,265,670 21,260,638
------------------ ------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions 10,778,288 151,112,076
Withdrawals (246,117,891) (83,928,855)
------------------ ------------------
Net Increase (Decrease) from Investors'
Transactions (235,339,603) 67,183,221
------------------ ------------------
Total Increase (Decrease) in Net Assets (227,073,933) 88,443,859
NET ASSETS
Beginning of Fiscal Year 234,346,872 145,903,013
------------------ ------------------
End of Fiscal Year $ 7,272,939 $ 234,346,872
------------------ ------------------
------------------ ------------------
</TABLE>
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE PERIOD
YEAR ENDED OCTOBER 11, 1994
SEPTEMBER 30, (COMMENCEMENT OF
------------------ OPERATIONS) THROUGH
1998 1997 1996 SEPTEMBER 30, 1995
---- ---- ---- -------------------
<S> <C> <C> <C> <C>
RATIOS TO AVERAGE NET ASSETS
Expenses 0.49% 0.52% 0.51% 0.55%(a)
Net Investment Income 4.02% 4.72% 5.34% 5.73%(a)
Expenses without Reimbursement 0.62% 0.52% 0.51% 0.55%(a)
Portfolio Turnover 266% 346% 330% 288%(b)
</TABLE>
- ------------------------
(a) Annualized.
(b) Not annualized.
The Accompanying Notes are an Integral Part of the Financial Statements.
26
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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, 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 commenced operations on October 11,
1994. The portfolio's investment objective is to provide a high total return,
consistent with moderate risk of capital, by investing in a portfolio of
international fixed income securities. 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 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 for 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
short-term 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 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 expense are
translated at the 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
27
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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. 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 at the current foreign exchange
rates, and the change in the market value is recorded by the portfolio as
unrealized appreciation or depreciation of forward foreign currency
contract translations. At September 30, 1998 the portfolio had open
forward foreign currency contracts as follows:
<TABLE>
<CAPTION>
U.S. DOLLAR NET UNREALIZED
VALUE AT APPRECIATION/
COST/PROCEEDS 9/30/98 (DEPRECIATION)
------------- ----------- --------------
<S> <C> <C> <C>
PURCHASE CONTRACTS
Netherlands Guilder 627,820, expiring 10/16/98... $ 331,969 $ 333,353 $ 1,384
SALES CONTRACTS
British Pound 438,435, expiring 10/16/98......... 705,829 744,428 (38,599)
Canadian Dollar 412,149, expiring 10/16/98....... 271,057 270,028 1,029
Danish Krone 1,772,133, expiring 10/16/98........ 259,513 278,924 (19,411)
Deutsche Mark 3,569,192, expiring 10/16/98....... 1,995,329 2,137,307 (141,978)
French Franc 5,752,038, expiring 10/16/98........ 960,547 1,027,135 (66,588)
French Franc 350,564 for CAD 89,425, expiring
10/16/98........................................ 58,589 62,600 (4,011)
French Franc 500,000 for DEM 149,110, expiring
10/16/98........................................ 89,290 89,285 5
Italian Lira 422,132,987, expiring 10/16/98...... 238,258 255,505 (17,247)
Netherlands Guilder 1,170,642, expiring
10/16/98........................................ 580,266 621,575 (41,309)
--------------
NET UNREALIZED DEPRECIATION ON FORWARD FOREIGN
CURRENCY CONTRACTS.............................. $ (326,725)
--------------
--------------
</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
28
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
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. Futures contracts at September 30, 1998
are summarized as follows:
<TABLE>
<CAPTION>
NET UNREALIZED PRINCIPAL AMOUNT
CONTRACTS LONG APPRECIATION OF CONTRACTS
-------------- -------------- ----------------
<S> <C> <C> <C>
Ten-Year French Government Bond, expiring
December 1998................................... 8 $ 7,153 $ 781,604
Ten-Year German Bond, expiring December 1998..... 8 24,176 1,348,719
Ten-Year Long Gilt, expiring December 1998....... 4 31,895 756,002
-------------- -------------- ----------------
Totals........................................... 20 $ 63,224 $ 2,886,325
-------------- -------------- ----------------
-------------- -------------- ----------------
</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) Prior to October 28, 1998, the portfolio had an Investment Advisory
Agreement with Morgan Guaranty Trust Company of New York ("Morgan"). Under
the terms of the agreement, the portfolio paid Morgan at an annual rate of
0.35% of the portfolio's average daily net assets. Effective October 28,
1998, the portfolio's Investment Advisor will be J.P. Morgan Investment
Management Inc. ("JPMIM"), an affiliate of Morgan and a wholly owned
subsidiary of J.P. Morgan & Co. Inc. ("J.P. Morgan"), and the terms of the
agreement will remain the same. For the fiscal year ended September 30,
1998, such fees amounted to $265,532.
