<PAGE>
LETTER TO THE SHAREHOLDERS OF THE J.P. MORGAN INSTITUTIONAL BOND FUND
November 23, 1998
Dear Shareholder:
The fiscal year ending October 31, 1998, was a volatile one for bonds and for
the J.P. Morgan Institutional Bond Fund. We are pleased to report, however, that
the fund provided a solid total return of 8.18% for the fiscal year under
review. The fund's performance lagged the 9.40% returned by its benchmark, the
Salomon Smith Barney Broad Investment Grade Bond Index. However, the fund
outperformed its competitors, as measured by the Lipper Intermediate Investment
Grade Debt Funds Average, which returned 7.94% for the year.
The fund's net asset value increased from $10.01 per share on October 31, 1997,
to $10.10 per share at the end of the fiscal year, after paying approximately
$0.63 per share in dividends from ordinary income and approximately $0.07 per
share in dividends from capital gains.The fund's net assets stood at
approximately $1.0 billion at the end of the fiscal year. The net assets of The
U.S. Fixed Income Portfolio, in which the fund invests, totaled approximately
$1.3 billion on October 31, 1998.
The report that follows includes an interview with William G. Tennille, a member
of the portfolio management team for The U.S. Fixed Income Portfolio. 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 President of Asset Management
Services Services
J.P. Morgan & Co. Incorporated J.P. Morgan & Co. Incorporated
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<S> <C>
LETTER TO THE SHAREHOLDERS . . . . 1 FUND FACTS AND HIGHLIGHTS . . . 5
FUND PERFORMANCE . . . . . . . . . 2 FINANCIAL STATEMENTS. . . . . . 8
PORTFOLIO MANAGER Q&A. . . . . . . 3
- --------------------------------------------------------------------------------
</TABLE>
1
<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
$5,000,000 (the minimum investment in the fund). The chart at right shows that
$5,000,000 invested on October 31, 1988,* would have grown to $11,135,966 on
October 31, 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 $5,000,000 OVER 10 YEARS*
OCTOBER 31, 1988 - OCTOBER 31, 1998
<TABLE>
<CAPTION>
J.P. Morgan Institutional Salomon Smith Barney
Bond Fund BIG Index
<S> <C> <C>
Oct-88 $5,000,000 $5,000,000
Oct-89 $5,413,780 $5,590,280
Oct-90 $5,890,330 $5,947,910
Oct-91 $6,570,570 $6,884,670
Oct-92 $7,184,630 $7,579,100
Oct-93 $8,054,430 $8,486,210
Oct-94 $7,786,680 $8,181,160
Oct-95 $8,993,400 $9,466,110
Oct-96 $9,462,240 $10,023,100
Oct-97 $10,293,500 $10,907,400
Oct-98 $11,136,000 $11,932,800
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE TOTAL RETURNS AVERAGE ANNUAL TOTAL RETURNS
-------------------- -------------------------------------
THREE SIX ONE FIVE TEN
AS OF OCTOBER 31, 1998 MONTHS MONTHS YEAR YEARS YEARS*
- -------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan Inst. Bond Fund 2.52% 4.43% 8.18% 6.69% 8.34%
Salomon Smith Barney Broad
Investment Grade Bond Index 3.46% 5.53% 9.40% 7.05% 9.09%
Lipper Intermediate Investment
Grade Debt Funds Average 2.70% 4.58% 7.94% 6.09% 8.25%
AS OF SEPTEMBER 30, 1998
- -------------------------------------------------------------------- --------------------------------------
J.P. Morgan Inst. Bond Fund 3.53% 5.71% 10.19% 6.93% 8.56%
Salomon Smith Barney Broad
Investment Grade Bond Index 4.14% 6.56% 11.47% 7.22% 9.34%
Lipper Intermediate Investment
Grade Debt Funds Average 3.67% 5.82% 10.02% 6.31% 8.47%
</TABLE>
*PERFORMANCE PRIOR TO 7/26/93 REFLECTS THAT OF J.P. MORGAN BOND FUND, THE
PREDECESSOR ENTITY TO THE U.S. FIXED INCOME PORTFOLIO, WHICH HAS A SUBSTANTIALLY
SIMILAR INVESTMENT OBJECTIVE AND RESTRICTIONS AS J.P. MORGAN INSTITUTIONAL BOND
FUND (GROWTH AND AVERAGE ANNUAL TOTAL RETURNS BASED ON THE MONTH END FOLLOWING
INCEPTION). THE FUND'S AVERAGE ANNUAL TOTAL RETURN FROM THE INCEPTION DATE ON
7/26/93 THROUGH 10/31/98 IS 6.97%.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. RETURNS ARE NET OF FEES,
ASSUME THE REINVESTMENT OF DISTRIBUTIONS AND REFLECT THE REIMBURSEMENT OF
CERTAIN EXPENSES AS DESCRIBED IN THE PROSPECTUS.HAD EXPENSES NOT BEEN
SUBSIDIZED, RETURNS WOULD HAVE BEEN LOWER. LIPPER ANALYTICAL SERVICES, INC. IS A
LEADING SOURCE FOR MUTUAL FUND DATA.