b) The portfolio has retained Funds Distributor, Inc. ("FDI"), a registered
broker-dealer, to serve as the co-administrator and exclusive placement
agent for the portfolio. Under a Co-Administration Agreement between FDI
and the portfolio, FDI provides administrative services necessary for the
29
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
operations of the portfolio, furnishes office space and facilities
required for conducting the business of the portfolio and pays the
compensation of the officers affiliated with FDI. The portfolio has agreed
to pay FDI fees equal to its allocable share of an annual complex-wide
charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable
to the portfolio is based on the ratio of the portfolio's net assets to
the aggregate net assets of the portfolio and certain other investment
companies subject to similar agreements with FDI. For the fiscal year
ended September 30, 1998, the fee for these services amounted to $1,636.
c) The portfolio 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 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 JPMIM acts as investment
advisor (the "master portfolios") and J.P. Morgan Series Trust in
accordance with the following annual schedule: 0.09% on the first $7
billion of their aggregate average daily net assets and 0.04% of their
aggregate average daily net assets in excess of $7 billion less the
complex-wide fees payable to FDI. The portion of this charge payable by
the portfolio is determined by the proportionate share its net assets bear
to the net assets of the master portfolios, other investors in the master
portfolios for which JPMIM provides similar services and J.P. Morgan
Series Trust. For the fiscal year ended September 30,1998, the fee for
these services amounted to $22,833.
In addition, J.P. Morgan has agreed to reimburse the portfolio to the
extent necessary to maintain the total operating expenses of the portfolio
not to exceed 0.65% of the average daily net assets of the portfolio
through January 31, 1999. This reimbursement arrangement can be changed or
terminated at any time after January 31, 1999 at the option of J.P.
Morgan. For the fiscal year ended September 30, 1998, J.P. Morgan has
agreed to reimburse the portfolio $94,563 for expenses under this
agreement.
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 $2,695 for the fiscal year ended September 30, 1998.
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.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 $500.
30
<PAGE>
THE NON-U.S. FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) for the fiscal year
ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
- ------------ ------------
<S> <C>
$177,845,451 $166,064,365
</TABLE>
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 the Financial Statements which are
included elsewhere in this report.
5. OTHER MATTERS
On January 20, 1998, the portfolio received a withdrawal request in the amount
of $217,929,049 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 $9,495,395, which is included in the
Net Realized Gain (Loss) on Investment and Foreign Currency Transactions in the
Statement of Operations.
6. TERMINATION OF PORTFOLIO
The trustees on November 12, 1998 approved a resolution to terminate the
portfolio. The liabilities incurred in connection with the termination and any
liabilities which arise after the termination date will be paid by Morgan. The
portfolio will be liquidated and all shareholders accounts will be redeemed on a
date to be determined by management.
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Investors of
The Non-U.S. Fixed Income Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the supplementary data present fairly, in all material
respects, the financial position of The Non-U.S. Fixed Income Portfolio (the
"Portfolio") at September 30, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the supplementary data for each of the three years in the
period then ended and for the period October 11, 1994 (commencement of
operations) through September 30, 1995, in conformity with generally accepted
accounting principles. These financial statements and supplementary data
(hereafter referred to as "financial statements") are the responsibility of the
Portfolio's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
As more fully explained in Note 6, the trustees have resolved and it is the
intention of management to liquidate the Portfolio.
PricewaterhouseCoopers LLP
New York, New York
November 12, 1998
32
<PAGE>
J.P. MORGAN INSTITUTIONAL FUNDS
PRIME MONEY MARKET FUND
TREASURY MONEY MARKET FUND
FEDERAL MONEY MARKET FUND
TAX EXEMPT MONEY MARKET FUND
SHORT TERM BOND FUND
BOND FUND
INTERNATIONAL BOND FUND
GLOBAL STRATEGIC INCOME FUND
TAX EXEMPT BOND FUND
NEW YORK TAX EXEMPT BOND FUND
CALIFORNIA BOND FUND: INSTITUTIONAL SHARES
DIVERSIFIED FUND
DISCIPLINED EQUITY FUND
U.S. EQUITY FUND
U.S. SMALL COMPANY FUND
TAX AWARE DISCIPLINED EQUITY FUND:
INSTITUTIONAL SHARES
INTERNATIONAL EQUITY FUND
EUROPEAN EQUITY FUND
INTERNATIONAL OPPORTUNITIES FUND
EMERGING MARKETS 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
INTERNATIONAL
BOND FUND
ANNUAL REPORT
SEPTEMBER 30, 1998
iibfr-989