2
<PAGE>
PORTFOLIO MANAGER Q&A
[PHOTO]
Following is an interview with WILLIAM G. TENNILLE, a member of the portfolio
management team for The U.S. Fixed Income Portfolio, in which the fund invests.
Bill joined Morgan in 1992 and has extensive experience across a broad range of
markets, including mortgage securities and derivatives. This interview was
conducted on November 16, 1998, and reflects Bill's views on that date.
HOW DID THE FIXED INCOME MARKETS PERFORM DURING THE 12 MONTHS ENDED OCTOBER 31,
1998?
WGT: Fixed income markets around the world experienced extreme volatility
during the past 12 months. The trouble goes back to July of 1997, when Thailand
devalued its currency. Since then, instability and turmoil have spread to most
other markets.
This summer, spreads - the difference between interest rates paid by different
types of bonds - started to widen. In a flight to quality, investors began to
sell the bonds they viewed as risky, and buy the bonds they viewed as more
stable.
Emerging markets debt and high-yield bonds were hardest hit. U.S. Treasury bonds
became the security of choice, pushing interest rates down to lows not seen
since the early 1990s. This touched off a wave of mortgage refinancings, which
caused mortgage-backed securities to suffer.
Corporate debt was left in the lurch as well, as the attractiveness of
government bonds left corporate bonds without any buyers.
HOW DID THE J.P. MORGAN INSTITUTIONAL BOND FUND PERFORM?
WGT: In this challenging market environment, the J.P. Morgan Institutional Bond
Fund held its own. The fund returned 8.18% for the 12 months ended October 31,
1998. The fund surpassed its peers as measured by the Lipper Intermediate
Investment Grade Debt Funds Average, which returned 7.94%. However, the fund
trailed the Salomon Smith Barney Broad Investment Grade Bond Index, which
returned 9.40% for the period.
The widening of spreads created challenges for all well-diversified bond
portfolios. We reacted to the changes in the market, trimming our positions in
the sectors that were hurt, while adding to our holdings in the
better-performing sectors. We also lengthened the portfolio's duration in order
to take advantage of the strong Treasury market. We presently have the portfolio
allocated the way we want, and we're watching the bond market closely to see
what further changes may be necessary.
3
<PAGE>
WHICH SECTORS CONTRIBUTED TO THE PORTFOLIO'S PERFORMANCE?
WGT: Our Treasury bond holdings contributed to the portfolio's performance
during the period. Our extended duration - we went as far as our portfolio
parameters permit - also boosted our performance. Roughly 5% of the portfolio
was invested in European bonds earlier in the year. These securities performed
quite well, and we sold out of the positions, believing that the gains from the
upcoming European Monetary Union have already been realized.
WHICH SECTORS HINDERED THE PORTFOLIO'S PERFORMANCE?
WGT: Our positions in emerging markets debt, high-yield bonds, and corporate
bonds all suffered with their broader markets. We did what we could to trim
these holdings, but selling took time. By mid-August, we had reduced our
holdings in these sectors to levels with which we were comfortable.
The Federal Reserve's decision to cut interest rates - three times as of this
writing - added much-needed liquidity to the fixed income markets. We're
starting to feel that we're out of the woods, as trades now have both a buyer
and a seller. However, there is still a lot of uncertainty in the world's
markets.
WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS?
WGT: J.P. Morgan, among many others, is forecasting a mild recession some time
in the first half of 1999. There are still many hot spots around the globe.
Japan has only recently come up with a realistic plan for dealing with its
economic woes. Latin America, Asia, and Russia all have serious problems that
are still making their effects felt.
Spreads are not as wide as they were this summer, but they tend to widen every
time a new bond issue comes to market. In such an uncertain environment, we are
watching the markets closely, ready to make whatever adjustments to the
portfolio we deem necessary. I believe that a well-diversified fixed income
portfolio offers worthwhile access to the bond market, regardless of market
conditions.
4
<PAGE>
FUND FACTS
INVESTMENT OBJECTIVE
J.P. MorganInstitutional Bond Fund seeks to provide a high total return
consistent with moderate risk of capital. It is designed for investors who seek
a total return that is higher than that generally available from short-term
obligations while recognizing the greater price fluctuation of longer-term
instruments.
- --------------------------------------------------------------------------------
COMMENCEMENT OF INVESTMENT OPERATIONS
7/26/93
- --------------------------------------------------------------------------------
FUND NET ASSETS AS OF 10/31/98
$1,001,410,634
- --------------------------------------------------------------------------------
PORTFOLIO NET ASSETS AS OF 10/31/98
$1,347,189,797
- --------------------------------------------------------------------------------
DIVIDEND PAYABLE DATES
MONTHLY
- --------------------------------------------------------------------------------
CAPITAL GAIN PAYABLE DATE (IF APPLICABLE)
12/11/98
EXPENSE RATIO
The fund's current expense ratio of 0.49% 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 OCTOBER 31, 1998
PORTFOLIO ALLOCATION
(PERCENTAGE OF TOTAL INVESTMENTS)
[CHART]
<TABLE>
<S> <C>
U.S. AGENCY OBLIGATIONS 28.9%
CORPORATE OBLIGATIONS 26.7%
U.S. TREASURY OBLIGATIONS 21.9%
CMO'S 11.5%
FOREIGN GOVERNMENTS 2.3%
CONVERTIBLE PREFERRED STOCK 1.3%
CERTIFICATE OF DEPOSIT 0.7%
PRIVATE PLACEMENTS 0.7%
CONVERTIBLE BONDS 0.1%
SHORT-TERM INVESTMENTS 5.9%
</TABLE>
30-DAY SEC YIELD
5.61%*
DURATION
4.83 years
<TABLE>
<S> <C>
QUALITY BREAKDOWN
AAA** 69%
AA 4%
A 10%
Other 17%
</TABLE>
*YIELD REFLECTS THE REIMBURSEMENT OF CERTAIN FUND EXPENSES AS DESCRIBED IN THE
PROSPECTUS. HAD EXPENSES NOT BEEN SUBSIDIZED, THE 30-DAY SEC YIELD WOULD HAVE
BEEN LOWER.
**INCLUDES U.S. GOVERNMENT AGENCY, TREASURY OBLIGATIONS, AND REPURCHASE
AGREEMENTS.
5
<PAGE>
DISTRIBUTED BY FUNDS DISTRIBUTOR, INC. J.P. MORGAN INVESTMENT MANAGEMENT INC.
SERVES AS 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 MORE OR LESS THAN ORIGINAL
COST.
Opinions expressed herein are based on current market conditions and are subject
to change without notice. The fund invests through a master portfolio (another
fund with the same objective). The fund invests in below investment-grade debt
obligations and foreign securities which are subject to special risks;
prospective investors should refer to the funds 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.
6
<PAGE>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY >
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investment in The U.S. Fixed Income Portfolio
("Portfolio"), at value $1,002,394,301
Receivable for Shares of Beneficial Interest Sold 1,420,113
Receivable for Expense Reimbursements 42,614
Prepaid Trustees' Fees 4,446
Prepaid Expenses and Other Assets 6,939
--------------
Total Assets 1,003,868,413
--------------
LIABILITIES
Dividends Payable to Shareholders 2,301,334
Shareholder Servicing Fee Payable 84,935
Administrative Services Fee Payable 23,935
Administration Fee Payable 4,184
Fund Services Fee Payable 882
Accrued Expenses 42,509
--------------
Total Liabilities 2,457,779
--------------
NET ASSETS
Applicable to 99,123,436 Shares of Beneficial
Interest Outstanding
(par value $0.001, unlimited shares authorized) $1,001,410,634
--------------
--------------
Net Asset Value, Offering and Redemption Price
Per Share $10.10
-----
-----
ANALYSIS OF NET ASSETS
Paid-in Capital $ 969,841,216
Undistributed Net Investment Income 773,443
Accumulated Net Realized Gain on Investment and
Foreign Currency Contracts and Transactions 12,211,641
Net Unrealized Appreciation of Investment and
Foreign Currency Contracts and Translations 18,584,334
--------------
Net Assets $1,001,410,634
--------------
--------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
8
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME ALLOCATED FROM PORTFOLIO
Allocated Interest Income $61,842,696
Allocated Dividend Income (Net of Foreign
Withholding Tax of $10,534) 1,438,960
Allocated Portfolio Expenses (3,387,770)
-----------
Net Investment Income Allocated from
Portfolio 59,893,886
FUND EXPENSES
Shareholder Servicing Fee $ 759,423
Administrative Services Fee 271,190
Fund Services Fee 28,012
Professional Fees 26,923
Administration Fee 20,814
Transfer Agent Fees 18,278
Printing Expenses 17,479
Registration Fees 17,000
Trustees' Fees and Expenses 11,770
Amortization of Organization Expenses 3,778
Miscellaneous 45,005
----------
Total Fund Expenses 1,219,672
Less: Reimbursement of Expenses (42,614)
----------
NET FUND EXPENSES 1,177,058
-----------
NET INVESTMENT INCOME 58,716,828
NET REALIZED GAIN ON INVESTMENT AND FOREIGN
CURRENCY CONTRACTS AND TRANSACTIONS ALLOCATED
FROM PORTFOLIO 12,631,804
NET CHANGE IN UNREALIZED APPRECIATION OF
INVESTMENT AND FOREIGN CURRENCY CONTRACTS AND
TRANSLATIONS ALLOCATED FROM PORTFOLIO 2,974,155
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $74,322,787
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
9
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE FISCAL
YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS
Net Investment Income $ 58,716,828 $ 53,510,308
Net Realized Gain on Investment and Foreign
Currency Contracts and Transactions Allocated
from Portfolio 12,631,804 5,992,503
Net Change in Unrealized Appreciation of
Investment and Foreign Currency Contracts and
Translations Allocated from Portfolio 2,974,155 9,053,869
---------------- ----------------
Net Increase in Net Assets Resulting from
Operations 74,322,787 68,556,680
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (58,731,284) (53,248,046)
Net Realized Gain (5,896,229) (1,207,006)
---------------- ----------------
Total Distributions to Shareholders (64,627,513) (54,455,052)
---------------- ----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Proceeds from Shares of Beneficial Interest Sold 271,326,921 402,506,302
Reinvestment of Dividends and Distributions 36,478,657 26,876,083
Cost of Shares of Beneficial Interest Redeemed (228,144,354) (367,496,156)
---------------- ----------------
Net Increase from Transactions in Shares of
Beneficial Interest 79,661,224 61,886,229
---------------- ----------------
Total Increase in Net Assets 89,356,498 75,987,857
NET ASSETS
Beginning of Fiscal Year 912,054,136 836,066,279
---------------- ----------------
End of Fiscal Year (including undistributed net
investment income of $773,443 and $450,111,
respectively) $ 1,001,410,634 $ 912,054,136
---------------- ----------------
---------------- ----------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
10
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share outstanding throughout each year are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OCTOBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 10.01 $ 9.84 $ 9.98 $ 9.23 $ 10.14
---------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.64 0.65 0.61 0.63 0.55
Net Realized and Unrealized Gain (Loss) on
Investment and Foreign Currency Contracts and
Transactions 0.15 0.18 (0.11) 0.75 (0.88)
---------- -------- -------- -------- --------
Total from Investment Operations 0.79 0.83 0.50 1.38 (0.33)
---------- -------- -------- -------- --------
LESS DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.63) (0.64) (0.61) (0.63) (0.55)
Net Realized Gain (0.07) (0.02) (0.03) -- (0.03)
---------- -------- -------- -------- --------
Total Distributions to Shareholders (0.70) (0.66) (0.64) (0.63) (0.58)
---------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR $ 10.10 $ 10.01 $ 9.84 $ 9.98 $ 9.23
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
RATIOS AND SUPPLEMENTAL DATA
Total Return 8.18% 8.78% 5.21% 15.50% (3.33%)
Net Assets, End of Year (in thousands) $1,001,411 $912,054 $836,066 $438,610 $253,174
Ratios to Average Net Assets
Expenses 0.49% 0.50% 0.50% 0.47% 0.50%
Net Investment Income 6.32% 6.59% 6.28% 6.62% 6.00%
Expenses without Reimbursement 0.50% 0.50% 0.53% 0.52% 0.69%
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements.
11
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
J.P. Morgan Institutional Bond Fund (the "fund") is a separate series of 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 July 26, 1993. Prior to January 1, 1998, the
trust's and the fund's names were The JPM Institutional Funds and The JPM
Institutional Bond Fund, respectively.
The fund invests all of its investable assets in The U.S. Fixed Income Portfolio
(the "portfolio"), a no-load 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 (74% at October 31,
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 the fund's net investment income is declared as
dividends daily and paid monthly. Distributions to shareholders of net
realized capital gains, if any, are declared and paid annually.
d) The fund incurred organization expenses in the amount of $49,925, which
were deferred and are being amortized on a straight-line basis over a
period not to exceed five years beginning with the commencement of
operations of the fund.
e) 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.
f) 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.
g) The fund accounts for and reports distribution to shareholders in
accordance with Statement of Position 93-2 "Determination, Disclosure, and
Financial Statement Presentation of Income, Capital
12
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
Gain, and Return of Capital Distributions by Investment Companies." The
effect of applying this statement was to increase Undistributed Net
Investment Income by $337,788, decrease Paid-in-Capital by $986 and
decrease Accumulated Net Realized Gain on Investment and Foreign Currency
Contracts and Transactions by $336,802. The adjustments are primarily
attributable to foreign currency gains. Net investment income, net
realized gains and net assets were not affected by this change.
2. TRANSACTIONS WITH AFFILIATES
a) The trust, on behalf of the fund, has retained Funds Distributor, Inc.
("FDI"), a registered broker-dealer, to serve as the 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 October 31, 1998, the fee for these services amounted to
$20,814.
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"), a wholly owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. 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 invest (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 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 October 31, 1998, the fee for
these services amounted to $271,190.
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
0.50% of the average daily net assets of the fund through February 28,
1999. The reimbursement arrangement can be changed or terminated at any
time after February 28, 1999 at the option of J.P. Morgan. For the fiscal
year ended October 31, 1998, J.P. Morgan has agreed to reimburse the fund
$42,614 for the 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 services to fund shareholders. The Agreement provides for the
fund to pay Morgan a fee for these services which is computed daily and
13
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
paid monthly at an annual rate. The rate was 0.075% of the average daily
net assets of the fund from November 1, 1997 through July 31, 1998.
Effective August 1, 1998 the rate was increased to 0.100%. For the fiscal
year ended October 31, 1998, the fee for these services amounted to
$759,423.
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
$28,012 for the fiscal year ended October 31, 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 the 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 $5,650.
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
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
Shares sold...................................... 27,037,802 40,888,366
Reinvestment of dividends and distributions...... 3,640,246 2,730,489
Shares redeemed.................................. (22,702,092) (37,416,665)
---------------- ----------------
Net Increase..................................... 7,975,956 6,202,190
---------------- ----------------
---------------- ----------------
</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
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 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 to the Agreement as of October 31, 1998.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
J.P. Morgan Institutional Bond Fund
(formerly The JPM Institutional 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 Bond Fund (one of the series constituting part of J.P.
Morgan Institutional Funds, hereafter referred to as the "fund") at October 31,
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 five years in the period then ended, 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.
PricewaterhouseCoopers LLP
New York, New York
December 17, 1998
15
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND
SUPPLEMENTAL PROXY INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
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 non fundamental.
3. To approve the reclassification of the fund's investment objective from
fundamental to non fundamental.
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.............. 45,089,408 -- 6,422,126
b. Relating to concentration of assets......... 45,089,408 -- 6,422,126
c. Relating to issuance of senior securities... 43,574,740 -- 7,936,794
d. Relating to borrowing....................... 43,350,172 224,568 7,936,794
e. Relating to underwriting.................... 45,089,415 -- 6,422,119
f. Relating to investment in real estate....... 43,574,740 1,514,675 6,422,119
g. Relating to commodities..................... 43,574,740 1,514,675 6,422,119
h. Relating to lending......................... 43,350,172 1,739,243 6,422,119
i. Reclassification of other restrictions as
non fundamental............................ 43,468,743 1,620,672 6,422,119
3. Reclassification of investment objectives..... 41,816,874 1,758,019 7,936,640
4. Investment advisory agreement................. 43,557,551 -- 8,134,229
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>
16
<PAGE>
The U.S. Fixed Income Portfolio
Annual Report October 31, 1998
(The following pages should be read in conjunction
with J.P. Morgan Institutional Bond Fund
Annual Financial Statements)
17
<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
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
BOND FUND
ANNUAL REPORT
OCTOBER 31, 1998
